In 2017, we had written how India may become a $5-trillion economy by 2024. But since then, a lot has changed both on the domestic and global front. In this backdrop, India still has a fair chance of reaching the goal reiterated by Prime Minister Narendra Modi last week. But to achieve it, there are two necessary conditions: one, to maintain an average real GDP growth of 7.1-7.3% through the forecast horizon (leading to average nominal GDP growth of 11.5%); two, rupee-dollar needs to stay stable in the 71-72 range, which is doable, with a little bit of help from the global economy.
Despite a challenging global environment, we believe that India’s medium-term outlook remains constructive, due to its demography, aspirational middle-class population, reforms push for increased formalisation and scope for substantial investment in physical and human capital.
Also, India is more resilient today than before and has the ability to deal with potential external shocks through appropriate policy responses. Indeed, India’s growth outperformance relative to emerging market peers is expected to continue, which should help attract substantial foreign capital.
Other milestones India should target by 2024-25:
* Doubling per capita income: India’s per capita income should rise to $3,500 by 2024, and almost double to $4,000 by 2025. Economies that have a significantly higher informal sector employment, like India, typically tend to have a lower per capita income and vice versa.
So, policies aimed toward a greater formalisation of the economy are bound to lead to an acceleration in per capita income growth. In India’s case, GST and demonetisation are likely to play a major role in this formalisation already underway. Also, GoI’s drive to focus on urbanisation will also help increase India’s per capita income significantly, as normally urbanisation leads to increased prosperity.
* Financialisation of savings: RBI’s move to adopt inflation-targeting a few years ago — and establishing positive real interest rate — coupled with GoI’s decision to bring more transparency in the real estate sector, has started an irreversible structural shift of household savings from physical to financial assets, a trend that should accelerate further. The share of financial savings in total household savings is likely to touch 50% by 2024 (from 38.5% now), with most of this incremental household savings likely to find its way into India’s capital markets.
* Drive inflation expectations of households lower to 6-7%: The focus on maintaining positive real rates through prudent monetary policy stance will continue. Inflation expectations saw a sharp decline only when RBI managed to turn real interest rate positive. This implies that to lower inflation expectations further, RBI would need to keep real interest rates positive, as it has done in the last few years.
* Lower public debt-GDP to 60% by 2024-25: GoI should eventually institutionalise the Fiscal Responsibility and Budget Management (FRBM) recommendations, which sets a path to reduce India’s debt-GDP to 60% over the next few years.
* Double gross FDI flows to $100 billion: India has made significant progress in the FDI space, where norms have been liberalised and simplified substantially since 2014. Consequently, it has seen significant FDI inflows increase in the last few years. Reforms related to FDI should continue, which, along with the focus on improving ease of doing business and simplifying tax administration through GST, should help to sustain the positive momentum in the period ahead. Gross FDI inflows should rise close to $100 billion by 2024-25, from the current $45 billion. This will remain akey support for financing the current account deficit (CAD).
* Increase FX reserves to $600 billion: India’s foreign exchange reserves currently stand at about $424 billion, which amounts to import cover of over nine months. Based on medium-term CAD and short-term external debt estimates (close to 150% cover combined and one-year residual maturity), forex reserves need to rise to about $600 billion by 2024-25 to maintain a strong reserves adequacy position.
The writer is India Chief Economist, Deutsche Bank