Former CEA Krishnamurthy V. Subramanian says India could become a USD 55 trillion economy by 2047. Here's how

Krishnamurthy Venkata Subramanian says India's GDP could double every six years between 2023 and 2047. (Image courtesy Rupa Publishers)

Krishnamurthy Venkata Subramanian, 53, was the chief economic adviser to the Narendra Modi government from 2018-21. He now holds the post of India's executive director at the International Monetary Fund (IMF). In his book 'India @100: Envisioning Tomorrow's Economic Powerhouse' (Rupa Publishers), released on July 31, 2024, he argues that India can become a $55 trillion economy, backed by sound policies that promote "inclusive growth for a large middle class, ethical wealth creation, virtuous cycle ignited by private investment and macroeconomic focus on growth". Excerpts from an interview:

You argue that India could be a USD 55 trillion economy by 2047 - the 100th year of India's Independence. Is that a realistic number?

(Laughs) So the $55 trillion economy does appear ambitious if you do not take into account all the key drivers of the macroeconomy. Let me illustrate this by using the Ernst and Young prediction of USD 26 trillion in 2047.

But let me first highlight that the difference between their prediction and mine depends crucially on what you take into account for the depreciation of the rupee vis-a-vis the dollar.

Which has been very sharp in recent years. Your book takes a 30-year span. But it's obviously not been steady through these 30 years.

Exactly. I think when one looks at a period of 22-23 years, you have to not just account for recent episodes, but look at a much longer run, which is what I do.

I actually go and test this for various 25-year periods in the past. So if you look at historically the rate of depreciation of the rupee vis-a-vis the dollar, it has been about 3 to 3.5 percent. But this has been during a period when inflation in India on average was more than 7 percent. And this is a critical fact that when inflation is higher, the currency that faces the higher inflation has to depreciate more, to keep the real value of the currency the same. Now since 2016 when India implemented inflation targeting (when the central bank tweaks monetary policy, to ensure price stability) directly, despite COVID and despite the Ukraine war, inflation has been of average only 5 percent from the 7 percent-plus which is the inflation that had prevailed.

During the Ukraine war, we bought Russian oil at much cheaper rates too.

If you look at the inflation that has prevailed globally, every advanced economy faced anywhere between 2.5 to four times the inflation that they had compared to historical. And the simple fact remains that the Ukraine war created huge supply-side bottlenecks, especially on food. And you have to account for the fact that about half of overall inflation comes just from food. In contrast, if you take the contribution of crude oil and even if you take into account the second-round effects, the effect of transportation, etc., the overall contribution of crude oil to headline inflation is about 8 percent. So it wouldn't be fair to therefore say that the crude oil itself actually led to lower inflation. Even if you were to, let's say, concede that there were some benefits from crude oil, the fact remains that COVID was a huge supply side shock, which led to significant inflation in the advanced economies because of the kind of policies that were followed.

The point remains that even accounting for such shocks, inflation, on average, has been 5 percent. And why? Because in the central bank is mandated to keep inflation at 4 percent + - 2 (percent). So 5 percent is actually about 1 percent (percentage point) higher than what is required. So it's a very reasonable expectation, therefore, that going forward, inflation, you know, should be about 5 percent.

Depreciation of about 3.5 percent prevailed in a period where inflation was 7 percent-plus. If inflation is going to be about 5 percent, and I think it could be lower than that, then the rate of depreciation will be at least 2 percent (percentage points) lower, which would translate to about 1 percent depreciation. Now if you do the economics actually, then you will start seeing why the rate of depreciation of the currency matters so much, taking into account the power of compounding.

To take into account compounding, there is this very nice rule, which is the rule of 72, which I'm going to use to actually illustrate this (plausibility of India becoming a USD 55 trillion economy by 2047). If you take the real growth to be 7 percent, inflation to be 5 percent, in nominal rupee terms, that translates into 12 percent: 7 + 5 is 12. Take the rate of depreciation of the currency to be 3 percent as has been historically the case - in other words, ignore the impact of the inflation targeting regime, etcetera - then you get, in dollar terms, 12 - 3, which is 9 percent. By the rule of 72, if you're basically growing at 9 percent, then 72 / 9, in eight years your money doubles, your GDP doubles every eight years. Take the 24-year period from 2023 to 2047, doubling every eight years means there will be three doublings. GDP in 2023 was $3.28 trillion. Let's round it off to $3.25 trillion. Three doublings will mean 3.25 to 6.5, 6.5 to 13, 13 to 26 trillion US dollars (by 2047). This explains the Ernst & Young prediction.

