Although India is among the world’s fastest growing major economies, there is still confusion over how to interpret India’s growth numbers and how the economy is performing relative to its potential. This confusion derives in the main from three separate factors.
There is, first, the background controversy over the revised GDP series at 2011-12 prices. There is a widely held and influential view that the GDP numbers in the revised series are overestimated during some years.
The second issue is that data from the informal sector, that accounts for the lion’s share of Indian GDP, is available only with a time lag. Consequently, trends from the formal sector are projected into the informal sector while making ‘provisional’ GDP estimates. These are subsequently revised once data from the informal sector is available. Since it is believed that the burden of currency demonetization, GST complexity and the covid lockdown fell disproportionately on the informal sector, one could expect that current provisional growth figures might be revised downwards when GDP numbers are finalized.
The third factor confounding our growth numbers is that most of the public debate in India revolves around headline figures of the Central Statistical Organization (CSO). These are readily available, as they are released from time to time through press notes, and easily weaponized for political purposes. The international best practice in analysing growth data, however, is to look at output loss/gain relative to the trend (medium-term average) growth rate. This methodology takes the base effect out of the equation.
The near-term raw growth numbers look good on two main counts. First, International Monetary Fund (IMF) data shows India as the fastest growing economy in the world currently. Second, near-term quarterly and annual headline growth numbers look superlative on account of the base effect deriving from the sharp slowdown in 2019-20 and economic contraction in 2020-21. Causes for the 2019-20 growth dip are unclear (possibly the lagged effect of demonetization and introduction of GST), while the GDP shrinkage of 2020-21 is attributable to covid. Thus, while GDP growth of 7% provisionally estimated for 2022-23 by the CSO (and 6.8% by the IMF), is very good by global yardsticks, the average annual growth over the four years ending 2021-22 is just 3.2%.
India’s growth needs to be benchmarked with Asia, where India is located, as Asian economies have higher growth potential. The table here shows average growth (a) over the calendar years 2014-22, (b) over 2014-18 (assumed to be the trend growth as it excludes the last four atypical years of crisis and recovery), (c) during the last four years (2019-22), and (d) the output loss over the last four years for major Asian economies, the US and the Eurozone. These calculations are based on data contained in the IMF’s World Economic Outlook database last updated in January. The results of the exercise are surprising. First, it emerges that the fastest growing major Asian economy over this seven-year period (inclusive of the crisis period) was neither China nor India, but Bangladesh.
Second, while global attention is focused on China’s growth deceleration on account of a trend of autocracy deriving from ‘Xi Jingping Thought’ that privileges security over economic growth, the deceleration over this period has actually been sharper in India despite a more favourable demographic profile. The political economy of autocracy—hubris and unpredictability in decision-making, circumscribed consultative mechanisms, accounting and transparency issues, and excessive reliance on loyal favourites who tend not to tender honest, fearless advice—has thrown cold water on the China story, globally, with its forward-looking growth projections being marked down. This should be a cautionary tale for India.
Third, even as there is talk of an ongoing economic crisis in Pakistan, its average growth during the last four years was higher than that of India. China and Vietnam grew about 50% faster, and Bangladesh twice as fast. During this period, Bangladesh overtook India’s per capita income.
The inconvenient truth is that our neighbours both on the east and west have on average done better than us on economic growth over the last four years. This should serve as a wake-up call and lead to introspection and corrective steps.
Fourth, an output loss of 18.2% of GDP over the last four years in India is very high. Some of this can be discounted, as all countries suffered output losses, and emerging markets more so. Even so, this is a very substantial loss by any measure, by far the highest among the countries in the table, and significantly higher than that of China and our South Asian neighbours that appear to have weathered the covid crisis better in economic terms.
A plausible explanation for this outsized output loss is that average growth between 2014 and 2018, based on official data, is overestimated. If this trend rate is downgraded by 1 percentage point from 7.4% to 6.4%, the output loss comes down to 7.9%, around the arithmetic average of the countries in the table, excluding India. Such downgrading would displace India as the fastest growing economy in the pre-crisis period, with China, Vietnam and Bangladesh then placed ahead.
Five questions arise from the above analysis. First, why is India’s output loss so large? Second, what corrections need to be made to GDP numbers in the 2011-12 GDP series? Third, how much of this output loss is a dead loss unlikely to be recovered, and how much can be recouped through future growth? Fourth, has trend growth shifted downwards, and if so, to what? Is this 5% to 5.5%, the overall average of 2014-22, depending on lower trend growth assumptions for 2014-18? The true extent of the long-term damage would be known only once data for the informal sector is finalized. Finally, what might or could be done to raise trend growth going forward?
Source: Hellenic Shipping News
