The recent constellation of economic data doesn’t look very pleasant — growth is down and inflation is up.
It would be silly to term this stagflation. Economic growth this year is expected to be 8.7%, the lowest in three years, going by the government’s early estimate. Wholesale price inflation for the week ended 26 January was at 4.11%, the highest rate in five months. The trend is sobering rather than alarming.
There would be far more cause for worry if the numbers were interchanged — growth at 4.11% and inflation at 8.7%. That seems to be nowhere on the horizon.
But to dismiss all fears about the Indian economy is also silly. There are fears that even China could lose some of its sizzle. Kenneth Rogoff of Harvard University said in a recent article that the odds of a significant growth recession in China are 50:50. Notice: Rogoff is talking about a growth recession—at least one year of sub-6% growth—rather than a proper recession with falling output.
India is not China. We have more robust domestic demand, are less dependent on exports, have a cleaner banking system and, perhaps most importantly, do not have the sort of inequality that could explode into social unrest in case the economy slows.
So, the chances of a growth recession here are far less than in China. Yet, history shows that countries on high-growth paths do occasionally experience sudden dips in performance, especially if the world economy is in a spot of bother.
Mint has argued since the overheating debate of early 2007 that India’s sustainable growth rate is between 8% and 8.5%. Anything above this range is likely to create inflation pressures, which is also why we support the Reserve Bank of India’s decision to increase interest rates. But there is also the occasional danger of the economy flying under the comfort zone as well.
A strong global economy fed by cheap money and the cumulative benefits of 15 years of economic reform has taken India to a higher growth path. What happens in the world economy this year is beyond the control of the Indian government.
But it can do something about the other driver. We need more reforms in the coming months if productivity and growth are to be pushed even higher. Double-digit growth is a receding possibility right now—but it’s still a goal that can be achieved in the long run.
Is India close to a growth recession? Write to us at email@example.com