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India’s Road to a $5 Trillion Economy: Challenges, and Key Drivers
India is on track to become the world’s third-largest economy, with its GDP expected to reach $5 trillion in the next three years and rise to $7 trillion by 2030, led by continued economic reforms.
A decade ago, India was the 10th global economy with a GDP of $1.8 trillion at current market prices. Fast-forward to the present, and the nation is now the 5th economy, with an estimated GDP of $3.7 trillion in FY24—despite the disruptions caused by the pandemic and having to take over an economy struggling with macroeconomic imbalances and a shaky financial system, as per the Finance Ministry’s January 2024 economic survey.
Obstacles to India's $5 Trillion Dream
International organisations have revised growth estimates downward, according to the IMF, which lowered the GDP estimate to 6.8%, and the OECD and World Bank, which revised forecasts in response to global economic slowdowns.
Roadblocks to India's $5 Trillion Dream
Many obstacles are putting India's ambitious goal of becoming a $5 trillion economy to the test. India's GDP growth rate projection was recently lowered by the International Monetary Fund (IMF) from 7.4% to 6.8%. Citing the global economic downturn and its effects on India, the OECD and World Bank also lowered their projections.
Impact of Pandemic
The COVID-19 crisis adversely affected the global growth with a massive decline of India's GDP by 6.6% during FY 2020-21, giving rise to a serious setback. Though the world has transcended the height of the crisis, residual impacts continue to be felt. Bottlenecks in the supply chain and a sudden surge in inflation caused by a hike in foreign remittances amid the pandemic increased India's inflation rate to 6.6% in 2020 from 3.73% in 2019.
Slow Agricultural Development
As nearly half of India's population relies on agriculture for livelihood, it is the prime mover of the nation's economy. Even so, agriculture contributed only 20.2% to the nation's GDP in 2022, a modest increase after 17 years, given its critical function. Even post-Green Revolution, the growth of the sector has been patchy.
Geopolitical Uncertainties
The global geopolitical climate has remained uncertain over the past three years, which has tested India's economic growth. Some of the major concerns include:
- The Federal Reserve of the United States' aggressive interest rate hikes
- The European energy crisis
- The Ukraine-Russia conflict
- China's zero-COVID policy
- The UK's economic recession
All these have indirectly affected international trade, which in turn has touched India's growth trajectory.
Unrealised Potential in Manufacturing
The manufacturing potential of India is currently underutilised. Nearly 70% of India's exports are low-value goods and raw resources, which limits its ability to participate in global trade. Even if complex manufacturing has a lot of potential, India cannot export high-value goods that are in high demand worldwide.
Education and Skill Gap
India's working class still lags in a huge skills shortage. Although the government has been trying to enhance education, only 29% of Indians are secondary educated, and only 5% of the working population is professionally qualified. This imbalance has an instant impact on productivity and innovation.
Although these challenges would not completely halt India's economic aspirations, addressing them will be crucial to hitting the $5 trillion milestone.
India's Growth Drivers
Export Diversification
To promote economic growth, India is simplifying its "Make in India" and "Local Goes Global" initiatives. To encourage domestic manufacturing, the government launched the INR 1.97 lakh crore Production-Linked Incentive (PLI) program. Given that MSMEs make up 80% of India's industry, the program has the potential to increase consumer spending power and create jobs.
Technological Advancements
India is quickly adopting technology in every sector, enhancing efficiency and productivity.The Unified Payments Interface (UPI) has revolutionised digital transactions, with 47.6 billion transactions done in 2021-22, of which half were made through UPI.
Make the Switch to Renewable Energy
With 40% of power coming from renewable sources, India is making headway in the renewable energy space. By 2030, India wants to generate half of its energy from renewable sources, potentially saving $300 billion on imports.
Growth in Offshoring and Remote Work
India is now a fairly priced talent pool after the post-pandemic trend to remote labor. Companies all around the world are using India's talent pool, which boosts the country's economy and gives professionals the opportunity to make high-value money.
Foreign Investment Inflows
India became one of the prominent destinations of foreign investment, especially in industries. From April 2000 to December 2021, the nation was able to mobilise $104.18 billion worth of FDI. It mobilised alone $58.8 billion in foreign direct investment during FY 2022 due to efforts like 'Make in India' and 'Atmanirbhar Bharat.'
Demographic Advantage
India possesses the world's largest youth population, with approximately 700 million people aged below 25. Both a large consumer market and a large labour market are positive. The young and educated workforce is poised to drive innovation and economic development.
With the use of these economic drivers and the removal of current obstacles, India can accelerate its path towards a $5 trillion economy.