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India's The World's Sixth Largest Economy—But Can It Stay There?

22/12/2016 1:21 PM IST | Updated 27/12/2016 8:55 AM IST
Mukesh Gupta / Reuters

In February this year, India surpassed China and achieved the label of the fastest growing economy of the world. The International Monetary Fund (IMF) predicts that India would hold the castle in the foreseeable future, expecting it to grow at 7.6% in 2017. Staying true to its new identity, India pushed to end the year on a high. The colonial underdog took more than 100 years, but achieved the milestone of surpassing the UK as the world's sixth largest economy in terms of the Gross Domestic Product (GDP). India now stands behind the United States, China, Japan, Germany and France.

In December 2011, economic think-tank Centre for Economics and Business Research (CEBR) had forecast that India would become the world's fifth largest economy by 2020. Though expected to overtake the UK by 2020, this feat has been possible because of the interplay of the post Brexit slump for the UK and the rapid economic growth of India in the recent years. With a nearly 20% depreciation of the pound in the past year, the dollar value of the UK's GDP could only stand at $2.29 trillion, at an exchange rate of £0.81 for $1. With an exchange rate of ₹66.6 for $1, India's GDP stood at $2.30 trillion, nudging itself over its former colonial leader.

For India to maintain and improve on its position, it is of vital importance that attention be paid to the short-term growth prospects of the nation.

In addition to these two primary factors, the IMF also points out that the Indian economy benefited from the decline in commodity process from a large trade gains and lower than expected inflation. Prime Minister Modi's radical market reforms have also been given credit for their contribution in the rapid growth.

There's argument that currency fluctuations might paint a different picture in the near future and may also put the countries at a roughly equal footing, but analysts point out that India is expected to have a slight edge over the their former oppressors. This is based on the fact that the Indian economy has better future growth prospects—a predicted growth rate of 6% to 8% per annum—compared to the UK's growth of 1% to 2% per annum till 2020, and likely beyond. However, the UK can take solace in the fact that its per capita income is considerably higher than that of India.

For India to maintain and improve on its position, it is of vital importance that attention be paid to the short-term growth prospects of the nation. Most recently, the government's move to take out and replace 86% of the currency in circulation may prove to be a hurdle in the growth of the nation primarily due to lack of liquidity—forcing the companies to roll back on a majority of their operations and re-think their plans of expansion. Even before the demonetisation move, in October 2016, industrial output contracted. The IIP registered a growth of (-) 1.9 % in the month, over the index of October, 2015. The index of Manufacturing, Mining and Electricity sector grew by minus 1%, minus 0.2% and 4.6 % respectively, during April to October, 2016-17 over corresponding period of previous year. These numbers are expected to worsen post the move.

The stock markets will play a vital role too. With the recent hiked rates in the US market, there is a looming possibility of foreign investors pulling out of the Indian market. Hence, maintaining the growth rate and building on it demands even greater attention.

As evident, moves to spur growth—– demonetisation, unification of the tax rate, deregulating the agricultural industry's fertiliser pricing—come with baggage. Being resilient to short-term chaos and pain, and having an optimistic outlook for the long run would be useful in building on the global position India holds today.

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