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India is expected to become the third-largest economy in the world with a GDP of 5 trillion dollar in the next three years and touch 7 trillion dollar by 2030 on the back of continued reforms, the Finance Ministry has claimed early this year.

In a note “Roadmap for $5 trillion economy in light of global economic and geopolitical circumstances” last January, the finance ministry said that India was a $3.57 trillion economy in FY24 and at the annual trend growth of around 6.5-7%, the target of $5 trillion would be achieved by 2028-29. And if the first advance estimates of GDP for FY25 projected a GDP growth rate of 6.4%, a four-year low, the government called it a transitory blip because of general elections last year and hoped to regain growth momentum soon.

Most of the international development organisations and rating agencies are in fact, seconding government’s claims and are projecting a high GDP growth trend in the coming years. The World Bank projected India's GDP growth at 6.5% for FY25, with a potential for 6.7% growth in the following two fiscal years (FY26 and FY27). The IMF expected India's growth to remain robust at 6.5% for both 2025 and 2026. Fitch Ratings has projected India’s GDP to grow at 6.5% in 2025-26 while Moody’s Ratings in its latest Banking System Outlook – India report, released recently has projected the country’s real GDP growth to exceed 6.5% in FY26.

India remains the fastest growing major economy

The overwhelming confidence of the international development agencies on the future of Indian economy suggests that barring unforeseen circumstances, the country is set to touch the $5 trillion GDP target by 2028-29. GDP serves as a key metric for assessing the magnitude of a nation's economy. It is a crucial economic indicator because it measures a country’s total economic output allowing for comparison of economic health and performance, and helps in making policy decisions. The volume of the GDP is important because it gives information about the size of the economy and how the economy is performing. The growth rate of real GDP is often used as an indicator of the general health of the economy. In broad terms, an increase in real GDP is interpreted as a sign that the economy is doing well.

As the fastest growing major economy, with an average annual GDP growth rate of over 8% in three years prior to 2024-25, India’s $ 5 trillion GDP target does not look overly optimistic.  Better fiscal management key to higher growth

India has remained the fastest growing major economy in 2024-25 despite some deceleration. But the country needs to upgrade its reform agenda to sustain the growth trajectory and become a 5 trillion dollar economy. And this must begin with better fiscal management by the government. New Delhi seems to have already made headway in this direction. Despite a bigger budgetary expenditure and nearly one lakh crore revenue loss due to restructuring of income tax rates India has succeeded in reducing its fiscal deficit to GDP ratios.

Apparently, the fiscal deficit figure is the only operational target for fiscal consolidation. In the revised estimate for 2024-25, the government has fixed its fiscal deficit target to 4.8% of GDP, marginally lower than the budget estimate of 4.9%.  And now, FM has projected a fiscal deficit at 4.4% of GDP for 2025-26. That is, India is now set to attain the goal outlined in the 2021-22 Budget to reach fiscal deficit level below 4.5% of GDP in FY 2025-26.

Managing fiscal deficit apart, another concern must be higher interest rate affected to control inflation. Conventionally, when the interest rates stay higher for longer, it increases the prospects of capital flight from emerging market economies, which weakens their currency. The weakening of the rupee will delay the progress towards a $ 5 trillion economy. India, thus, needs to be on guard on this front also.

More reforms to meet new challenges

The target to become a 5 trillion dollar economy was set almost six years ago in July 2019 when the Economic Survey laid out a blueprint for growth expansion. The survey focussed on moving to a “virtuous cycle” of savings, investments and exports to transform India into a $5 trillion economy in the next five years. 

And if India has failed to keep its date, it has been growing steadily on course to become a 5 trillion dollar economy. Of course, it needs to address a number of challenges from sustaining higher growth through more policy reforms, creation of adequate physical infrastructure, boosting private sector investment, meeting the health and nutritional needs of growing population, creating jobs for the growing workforce and mitigating the risk of climate change.

Despite continuous reforms undertaken by successive governments, challenges remain. More reforms are needed to further improve the ease of doing business by ensuring faster regulatory clearances. India ranked 63rd in the World Bank’s ‘Doing Business Report, 2020’ before its discontinuation by the Bank. India improved its rank from 142nd in 2014 to 63rd in 2019, registering a jump of 79 ranks in a span of five years. A big improvement but 63rd rank is in ease of doing business certainly does not compare well with its better counterparts.

