India: A $30 trillion Economy and a wrong math

The Mint article reads as follows (selective extract. You may read the full article here):

....And this is the precise mistake that Piyush Goyal, India’s minister for commerce and industry, among other portfolios, seems to have made in a recent forecast. He predicted that the size of the Indian economy would touch $30 trillion 30 years from now. So, Goyal has given us both a number and date.

The size of the Indian economy is currently around $3 trillion. If it grows by 8% per year in each of the next 30 years, it will cross $30 trillion in 2052. As per the World Bank, the gross domestic product (GDP) of the US in 2020 (in constant US 2015-dollar terms) stood at $19.3 trillion, having fallen from around $20 trillion in 2019. So, what Goyal has basically forecast is that the Indian economy in 2052 will be 50% bigger than what the American economy was in 2019.

You may take note of the line in the article which says – ‘The Size of the Indian Economy is currently around $3 trillion’. As per MoSPI provisional estimate for the year 2021-22, India’s GDP in current price is Rs. 236.64 trillion. If you express it in USD trillion taking the exchange rate of USD 74.4 (exchange rate derived from IMF estimates), India’s current GDP for the year 2021-22 is USD 3.18 trillion.

The article is therefore correct so far in benchmarking India’s growth projection of USD 30 trillion in nominal terms (or in current price).

India’s constant GDP for the year 2021-22 (provisional estimate) is INR 147.36 trillion. Expressing it in dollar terms, it comes around USD 2 trillion. Therefore, there is no doubt that the article is talking about GDP number only in current price.

But then read second line of the same para in the article which says –

As per the World Bank, the gross domestic product (GDP) of the US in 2020 (in constant US 2015-dollar terms) stood at $19.3 trillion, having fallen from around $20 trillion in 2019.

Why is the article comparing India’s nominal GDP with US GDP in constant terms? That is precisely the place from where the article took the wrong turn.

Read the next few paragraphs of the article.?It reads as follows:

The trouble is that countries rarely grow at 8% per year for decades on end. In fact, even an annual growth of 6% for long periods of time is rare…China has been the only exception so far. In 1990, the Chinese GDP was $1.03 trillion. Thirty years later, it had grown to $14.6 trillion, implying a growth of 9.2% per year. As per World Bank data, India’s annual growth rate during the same period stood at an average 5.8%.

Is this true? Is it like that the countries seldom grow at 8% per annum on nominal basis?

Fact of the matter is that India has most often grown at 8% plus rate in its 70 years of National Accounts History in nominal terms (current price basis). Another fact is that, in 1990, China was not a trillion-dollar economy. As per IMF World Economic Outlook April, 2022 database, China became a trillion-dollar economy only in 1998 with GDP value of USD 1.02 trillion (check IMF WEO series NGDPD) for China.

Keep reading the article. It continues to argue:

Finally, India has rarely grown at a rate of 8% or higher. In fact, between the fiscal years 1951-52 and 2021-22, economic growth of 8% or higher has happened only on eight occasions. Interestingly, there has been only one occasion when the country’s economy has grown at 8% or higher for two consecutive years (that is 2015-16 and 2016-17). However, in each of the years from 2003-04 to 2007-08, the country grew at greater than 7.6% per year.

Hence, given the above facts, there is almost no chance of India growing by 8% annually for a period of three decades at a stretch. A growth rate of 5-6% per year seems like a more realistic level. At a growth rate of 5.5% per year, India will be a $30 trillion by 2065, which is some 43 years from now.

Fortunately, this is not true. Indian economy has grown more often than not at 8% rate in nominal terms. The MOSPI back-series estimate provides various national income estimates up to the year 2020-21. Indian economy in the last 70 years (1951/52 to 2020/21) has grown 52 times at a rate above 8% (74% of the time).?

The table shows the decadal average growth rate of India starting with 1951-52. If we leave aside the first decade, Indian economy on an average has always grown above 8% rate. What still baffles me is that why the article took this wrong turn? When the journey from $3 trillion to $30 trillion is on GDP at current price, why the article took the wrong turn of discussing real GDP growth rate??

The article continues to argue:

Given this, Goyal would have been better off forecasting just the $30 trillion number without putting a date to it, because one day the size of the Indian economy will surely cross that figure. In doing this, he would have taken inspiration from the mutual fund manager who in 2007 forecast that the BSE Sensex will touch 100,000 points in our lifetimes, without offering a date. Whenever this forecast comes true, and it eventually will, of course, perhaps this gentleman will be hailed as a visionary.

How a confusion between current price and constant price leads to a wrong conclusion!

Nevertheless, question arises - where the economy will be after 30 years? Well, no one knows for sure. Future is uncertain. But, if we can simply apply the historical growth rate, some pictures emerge.

The starting point in the table is GDP for the year 2021-22 which is USD 3.18 trillion. Exchange rate is derived from IMF data (USD 74.4) and kept it constant for rest of the simulation. Exchange rate would not remain constant but for the simplicity purpose I have kept at that level.

If nominal GDP grows at 8% rate (let’s assume inflation of 4% and real GDP growth of 4%), India will be USD 30 trillion economy in 2051-52 under scenario 1.

India’s 70-year average GDP growth (in current price) is 11.5%. If India’s nominal GDP grows at that rate, we will be a USD 30 trillion economy in 2041-42 which is scenario-2. We can assume that the inflation would remain around 4% and the real economy would grow at 7.5%. This assumption is not far fetched and by all means the country should try to grow at that rate if we have to take millions of people from the trap of deprivation and poverty.

Let’s for the time-being assume that, while inflation remains at 4%, real GDP grows at 6%. Under that scenario, India’s GDP in current price would be USD 30 trillion in 2044-45 which is our third scenario.

What if the country grows at 11.5 % (4% inflation and 7.5% real GDP growth) for the next 30 years? India’s GDP in terms of nominal or current price will be USD 83.3 trillion.

Therefore, a simple confusion of current and constant price has led to this OPED with such scathing criticism.

The article concludes with a quotation which reads as follows – “The new rule is to forecast so far into the future that no one will know you got it wrong." Well, not exactly. We have to think about the ‘Economic Possibilities for Our Grandchildren’ – which is the essay title of one of the greatest economists of the world whom the author has quoted that is John Maynard Keynes.

?Article Link: https://www.livemint.com/opinion/columns/a-30-trillion-economy-is-within-our-reach-but-we-can-t-say-when-11656432500286.html