Implications of a $ 5 trillion economy

Recently, Prime Minister Modi spoke about the challenge of making India a $5 trillion economy by 2024. He feels that even though it would appear as a challenge, it is doable. Earlier NITI Ayog had set a target of $10 trillion economy by 2030.

There are many imponderables to these targets. Apart from sustained high growth it would depend on the exchange rate. If the rupee depreciates faster than normal it would be a tall order. On the other hand, if the rupee appreciates the target would be easier to achieve. There is a catch in the goal of $ 5 trillion economy by 2024: If the economy is to achieve sustained high growth, impressive export growth is a must. This, in turn, requires a competitive exchange rate, which will pull down the GDP expressed in dollar terms.

Sustained high growth should be the top priority of the government. Only high growth can generate the tax buoyancy to make growth inclusive. There is a near consensus in economic circles in the world today that only a market economy can generate sustained growth. But market economy creates massive inequalities, which is not desirable and can throw up political and social challenges, particularly in a developing economy like India. Therefore, growth has to be inclusive. It would be correct to infer that the strategy to provide toilets and cooking gas to the poor and schemes like the Jandhan Yojana have paid rich political dividends, while making growth more inclusive. More needs to be done in this direction and initiatives for that can be expected from this government. The real challenge is that inclusive programs require high tax revenue that can come only through sustained high growth.

The exceptionally strong mandate that the people of India have given to this government and the uniquely powerful position in which Prime Minister Modi is in now, provide a historic opportunity to push ahead with economic reforms that can deliver sustained growth. Land and labour market reforms that can enhance factor productivity, leading to sustained growth, should be among the top priorities of the government.

A $5 trillion economy by 2014 and a $10 trillion economy by 2030 need a favorable external environment. This cannot be taken for granted in the present phase of deglobalization engineered by a few exceptionally powerful leaders. Even then, a $ 7 trillion Indian economy by 2030 is certainly doable. This has an important implication for investors. A $7 trillion economy means a market cap of $7 trillion by 2030 assuming a Market cap – GDP ratio of 1:1.  This has the potential to translate into around 200 percent appreciation in Nifty in 11 years. In other words, wealth creation through the stock market in the next around 11 years would be 3 times more than the wealth created so far. This is the big picture that investors should always keep in mind while investing in the market. Systematic investment should be the strategy.

Patience pays!