India is now the world’s fifth-largest economy after the USA, China, Japan and Germany.

In 2022, GDP in India, Germany, and Japan stood at $3.4 trillion, $4.1 trillion and $4.2 trillion, respectively. The year had been unusual for Japan, as it experienced a steep fall in its GDP from $5 trillion in the preceding six years to just $4.2 trillion, he said, adding that the major cause of the fall in Japan’s GDP in dollar terms was a large appreciation of the dollar against the Japanese yen. Specifically, the dollar’s value at the end of 2022 was 13.9 per cent higher than at the beginning of the year, Panagariya said while delivering the 18th C. D. Deshmukh Memorial Lecture organised by the RBI.

On Germany, he said its economy is currently struggling, with the IMF predicting negative growth in real terms in the euro. Its GDP in current dollars is expected to get help, however, from high inflation and appreciation of the euro in 2023. These two factors are predicted to pull up the German GDP in current dollars by a little more than 8 per cent to $4.4 trillion. But in the coming years, with inflation likely to decline sharply, GDP in current dollars will grow at most 4 per cent a year, he said.

“Therefore, it is unlikely that GDP in current dollars in either Germany or Japan will cross the $5 trillion mark in the coming three years,” he said.

“Given these estimates, how soon can the Indian GDP cross the GDPs of these two countries? One way to answer this question is to assume that in the next four or five years, India will maintain the average growth rate in current dollars achieved during the last two decades,” Panagariya said.

Recognizing that the first of these decades was rocked by the global financial crisis and the second by the pandemic, that there have been many reforms in the last decade, and that the problems afflicting China have led global investors to turn to India as an important destination, this is a conservative assumption, he said.

“To realise its full potential, India must take the steps necessary to help its economic units grow larger. Small habitations, small farms, and small enterprises are intimately linked,” Panagariya said. Reforms that will help the enterprises in industry and services grow larger will create job opportunities for the masses, which will, in turn, pave the way for workers to migrate from rural to urban areas, he said.

He said such migration will automatically increase land per worker in farming while also bringing more and more of the population to where development is. “With the population becoming progressively concentrated in urban agglomerations, we will also see larger economic units replace some smaller ones in areas such as schools and colleges,” he said.