India is bracing for its third budget in 12 months as Finance Minister Nirmala Sitharaman gears up to present her second Union Budget on February 1. This is a good time to take stock of where India stands as an economic powerhouse and how the country is placed among its global peers.
India was the world's fastest growing major economy until as recently as 2018. But things have gone drastically downhill in the past one year with its gross domestic product (GDP) expanding at a more than six-year low pace in the July-September period. The government has in its recent estimate pegged the weakest pace of annual growth for the economy in 11 years. The International Monetary Fund (IMF) has attributed the slowdown to a variety of factors, including decline in consumption and fall in investments.
The United States is the largest economy in the world today and has been so since 1871. It still constitutes almost a quarter of the global economy, backed by its leadership in science and technology, advanced infrastructure and abundance of natural resources. The size of the US economy, measured in terms of nominal GDP, was $21.44 trillion in 2019 and is estimated to reach $22.32 trillion in the year 2020, according to the International Monetary Fund.
China, known as the world's factory because of its exponential growth in manufacturing and exports, is fast closing in on the US. China's nominal GDP stood at $14.14 trillion in 2019, trailing behind the US by a mere $7 trillion, and the GDP difference between the two economic giants is set to contract to $5.47 trillion by the year 2023, according to the IMF.
Japan is the third largest economy in the world, with its nominal GDP surpassing the $5-trillion mark to $5.15 trillion in 2019. Germany, Europe's largest economy, is at the fourth position in the list of the world's largest economies, with nominal GDP figures of $3.86 trillion.
India, with nominal GDP of $2.94 trillion, overtook UK and France to emerge as the world's fifth largest economy in the year 2019. In the process, the country has left behind the likes of France, Italy, Canada, Russia and Australia -- major trillion dollar economies with nominal GDP figures ranging from 1.3 trillion to 2.7 trillion US dollars.
India and China had the same GDP in 1950, and China's GDP per capita lagged countries such as Cambodia, Kenya and Sierra Leone as late as the 1960s. China witnessed a meteoric rise from the late 1970s to become the world's second largest economy, next only to the US, as the path-breaking reforms initiated by Deng Xiaoping propelled the largely agrarian society to the industrial powerhouse of today. In fact, China's $14-trillion economy surpasses India's $2.9-trillion economy by about five times.
India had to wait for another two decades until the year 1991, for then Prime Minister PV Narasimha Rao and Finance Minister Dr Manmohan Singh to put India on the path of economic liberalization. It is a tribute to the potential of the Indian economy that within a decade of the forces unleashed by Rao-Manmohan duo, its GDP growth started expanding at the rates to the tune of 6-8 per cent annually - a far cry from the growth rates of 3 per cent seen in the pre-liberalisation era.
It is noteworthy that India sustained its growth momentum despite the global financial crisis in 2008. India was, in fact, the world's fastest growing major economy between 2014 and 2018, with the services sector contributing more than 60% to its economy. The GDP growth however slumped to 4.5 per cent in the September quarter, amid financial stress in the rural sector and joblessness across sectors.
The slowdown may just be a blip, after all. The World Bank, in the South Asia Economic Focus, said the country was expected to gradually recover to 6.9 per cent in 2021 and 7.2 per cent in 2022 on the back of an accommodative monetary stance. Reserve Bank of India (RBI) Governor Shaktikanta Das sees the emergence of some green shoots - such as rise in the cost of projects sanctioned by banks and financial institutions, and higher investments in fixed assets by India Inc.
Mr Madan Sabnavis, Chief Economist, CARE Ratings is of the opinion that the government needs to do more to stimulate demand in the economy, especially given the fact that most measures unveiled so far have been on the supply side. Relaxing the fiscal deficit target could go a long way to bolster government spending and revive growth, he feels.
The long-term growth prospects also remain encouraging due to young demographics. By 2027, India will have a billion people aged between 15 and 64, according to a Bloomberg News analysis. Healthy investment rates and a strong, fast-expanding middle class are positives for the Indian economy. Reforms such as Insolvency and Bankruptcy Code (IBC) and Goods and Services Tax (GST) also hold immense promise for the long-term prospects of the economy, say economists.
India has set the ambitious target of becoming a $5-trillion mark by 2024. The Finance Minister has said that PM Narendra Modi's vision of making India a $5-trillion economy and a global economic powerhouse by 2024-25 is "challenging" but "realizable". India will have to grow at double its current pace of growth in the next 5 years to reach the target. Time will tell if India will be able to achieve the coveted goal within that timeline.