IMC Journal (opens a pdf)
GDP targets set in terms of a foreign currency can lead to unintended consequences: India must consider setting growth goals in its own currency
India has experienced robust economic growth in the aftermath of the pandemic, emerging as the fastest-growing major economy in recent years. The government’s prudent fiscal management during the crisis—avoiding aggressive stimulus spending that would have exacerbated inflation—has helped India avoid the sharp inflationary spikes that have plagued many developed economies. This careful handling of inflation, with levels consistently lower than those seen in hard currencies, allowed the Indian rupee (INR) to retain its value against major global currencies.
In fact, India’s inflation control strategy has been nothing short of commendable. While many nations, especially in the developed world, struggled with soaring inflation, India’s inflation remained within manageable levels. This stability played a crucial role in ensuring the INR did not suffer from the same level of depreciation seen in other currencies. As a result, the rupee depreciated much more slowly against the US dollar than would have been expected given historical trends.
Depreciation differentials
India’s central bank, the Reserve Bank of India (RBI), has long maintained an inflation target of around 4%, with a +/-2% leeway. If inflation in India continues to hover around this mark, and the US continues its journey to a 2% inflation target, it is estimated that the INR could depreciate at an annual rate of approximately 2%. This rate is substantially lower than the historical annual depreciation rate of 3.5%-4% that the rupee has experienced since the early 1990s, following India’s economic liberalization.
Consider this in practical terms: If the INR/USD exchange rate were to stand at 83.0 in March 2024, and the rupee depreciated at a 2% annual rate, it would trade at 89.4 per USD by March 2029. However, if depreciation were to follow the historical trajectory of 4% annually, the INR would weaken to around 101.0 over the same period. This difference between ~90 and ~100 has a profound impact on India’s nominal GDP when converted into US dollars.
USD 5 trillion dream: A delicate balance
India’s nominal GDP in FY2024 stands at INR 295 trillion, with expectations of a 12% annual growth rate. This growth is derived from a combination of real growth—projected at around 8%—and inflation, which is expected to be around 4%. While optimistic projections are common, maintaining a 12% nominal growth rate over the next five years will be no small feat. If India successfully achieves this growth trajectory, its nominal GDP could reach INR 520 trillion by FY2029.
Now, let’s factor in the exchange rate. If the INR/USD exchange rate were ~90, India’s nominal GDP in USD terms would be approximately USD 5.8 trillion. If the rupee depreciates more sharply, to ~100 against the USD, the nominal GDP would amount to only USD 5.2 trillion. The difference may seem minor in percentage terms, but it represents a significant gap when viewed in the context of India’s aspirational USD 5 trillion GDP target.
This is more than a matter of academic curiosity. Meeting the USD 5 trillion target sooner rather than later has become a critical goal. Yet, these calculations show that the journey to this milestone may take longer than anticipated, possibly extending to FY2029, rather than FY2027 or FY2028 as many forecasts expect.
Trade-off between currency stability and economic growth
Achieving the desired USD 5 trillion economy is intrinsically linked to the stability of the Indian rupee. A stable or appreciating rupee means that India’s growth will be more pronounced in USD terms, and the time to reaching the coveted USD 5 trillion GDP milestone becomes shorter.
However, stabilizing the INR is no easy task. The most effective tool at the RBI’s disposal to control inflation is to keep interest rates high. High interest rates curb demand, which in turn helps control inflation. This, however, comes at the cost of slower domestic growth. The challenge lies in balancing inflation control with growth stimulation. A high interest rate environment can suppress economic activity, leading to an overall slowdown in the local economy, creating an inherent contradiction in monetary policy that is difficult to navigate.
Recast growth targets in INR
In light of the complexities involved in managing a currency that is susceptible to global economic forces, it may be time for India to recalibrate its growth targets in local currency terms, rather than relying on USD-based goals. Setting a target for nominal GDP in INR—say, an INR 500 trillion target by FY2029—would allow policymakers to focus squarely on domestic economic health and provide the central bank with clearer guidance in its policy-making.
By decoupling India’s economic targets from the whims of the US dollar, India would reduce its vulnerability to external economic policies, including those of the US. The US’s economic environment, with its unpredictable shifts—such as tax cuts, large tariffs, and rising national debts—often complicates local policy-making. By being “atmanirbhar” in its target-setting, India could better insulate itself from external shocks, allowing for more effective management of inflation, interest rates, and ultimately, growth.
A path to sustainable growth
India’s economic future is bright, but it faces complex challenges in navigating the path to prosperity. The rupee’s depreciation, inflation management, and the balancing act between monetary policy and growth require careful attention. By refocusing growth targets in INR and prioritizing domestic economic stability, India can ensure a more sustainable trajectory towards its economic aspirations, without having to constantly second-guess external factors.
In the long run, India’s economic success will not be defined by its USD GDP figures, but by its ability to foster consistent, sustainable, and equitable growth in its own currency. In a world that increasingly values self-reliance and local economic strength, recasting growth targets in INR may well prove to be the most strategic step forward for the Indian economy.
Views are personal. The author is co-founder, Thurro, an alternate data and artificial intelligence platform.
