India Set to Become World's Second Largest Economy by 2031, RBI Deputy Governor Predicts

India could become the world's second-largest economy by 2031 and the largest by 2060, according to Reserve Bank deputy governor Michael D Patra. However, India must address issues related to labour productivity, infrastructure, manufacturing sector contribution to GDP, and sustainable development. Patra shared these insights with Indian Administrative Service officials at the Lal Bahadur Shastri National Academy of Administration in Mussoorie.

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Patra highlighted that if India grows at a rate of 9.6% annually over the next decade, it could escape the lower middle-income trap and become a developed economy. He noted that achieving middle-income status requires a per capita income between USD 4,516 and USD 14,005. By 2047, the threshold for developed country status will rise to USD 34,000.

Purchasing Power Parity (PPP) as an Alternative Measure

Current exchange rates are volatile and may not be suitable for cross-country GDP comparisons. Instead, purchasing power parity (PPP), which measures the price of an average basket of goods and services in each country, offers a more stable comparison. In PPP terms, India is already the third-largest economy globally. The USD 5 trillion milestone for 2027 translates to USD 16 trillion in PPP terms.

The Organisation for Economic Cooperation and Development (OECD) projects that India will surpass the US in PPP terms by 2048, becoming the world's second-largest economy. As of end-March 2024, India had a GDP of Rs 295.4 lakh crore or USD 3.6 trillion at current exchange rates, with a per capita income of Rs 2,07,030 or USD 2,500, placing it in the lower middle-income group.

Monetary Policy's Role in Economic Growth

Patra emphasised that monetary policy should anchor India's economy by managing short-term fluctuations in aggregate demand to align with the economy's productive capacity. "Price stability is the best contribution that monetary policy can make to strengthen the foundations of the aspired trajectory of growth over the next few decades," he said.

He also stressed that inflation in India needs to converge with global inflation rates to preserve both the internal and external value of the rupee. This alignment will pave the way for the internationalisation of the rupee and position India as a future economic powerhouse.

"Given the innate strengths I described and the resolve to achieve its aspirational goals, it is possible to imagine India striking out into the next decade to become the second largest economy in the world not by 2048, but by 2031 and the largest economy of the world by 2060," Patra stated.

In his address titled "Future Readying India's Monetary Policy," Patra underscored that monetary policy must proactively manage short-run fluctuations in aggregate demand. This approach ensures broad alignment with evolving productive capacity.

Patra concluded by highlighting that India's journey towards becoming an economic powerhouse involves navigating inflation towards global convergence. This step is crucial for preserving the rupee's value and preparing for its internationalisation.