Page 123 - Abhivruddhi

2019, is our bullish projection of close to 3% real exchange rate annual
rise, almost a 20% rise over six years. That is a big rise.
How would our projections and target date be affected if inflation
turns out different from our assumed 6%. Suppose inflation averages 4%
which is the RBI target. Then with the same real GDP growth (since
there is no long run tradeoff between growth and inflation as per the
natural rate hypothesis and our classical macroeconomics framework),
NGNP growth will be correspondingly 2% less. However since inflation
is lower by 2%, we will assume that the Rs. will be stronger by 2% due to
the relative PPP effect.
If this is the case, the 2% Rupee rise will offset the 2% lower Rs NGNP
growth. The end outcome will be the same for $NGDP. While building
in substantial ongoing real appreciation of the rupee, over and above that,
we are assuming the Rs/$ rate will move in accordance with higher or
lower inflation in India, or relative PPP.
Thus, continuing with 6% real GDP growth, we can evaluate the scope
for reaching $NGDP targets. We can ignore any changes in inflation and
RS NGDP growth, by assuming nominal Rs/$ rate will adjust to exactly
offset the change in inflation and corresponding NGDP growth. As of
mid 2019, the $ 5 trillion target was reasonable. However, if real growth
turns out weaker, the target date would stretch out and vice versa.

Section Five: Assessing and Formulating Revised Target Dates
following the Covid Slump
The reasonably sound economic outlook, as of mid 2019, was short
lived. Towards the end of the year, quarterly growth fell below 5%,
unusually low for India. This was attributed to various reasons: the
adverse impact of the GST compliance Raj on small firms, the drop in
NBFC lending following IL& FS going bankrupt etc. The next year, covid
completely devastated the economy due to lockdowns in both 2020 and
2021.
For the two years 2019 and 2020, nominal GDP grew by 4.5%
combined, for an average rate of 2.5% and slightly negative in $ terms
due to rupee depreciation. Needless to say, actual GDP came in well
below that predicted with 12% NGDP growth. The pandemic pushed the
NGDP level about 20% below that projected with 12% NGDP growth.
This would obviously push back the target date to reach $ 5 trillion. But
by how long?
Accordingly, the timeline for $5 trillion GDP target was pushed back

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