Amidst a whirlwind of debates and controversies, the prospect of India’s GDP crossing the formidable $5 trillion mark has become a focal point of discussion. How realistic are the chances of the Indian economy going past the $5 trillion GDP mark in the near future? The other contention is: what will and what will not change in Indian politics and society if and when the $5 trillion milestone is crossed?
By Sutanu Guru
- The most significant impact on the global stage has been the growing stature of India in the global geo-political and geo-strategic matrix
- By 2028, when the Indian economy is expected to be much bigger, there is little doubt that expenditure on various welfare schemes will be massive
- For decades, the southern states have outperformed the so-called Hindi heartland states in terms of both economic growth and quality of life
- The reality is that until this century, the government simply did not collect enough tax revenue to have the money to spend on welfare schemes
THERE is a lot of hoopla and plenty of controversy surrounding speculation and forecasts of the Gross Domestic Product (GDP) of India surpassing the US $ 5 trillion mark in the near future. Ardent fans of Prime Minister Narendra Modi argue with fervour that the structural reforms implemented by his regime since 2014 have played a vital role in the Indian economy racing towards that significant milestone. Fierce critics of Modi argue passionately that such rhetoric and chest-thumping is a lot of hot air without any substance. Which point of view you support, of course, depends on your ideological and political inclination. For his fans, Modi can do no wrong. For his critics, he can never be right. But then, that has been media, cadmium and political discourse ever since Narendra Modi was sworn in as Prime Minister in May 2014. His re-election in 2019 with an even bigger mandate has fuelled even more ideological wars. But then, one is not talking here of Modi; more than enough has been said and written about him to bore an ordinary citizen to sleep. The point of this piece is: How realistic are the chances of the Indian economy going past the $ 5 trillion GDP mark in the near future? The other contention is: what will and what will not change in Indian politics and society if and when the $ 5 trillion milestone is crossed?
The “West” knows that India is the only country in Asia that can be strategically “used” by them to contain the menace of an increasingly aggressive and belligerent China. That is one major reason why PM Modi is being wooed and feted in global capitals
Let’s look at the possibilities first. Even a student of elementary economics, Modi fan or critic, who understands data knows that the GDP of India will almost certainly (barring another Covid style catastrophe) cross $ 5 trillion by 2028. It is simple statistics and mathematics. The economy doesn’t need to grow at double digits, or even at 8% for that to happen. A 6% plus annual GDP growth rate between now and 2028 will translate into a $ 5 trillion economy. It is mathematically inevitable and no rhetoric or polemics are required to argue the matter.
Ascension to the Third-Largest Economy
The most immediate change that one will see is what Modi and his supporters are boasting about in various forums nowadays: India would have overtaken Germany and Japan to become the third largest economy in the world after the United States & China. There is simply no rocket science or black magic involved in this. One look at the accompanying chart that plots the GDP of the three economies since 2000 makes it very clear. Apart from a few short spells of recovery, the Japanese economy has been stagnating since the 1990s. In fact, it has periodic phases of actual contraction. Germany had been performing comparatively better in the same period. But it has also been stumbling in recent times. Now look at the maths. In 2023, the GDP of Germany was estimated at $ 4.3 trillion while that of India was a shade less than $ 3.4%. According to IMF projections, the German economy will actually shrink in the current year while the Indian economy will grow at more than 6%. In effect, the GDP of Germany next year will be about $ 4.2 trillion while that of India will be about $ 3.7 trillion. For a few years after that, IMF and other projections are very clear that the German economy will grow at less than 1% a year while India will keep growing at more than 6% a year. By 2025, India’s GDP will cross $ 4 trillion.
One can keep arguing as to why and how India will become a $ 5 trillion economy and the third-largest one by 2028. Ideological wars apart, all normal and stable regimes starting from that of P V Narasimha Rao in 1991 to Atal Bihari Vajpayee in 1998 to Dr Manmohan Singh in 2004 to Narendra Modi in 2014 have undertaken reform measures that have incentivised economic growth prospects in the country. The only blemish has been the second stint of Manmohan Singh between 2009 and 2014 when corruption scandals, high inflation rates, slowing economic growth, a mini foreign exchange crisis et al had made India one of the five designated “fragile” economies of the world. But it has since recovered smartly and is now the fastest-growing major economy in the world. The most significant impact on the global stage has been the growing stature of India in the global geo-political and geo-strategic matrix. It has become impossible for traditional global powers to ignore India anymore. For one, the “West” (that includes Australia and New Zealand) knows that India is the only country in Asia that can be strategically “used” by them to contain the menace of an increasingly aggressive and belligerent China. That is one major reason why Prime Minister Modi is being wooed and feted in global capitals.
