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‘India’s $5 tn goal set back by 3-5 years’

EY India sees country’s economy now reaching the target size by 2027-28 in its ‘optimistic scenario’

October 30, 2021 09:46 pm | Updated 11:27 pm IST - NEW DELHI

Booster dose: India must ramp up public sector investment to help crowd in private investments, says EY India.

Booster dose: India must ramp up public sector investment to help crowd in private investments, says EY India.

India’s goal of becoming a $5 trillion economy by 2024-25 is likely to be set back by about 3-4 years in an ‘optimistic or business-as-usual’ scenario, and may have to wait till 2029-30 in a worst-case outcome, as per an EY India estimate.

India is poised to overtake China in terms of the annual pace of economic expansion and become the global growth leader for the next five years, starting from 2021-22, as per the latest projections of the International Monetary Fund (IMF). EY India’s macro-fiscal unit, tax and economic policy group used the IMF projections to arrive at their estimates.

The IMF has projected a 9.5% GDP growth for India this fiscal, followed by an 8.5% growth next year and the consulting major’s economy team led by chief policy advisor D.K. Srivastava reckoned this indicated a real GDP growth of 6% in the medium term.

“This is still lower than the previous peak of trend growth rate of close to 7% during the four years from 2007-08 to 2010-11,” EY India said in a report. “In fact, if we include the forecasted growth of 9.5% for this year and 8.5% for 2022-23, the trend growth rate is uplifted to only 4.9% by 2022-23,” it noted, adding that this suggested the need for initiatives to lift the trend growth rate to 7% or above in the medium term.

“As a point of reference, we consider the likely year by which the Indian economy would reach or just cross the $5 trillion mark in three alternative scenarios. In our benchmark solution, we utilise the IMF projections for real and nominal GDP growth up to 2026-27. The exchange rate projections are also taken from the IMF,” the firm’s economists noted.

“In the pessimistic scenario, the real GDP growth is reduced by 1 percentage point starting 2022-23 as compared to the benchmark solution. Other parameters namely implicit price deflator-based inflation and exchange rate depreciation are kept at the same levels as in the benchmark solution. In this case, the crossover point shifts one year forward to 2029-30,” EY said.

“In the optimistic scenario, real GDP growth is increased by 1 percentage point beginning 2022-23 as compared to the benchmark solution. In this case, India reaches the $5 trillion mark by 2027-28,” the EY team concluded in a chapter on ‘India and the global economy in context of the evolving contours of post-COVID recovery’ in its October report.

‘Raise public spending’

Calling for a ramp up in public sector investment to help crowd in private investments, EY emphasised the need to reverse the declining trend in the overall investment rate from a peak of 39.8% of GDP in 2010-11 to an estimated 29.3% in 2020-21.

“These trends indicate that more policy initiatives are needed to lift the trend growth rate to 7% or above,” it underlined.

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