Data | The problems with the Prime Minister’s economic claims

India to become $5trillion economy soon: PM Modi; however, nominal GDP, exchange rate conversions, and skewed income distribution complicate the narrative. In terms of PPP-based GDP, India is already the 3rd largest economy in the world. To attain a dignified living standard for its people, India needs to augment resource mobilisation and real investments.

Addressing the BRICS Business Forum Leaders’ Dialogue at Johannesburg last week, Prime Minister Narendra Modi said, “Soon, India will become a $5 trillion economy.” In 2018, a working group under the Ministry of Commerce and Industry set 2025 as a deadline for achieving the same. The economic slowdown induced by the COVID-19 pandemic has upended the target deadline.

With the revival of the economy now, and the general elections on the horizon, official rhetoric on this count has resumed. While addressing the nation on the 77th Independence Day from the Red Fort, Mr. Modi noted that India was the world’s 10th largest economy in 2014, but now stands at fifth spot. He has also invoked a “third term” in office saying that India would be among the world’s top three economies by then.

Even if one ignores the political hubris and sidesteps the serious debate over the methodological rigour of India’s GDP estimates, the problems with the Prime Minister’s economic claims are manifold.

First, Mr. Modi is using nominal Gross Domestic Product (GDP) estimates to make claims about the size of the Indian economy relative to other national economies. This is wrong. Nominal GDP gives an estimate of the national output for a year at the prices prevailing in that year. However, the actual size of the economy is reflected in real GDP, which is adjusted for price changes. In other words, India can become a $5 trillion economy in nominal terms through high inflation, even without any significant changes in the economy’s output. It is for this reason that national governments, the United Nations, and other international agencies such as the World Bank and International Monetary Fund base their economic growth estimates on real GDP (price adjusted) and not nominal GDP (estimated at current market prices).

Second, international comparisons between national GDP estimates get further complicated because of exchange rate conversions. Researchers have long held that market-based exchange rates are not the appropriate way in which national GDPs can be converted into a common currency for comparison because of the existence of a substantial share of non-tradable commodities in national outputs as well as the innate volatility in market-determined exchange rates.

Going by nominal GDP, the Indian economy, valued at $3.39 trillion in 2022, ranked fifth in the world, as Mr. Modi said. However, in terms of real GDP, India’s economy in 2022 was $3 trillion and ranked sixth in the world. PPP-based GDP estimates (in terms of purchasing power parities estimated through price surveys of a common basket of commodities across countries) show that the Indian economy’s size was over $10 trillion in 2022. India’s PPP-based GDP has consistently expanded since the 1990s. India surpassed Germany in 2005 to become the fourth largest economy in the world and Japan in 2009 to become the third largest, a rank that has remained unchanged till date. 

Table 1 | The table shows the rankings for the 10 largest economies in the world in terms of PPP-based GDP, real GDP, and nominal GDP in 2022.