But as I said, crucially, this assumes that the rate of depreciation will be what has been the case in the past, when inflation was 7 percent-plus. But if inflation is likely to be 5 percent, then the rate of depreciation is likely to be 1 percent or less than that. So let's do the same economics now with lower rate of depreciation: 8 percent growth, 5 percent inflation. That's 13 percent in nominal rupee terms. Subtract 1 percent depreciation, you get 12 percent in dollar terms. Rule of 72 again, 72 / 12 is 6. So now you're doubling your GDP every six years. So over a 24-year period, 24 / 6 is 4, so (will we have) not three doublings, but four doublings: USD 3.25 trillion to 6.5 trillion, 6.5 to 13, 13 to 26 trillion, that was 3 doublings, but one more doubling from 26 to 52, which is close to the 55 trillion mark that's a precise estimate that I have in the book using this (method).

This is assuming that the rate of growth and the rate of inflation go at this particular rate which is based on the past. Is that your experience of how things turn out?

Actually on inflation, I gave you very solid economic arguments why I think that the rate of inflation should be in fact less than 5 percent. As I said, the inflation targeting regime requires the central bank to keep at 4 percent in fact. And over the last 7-8 year period, despite these shocks, inflation has been 5 percent. So it's a very reasonable expectation.

In fact, a tailwind that I have not taken into account is that inflation in the United States may very likely be more than 2 percent. Then the difference inflation narrows further, that's a tailwind that I have not taken into account. I have been conservative by assuming rate of inflation to be only 2 percent.

Of course, I think the ambitious expectation, or the ambitious goal is to grow at 8 percent in real terms. That will require good policies, especially given the emphasis on innovation, entrepreneurship, formalization of the economy, this growth rate is something that is ambitious but achievable.

What are the biggest hurdles to this growth rate, this inflation rate, this target of USD 55 trillion Indian economy?

Whenever one makes a prediction about the future, one makes it using past data and then good conceptual argument to then see how much of that past will translate into the future. That does leave the possibility of both headwinds and tailwinds that can change the prediction.

There are some potential headwinds. For one, the trend in globalization is not as strong as it had been when let's say China, for instance, grew. At the same time, it's possible, if we go by what the WHO says, because of climate change and other factors, pandemics may be more frequent. So these are potential headwinds.

But I think if we look at the growth drivers, what are the drivers that can deliver 8 percent growth? First, India is still a very large informal economy, anywhere between 2/3rds to 3/4th of our economy, and estimates vary, is informal and we know very well that firms in the informal sector are far less productive than firms in the formal sector.

Given the emphasis on digital public infrastructure that has been made in the last several years, and the potential for that to actually generate greater formalization, and the emphasis on formalization itself, I anticipate significantly more formalization in the next 2-2.5 decades and that will lead to productivity improvements.

Second, even if you look at our formal sector firms, the formal sector firms are also still behind their global peers in terms of their productivity. And if you look at the trends on entrepreneurship and innovation, from 2004 to 2014, new firm creation in India grew at 3.2 percent. Since 2014, new firm creation has grown at orders of magnitude higher, 200 percent-plus. And as a result of that, India has now created a third largest entrepreneurial ecosystem in the world.

And the best thing about entrepreneurship is that it leads to creative destruction. New firms bring new ideas and that leads to higher productivity. But at the same time, they also push the incumbent firms.

How do new firms improve the productivity of incumbent firms?

Why don't we take the example of Swiggy? Ten years back, if you wanted to actually order food from the outside, you had to maybe go in a car or on your bike, you would have to spend 2 hours to actually go to a restaurant. And then you would get outside food.

Or you had relationships with your local restaurant, you could call them and then they would deliver?

