Rangarajan and Shanmugam: Tamil Nadu’s $1.5 Trillion Target Needs 12.2% Real Growth; 2038-39 More Likely

The news

Tamil Nadu. In an op-ed in The Hindu, C. Rangarajan, former Chairman of the Economic Advisory Council to the Prime Minister and former RBI Governor, and K.R. Shanmugam, former Director of the Madras School of Economics, test the arithmetic behind Chief Minister C. Joseph Vijay’s goal, announced at the NITI Aayog meeting on June 11, 2026, of making Tamil Nadu a $1.5 trillion economy by 2035-36. Tamil Nadu’s Gross State Domestic Product (GSDP), the State-level equivalent of GDP, was ₹35.29 lakh crore in 2025-26. To reach $1.5 trillion in 10 years, it must rise 4.9-fold to ₹172.56 lakh crore by 2035-36, assuming the dollar appreciates by 2% a year against the rupee to ₹115.38. That requires nominal growth of 17.2% and, with 5% inflation, real growth of 12.2% every year for a decade. Tamil Nadu’s real growth has exceeded 12% in only three years: 13.96% in 2005-06, 15.21% in 2006-07 and 13.12% in 2010-11. At 17.2% nominal growth, per capita income would rise from $4,808 to $19,157, above the $16,383 that the writers estimate as the developed-country norm, extrapolated from World Bank cut-offs. At 15% nominal (10% real), the target is reached in 2037-38 and developed status in 2036-37. The State grew 10.3% a year in real terms between 2005-06 and 2011-12 against 8.2% for India, fell to 6.98% (India 6.96%) between 2012-13 and 2018-19, and recovered to 9.1% (India 8.1%) between 2021-22 and 2025-26; at that pace, with nominal growth of 14.1%, the target arrives in 2038-39. The earlier one-trillion-dollar-by-2030 goal would be met in 2033-34 or 2034-35 depending on the scenario. Sustaining 10% real growth needs an investment rate of 40% of GSDP, assuming an Incremental Capital Output Ratio (ICOR) — the units of capital needed to produce one additional unit of output — of 4, which itself needs better use of capital. With 14% nominal growth, a fiscal deficit below 3% would stabilise the debt-GSDP ratio at around 23%. The authors conclude that the most likely path is 14% nominal growth, reaching $1.5 trillion by 2038-39. The syllabus link is GS3 on growth, investment and fiscal federalism.

Static syllabus linkage

1. The ICOR links investment to growth in a single ratio. The Incremental Capital Output Ratio is the additional capital needed to produce one additional unit of output. In the Harrod–Domar model, the growth rate equals the investment rate divided by the ICOR, so with an ICOR of 4, an investment rate of 40% of output yields 10% growth. A lower ICOR means capital is used more efficiently. The model underpinned India’s early Five-Year Plans and remains a quick test of whether a growth target is consistent with savings and investment.
2. Nominal and real growth are separated by inflation, and dollar targets by the exchange rate. Nominal growth measures the change in output at current prices; real growth removes the effect of inflation. A target stated in dollars also depends on the exchange rate, so rupee depreciation raises the rupee growth needed to hit the same dollar figure. This is why the authors state their assumptions of 5% inflation and a 2% annual appreciation of the dollar explicitly. Any target stated in dollars is really three targets: real growth, inflation and the exchange rate.
3. State borrowing is bounded by the Constitution and fiscal rules. Article 293 of the Constitution governs borrowing by States; under Article 293(3), a State that owes money to the Centre needs the Centre’s consent to raise new loans. Finance Commissions have generally recommended a fiscal deficit ceiling of 3% of GSDP for States, and States have enacted their own Fiscal Responsibility and Budget Management laws. The debt-GSDP ratio stabilises when nominal growth is high enough relative to the deficit, which is why the authors pair 14% nominal growth with a deficit below 3%.
4. Developed status is measured by per capita income thresholds. The World Bank classifies economies into low, lower-middle, upper-middle and high income groups using gross national income per capita in U.S. dollars by the Atlas method, and revises the thresholds every July. ‘High income’ is commonly used as the marker of a developed country. Viksit Bharat 2047 is the national goal of India becoming a developed country by the centenary of Independence. The authors project the threshold forward from past trends to estimate a cut-off of about $16,383 for 2035-36.

Why UPSC loves this

1. GS3 asks about growth, investment and inclusive development. Questions have asked about the savings-investment gap, the capital efficiency of Indian growth and what it takes to become a developed economy. The ICOR arithmetic from this op-ed is a precise tool for such answers.
2. Competitive federalism is an established GS2 theme. States setting their own trillion-dollar targets reflect competitive federalism promoted through NITI Aayog. Answers on the role of States in Viksit Bharat 2047 can use Tamil Nadu as an example of both ambition and constraint.
3. Prelims asks basic macro concepts. ICOR, nominal versus real growth, GSDP and the fiscal deficit are classic Prelims concepts. The examiner often tests whether a higher ICOR means more or less efficient use of capital.

Analysis

1. The target fails not on ambition but on arithmetic. The authors do not say Tamil Nadu cannot grow fast; they show that 12.2% real growth for 10 years has no precedent in its history, which has seen such rates in only three isolated years. A target that requires sustained record performance sets up a political narrative of failure. A target of 2038-39 at 14% nominal growth is still ambitious and more credible. Credible targets anchor investor expectations; implausible ones are discounted by markets and become slogans.
2. Capital, not intent, is the binding constraint. A 40% investment rate is very high even by Indian standards and would have to be financed by domestic savings, flows from the rest of India and foreign investment. That puts the capital factor of production at the centre. It also means Tamil Nadu competes with other States for the same investment, which is why the authors stress an investment-friendly environment. Individual large projects, however high-profile, do not add up to 40% of GSDP on their own.
3. Efficiency is the cheaper path to growth. If the ICOR could be lowered from 4 to, say, 3.5, the same growth would need less investment. That depends on reliable power, faster approvals, good logistics and skilled labour, which are within the State’s control. Tamil Nadu’s large manufacturing base and educated workforce give it an advantage here. The counter-view is that capital efficiency tends to fall as economies move into capital-intensive sectors like semiconductors and heavy industry, so the ICOR may rise rather than fall.
4. Fiscal discipline is the condition the target cannot skip. The authors tie 14% nominal growth to a deficit below 3% so that debt stabilises at around 23% of GSDP. A State tempted to spend its way to a target through borrowing would raise its debt and interest bill, crowding out the very capital spending it needs. Welfare commitments compete for the same budget. The lesson for every State with a trillion-dollar goal is that growth targets and fiscal rules must be set together.
5. Developed status is a moving target and a narrow definition. The developed-country per capita norm rises every year, so reaching it in 2036-37 or 2037-38 depends on where the threshold is by then. More important, a per capita average says nothing about distribution between Chennai and the southern and western districts, or between formal and informal workers. For a Hindi-medium aspirant, the key point is that a dollar income figure is a necessary but not sufficient measure of development; human development and inequality measures complete the picture.

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