There are two views on India’s growth. The first argues that the fall in growth in the 2010s, worsened by the collapse during the pandemic, was because of fundamental flaws that persist. And that growth cannot sustain without an entirely new set of policies. An alternative interpretation is that sufficient reforms have been undertaken to set off a virtuous growth cycle. To sustain this, it is important that counter-cyclical policy smooths over the shocks, while cost-reducing supply-side actions continue. Whichever view is taken will affect future policies and outcomes. But, what is the evidence for each?
Continued robust growth for the fourth year after the pandemic, contained inflation and a reduction in poverty despite a fragile global environment support the latter view. So, why introduce disruptions to fix what isn’t broken? Those who hold the first view are unwilling to concede. Their initial position was that as better data comes in, growth figures will be revised downward. Unfortunately for them, the revisions have been upwards.
A second argument was that since wholesale price index-based inflation had become negative in April 2023, high growth last year was spurious because CPI inflation was higher than the partially used WPI deflators. A lower inflation measure overestimates growth. But if low WPI overestimates growth, then high WPI inflation should underestimate growth. WPI inflation was in double digits for two years between April 2021 and March 2023. According to their logic, the average post-pandemic GDP growth over 2021-24, measured at 8.1 per cent, should actually be even higher.
Bogeys such as the absence of double deflation are raised. This is not feasible since India, along with other major countries, does not yet have a services price index. Research finds that the use of double deflation can either under- or over-estimate GDP. So it is not a solution to all problems. Of course, improvements in measurement and movement to global norms are and have to be a continuous process. But critics choose to question improvements also on grounds such as non-comparability with the past. This is inevitable. As India changes, so must measurement practices.
Third, there is an attempt to over-interpret quarterly results that are subject to seasonal and base effects as well as measurement issues, to declare growth is collapsing. The steep fall in growth to — 23.2 per cent in the first quarter of 2020-21 created a base effect that made first-quarter growth relatively higher in the following years. Growth rebounded to 23 per cent in Q1 2021-22, 12.8 per in Q1 2022-23, and 8.2 per cent in Q1 2023-24. The lower growth in the quarters that followed does not mean growth is decelerating. The base effect is fading. In Q3 2023-24, growth exceeded Q1 for the first time at 8.4 per cent, implying growth is accelerating, not the reverse.
The fourth strategy is to question the data. The lower third-quarter gross value added (GVA) growth of 6.5 per cent was said to be more reliable since the sharp rise in product taxes minus subsidies that led to the difference was suspect. By definition, net product taxes have to be added to GVA to get GDP, since these taxes are applied after the production process. Else it would not fully capture the government’s contribution to GDP.
GST and other product taxes and subsidies on food, fuel and fertiliser are well measured. From the expenditure side, despite product taxes rising and subsidies falling in the third quarter, consumption rose by 3 per cent of GDP implying a strong compensating rise. Consumption is derived from the gross disposable income of households that nets out the share of government. Once households are provided with assets they need less of continual subsidies to sustain consumption.
GDP measurement in India is more robust from the production side. The difference with the expenditure-side measurement is given as a discrepancy. Since these are independent measures of a complex total, other countries also have discrepancies. Nevertheless, critics had cast doubt on the first quarter growth figure because the expenditure side measurement was lower by 3.3 per cent of GDP. In the third quarter, the discrepancy was only 0.2 per cent, implying GDP growth from the expenditure side was close to that from the production side. Predictably, there was no mention of the discrepancy this time. A strategy of highlighting only data that supports priors and ignoring contrary evidence is itself suspect.
Fifth, data in India is often subject to “smell tests”, highlighting any evidence that can be found to question the veracity of growth measurement. But, so much high-frequency data, not subject to the problems in measurement of aggregates, is available now. Instead of deceleration, all kinds of indicators show strong economic activity.
Sixth, it is argued that India did better than expected because global growth was higher. But India did not do well in 2019 despite good global growth. Appropriate domestic policy is essential.
Seventh, fingers are pointed at the fall in household financial savings arguing that a fall in investment and a rise in current account deficits (which must equal investment minus savings) will follow. This ignores the rise in household physical savings, which is measured as identical to household investment. Households include informal enterprises and they are borrowing to invest. But, liabilities are rising to finance investment more than consumption. This is healthier and more sustainable, unlike the borrowing financed consumption binge of the 2010s. Moreover, the current account deficit has fallen below 1 per cent of GDP, partly because financial savings are better intermediated and available for domestic investment.
There is healthy investment and credit-led growth supported by a strong financial sector that will raise savings as incomes rise. India’s private credit ratios are much below its peers. The view that private investment is not rising is because of an expectation of a 2008-type infrastructure boom that turned out to be unsustainable. This will thankfully not happen under better bank independence, regulation and risk-based pricing today. Gross capital formation was 32.2 per cent of GDP in 2022-23. This is not low and is mostly contributed by private capex, which is rising sustainably in a virtuous cycle that will become clearer after the elections. Policy continuity is important for private capex. CMIE data shows new private sector projects in Q4 2023-24 were at Rs 9.8 trillion — the second-highest level ever.
The writer is emeritus professor, IGIDR and member, Monetary Policy Committee
