The long road to a $10 trillion economy

The long road to a $10 trillion economy

A believable target but questions about the strategic path

The Niti Aayog has presented Prime Minister Narendra Modi with a rather airy strategy to make India a $10 trillion economy by 2032. The strategy document offers us some insights into the minds of the men around the prime minister.

Sceptics have been quick to point out that the goal is unrealistic. It is not. The International Monetary Fund publishes historical data on the size of its member countries. India had a gross domestic product of $494 billion in 2001. That is expected to grow to $2.2 trillion by the end of this year. In other words, the size of the Indian economy will have gone up 4.6 times in the past 16 years. The same rate of growth over the next 16 years will lead to an economy that produces more than $10 trillion by 2032. Bingo!

What the sceptics have missed — and the Niti Aayog head has also curiously glossed over — is that the change in the dollar value of national output depends on the nominal growth rate in rupees as well as the exchange rate of the rupee. The Niti Aayog presentation is instead focussed on the real growth rate in terms of the domestic currency, and assumes that it will be in the double digits over the next decade and a half, an unrealistic assumption given the state of the global economy. This is Economics 101.

So the $10 trillion target itself is not as unrealistic as it seems at first. The link drawn between faster growth and the removal of poverty as we understand it today is also welcome, especially given the erroneous belief of the previous government that entitlements could deal with the problem of mass poverty.

The more questionable part of the presentation to the prime minister is the strategic path that has been charted out. There is an interesting comparison to be drawn between the tightly argued Economic Survey written by the economists of the finance ministry in February on the one hand and the laundry list of various government programmes (Creating a movement for change) that the Niti Aayog seems to be banking on.

The policy focus in the latter document is clearly on new thinking, executive action and good implementation. This is perhaps not surprising given that Amitabh Kant, chief executive officer of Niti Aayog, has earned his spurs as an extraordinary project manager, as in the case of the proposed industrial corridor between Delhi and Mumbai. It also fits in with the administrative strengths of the prime minister. But it skirts the deeper challenges such as maintaining macroeconomic stability, raising the investment rate of the economy, tackling the problem of exit, improving the supply of public goods, putting an end to institutional decline and bolstering state capacity in areas that matter.

Economists have differed about what is the key variable that explains national economic performance over the long run. Is it the rate of capital accumulation? Or productivity growth? Or the quality of institutions? There are no easy answers to these grand questions, but there is no doubt that there is more to sustained economic growth than large projects that can be pushed by executive action. The Niti Aayog strategy misses the mark here, even though the experience of the private sector shows that a seemingly stretch target does focus management energy.

In September 2001, a group of McKinsey & Co. consultants had made a presentation to Prime Minister Atal Bihari Vajpayee and his senior cabinet colleagues on how India can grow at double digits. The suits had argued that India was not constrained by resources but by barriers to their efficient use. They had also argued that the government should push ahead with reforms that require executive action rather than legislative approval, given the gridlock in parliament at the time (well, some things never change). A similar approach is evident in the Niti Aayog strategy document.

There is an apocryphal story that Vajpayee patiently sat through the McKinsey presentation, and then asked in a puzzled tone: “Magar yeh hoga kaise?”.

The same question needs to be asked about the technocratic Niti Aayog plan.