India needs more reforms to improve the ease of doing business. The notification of the long-pending four Labour Codes, further land reforms, a national e-commerce policy as well as regulation of the digital economy are some of the pressing reforms the government needs to address.

FDI inflows cross $ 1 trillion-mark

To achieve higher GDP growth, a necessity to become a 5 trillion dollar economy, India must simplify regulations and make it easier to do business that would in turn, attract both domestic and foreign investment. The government in fact, has undertaken several reforms over the years to make the Indian market more accessible for foreign capital. To promote FDI, the government has allowed up to 100% FDI for most of the sectors, except certain strategically important ones, under the automatic route. More than 90% of the FDI inflow is received under the automatic route.

FDI directly supplements the domestic capital and brings technology and skill to the sectors of direct entry. It also has indirect multiplier effects on other related sectors thereby stimulating economic growth leading to increased production, exports and employment generation. To facilitate FDI inflows the government has undertaken reforms in the FDI policy in multiple sectors including defence, insurance, petroleum and natural gas, telecom and space. FDI in the defence sector is allowed up to 74% through automatic route (from earlier 49%) for companies seeking new industrial licenses. Further, 100% FDI in the telecom sector is allowed and the cap in the insurance sector has been revised from 74% to 100% in the last budget.

Backed by these reforms India has emerged as a significant global hub for FDI, with inflows surpassing $1 trillion since 2000, and in 2023, it ranked 8th globally as an FDI recipient.  Better infrastructure needed to boost growth

Even before setting the target to become a $5 trillion economy, the government had acknowledged the importance of a well developed infrastructure to sustain growth and has steadily increased budgetary outlay on infrastructure development.

A developed infrastructure serves to improve the effectiveness and efficiency of the entire supply chain network by lowering transportation costs and simplifying operations. Investment made over the years in building and improving infrastructure has had a strong multiplier effect on the economy. That the government considers infrastructure building as the growth engine of the economy is evident from the sharp rise in capital expenditure over the years. In five years, between 2020-21 and 2025-26, the government’s capital expenditure has gone up by more than two and half times from Rs. 4.26 lakh crore in 2020-21 to Rs.11.21 lakh crore in 2025-26.

The government has announced a host of measures aimed at driving infrastructure development and innovation. And while FM has reiterated the role of the private sector in infrastructure building, she has urged for states’ active participation in infrastructure development. She has announced that Rs.1.5 lakh crore will be provided in the form of 50-year interest-free loans to states for infrastructure projects in the last budget.

As per a World Bank report, India's infrastructure score has improved significantly, moving up five places from 52nd in 2018 to 47th in 2023.  Additionally, India jumped to the 22nd spot for international shipments in 2023 from 44th in 2018 and has moved up four places to 48th in logistics competence and equality.

An increase of five places in five years in world infrastructure ranking, however, does not look impressive and the sector needs far more attention to allow the country to compete in the global sphere.

Make in India initiative needs to become a success

Manufacturing is a critical pillar of India’s journey to a 5 trillion dollar economy. The government has launched the “Make in India” initiative to boost manufacturing growth and industry competitiveness. India’s manufacturing sector stands at a critical juncture in its journey, with an ambitious plan to elevate the sector's contribution to GDP from 15% to 25% through strategic regulatory reforms

India's growing middle class, rapid urbanisation and rising disposable incomes are driving demand for automobiles, consumer goods, and electronics, creating a strong domestic market for manufacturing. But the sector’s contribution to GDP has been hovering at around 15-17%. The sector needs more reforms to attract more investment as well as policies to increase competitiveness in the global market.

Some of the policy initiatives which will increase the sector’s competitiveness include development of multi-modal transport systems, port connectivity and dedicated freight corridors. Streamlining of labour laws, land acquisition processes and environment clearances will reduce compliance costs and attract foreign investors.

The sector also needs to adopt state of the art technologies through widespread adoption of automation, robotics, IoT, and AI in manufacturing processes to improve productivity and quality.

Startup – the GenNext growth driver, needs special care

But while India is looking at traditional growth engines to drive GDP, its GenNext growth multiplier, the startup ecosystem is all set to play a big role. A start-up technically is any enterprise that is working on the growth, commercialization, and the  creation of brand-new products, services, or mechanisms that are driven by intellectual property or new tech.

