India is unlikely to become a $5 trillion economy by 2024-25, but will be worth about $4 trillion, estimates Gita Gopinath, economic counsellor, and research department director of International Monetary Fund (IMF). The $5 trillion aspirational target was set by prime minister Narendra Modi in 2019.
“India has significant potential for rapid growth over the medium term given its young population, large labour force, and rising educational attainment”, though “there remain certain structural impediments that need to be addressed to harness this potential,” Gita Gopinath tells Fortune India.
“First of all, there is a need for increased public expenditure in infrastructure, education, health and social safety nets, but for this to happen greater fiscal space is needed. This can be enhanced through a credible and communicated medium-term fiscal consolidation strategy that includes additional revenue mobilization and advancement of the authorities’ privatization agenda”, Gopinath says.
According to her, the recently announced plans to privatize two public sector banks and one state-owned insurance company should be used to pave the way for a substantial reduction in the government’s presence in the sector, which would help boost medium-term growth. “Additionally, the planned reform of non-bank regulations should help reduce systemic vulnerabilities. Further development of the domestic corporate debt markets will also be important for boosting growth, as will enhancing the resolution and crisis management framework”, Gopinath adds.
The IMF's chief economist also points out that addressing other long-standing reform priorities—including improvements in governance; increasing female labour force participation; boosting access to finance; reducing informality and improving education outcomes will help maximize medium and long-term growth. “Further investment liberalization and a reduction in tariffs could also help deepen India’s integration in global value chains”, she tells.
On the ways to recover from the Covid-19 induced economic slowdown, Gopinath tells a continued coordinated policy response to fight the virus—including through vaccinations—is critical to overcome the ongoing health crisis and support the recovery. “We see grounds for additional fiscal support, including additional spending on health and to support the most vulnerable groups. As for monetary policy, we believe it should remain accommodative for now given the incomplete recovery but at the same time, it should be ready to act quickly if inflation pressures rise further. Similarly, financial sector and regulatory policies should support the recovery, while allowing the exit of non-viable firms and encouraging banks to continue building capital buffers and recognize problem loans”, she says.
There is still much more that needs to be done for India to become a $5 trillion economy, she adds.