GDP growth rate is an important metric that interests all. The reason — the prosperity of the country and its international leverage depends on its GDP growth, which in turn decides the size of its economy. Of course, India is not an exception. All stakeholders especially the government have a close watch on it. India is making special efforts for getting included in the league of nations whose economy is 5 Trillion dollars and above. Recently, IMF has made a prediction that by 2027 India will be a 5T dollar economy. How this prediction works and what parameters are involved, and how this prediction will change in case these parameters deviate, are the topics of the discussion in this note.
GDP Forecast Model
To understand this better I have created a model in which a user can input his own assumptions and see how India’s GDP forecast change over the baseline (estimated on current averages of growth rate and dollar depreciation). Interested users can click on the embedded link to access the model. To make the model simple to use, I have enabled only three parameters whose values can be altered by the user to estimate the impact on India’s GDP forecast over baseline. These parameters are:- a) Changes in the current average growth rate of India’s nominal GDP (Rs Cr); b) Changes in the current average depreciation rate of Rupee compared to US Doller; c) The chosen year in future from when you want these changes to apply.
Now, the baseline rates are simple to estimate. For which I have taken the average of the rates of growth of nominal GDP and the depreciation of the rupee from 1994 till date. India’s average nominal GDP growth in Rupees for the last 25 years is 12.1%, and the corresponding Rupee depreciating rate is 3.1%. These parameters the user can alter in the model from its baseline values to see the impact. Inputs are possible in “basis points”, which get added or subtracted (depending on the sign of values entered) from the baseline growth numbers. Based on the altered values, the model then presents the trajectory of the new GDP forecast line by superimposing it on that of the baseline projections.
GDP Model Output
The following is the output of the model in case the GDP growth rate is tweaked by 100 basis points keeping the dollar depreciation rate constant. This means the nominal GDP growth rate gets increases from 12.1% to 13.1%, and the dollar depreciation rate remains constant at 3.1%.
A) GDP Rate 13.1%, Dollar Dep Rate 3.1%
One can clearly see that even a 100 basis points (1% growth rate) can alter our 2040 numbers by $ 2.7 Trillion. But it doesn’t change much on India’s 5T window, which we will hit by FY26–27 if we continue on the baseline numbers.
B) GDP Rate 12.1% Dollar Dep Rate 4.1% (100 basis points more)
In this case our 5T target shifts by one year i.e FY27–28, and by 2040 the GDP will shrink by $ 2.5 Trillion.
C) GDP Rate 11.1% and Dollar Dep Rate 3.1%
In this case also our 5T target shifts by one year i.e FY27–28, and by 2040 the GDP will shrink by $ 2.3 Trillion.
Conclusion
The size of India’s economy is highly dependent upon small variations in our GDP baseline numbers. If the growth rate of nominal GDP decreases by 2% then it will push the target of us becoming a 5T economy to FY 28–29 (2 years out from the baseline numbers). Also, the value of the rupee also has a similar impact on our GDP targets. India will be able to grow fast if we are able to drive our economy to become more efficient and productive. Then only we will be able to contain inflation — which has a direct bearing on the rupee exchange rate compared with the dollar. Since the objective is not trivial, it is important that we stay on the course, and we can only do so when we can visualize the impact, and the purpose of the tool is to provide us with that capability. I hope this will be useful.
(Views expressed are of my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
