By R Jagannathan
After missing the bus for two consecutive years, thanks to an accelerating slowdown, India will probably keep its tryst with a $2 trillion economy this year.
According to the Prime Minister’s Economic Advisory Council (PMEAC) headed by C Rangarajan, the Indian economy’s GDP will hit $2,126 billion (i.e. $2.12 trillion) this year if growth rises to 6.4 percent as projected in real terms. Even if it doesn’t, making the leap from $1,847 billion last year to at least $2,000 billion will be nixed only if we have a further dramatic slowdown this year. Which, even the UPA’s ill-wishers will acknowledge, is unlikely in an election year, when a flood of black money usually rejuvenates the economy.
The real story, though, is the story of missed opportunities. The PMEAC had predicted an economy of $1,944 billion in 2011-12, which, with some rupee appreciation in a high-growth year, could have hit $2 trillion. But not only did the economy head south due to the policy paralysis, even in the following year (2012-13) the rupee’s weakness ensured that the $2 trillion target was not achieved.
Even now, if growth falters for whatever reason, and if the rupee tanks to Rs 60 because the current account deficit (CAD) soars again, we may still miss the $2 trillion mark in 2013-14.
As we said, that appears unlikely at this point, but then who thought growth in 2012-13 would hit a decade’s low?
None of this has prevented the PMEAC from hoping for pie in the sky. Says the Council’s report: “The next decade will be a crucial decade for India. If we grow at 8-9 percent per annum, we will graduate to the level of a middle-income country by 2025. It is once again a faster rate of growth which will enable us to meet many of our important socio-economic objectives.”
The reality is this: raising growth from 5 percent to 8-9 percent will remain a pipedream without dramatic reforms. Especially in factor markets such as labour and land. While there is no sign of labour reforms, land reforms are heading in the direction of a further escalation in costs, which can only slow down growth and destroy jobs.
To be sure, India is already a “lower middle income” country by World Bank definition. The Bank classifies countries with per capita national incomes below $1,025 as low-income, those in the $1,205-4,035 range as lower-middle income, those between $4,036-12,475 as upper middle income, and those above $12,476 as high income countries.
The PMEAC is obviously talking of India rising from lower middle income status - which is where we are currently with a per capita GDP of $ 1,518 in 2012-13 – to upper middle income status.
For 2013-14, the PMEAC has projected income at $1,725 – which, of course, depends as much on growth as exchange rates. It is worth recalling that last year, our dollar per capita income actually declined (from $1,551 in 2011-12 to $1,518 in 2012-13), and no bets can be laid on whether $1,725 will be reached this year.
The critical issue for hitting both the $2 trillion GDP target and the $1,725 per capita income target is how the current account deficit – the gap between external earnings and expenses – is addressed.
The PMEAC is chuffed that gold and oil imports are falling, but even with this it is projecting an increase in the absolute CAD numbers for 2013-14 at $100 billion, against $94 billion in 2012-13. The merchandise trade deficit itself was $200 billion last year, and could rise to $213 billion in 2013-14. Only remittances and more foreign borrowings enabled us to bridge this gap last year. It will be the main challenge this year too. “Controlling CAD remains our main concern at present,” the PMEAC acknowledges.
In percentage terms, CAD is expected to decline from 5.1 percent of GDP last year to 4.7 percent this year, but one wonders if this is entirely consistent with expectations of higher growth of 6.4 percent. The question is whether growth will worsen the CAD (growth requires more energy, especially oil) or improve it, unless exports revive. If CAD worsens beyond what the PMEAC estimates, and if the climate for foreign investment inflows is negative, we should expect the rupee to stay weak.
In an election year, where political uncertainty abounds, it is difficult to be sure that capital inflows will remain predictable.
We should not take the date with the $2 trillion economy for granted even in 2013-14.