By 2025, Apple Inc would have moved 25% of its mobile phone production capacity to India. It may seem trivial, but it signals a tectonic shift. The other reason is the size of the Indian market. Academics and media pundits have been debating for years about the actual size of the Indian middle class. Some sceptics put it at no more than 100 million while optimists insist it is above 500 million (more of that later). The fact is that for most products and services, India is actually the second, third or fourth largest market in the world. How can any corporate entity with global telecom ambitions not afford to be present in a market where 160 million smartphones are sold every year and where close to 1000 million consumers are fiddling with apps on their smartphones on a daily basis? India’s salience and stature will grow even further by 2028 when it becomes a $5 trillion economy. Reluctantly or not, critics of Modi will have to accept this reality.
Changes in Poverty Dynamics
Another extremely significant implication of India crossing the $ 5 trillion milestone is that it will finally sit the group of poor nations. That doesn’t mean poverty will disappear from India. Far from it. But both the proportion and number of Indians living in absolute poverty would have declined dramatically by the end of 2028. As the Indian economy grew at a rapid rate in the first two decades of this century; it successfully lifted more than 550 million citizens out of poverty. But a huge number remained poor. The NITI Aayog recently came out with the 2023 diction of its report on multi-dimensional poverty in India. This measure doesn’t depend on family income and expenditure but looks at 12 parameters related to health, education and access to things like toilets, electricity, clean cooking fuel, water and bank accounts that actually reflect the real standard of living of a family. According to this report, a shade less than 15% of India is still multi-dimensionally poor while the poverty rate based on income has dropped well below 10%. Now 15% means about 210 million Indians still don’t have a decent standard of living. But with massive investments in both physical and social infrastructure, there will inevitably be a massive improvement by 2028. In fact, if one factors out just a few states like Bihar, Jharkhand and Assam, most of India will be a middle-income country by 2028.
Both India and China were ranked below 100 when the 21st century dawned. Some economists used to argue that it was inevitable for such countries with massive populations to have low HDI rankings. But now, China has improved to rank 79 while India languishes at around 132
The maths even here is quite simple. The population of India is estimated to be 1500 million or 1.5 billion by the end of 2028 while the GDP will be 5 trillion USD. That translates into a per capita income of about $ 3400. Even this figure is misleading. The more accurate measure of GDP and per capita income is based on Purchasing power parity (PPP). In PPP terms, the per capita income of India is already $ 8,400 a year. By 2028, it will be comfortably well above $ 10,000, the hallmark of a middle-income country.
This measure is more accurate because it shows how much an Indian can buy within India with his/her family income. As the accompanying chart on the per capita income of India since 2000 shows, India has already crossed the poor nation threshold even in the current USD and is close to middle income in terms of PPP. To emphasise again, if governance improves significantly in states like Bihar, Jharkhand, UP and Assam, India will be a dramatically different place by 2028. States like Odisha, which were the poorest in the country when the 21st century dawned, have transformed dramatically. Uttar Pradesh has seen remarkable economic growth and improvements in infrastructure over the last decade; though one cannot yet say conclusively that it is firmly on a growth and poverty reduction path like Odisha. But if the state that accounts for more than 16 percent of the country’s population does achieve what looked very improbable a few years ago, it could be a modern-day economic miracle.
India’s Trajectory against Pakistan’s Decline
Most Indians would be fascinated by this little nugget of information: Among the numerous terrorist attacks within India in major cities and civilian centres orchestrated and executed by so-called “non-state” actors of Pakistan, the 26/11 attacks on Mumbai in 2008 was one of the most horrifying. But that was a significant year for another reason. The per capita income of India ($ 993) finally moved ahead of the per capita income of Pakistan ($ 914). There has been no looking back since then. As Pakistan continued to play snakes and ladders with extremism and terrorism, the Indian economy started racing further and further ahead of Pakistan. The gap has been widening to yawning levels in recent times as the Pakistani economy teeters on the edge of bankruptcy even as India becomes the fastest growing economy in the world. By the turn of the century, the per capita income of India was significantly lower than that of Pakistan. Now, it is 40% higher.
