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Budget 2020: PM Modi’s Dream of a $5 Trillion Economy is at Risk

Last Updated September 23, 2020 1:32 PM
Harsh Chauhan
Last Updated September 23, 2020 1:32 PM
  • India’s 2020 Union Budget will be released on Feb. 1.
  • PM Modi’s dream of a $5 trillion economy hinges on the budget.
  • The budget could turn out to be ineffective and defeat the PM’s ambition.

A few months after his re-election last year, India’s PM Narendra Modi made a bold statement that the country’s economy was on track  to hit the $5 trillion mark by 2024. But it didn’t take long for India’s economy to lose its wheels, and now, people are pinning their hopes on the 2020 Union Budget for a turnaround.

The country’s gross domestic product (GDP) increased just 5 percent in the first quarter of the fiscal year before stooping to a six-year low in the following quarter.

Source: Twitter 

Q3 isn’t going to be much different. Analysts expect the fiscal third-quarter growth to weaken further . But Indians believe that the Union Budget of India could help steady the ship , according to a survey by the Economic Times.

Budget 2020 could be critical to PM Modi’s $5 trillion dream

India’s economy is expected to grow at just 4.5 percent this fiscal year, according to brokerage firm Motilal Oswal. If the country sustains this rate of GDP growth for the next five years, PM Modi will fall well short of his government’s aim of a $5 trillion economy.

The current size  of the Indian economy is around $2.9 trillion. If India’s GDP keeps growing at a rate of 5 percent, it would take just over 11 years to achieve PM Modi’s $5 trillion goal. This means that India’s GDP needs to grow at a rate that’s slightly more than double the current pace.

In simpler words, the Indian economy needs to clock a 10 percent-plus growth rate to hit a size of $5 trillion within PM Modi’s timeframe. This is where the 2020 budget that’s set to be released in the Parliament on Feb. 1 will come into play.

According to the ET survey, only 29.3 percent of the respondents believe that the 5 percent growth rate is just temporary and the economy will start firing on all cylinders. But then, 37 percent believe that a positive reform trajectory is needed to get India’s flailing economic growth back on track. Nearly 12 percent believe that the period of a fast-growing Indian economy is over.

Chart showing a survey about India's economic growth.
A majority of Indians seem not so confident about the country’s GDP growth rate bouncing back. | Source: The Economic Times

As far as a turnaround is concerned, nearly 25 percent of the respondents are pinning their hopes on the 2020 union budget. At the same time, 57 percent believe that wholesale changes are needed to kick-off a turnaround.

Chart showing sentiment about a turnaround in India's economy.
Respondents believe a lot depends on the Union Budget 2020 and radical changes to India’s economy. | Source: The Economic Times

A consolidated view of various analyst firms  indicates that the Indian government is expected to increase spending in the 2020 budget across several sectors in a bid to boost the economy. The auto industry, for example, could get relief in the form of lower taxes, while a reduction in personal tax rates could boost retail consumption.

But then, any efforts to kick-start the Indian economy with an aggressive union budget for 2020 might not be enough to double the GDP growth rate and hit PM Modi’s $5 trillion GDP target.

Key challenges beyond the budget

In October last year, PM Narendra Modi seemed quite confident of achieving his ambition . He had said:

Our foreign policies are being well appreciated. The entire world is looking at us as a major industrial destination.

The problem is that the scenario has changed drastically since then. Notable businessmen such as Amazon CEO Jeff Bezos have been given the cold shoulder  by India’s government despite investing billions of dollars. Walmart recently laid-off employees , shuttered a warehouse, and put its expansion plans on hold.

All of this has given rise to a negative perception about the Indian market to foreign investors, and this is something that the union budget 2020 will not be able to change.

Shooing away big investors at a time when India’s economic growth is in tatters doesn’t look like a smart approach by the Modi government. The country’s core sector output has shrunk for four months straight  and the unemployment rate has trended up over the past year .

Chart showing India's unemployment rate.
The unemployment rate in India has trended up over the past year. | Source: Business Today

Although PM Modi’s government has attempted to boost India’s economy through steps such as September 2019’s corporate tax rate cut , the efforts seem to have been misdirected. A lower tax rate hasn’t sparked a wave of new employment. The country’s urban unemployment rate rose to 8.91 percent in December 2019 from 8.58 percent at the beginning of the year.

So, expecting the 2020 budget to magically create more employment and cure the ailing sectors is a pipe dream. The Indian economy is likely to take time to get back on track if the reforms in the upcoming budget are favorable. Even then, the growth rate is unlikely to accelerate enough to make the goal of a $5 trillion economy by 2024 a possibility.