ECONOMIC SURVEY-CHAPTER 5: INDIA’S MEDIUM TERM ECONOMIC OUTLOOK
Growth Aspirations:
- Vision: India aims to become a “Viksit Bharat” (Developed India) by the centenary of its independence in 2047.
- Growth Rate: To achieve this vision, India needs to maintain an average growth rate of around 8% at constant prices for the next 10-20 years.
- Factors: This growth will depend on both domestic factors, such as policy reforms and infrastructure development, as well as the global environment, including political stability and economic trends.
IMF Projections:
- Economy Size: The International Monetary Fund (IMF) expects India to become a USD 5 trillion economy by the fiscal year 2028 (FY28) and further grow to USD 6.307 trillion by FY30.
- Annual Growth: The IMF projects that India’s nominal GDP will grow at an annual rate of 10.2% in USD terms from FY25 to FY30.
- Comparison: For context, over the past 30 years (from FY94 to FY24), India’s GDP in dollar terms grew at an annual rate of 8.9%.
Nominal GDP Growth:
- Past Growth: India’s nominal GDP has grown at an impressive rate of 12.4% annually over the past three decades.
- Future Growth: For the next five years, the IMF projects that India’s nominal GDP will grow at a rate of 10.7% annually.
- Rupee Depreciation: The rupee is expected to depreciate mildly by 0.5% per year from FY25 to FY30, which is much lower than the 3.3% annual depreciation seen in the last 30 years.
- This reflects India’s growth potential and its role as an attractive investment destination.
Current Account Deficit:
- Projection: The IMF projects that India’s current account deficit will gradually rise to 2.2% of GDP by FY30.
- Reason: This gradual increase is seen as a natural part of India’s economic evolution and growth, as the country invests more in infrastructure and other development projects.
Growth Projections for FY26:
- Ministry of Statistics: The Ministry of Statistics and Programme Implementation projects a 6.4% growth in constant prices for FY25.
- IMF Projection: The IMF expects growth for FY26 to be between 6.3% and 6.8%, with an average projection of around 6.5% growth from FY26 to FY30.
GLOBAL ECONOMIC & POLITICAL CONTEXT
- Impact: The global environment, particularly geo-economic fragmentation, will significantly affect global growth. This fragmentation refers to the breakdown of global economic integration due to political and strategic considerations.
- China’s Role: China’s manufacturing dominance and strategic influence will play a crucial role in shaping global economic trends. India must navigate these challenges to achieve its growth targets.
GLOBAL ECONOMIC FRAGMENTATION
Keynes’ Vision of Globalization:
- Ideal World: John Maynard Keynes envisioned a world where people could easily access global products and invest anywhere, enjoying prosperity and ease.
- Impact: This vision reflects the state of hyper-globalization over the past few decades, where global integration has shaped economic life, leading to significant flows of capital, goods, services, and people, enhanced by technology and ideas.
Geo-Economic Fragmentation (GEF):
- Definition: Geo-Economic Fragmentation (GEF) refers to the policy-driven reversal of global economic integration, often guided by strategic considerations.
- Impact: GEF affects trade, capital, and migration flows, leading to a more fragmented global economy.
- Consequences: While globalization brought many benefits, hyper-globalization led to complacency, leaving some people behind due to changing industries and rising global competition.
GLOBALISATION IN THE PAST FEW DECADES
- Trade Growth: In 1980, global trade was 39% of world GDP, rising to 60% by 2012, showing deeper market integration.
- FDI Growth: Foreign Direct Investment (FDI) grew from USD 54 billion in 1980 to over USD 1.5 trillion in 2019, highlighting the rise of multinational corporations.
- Economic Growth & Poverty Reduction: The global economy grew from USD 11 trillion in 1980 to USD 100 trillion in 2022 (nominal). Extreme poverty rates fell from 42% of the global population in 1981 to 8.4% in 2019, largely due to rapid growth in countries like China and India.
GROWTH IMPLICATIONS OF GLOBAL ECONOMIC FRAGMENTATION
Impact on Trade:
- Trade-Restrictive Measures: Trade is the primary channel through which fragmentation reshapes the global economy. Increasingly, trade-restrictive measures are stifling the ability of trade to generate productivity gains.
- Value of Trade: Between October 2023 and October 2024, the value of trade covered by 169 new trade-restrictive measures was USD 887.7 billion, up from USD 337.1 billion in the previous year.
- WTO Report: The World Trade Organization (WTO) has reported a sharp rise in the coverage of trade restrictions, indicating a more protectionist global trade environment.
Cost of Trade Fragmentation:
- Global Output: The IMF estimates that the cost of trade fragmentation could reduce global output by 0.2% to 7% of GDP, depending on the level of fragmentation.
- Technological Decoupling: If technological decoupling is added to the mix, output losses could rise to 8-12% of GDP in certain countries, highlighting the significant economic impact of fragmentation.
Foreign Direct Investment (FDI) and Friend-Shoring:
- FDI Flows: FDI flows are increasingly concentrated in geopolitically aligned countries, particularly in strategic sectors.
- Emerging Markets: Emerging markets and developing economies face greater restrictions and output losses due to friend-shoring and re-shoring, as FDI moves away from these economies towards more aligned countries.
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