The accompanying chart compares the total exports of India with the GDP of Pakistan. It needs to be repeated: not a comparison between the GDP of the two countries; but a comparison between exports from India with the GDP of Pakistan. Once again, the 26/11 terror attacks serve as a gruesome milestone. Soon after that, total exports from India started exceeding the GDP of Pakistan. The gap has been widening ever since and Indian exports are more than double the entire GDP of Pakistan. This single number poignantly reveals how irrelevant Pakistan has become to India at a strategic level.
The first major scheme where big sums were committed was the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) rural jobs promise kicked off by the UPA. Now, there are so many welfare schemes launched by the central and state governments that it would take a small book to list their details
By 2008, it will just be a pesky nuisance. Sure, cross-border terror attacks will continue, and China will keep using Pakistan as a client state to inflict damage on India. But by 2028, India would have moved permanently out of Pakistan and so-called South Asian orbit. Young Indians are the children of the reform era and are not aware of this. But there was a time in the 1990s when arrogant American diplomats like Robin Raphel (who was subsequently investigated by the FBI for being in cahoots with Pakistan’s notorious ISI) would hector India, equate her with Pakistan and even go to the extent of questioning the accession of Jammu & Kashmir to India. That era will be a distant memory by 2028.
MIDDLE CLASS DREAMS, Growth, and Impact
Everybody agrees that India has a large middle-class population that is growing year after year. If 160 million smartphones are sold every year; 4 million passenger vehicles and 18 million two-wheelers are sold each year and more than 100 million take to the skies in domestic flights each year, it would be stupid to argue that India doesn’t have a significantly large middle class population. The debate is on how big the middle class is. The data and facts are clear. But how big the size of the Indian middle class is depends on your worldview as the glass is half empty or half full. For the sceptics, starry-eyed optimists grossly inflate the numbers. They do have numbers to back them up. For instance, just about 70 million Indians file income tax returns. Another data set the sceptics cite is the fact that just 7.6 million to 8 million Indians earn between Rs 10 lakh and Rs 1 crore a year. If you set such a high benchmark, it is obvious that the size of the Indian middle class would be puny. But that would be the wrong way to look at it since such people are affluent and should not be categorised as middle class. Beyond the affluent, there are the genuine middle class and then the aspirational middle class. The middle class buys cars and air conditioners while the aspirational middle class buys two-wheelers and air coolers. Going by various estimates of credible academic and research bodies like the NCAER (National Council of Applied Economic Research), the proportion of the middle and aspirational middle class in India ranges from 35% to 40%. In effect, India currently has a middle-class population of between 490 million to 560 million.
China faces two daunting hurdles, First, after molly coddling the authoritarian state for decades, the west now perceives China as a dangerous adversary and is making determined efforts to move at least some manufacturing away from the “factory of the world”
Look at it another way. The projected per capita income of India in 2028 will be 3,400 USD or so. At current exchange rates, that will be Rs 2,82,00 a year. In 2010, the per capita income of India was sufficient to buy one two-wheeler. By 2028, it will be sufficient to buy three-wheelers. Beyond just data, that is the profound change taking place in the Indian economy. And it will not stop once Indian GDP crosses $ 5 trillion in 2028. One may well ask? What about the 150 million or so Indians who will remain multi-dimensionally poor? That brings us to the fifth positive change that India will witness by 2028; a change that has been clearly visible for the last five years or so.
Expanding Welfare Spending
One of the rhetorical points made often by Narendra Modi and other BJP leaders is that past Congress regimes like that of Indira Gandhi in the 1970s talked about “garibi hatao” but did not achieve much on the ground to actually reduce poverty. According to data, it is a fact that the absolute number of poor people in India kept rising until the 1990s. But was it really due to lack of intent on the part of leaders like Indira Gandhi, Rajiv Gandhi, and P. V. Narasimha Rao? It would be unjust to question their intent. The reality is that until this century, the government simply did not collect enough tax revenue to have the money to spend on welfare schemes for poor citizens, even if the intent was there. However, there were massive leakages in even the modest welfare schemes that were launched in that era, a lacuna that has been largely resolved in this age of Jan Dhan Zero Balance Bank accounts and digital money transfers via the JAM trinity.
