Modi dreams of growing India's GDP to $20 trillion!

Dreams must be accompanied with a reality check on what they actually imply, notes  A K Bhattacharya.

What should be the average annual economic growth rate of an economy if its size in terms of its gross domestic product or GDP has to rise from $2 trillion to $20 trillion?

And how long will it take to raise its GDP size 10 times? 

These are not irrelevant questions. Addressing a recent business summit organised by The Economic Times, Prime Minister Narendra Modi shared with the audience his dream of growing India's GDP size from $2 trillion to $20 trillion.

Similar aspirations were echoed later at the same forum by the railways minister, Suresh Prabhu. 

Leaders must dream. That is necessary and also their legitimate entitlement. But dreams alone are not enough. Dreams must be accompanied with a reality check on what they actually imply.

For the $20 trillion dream to be realised, it is important, therefore, to understand the pace of growth that would be needed and for how long that pace has to be sustained. 

A simple arithmetical calculation shows that India's GDP could grow to $20 trillion if the average annual economic growth for the next 25 years is maintained at 9.65 per cent.

The Indian economy has grown at a rate higher than nine per cent only in about a few years in the past. And it is well-nigh impossible for any country to manage a sustained nine per cent plus growth rate consistently for 25 long years. 

While it may, therefore, be logical to assume that India could theoretically grow its GDP to over $20 trillion, but it must also be acknowledged that achieving that goal would take much longer than 25 years.

The bigger the economy gets, the feasible growth rate targets will have to necessarily come down. That is what happened to all economies when they exceeded a certain size. Look at what happened to the US and Japan and what is happening to China now. India will be no exception. 

Recognition of such growth limitations is as important as dreaming big or planning for achieving an annual 10 per cent growth rate target. Indeed, it is important for leaders of the government to understand that growth does not happen in isolation.

The global economy, a country's inherent potential, the domestic policy environment and its relative strengths and weaknesses are important elements in growth calculations. 

Equally important is the need to get a sense of what a feasible rate of growth for a country should be in the context of the reality that prevails. In the Indian context, a relevant question would be: Is a five per cent growth rate now similar to a nine per cent growth rate achieved before the global financial turmoil of 2008? 

In the hey days of high growth for India - between 2005 and 2007, when the economy was clocking an annual growth rate of over nine per cent, most analysts would use the global economic environment to place the India growth story in perspective.

The argument then was that in a high tide all boats in the sea are lifted. India's growth momentum was thus attributed to some extent to the global economic boom and the liquidity surge. According to some estimates, at least one or two percentage points in India's overall growth were certainly due to the buoyant global economic factors. 

For instance, while the global economy grew by five or a little more than five per cent in the years between 2005 and 2007, the Indian economy too clocked over nine per cent growth in each of those three years. India was then seen to be benefitting from the global economic upturn. 

The question policy makers should now pose is whether the same argument should hold now as the world economy is once again in turmoil.

Barring the United States, most emerging economies, Europe, Japan and other developed countries are experiencing a significant slowing of economic growth.

According to some estimates, global growth will be capped at two per cent, although the International Monetary Fund is still a little bullish about the world GDP output projecting it to grow by around 3.8 per cent in 2015. But an overall slowdown seems inevitable. 

In such a situation, a growth rate of five or six per cent for the Indian economy could well appear no less impressive than its performance in the 2005-07 period.

After all, clocking a growth rate of 5-6 per cent without a global tide of good performance should be equivalent to a performance of nine per cent GDP growth when the global economy was firing on all cylinders.

Shouldn't India's growth performance in a situation of low global tide get some credit just as the high global tide in the 2005-07 period had taken the gloss off the Indian economy's nine per cent plus growth performance. 

In any case, India's dreamers of double-digit growth should now pause and recognise that the current performance of 5-6 per cent growth is not to be dismissed lightly because the global economic scenario is not too bright.

Additionally, even this performance will be creditable because it is being achieved against all kinds of odds - a more stringent land acquisition law even after the latest round of amendments and a more rigorous enforcement of environment protection rules.

Instead of moaning over what they mistakenly consider tepid and disappointing, they should appreciate and even celebrate India's current growth performance in spite of the adverse global headwinds.

Dreaming double-digit growth or a $20-trillion economy must be rooted in a realistic assessment of the state of the economy - both in the country and abroad.