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India needs to grow at 9% to achieve PM's target of USD 5 trillion economy: EY

IBEF:  August 07, 2019

According to EY, to achieve the Prime Minister Narendra Modi’s target of turning India into a US$5 trillion economy, the country needs to grow by 9 per cent every year for five years continuously. It also needs to raise aggregate investment rate to 38 per cent of GDP.

In its newest edition of Economy Watch, EY said that it is assuming India growth by 7 per cent in the current fiscal year ending March 31, 2020, so the size of the economy will grow to US$ 3 trillion from US$ 2.7 trillion in the previous year.

It needs to grow by 9 per cent in each of the five following years to take the size of the economy to US$ 3.3 trillion in FY21, US$ 3.6 trillion in FY22, US$ 4.1 trillion in FY23, US$ 4.5 trillion in FY24 and US$ 5 trillion in FY25.

When assuming an inflation rate of 4 per cent which is the target inflation rate as per the Monetary Policy Framework, a real growth rate close to 9 per cent would be required to increase the size of the Indian economy to USD 5 trillion by FY25. This indicates a nominal growth rate of 13 per cent, assuming an average annual depreciation of the rupee viz-a-vis the US$ at 2 per cent.

 In FY19, the gross investment rate, estimated at 31.3 per cent, was able to deliver a real growth rate of 6.8 per cent. The implicit incremental capital-output ratio (ICOR) was 4.6.

India's average ICOR during the three-year period from FY17 to FY19 has been averaged at 4.23. The highest investment rate in India was 39.6 per cent in FY12. 

 

For raising the growth rate to 9 per cent in FY21, there is requirement to uplift the investment rate to close to 38 per cent of GDP as against 31.3 per cent in FY19. 

Although the central government plays a four-fold role in defining the overall investment rate through its budgetary capital expenditure, spending through PSUs, policy initiatives inducing private investments and coordination with state governments, the Centre's share in country's aggregate investment was quite small at 1.6 per cent of GDP in FY19. 

According to the Controller General of Accounts (CGA), this only constituted 5.1 per cent of the aggregate investment. After summing the central PSU's capital expenditure of 2.4 per cent of GDP in FY19, the Centre's role in the investment increases to 4 per cent of GDP, which is 12.6 per cent of the total investment. 

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.