Moreover, past regimes themselves were too constrained by resources to help poor Indians in any meaningful way. What little was collected via obsolete tax mechanisms – both for direct and indirect taxes – was not even enough to pay salaries, pensions, interest payments, and expenditure on defence, social, and physical infrastructure. Only in the first decade of this century did tax revenues start growing in a phenomenal manner.
The accompanying chart that shows total tax collections by the central government makes it clear how phenomenal that growth has been. This chart shows only central tax collections. The capacity of state governments to raise tax revenues has also increased considerably.That is one of the main reasons why welfare schemes targeted at the poor and the disadvantaged started with a trickle towards the end of the first decade and became a deluge towards the end of the second decade. The first major scheme where big sums were committed was the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGS) rural jobs promise kicked off by the UPA. Now, there are so many welfare schemes launched by the central and state governments that it would take a small book to list their details. More importantly, politicians have realised that promises of more such “freebies” not only lead to electoral victories but their delivery also leads to repeat election victories. Pro-incumbency verdicts have become more common in India. By 2028, when the Indian economy is expected to be much bigger and tax revenues even more buoyant, there is little doubt that expenditure on various welfare schemes will be massive.
These are some of the ways in which changes in Indian economy and society can be viewed positively as GDP crosses the $ 5 trillion milestone. But it will not all be hunky-dory. There would also be five ways in which India will continue to disappoint dispassionate analysts and well-wishers.
The Economic Gap Between India and China Will Prevail
Many ultra nationalistic Indians have conjured up mythical fantasies about India’s emergence as a greater power once it crosses the $ 5 trillion milestone. One such fantasy is that China will no longer pose a great threat as India closes the yawning gap between the two countries. The reality is far more sobering.
As of now, the GDP of China is about six times that of India. By 2028, when India crosses the $ 5 trillion milestone, the GDP of China will still be almost six times that of India. That will happen even as India grows at a faster pace than China as most global institutions have predicted. China has been the biggest beneficiary of the golden era of globalization that straddled the last decade of the 20th century and the first decade of the 21st century. It grew consistently at double digit rates; often growing twice as fast as India. The ultra nationalists would do better to pin their hopes in the third decade of this century. While India will never catch up fully with China, it will start reducing the gap after 2028 when it reaches the $ 5 trillion milestone. China faces two daunting hurdles that will become even more insurmountable with time. First, after molly coddling the authoritarian state for decades, the west now perceives China as a dangerous adversary and is making determined efforts to move at least some manufacturing away from the “factory of the world”. The decision by Apple Inc to manufacture 25% of its iPhones in India is one telling example of that. Besides, the United States is taking policy steps to deny China access to cutting edge technology. But the most important problem China will face is demographics. Its population has started shrinking, once that happens, it is near impossible to maintain high GDP growth rates. India will become a $ 10 trillion economy sometime around 2033. That would be the right time for nationalists to preen.
The Persistence of Poverty in India
As pointed out earlier, the latest NITI Aayog report on multi-dimensional poverty in India states that about 15% of Indians can still be categorised as poor. This is a significant improvement over five years or so as the percentage of Indians categorised as multi-dimensionally poor was more than 25% in 2016-17. Yet, assuming India’s population is 1400 million, the country still has 210 million citizens living in poverty; a number that is more than the total population of most countries in the world. Even more sobering, even as the Indian economy crosses the $ 5 trillion milestone in 2028, a huge number of citizens will still be living in poverty. It is impossible to forecast the extent to which multi-dimensional poverty in India will fall by 2028, but there can be no doubt that more than 100 million Indians will remain poor. By any yardstick, that is a number that should embarrass India, no matter which way one looks at it.
Persistent Agricultural Crisis
One reason why India will continue to host more than 100 million Indians living in poverty is the persistent crisis in Indian agriculture. Despite efforts by successive governments and despite vastly improved infrastructure and productivity, the farm sector presents more of a picture of despair than joy. In 2023, there have been 140 million NREGA job card beneficiaries. This scheme, launched by the UPA government in 2007-08, promises 100 days of paid work to any rural Indian who seeks work at a guaranteed minimum wage. The beneficiaries usually are landless labourers and even marginal farmers whose meagre land holdings produce barely enough to feed the families. Normally, people go for NREGA work only when they are desperate and have tried and failed to access any other source of livelihood. That this scheme is a kind of last resort was proven during the Covid pandemic when workers migrated back from cities to their villages leading to a massive increase in demand for NREGA work. There is not much chance of the situation changing significantly by 2028 when the Indian economy crosses the $ 5 trillion milestone.
