India’s Ambition of Becoming A Developed Nation By 2047- We Need To Bring Down Our ICOR Significantly
For India to reach a $30 trillion real GDP by 2047, it needs an annual GDP growth of 9.4% CAGR over the next 22 years. Maintaining an ICOR of 4.84 would require an unrealistic 45.53% of GDP as additional investment, whereas India’s historical Gross Fixed Capital Formation (GFCF) has never exceeded 34%. The only viable solution is bringing down ICOR to 3 within the next three years, enabling 9.4% GDP growth with just 28.2% GFCF.
Achieving this requires transformational improvements in economic productivity, including:
- Ease of doing business through “Minimum Government, Maximum Governance.”
- Labor productivity enhancement via continuous upskilling.
- Technology adoption, including AI and machine learning.
- Infrastructure and logistics efficiency improvements.
Reducing ICOR is essential for India’s economic growth, requiring strategic policy changes and investment efficiency.
___________________________________
India’s Ambition of Becoming A Developed Nation By 2047- We Need To Bring Down Our ICOR Significantly
WHAT IS ICOR?
It measures the incremental capital required to produce one additional unit of output in the economy.
In other words, it shows HOW EFFICIENTLY a country uses its additional capital to increase the output by one unit.
The lower the additional capital required for this, the better the efficiency.
ICOR COMPUTATION
It is calculated as:
ICOR= % of additional investment made as a % of the GDP/ The % of real GDP growth.
Note: The percentage of the additional economic investment made in a financial year is called the “Gross Fixed Capital Formation ( GFCF).”
THE DIFFERENCE BETWEEN GDP AND ICOR
GDP measures the total value of all the goods and services produced WITHIN A COUNTRY in a financial year. It does not take into account the amount of CAPITAL invested to achieve the total value of the output goods and services.
So, it does not show how efficiently an economy uses its capital invested to achieve the GDP in a financial year.
In contrast, the ICOR shows the efficiency in using the capital invested in the economy.
Thus, the ICOR is a SUPERIOR measure of a country’s PRODUCTIVITY in its economic operations.
WHAT IS INDIA’S ICOR IN FY 25?
The NSO estimates that India’s real GDP growth in FY 25 will be 6.4%.
The Economic Survey presented in parliament on January 31, 2025, a day before the Union Budget, estimates the additional investment made in FY 25 ( GFCF) at 31%.
Hence, India’s ICOR in FY 25 = 31/6.4 or 4.84.
So, to increase output by 1% of our GDP, we need to invest 4.84% of our GDP as incremental capital.
COMPARISON OF THE ICOR WITH THE ADVANCED NATIONS
The U.S. has perhaps the best ICOR worldwide at 2.5
Germany and Japan have an ICOR of 3.5
The advanced nations generally have an ICOR in the range of 2.5 to 3.5
WHAT SHOULD BE INDIA’S REAL GDP GROWTH PERCENTAGE IN CAGR TERMS IN THE NEXT 22 YEARS TO ACHIEVE A REAL GDP OF $ 30 Trillion by 2047?
In FY 25, India’s real GDP ( gross GDP less inflation) is expected to be $ 3.8 trillion at an average USD-INR exchange rate of Rs.85.
Assuming this rate remains constant, using the CAGR formula, our REAL GDP needs to grow at a CAGR of 9.4% in the next 22 years, from FY 26 to FY 47.
The FY25 ICOR of 4.84 needed 31% of GDP as an additional capital investment in the economy to achieve real GDP growth of 6.4%.
If the ICOR remains the same at 4.84 in the next 22 years, we would need additional capital investment on a CAGR basis every financial year of 45.53% of our every year’s real GDP!
This is calculated as given below:
ICOR every year as a% of our real GDP=(31/6.4)* 9.40
To my knowledge, India’s GFCF has not exceeded 34% of its real GDP.
The additional capital investment must come from the economy’s total savings, including household, corporate, PSU, and government savings.
AT BEST, WE CAN ACHIEVE A GFCF OF 35%.
HENCE, THE ONLY SOLUTION TO ACHIEVE OUR GOAL OF “VIKASIT BHARAT” WITH A $30 TRILLION REAL GDP IS TO KEEP INCREASING OUR PRODUCTIVITY IN ALL OUR ECONOMIC ACTIVITIES TO BRING DOWN OUR ICOR TO 3 IN THE NEXT THREE YEARS.
When this happens, we will achieve the CAGR GDP growth rate of 9.40% with a CAGR additional investment to GDP of just 28.2%(GFCF)
The details of how to bring about this transformational improvement are beyond the scope of this Article.
However, I will delineate the areas in which we must bring about prodigious transformation in:
- Further improving the ease of doing business using the Mantra of “Minimum Government and Maximum Governance.
- Labour Productivity through upskilling continuously.
- Technology upgradation to cutting-edge levels.
- Harnessing AI and Machine Learning.
- Logistics, and more.
Author Bio