India has the third-largest startup ecosystem in the world, with over 1.57 lakh certificates issued by Department for Promotion of Industry and Internal Trade (DPIIT) for recognition of startup as of December 31, 2024.

This journey to becoming the world’s third-largest startup ecosystem was no accident but the result of years of persistent  effort, government support and the dynamic interplay between  entrepreneurs, investors, and policymakers.

Startups have become vital contributors to India’s economic growth and job creation. They play a crucial role in driving innovation and generating employment opportunities. As a result, it fosters a culture of entrepreneurship.

Startups are projected to contribute significantly to the Indian economy, potentially adding about $ 120 billion to the GDP by 2030. This will be a big contribution to meet India’s 5 trillion  dollar GDP target. Maybe, the sector will do even better if reforms  focus on simplifying regulations, expanding access to funding, promoting innovations through initiatives like strengthening mentorship programmes and fostering industry-academia partnership, Agriculture, the first engine of growth And if the industry, the infrastructure sector, digital expansion and fiscal management have a special role to take India to a 5 trillion dollar economy, a burgeoning agriculture sector will not only help this effort but will also mitigate the economic disruption back home. More than 60% people rely on agriculture for their livelihood and their wellbeing depends on the performance of the sector.

In addition, a booming agricultural sector will increase the purchasing power of rural people which will help the non-agricultural sector of the country. It will provide a market for increased production from cars to consumer electronics to consumer goods of everyday use and stimulate the growth of the non- agricultural sector.

Agricultural progress is essential to provide food for growing non-agricultural labour force, raw materials for industrial production and saving to support development of the rest of the economy, to earn foreign exchange and to provide a growing market for domestic manufactures.

Recognising the importance of the sector the prime minister has claimed that “the agriculture sector has a very important role to play in making India a five trillion dollar economy. For this, our government is focusing on formulating a cash crop and export centric farming system”.

The prime minister is right; India has become a significant exporter of agricultural goods today. India ranks second worldwide in farm outputs. It is the world’s biggest exporter of rice – in 2023, it exported $11.4 billion worth of rice. India's agricultural exports reached $ 53.1 billion in 2022-23 – up 134% in ten years from $ 22.7 billion in 2013-14.

But the sector needs more government attention and upgraded technology to compete in the world market. To improve its competitiveness and productivity, focus must be on sustainable practices such as improvement of soil health, efficient water management, crop diversification, research on seed development, technological adoption, supporting farmers through training, access to credit and infrastructure development.

Who will benefit from India’s becoming a 5 trillion dollar economy!

Most Indians are by now familiar with the slogan that India will become a $ 5 trillion economy. Government’s earlier slogan of doubling farmer’s income may have failed but the new agenda of becoming a $ 5 trillion economy is all set to turn into a reality. As the country’s GDP growth trend suggests, India is likely to achieve the target by 2028-29.

The question is: How will it affect an average Indian? The government’s documented master plan ‘5 Trillion Dollar Economy: The Target’ says that “The size of the cake matters” meaning that the larger the size of the cake, the bigger the share each person will get. Similarly, the bigger the economy, the bigger is the prosperity. Bigger prosperity, bigger the possibilities and facilities for individuals.

The theory sounds appealing, but the reality does not exactly follow such logic. This goes without protest that the country’s growth dynamics and resultant prosperity does not include an average citizen. As the example of the size of the cake suggests, the estimated per capita income of an average Indian will surely rise with bigger GDP. But his or her actual income may not have any relation with this calculation as a few multi-billionaires will take away disproportionately larger share of the GDP. That is, the bigger the GDP, the bigger will be their share. Average Indians will remain where they were.

This is reflected in the sharp rise in the number of billionaires and their wealth. According to the ‘Billionaire Ambitions Report 2024 prepared by the Union Bank of Switzerland the number of Indian billionaires has increased by 123% in the last ten years, reaching 185 in 2024. Their wealth has grown by 263% to $905.6 billion.

As the number of billionaires increases, the income and wealth inequality in the country are widening. According to the World Inequality Database, the share of the top one per cent individuals in the country’s national income has grown from 15.5% in 2000 to 23.07% in 2023. At the other extreme, the share of the bottom 50% has fallen from 18.54% to 13.25% during the same period.

Given this trend of rising number of billionaires and widening income disparities, it is anybody’s guess how average Indians will benefit from a 5 trillion dollar economy. They will have to be happy with the trickling down effect of growth.