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Given India’s inherent strengths and its determination to achieve its aspirational goals, it is conceivable that India could become the second-largest economy in the world by 2031, rather than 2048, and the largest economy of the world by 2060, said the Reserve Bank of India (RBI) deputy governor Michael Debabrata Patra.
“Given the innate strengths… it is possible to imagine India striking out into the next decade to become the second-largest economy in the world not by 2048, but by 2031, and the largest economy of the world by 2060,” he said at the Lal Bahadur Shastri National Academy of Administration, Mussoorie, on July 9. The speech was released on the RBI website on Friday.
The policy emphasis on macroeconomic and financial stability is also a positive for the Indian rupee going international, he said.
“The formation of inflation in India needs to be navigated towards convergence with global inflation so that both the internal and external value of the rupee is preserved. This will prepare the ground for the internationalisation of the rupee and the emergence of India as the economic powerhouse of the world of tomorrow,” he said.
Commenting that steadfast monetary policy actions and supply side measures helped inflation to fall back into the tolerance band around the target of 4 per cent, Patra said RBI projects inflation to average 4.5 per cent in 2024-25 and 4.1 per cent in 2025-26.
He said that price stability is the best contribution monetary policy can make to strengthen the foundations for long-term growth. Inflation in India must converge with global inflation to preserve both the internal and external value of the rupee. This will lay the groundwork for the internationalisation of the rupee and position India as a leading economic powerhouse in the future.
Patra further said that pursuing short-term growth at the expense of inflation control can lead to rising inflation levels, which ultimately harm economic growth. He said that if monetary policy succumbs to the temptation of exploiting short-term trade-offs, such as neglecting inflation control to boost growth—a concept known as time inconsistency—it risks losing sight of its long-term objectives.
“Monetary policy should be conducted in terms of some rule-like behaviour that binds it to pursue its goals across time. Instead, if it falls prey to the temptation of exploiting short-run trade-offs – like abandoning inflation control in the short run and boosting growth, or what economists call time inconsistency – it will ultimately lose sight of its objective because in the short-run pursuit of growth, inflation may be allowed to rise to levels that can be inimically harmful to growth,” he said.
The domestic monetary policy committee has kept the repo rate unchanged at 6.5 per cent for more than a year in order to align the inflation to the 4 per cent target on a durable basis. On the other hand, the rate-setting panel revised the growth forecast for the financial year 2024-2025 (FY25) to 7.2 per cent from the earlier projection of 7 per cent.
He said there is evidence that Indian households are switching from financial savings to physical savings, which is financed by loans.
“As regards the supersavers – households – there is evidence of switching from financial saving to physical saving, with the latter being financed by accretions to households’ financial liabilities,” he said.
He said debt service, i.e., interest and principal repayments, are together less than 7 per cent of current receipts.
In the period 2021-23, the gross domestic saving rate has averaged 30.7 per cent of gross national disposable income. “Thus, unlike many countries, India does not have to depend on foreign resources, which play a minor and supplemental role in the growth process,” he said.
He said that India must intensify its efforts to increase exports of goods and services from the current $768 billion (2.4 per cent of the world total) to $1 trillion each for merchandise and services (5 per cent of the global total) by 2030.
Patra also said that in order to elevate India’s manufacturing sector and position it as a global manufacturing hub, the growth rate must be increased to 10 per cent. Achieving this growth will boost the manufacturing share in gross value added to 25 per cent, fostering significant forward and backward linkages with other economic sectors. He said that key to this transformation is embracing the Fourth Industrial Revolution, which encompasses automation, data exchange, cyber-physical systems, the Internet of Things, cloud computing, cognitive computing, and advanced robotics to create smart factories. Crucially, the development of a skilled labour force will be essential for India to succeed as a manufacturing powerhouse.
First Published: Jul 12 2024 | 7:37 PM IST
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