India's $10 trillion run – the first milestone on the developed economy road

In his Independence Day speech on August 15, 2022, Prime Minister Narendra Modi pledged to make India a developed nation by 2047.

That the Indian economy is a bright spot in an uncertain world has been widely said for the better part of a decade. While the COVID-19 pandemic caused the economy to contract in 2020-21, a fairly quick turnaround followed, with the latest GDP numbers — quarterly and annual — surprising on the upside and forcing economists to significantly raise their forecasts.

But while the present is bright, it is the future that matters. And the Indian government is aiming for the stars with its target of making the country a developed economy by 2047 to coincide with the hundredth anniversary of India's independence from British rule.

Also Read: A $30-trillion Indian economy by 2047 a conservative target, says FM Sitharaman

To be sure, there is no precise definition of what constitutes a developed economy. Even the range of annual per capita income — the most commonly cited metric to determine what stage an economy is at — is rather wide and can be anywhere from $15,000 to $30,000. What is clear is that increasing the current per capita income level of around $2,500 will require broad economic and social reforms across sectors and deft management from the government.

Size of the task

India's growth rate may be surprising on the upside, but that is in real terms. Nominal growth, or growth without adjusting for inflation, has been lower than expected, with the statistics ministry estimating India's gross domestic product (GDP) to have grown by only 8.9 percent in 2023-24 in current rupee price terms. This is lower than the 10.5 percent the finance ministry had assumed in the budget.

A simple extrapolation of the nominal GDP at a growth rate of 11 percent reveals that even if the Indian rupee does not depreciate at all against the US dollar from hereon, it may take until 2034 for the size of the economy to rise to $10 trillion. But if growth continues at the same rate of 11 percent, the GDP may indeed hit $40 trillion in 2047.

But the exchange rate will be the big spanner in the works here. If one assumes a steady 1 percent per-year depreciation of the rupee, the math could be upended. This is where the reforms come in.

Budget and beyond

The 2024-25 budget may only be an interim one, but it, along with the new government's full budget that will be presented in July after the Lok Sabha elections, will lay the groundwork for the near future.

"With the upcoming Union Budget for 2024-25 set to be an interim one for the purpose of a vote-on-account, major policy changes and announcements are unlikely. However, the expansion in the Government of India's capex and the extent of fiscal consolidation would be scrutinised closely," economists from ratings agency ICRA said.

The Centre has spent heavily on capital expenditure in recent years to drive growth and crowd in the private sector. And while another record capex target will likely be set, up from Rs 10 lakh crore in 2023-24, fiscal constraints and the beginnings of the private capex cycle mean the government may have to go easy on the pedal.

The central government has a medium-term fiscal deficit target of 4.5 percent of GDP by 2025-26. The target for 2024-25 could be set at around 5.3 percent, down from 5.9 percent this year. Later this week, on January 18, economists can be expected to shed some more light on this matter at Moneycontrol's Policy Next summit.

Reforming the tax system

The key to the government's ability to raise spending going forward is how much tax it collects. And while the interim budget is unlikely to make any meaningful changes when it comes to direct taxes, the indirect tax regime offers plenty of opportunity for change.

Also Read: GDP growth-tax collections relationship is now complicated

The Goods and Services Tax (GST) system was introduced in July 2017. Monthly GST collections have steadily increased over the years, with this year's average at Rs 1.66 lakh crore, up from Rs 1.51 lakh crore in 2022-23.

However, GST is far from complete and needs substantial work – from reducing the number of tax slabs to widening its scope to include key items such as fuel products, among others. The Moneycontrol Policy Next summit will also see a panel discussion where indirect tax experts and former high-ranking bureaucrats debate what should be done next to reform the GST.

Food and energy security

While raising per capita income is crucial to becoming a developed nation, it will count for little if the prices of mass consumption items spiral out of control. Since 2022, food prices have surged due to the disruptions caused by Russia's invasion of Ukraine and the unseasonal and uneven rainfall hurting domestic agricultural production.

The government, to give it its due, has taken a raft of steps to bring down prices of cereals, pulses, edible oils, and key vegetables such as onion and tomato. Elaborating on this at this week's Policy Next summit will be Consumer Affairs Secretary Rohit Kumar Singh.

The other key mass consumption item that puts pressure on household pockets is fuel, with prices of petrol and diesel unchanged for more than a year now. The energy sector, however, is going through a huge change as the world continues to push towards renewable sources. For India, power is crucial, with Chief Economic Adviser V Anantha Nageswaran saying on more than one occasion that energy security could be the biggest challenge to India's future growth prospects.

Fittingly, the Policy Next summit will have RK Singh, Union Minister for Power, New, and Renewable Energy, deliver the keynote address on securing India’s energy future.

The age of women

Action on food and fuel prices and other reforms will count for little in India's pursuit of first becoming a $10 trillion economy and then a developed one if it does not manage to bring half its population on par with the other.

"India has aspirations to become a high-income country by 2047… In order to get to high-income country (levels), it needs to grow closer to 8 percent. And you can't get there if a large part of your workforce — females — is not participating," World Bank Senior Economist Dhruv Sharma had said in October 2023 at the release of the Bank's India Development Update report.

As part of this effort, the January 18 Policy Next summit will see women leaders from different spheres — law, politics, business, and economics — debate how women can truly become India's next growth engine.