Why in the News

Union Minister Piyush Goyal stated that India will become a $30 trillion economy in 20-25 years, emphasising India’s “strength-to-strength” growth and the vision of matching the US economy in scale. However, an analysis of India’s GDP trajectory and exchange rate trends over the past 25 years suggests that this goal appears overstated unless the rate of economic growth increases substantially. The divergence between nominal GDP growth and exchange rate depreciation is central to understanding why India may fall short of this projection.

How is the Size of an Economy Measured?

1. Gross Domestic Product (GDP): Represents the total annual value of goods and services produced within a country.
2. Nominal GDP: Expressed in current prices and domestic currency (rupees).
3. Conversion to USD: For global comparison, GDP in rupees is divided by the exchange rate (₹ per $).
4. Example: India’s nominal GDP in FY 2024 is ₹330 trillion, translating to about $3.9 trillion at an exchange rate of ₹84.6 per USD.
5. Comparative Context: The US GDP in 2024 is estimated at $41 trillion, nearly 10 times India’s size.

Where Does the Divergence in GDP Projection Arise?

1. Historical Growth (25 years):
   • India’s nominal GDP grew at a compound annual growth rate (CAGR) of 10.3%.
   • The rupee depreciated by 3.08% per year.
   • This combination would yield a net dollar GDP growth of around 7.2% CAGR, resulting in a $31.9 trillion economy by 2048.
2. Recent Growth (past 11 years):
   • India’s nominal GDP CAGR dropped to 8.2%.
   • The rupee’s depreciation averaged 3.08%, giving a dollar GDP CAGR of just 5.1%.
   • Under this trend, India’s GDP would reach only $17.4 trillion by 2048.
3. Key Finding: The long-term projection is highly sensitive to assumptions. Small changes in growth or currency value lead to large differences in dollar GDP outcomes.

Why is the $30 Trillion Target Difficult to Achieve?

1. Slowing Growth Momentum: India’s nominal GDP growth rate has weakened since 2014, reflecting post-pandemic structural and demand-side constraints.
2. Exchange Rate Depreciation: The rupee has steadily weakened over time, eroding the USD value of India’s output despite growth in rupee terms.
3. Inflation Differential: India’s higher inflation compared to advanced economies results in faster currency depreciation, reducing the global GDP value.
4. Projection Assumptions: To achieve $30 trillion, India must sustain a nominal GDP CAGR of ~11% and limit currency depreciation below 2.5%, a historically rare combination.

Is the $30 Trillion Vision Still Useful?

1. Aspirational Benchmark: The projection serves as a long-term vision anchor for policy and investment decisions, guiding structural reforms.
2. Strategic Optimism: Such forecasts reflect confidence in India’s demographics, industrial potential, and service exports.
3. Policy Implication: Even if unattained, the projection pushes economic governance to focus on productivity, export competitiveness, and rupee stability.

What Needs to Change for Realising the Vision?

1. Sustained High Growth: Requires double-digit nominal growth through manufacturing diversification, digital economy expansion, and logistics reforms.
2. Rupee Stability: Demands foreign investment confidence, fiscal discipline, and stronger current account performance.
3. Inflation Control: Stable inflation curbs depreciation and maintains global competitiveness.
4. Structural Reforms: Continued focus on labour, land, and capital market reforms to support long-term productivity.

Conclusion

India’s $30 trillion projection embodies the nation’s growth ambition, but economic realism demands higher productivity, policy consistency, and exchange rate stability. Without stronger structural momentum, India may remain well below that figure by mid-century. The aspiration, however, serves as a strategic motivator to deepen reforms and strengthen global competitiveness.

PYQ Relevance

[UPSC 2020] Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP?

Linkage: The PYQ tests conceptual clarity on potential GDP, its determinants, and growth constraint. This is a recurring UPSC theme reflecting India’s long-term economic health and reform needs.

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