‘Indiawillbe$20tneconomyby’40’

Medium-term fundamentals of economy solid, says CEA Nageswaran

Press Trust of India

NEW DELHI: Sustaining a high growth rate, moderating inflation, keeping fiscal deficit under the balance, and ensuring stability in the external value of the rupee are the four key challenges triggered by global factors and the Union finance ministry is well prepared to handle them, chief economic adviser (CEA) V Anantha Nageswaran said on Wednesday after the central bank raised the policy rate.

It’s possible for the size of the Indian economy to be $20 trillion by 2040, he added, with a per capita income of $15,000. According to the World Bank, India’s per capita income in 2020 was $1,927.70.

“...we had the Reserve Bank of India (RBI) raising interest rates by 50 basis points (bps) but also maintaining its growth forecast for the year at 7.2%,” he said at the Iconic Day celebrations of

Azadi Ka Amrit Mahotsav organised by the department of economic affairs.

Earlier, RBI governor Shaktikanta Das said the real gross domestic product (GDP) is estimated to grow at 7.2% in 2022-23, retaining its April forecast. “Nevertheless, the negative spillovers from geopolitical tensions, elevated international commodity prices, rising input costs, tightening of global financial conditions, and slowdown in the world economy continue to weigh on the outlook,” Das said after the meeting of RBI’S monetary policy committee meeting.

Nageswaran said there are considerable challenges for the economy, referring to headwinds emanating from the global macro-economic situation, monetary policy decisions, and the Ukraine war. He added that policymaking under the current circumstances should be flexible. “Naturally, there is no pre-programmed roadmap or a menu of options that would help us achieve these challenges,” he said. He added the finance ministry is “well prepared” to respond to the challenges of balancing these four important considerations.

“Naturally, there will be adjustments as we go along in the course of the fiscal year as developments happen, but we are quite aware that the hardearned macro and financial stability of the last several years will be important to maintain and they will also stand this in a good state as we navigate this immediate and near-term challenges.”

The Covid-19 outbreak in 2020, followed by a 68-day nationwide lockdown, had a devastating impact on the economy. India’s GDP shrank 24.4% in the first fiscal quarter that ended in June 2020. It plunged further into a technical recession—negative growth for two consecutive quarters—as it contracted 7.4% in the next three months. Thereafter, the economy saw a V-shaped recovery on the back of a ₹20.97 lakh crore stimulus package and policy reforms announced.

According to the provisional estimates released by the National Statistical Office (NSO) on May 31, India’s real GDP growth in 2021-22 is estimated at 8.7%, taking the economy’s size to over the pre-pandemic (2019-20) level.

According to experts, surging inflation—mostly due to a spike in food and fuel rates due to global reasons—could slow India’s growth. India’s retail inflation surged to eight-year high at 7.8% in April 2022, which is well above the RBI’S official upper tolerance level of 6%.

Nageswaran expressed confidence about the resilience of the Indian economy. “...look beyond the current concerns over inflation, prices of oil, food, fertilizer, central bank interest rates, etc, because India has emerged out of [previous crisis] with its financial system well repaired, improved and with the balance sheet strength…,” he said, referring to structural reforms introduced by the government, including goods and services tax regime, and Insolvency and Bankruptcy Code.

He said the fundamentals of the Indian economy are strong but some external headwinds such as pandemic and geopolitical conflicts may “temporarily” overshadow its growth. The strength of the Indian economy is evident in the IMF’S expectation that the Indian economy will “cross $5 trillion by 2026-27”, he said, adding that “if the dollar GDP of the country doubles every seven years, we will be at $20 trillion GDP by 2040 with a per capita income of close to $15,000.”

He said while India is focusing on the near-term concerns and challenges, the medium-term fundamentals of the economy remain solid and the Indian economy is much better placed to face the challenges that the world is currently encountering.

Experts said both the RBI and CEA are optimistic on economic resilience of the economy and willingness of the government for prompt monetary and fiscal measures as and when required.

EY India chief policy adviser DK Srivastava said the positive growth outlook could be realized if “strong fiscal support” is mounted.

A Kotak Institutional Equities Research said the optimism is pn account of several factors such as pickup in rural consumption on expected good monsoon, rebound in contact-intensive services aiding urban consumption, pickup in investment activities, government’s capex push, and buoyancy in merchandise exports.

“However, downside risks to growth remain from persistence of supply bottlenecks and tightening global financial conditions,” it added.