Unfortunately, India is a unique country where rapid economic growth has not significantly reduced the proportion of the workforce that is dependent on agriculture and allied activities for a living. The agriculture sector contributes just about 15% of the GDP of India. However, 50% of the population is still dependent on it for a livelihood. Unlike other countries that have transitioned from the status of poor to developing to middle-income, India has failed to create enough jobs in the manufacturing sector on a sustained basis.
Policies like the Production Linked Incentive Scheme (PLI), Make in India and others have started turning things around. Massive investments being pumped in by foreign as well as domestic investors in building new factories under the Make in India campaign will no doubt create millions of new jobs. But when the workforce is more than 600 million, a few million jobs in 2028 will not make a significant difference. It is only when the proportion of Indians dependent on agriculture falls below 25% that cheerleaders and nationalists can declare success or victory. But that is certainly not going to happen by 2028 when India becomes a $ 5 trillion economy.
The North-South Divide Will Widen
There have been a series of controversies in the two southern states of Tamil Nadu and Karnataka. In the latter, activists agitating against the “imposition” of Hindi and arguing for a “Kannada” only approach have used social media platforms aggressively to speak out against migrants from North Indian states who come to Karnataka seeking jobs and livelihoods but insist on communicating only in Hindi. Tamil Nadu, of course, has always been the epicentre of anti-Hindi agitations. Earlier this year, rumours about workers from Bihar being assaulted and even killed in Tamil Nadu triggered a panic about reverse migration.
So serious was the issue that entrepreneurs in the state wondered how their factories would run without Bihari workers. Many have been arrested and stringent charges like UAPA have been invoked. But beyond all this surface trouble lies a more serious issue: the North-South divide. For decades, the southern states have outperformed the so-called Hindi heartland states in terms of both economic growth and quality of life or standard of living.
Going by various estimates of credible academic and research bodies like the NCAER, the proportion of the middle and aspirational middle class in India ranges from 35% to 40%. In effect, India currently has a middle-class population of between 490 M to 560 m
For almost 10 years, PM Modi has been harping on the issue: that a special effort must be made to promote rapid infrastructure and economic growth in the laggard states. Yet, as the accompanying chart Indicates, the gap between the Hindi heartland states and the south is widening by the year. Just look at how far ahead Tamil Nadu is of Bihar when it comes to per capita income. The gap will almost certainly grow wider by 2028 when India becomes a $ 5 trillion economy.
By then, India will face a serious crisis when a delimitation exercise for Lok Sabha seats will be due. Because of their swelling population, the Hindi heartland states will end up getting an even bigger proportion of Lok Sabha seats. This will inevitably lead to disaffection and even anger in the South. No one seems to know how to handle this potentially explosive situation.
Slow Human Development Index Progress
Elsewhere in this write up, it has been discussed how quality of life or standard of living based on certain parameters is considered to be a better way of measuring and understanding the extent of poverty and deprivation in a country. Accordingly, even the NITI Aayog now comes out regularly with reports on multi-dimensional poverty. This is based on 12 parameters and Kerala is the least poor state even though many other states have higher per capita incomes. This concept was pioneered and used by the UNDP in the 1990s and is now the gold standard in measuring human development. The UNDP comes out with a Human Development Report every year that ranks all countries in the world. The lower your rank, the better off you are and vice versa.
It is clear from the accompanying chart that China has beaten India hollow not just in terms of GDP, but also standard of living of citizens. Both India and China were ranked below 100 when the 21st century dawned. Some economists used to argue that it was inevitable for such countries with massive populations to have low HDI rankings. But now, China has improved to rank 79 while India languishes at around 132. This does not mean that there has been no improvement in India in terms of health, education, life expectancy and per capita incomes. India has improved but other developing and emerging countries have improved at a much faster rate. Once again, things will not be significantly different in 2028 when India becomes a $5 trillion economy.
What, then, does a $5 trillion economy, which is the third largest in the world, really mean? The answer is simple: there is plenty to cheer, but there is also plenty to be embarrassed about.