2030: $7 Trillion Economy

When did China’s GDP cross USD seven trillion for the first time? It was as recently as 2011. In 2007, China’s GDP was still USD 3.55 trillion, similar to India’s GDP in 2022-23. China’s economy doubled in four successive years thanks to two factors. One, massive export-led growth and two, a rock-steady yuan.

The Chinese currency in fact appreciated from an average of 7.61 yuan to the USD in 2007 to 6.46 in 2011. That 16 per cent appreciation helped turbocharge China’s GDP measured in USD. Over a decade later, the yuan has depreciated only modestly from its 2011 high of 6.46 to 7.14 to the USD.

This was in contrast to virtually every other global currency. In 2007, for example, the INR was trading at 41.35 to the USD. It has since fallen by over 100 per cent to 83.50. The reason of course is China’s large positive trade balance and India’s chronic current account deficit. It is only now, with services exports booming, that India’s CAD has fallen below one per cent of GDP.

To achieve a GDP of USD seven trillion by 2030, what are the necessary macro and micro ingredients? First, India must maintain the downward trajectory of CAD. With net remittances of over USD 105 billion and FDI, though currently muted, at about USD 50 billion, India’s balance of payments (BoP) will be strongly positive around USD 80 billion in FY25.

That will ease pressure on the rupee. Had the Indian currency not halved in value from 2007 to 2024, India’s GDP measured in USD would already be over USD seven trillion – which it in fact is in purchasing power parity terms since PPP adjusts the dollar-rupee value based on a relative wages-cost index.

The second step necessary to take India’s economy to USD seven trillion by 2030 is encouraging greater private sector capex in the manufacturing and infrastructure sectors. These have significant spin-off advantages in employment creation. The third measure is to keep a lid on prices. Inflation eats into wages and was one of the causes for the BJP’s reverses in key states during the recent Lok Sabha election. Lower prices will boost consumption.

The road to USD seven trillion
India’s GDP at the end of calendar 2024 is estimated to be Rs 350 lakh crore. At Rs 83.50 per USD, that is USD 4.14 trillion. Using this as a base, what is the average annual growth rate India needs to achieve a GDP of USD seven trillion by December 2030?

Assume average real GDP growth of eight per cent a year. Add the inflation deflator of four per cent. In 2023-24 this WPI-based deflator was less than two per cent because of low commodity prices while the CPI was over four per cent. However, the inflation deflator is based on WPI which in FY25 is likely to rise to four per cent. Nominal GDP growth is real growth (eight per cent) plus the WPI inflation deflator (four per cent). Thus average annual nominal GDP growth is estimated at 12 per cent.

In the six years between December 2024 and December 2030, at a compounded annual growth rate (CAGR) of 12 per cent, India’s nominal GDP will therefore double from Rs 350 lakh crore to Rs 700 lakh crore. The key factor is the INR-USD exchange rate. Historically, the rupee has depreciated against the US dollar at three per cent a year. That was broadly the differential between the inflation rate in the US (two per cent) and India (five per cent).

That differential has narrowed since the Covid pandemic. Nonetheless the long-term US inflation target set by the Federal Reserve is two per cent. The Reserve Bank of India’s (RBI’s) inflation band is two to six per cent, with four per cent as the median target. For a fast-growing economy like India, an elevated inflation target compared to a mature US economy is acceptable.

Assuming, therefore, an average two per cent annual depreciation of the rupee against the US dollar, the rupee could fall in the next six years on a compounded basis by 13-14 per cent to Rs 95. At a GDP of Rs 700 lakh crore in 2030, that would translate to a GDP of USD 7.35 trillion, slightly above target.

What are the assumptions in this computation and what could go wrong? The first assumption is an average annual GDP growth of eight per cent. That appears a reasonable estimate, given India’s current economic growth trajectory.  

The second assumption is a stable inflation rate of four per cent. That too, barring external shocks, seems a fair estimate. The third assumption is the exchange rate. A depreciation of 13-14 per cent over 2024-30 again appears supportable by available evidence.

Remember, China crossed a GDP of USD seven trillion as recently as 2011. A humongous trade surplus helped keep the yuan steady and even appreciate against the US dollar. Had the yuan depreciated like other Asian currencies, China’s GDP today would be nearer to USD 10 trillion rather than USD 18 trillion. With India’s CAD narrowing and the balance of payments likely to rise in the near future to over USD 100 billion a year, India is on the cusp of strong growth.

Will India grow old before it grows rich? Will India’s demographic dividend that drives high growth taper off? That is a fear unsupported by evidence. What the evidence does suggest is that India’s current per capita income of USD 2,800 will by 2030 rise to USD 5,500. By PPP, the correct way to measure per capita income (but not GDP), India’s per capita income by 2030 will be around USD 12,000.

That is still low by global standards. But it is a good base to begin with in 2030, bringing a fresh burst of economic growth and greater prosperity for all.