India needs more firm growth goals as it aims to be the third-largest economy

By 2020, India moved into the top-5 club and has remained there. India’s rise to this elite club was possible because of higher GDP growth rates since the 1980s.

Prime Minister Narendra Modi in a recent speech proclaimed that India will be the third-largest economy in the world in the third term of the National Democratic Alliance government. The speech sparked commentaries among the political and economic communities. The political community has been discussing whether the speech was a mark of confidence of the current government about getting re-elected to power in the General Elections of 2024. Economists are discussing whether India can indeed be in the club of the top three largest economies within the next five years. Let us consider the economics aspect of the debate.

There are two points of analysis here. First, let us examine how India has fared in the global rankings. The World Bank GDP data, available since the 1960s, shows India was in the top-15 club till 2000. The country entered the top-10 club for the first time in 2007. By 2020, India moved into the top-5 club and has remained there. India’s rise to this elite club was possible because of higher GDP growth rates since the 1980s.

GDP indicators published by some agencies even suggest India’s economy may be bigger than that of the United Kingdom. If the criteria for development is to be among the top economies in terms of total GDP, India has not done badly. After all, India has always been in the top-15 economies club.

Second, does being in the top-5 club in terms of absolute GDP translate into a similar position in terms of per capita GDP too? Ultimately, what matters is not absolute GDP but per capita GDP. The track record in terms of per capita GDP looks abysmal. India’s rankings in terms of GDP per capita have fallen with rising rankings in absolute GDP. Despite India’s rise to the top-5 club, per capita GDP rankings have been above 150 in a list of 200-plus countries. This suggests that even if India moves into the top-3 club, it will continue to lag behind many countries in terms of average incomes. When we look at other global measures of economic progress such as the human development index, hunger, etc., our rankings are similar to the per capita GDP rankings.

We also see that among the largest economies, just the United States and Australia figured among countries with the highest per capita GDP over the decades. Economies such as Denmark, Singapore and Switzerland, which have among the highest per capita GDP, are ranked as the best countries to live in on multiple indices. On the other hand, countries such as Japan, Germany, the UK and Italy which are among the largest economies have been facing low growth for a long time now. Bermuda, Monaco Isle of Man and Cayman Island which make it to the list of countries with the highest per capita GDP are mainly tax havens.

What do we make of the above analysis? It is that while being part of the top-3 GDP club is an achievement, it is at best an illusion for showing economic progress. What is instead needed is to raise the per capita income.

Raising Incomes

The government has tried to work on the objective of raising incomes. In 2016, the government announced a vision of doubling farmers’ income. In 2017, the Department of Agriculture prepared a 14-volume report to work on the vision. The Committee identified seven sources of doubling farmers’ income growth over a six-year period from 2016-17 to 2022-23. Accordingly, the government increased its investments in agriculture and related activities over the years. As per the latest data, the average monthly income per agricultural household increased by about 60 percent from Rs 6,426 in 2012-13 to Rs 10,218 in 2018-19. However, the data covers just the first half of the period over which the incomes were to be doubled. We have to wait for more data before we can conclude if farmers’ incomes have doubled.

In 2018, the government set another goal of making India a $5 trillion economy by 2024. India’s GDP in 2018 was $2.8 trillion. There were discussions on how India will have to grow at an average annual rate of 10-12 percent in nominal terms to achieve a target of $5 trillion. That target was derailed by the pandemic, and is expected to be achieved in 2027/2029, according to projections by different economists. Even if this $5 trillion goal was achieved, it would not have led to the desired development. First, the target was based on nominal GDP which includes inflation, and not real GDP which excludes inflation. So, it is confusing whether the expansion of GDP is due to inflation or actual growth. Second, a larger GDP will push India higher up in the GDP club but not in the per capita GDP club.

To sum up, there are two lessons from the above analysis. First, the government should not change growth goals too often. Second, growth goals should not be based on the overall size of the economy. Instead, it should be based on growth rates and, more importantly, growth rates of per capita incomes. The focus of growth should not be limited to agriculture but across sectors. India’s size and population will automatically make it one of the largest economies. The race to be in the club of largest economies is like a race between old tired runners (developed countries) and a relatively younger runner (India). Why care about coming third in such a race?

Amol Agrawal teaches at Ahmedabad University. Views are personal, and do not represent the stand of this publication.