The first and only rule of political economic forecasting is to find a big round number that catches people’s attention. Take the case of the recent forecast by Oil and Gas Minister Hardeep Singh Puri, who said the Indian economy will reach $10 trillion in 2030.
Somehow, projections of the size of the Indian economy in US dollar terms sound sexier. If he had said that India’s GDP would reach 800 lakhcrore (assuming a dollar stays around Rs 80 for years to come) that would sound like quite a lot, but it still doesn’t have the same ring as a “10 trillion -dollar economy”.
Politicians understand this better than others, which explains why any forecast of the size of the Indian economy, be it 5 trillion, 10 trillion or 30 trillion, is expressed in dollars and not spoken in rupees.
However, let’s dig a little deeper into the $10 trillion figure. Puri did not specify whether this forecast was real, ie adjusted for inflation, or nominal, ie not adjusted for inflation. Still, let’s look at this in real terms, adjusted for inflation. Inflation is the rate of price increase. The growth rate above the inflation rate is the real growth rate and actually helps improve people’s economic situation and lift many out of poverty.
In real terms, the size of the Indian economy last year was USD 2.7 trillion (GDP at constant 2015 USD exchange rates). To reach $10 trillion in size in 2030, that would mean growing at an average of 15.7% per year through 2030. India has never experienced such economic growth in the past. The best economic growth occurred in 2002 and 2010, when the economy grew in size from $871 billion to $1.5 trillion, growing at an average of 7.3% per year. Puri’s forecast calls for a growth rate more than double the previous highest!
Now let’s compare this to China’s growth rate over the past four decades. The size of the Chinese economy in 1981 was just over $444 billion. In 2021, it was $15.8 trillion, representing economic growth of 9.3% per year.
This tells us that Puri expects the Indian economy to grow significantly faster over the next nine years than China’s economy has over the past four decades. But who said that economic policy forecasts have to be logical? Their main goal is to grab attention, which a $10 trillion projection by 2030 definitely does.
In fact, Puri’s colleague Piyush Goyal, who is Minister of Trade and Industry, made a forecast in June – the size of India’s economy would reach $30 trillion in the next 30 years. To do this, the economy must grow steadily by around 8% per year over the next 30 years.
Goyal’s forecast can be considered more realistic than Puri’s given that China has grown by 9% over the last three or four decades. But China is the only country that has grown so rapidly in modern times. In fact, every decade there is a major churn in the top 10 growing economies in the world.
As Ruchir Sharma wrote in The 10 Rules of Successful Nations: Three of the 10 fastest growing economies from the 1950s repeated this feat in the 1960s, but none from the 1960s repeated it in the 1970s. Only one from the 1970s, South Korea, returned to the top 10 list in the 80s. Only two from the 1980s – South Korea and China – made the top 10 in the 90s. And one from the 90s, China, returned in the following decade.”
In fact, it has been very difficult to sustain even 5% annual economic growth over the decades. As Sharma wrote in Breakout Nations: Only six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong) have sustained this rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades.” This book was first published released in 2013, and China has since joined the list.
History teaches us that economic growth should not be taken for granted. Our politicians tend to do just that. In fact, before the $5 trillion forecast comes true, we’re talking about $10 trillion and $30 trillion. But that’s what political economic forecasting is all about. It’s profitable to keep tossing people big round numbers in American dollars.