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At the Cafemutual India Investment Summit 2024 recently held in Dubai, Krishnamurthy Subramanian, the current Executive Director of International Monetary Fund and the former Chief Economic Advisor to the Government of India said that Indian economy is on its path to become a USD 55 trillion economy at the completion of the 100 years of its independence i.e. by 2047.
Addressing a session titled ‘India @100’, Subramanian pointed out that the macroeconomic, global and domestic policy indicators shows that India will have an average inflation of around 5% in the upcoming two decades.
The IMF ED expects the rupee depreciation to be below 1% with the real term growth potential of the Indian economy at around 8%.
Here are some of the factors that will help India become a more than USD 50 trillion economy by 2047 according to Subramanain.
Power of compounding growth
Currently, India is standing at the same journey point where Japan was in 1970s and China was in 1990s. Between 1970 and 1995, Japan’s economy multiplied more than 25 times while the Chinese economy multiplied by around 25 times between 1996 and 2012.
Seeing the policy improvements by the government and the macroeconomic and demographic indicators, it can be said that India is going to witness similar growth between 2024 and 2047.
The 8% real growth potential with less than 1% value depreciation and an average inflation of around 5% will result in the GDP doubling in every six years. This will mean that by 2047, there will be four doubling of the Indian GDP, which will lead the size of the Indian economy to around USD 55 trillion compared to the current GDP size of USD 3.28 trillion.
Why there will be a reduction in Rupee depreciation?
The year 2016 is a significant milestone in the India growth story. 2016 is the year that marked the advent of the inflation targeting regime when the Government of India mandated the RBI to keep the inflation rate between the upper and lower limits of 6% and 4%, respectively.
The impact of this decision can be understood by the fact that between 2016 and 2024, the average inflation rate has been around 5% compared to around 7.5% before 2016. The fact that the currencies with higher inflation face higher depreciation risks will in turn result in reduced depreciation in the valuation of Rupee as a currency.
What are the economic drivers for the Indian economy?
Subramanian highlighted that the need of the hour for the Indian economy is to develop growth models that caters to India’s specific needs. Indian needs are different than the rest of the world and we cannot afford to copy paste their models and expect extraordinary results.
Further, the concerns around the law of diminishing returns may not be valid for the Indian growth story because unlike the developed countries, which focused on frontier businesses, Indian growth story will be a catch-up growth.
Formalization of the economy, credit creation and the improvement in the productivity to improve the returns on investment will be the three growth drivers in the upcoming two decades.
Development of entrepreneurial culture in India
Although India needs to work a lot to be accepted as a country with leading entrepreneurial culture, the momentum that it has achieved cannot be ignored. Since 2015, India has improved its position in Global Innovation Index to 39th rank in 2024 from the 85th in 2015.
The ratio of private credit to GDP also indicates a broad scope for the development of entrepreneurship ecosystem. Currently the private credit to GDP ratio for India stands at 58% compared to the global average of 150%. It is expected to be at around 130% by 2047.
Things that need to be kept in mind
Demographic and employment challenges are expected to be one of the greatest challenges for the Indian economy to navigate its way toward its aim of becoming a developed country by 2047.
In order to address these problems, India needs to move away from the western thought process. Developed world’s policies are capital oriented and India can not afford to have those policies. Capital intensive policies in themselves can hurt the Indian economy.
Indian entrepreneurs should focus on delivering business ideas at the India scale with India specific price points while solving India specific problems.
You can watch the complete session here on Cafemutual YouTube channel.