That would have been sporadic, it wasn't as ubiquitous as it is today. Maybe you might have had, I did not certainly have that kind of relationships (with local restaurants sending their own delivery staff over). So, I would have had to go for 2 hours, whereas I could now be sitting at home, maybe working on that book, and food gets delivered. So, I'm actually not losing that time. I'm being more productive. That's an example of productivity improvements that actually new firms bring. But what they also do, they also push the existing firms to, for instance, now many of the existing firms now use Swiggy themselves.

Take other examples, take for instance a Flipkart or Amazon. They basically pushed many of our existing retailers to, to be more productive. I think there's ample economic evidence. As you know, an entire area of economic research basically shows the kind of productivity improvements that entrepreneurship brings, not only in the entrepreneurial firms, but in the incumbent firms as well. And I'm actually drawing on that research to make this prediction that the formalization of the economy and entrepreneurship and innovation will lead to productivity improvements.

I was going to finish up on the second part, which is innovation. India for the first time entered the top 50 innovative countries in 2019. Now we are in the Top 40. And the combination of entrepreneurship and innovation will enable productivity improvements, even among our formal sector firms.

The second example, which I have in the book, is if you take China in 2007. China had a GDP per capita that was almost identical to what our GDP per capita is today. In other words, that's a very good apples to apples comparison in terms of the policies that one needs to implement. If you look at the growth that has prevailed in China since then, China had grown in the next two decades at almost 8 percent - despite the global financial crisis, despite COVID, despite the Ukraine war, which itself led to adverse shocks to global demand. How did they do it? They did it by focusing on good economic policies that enabled them to drive two key growth engines: domestic investment and export. And the lesson for us to take from there actually is to double down on good economic policies that will enable us to grow at 8 percent from now on.

'India @100: Envisioning Tomorrow's Economic Powerhouse', Rupa, 497 pages.

You've talked about four pillars of growth for India. Two of them are ethical wealth creation and the growth of a middle class. Are these two forces? How do you reconcile them?

I don't think about them as opposing forces at all. If we look at the evidence, not just in India but also across the world, wealth creators have led to significant employment creation as well. I'll give you 2 examples.

First example from my own childhood. I come from a lower middle-class family. The help that used to come to work for us, to wash our dishes, used to work in nine other houses. So each of us lower middle-class families was providing 1/10th of a household helper's job. In contrast, at that time, actually, I hadn't learned economics then so we used to sometimes not appreciate the fact that the jeweller in our town, he basically employed 100 people, not just at home, but also in his shop and in his profession as well. And he was paying salaries that were at least twice or thrice as much as what the maid got. So if you think about it, we, each of us lower middle-class, we were not creating as much wealth. We were producing 1/10th of a job while that wealth creator was actually creating 100 jobs. So in other words, thousand times as many jobs and paying higher wages as well. And if you look at the data, and we've covered that, I cover that in the book as well, if you correlate the number of wealth creators that have been wealth that have created wealth in the last 30 years since liberalization correlate with employment, actually it is a very strong correlation.

So I think many times, when we speak anecdotally, without looking at careful evidence, we think about this non-existent tension between wealth creation and employment creation. But in reality they do go hand in hand. I would also mention that ethical wealth creation is really critical. As we saw with the crony lending that happened post the global financial crisis up until 2014, the overhang of that actually dampened credit creation, thereby dampening investment and growth rate in the economy, and also had an impact on other aspects. So ethical wealth creation is incredibly important for employment creation.

Last example, take a firm like Infosys. In the 1980s, when it was started, it employed six-seven people. Now it employs millions (Infosys data show it has just over 3.17 lakh employees). Swiggy started with a few people. Now it is employing so many people. I can giving you examples like this till the cows come home, about the number of jobs that are created by entrepreneurs.

So I think this is an aspect that we need to understand and remember that there is no tension between wealth creation and job creation, which is really critical for social and economic inclusion.

So, does the policy get made for the wealth creator or does it get created for the larger base which is the middle class that is possibly getting employed by this wealth creator?

Here actually let me let me make a bigger point. Having interacted with the media from the time when I was in the government, we have this tendency to always look for binaries. The real world is far more nuanced, and binaries oftentimes lead to and / or. In the book, I clearly mention that what is really critical is the policies that will lead to job creation will also be ones that actually will help in wealth creation as well. So these binaries are actually artificial ones that can help to grab headlines, but that is not how good policy is done.