Opinion | The sobering reality of the India growth story
Sustained non-inflationary growth around the 7.5% level will help create conditions for an up move
One big problem with the shift to the new gross domestic product (GDP) series in 2015 was that the government did not provide a link to the old series. This made comparisons difficult and created controversies around GDP data. Even though the government has not officially published historical data with the new base, the committee on real sector statistics, constituted by the National Statistical Commission, has generated numbers with the base of 2011-12, going back till 1993-94. This is a welcome development as it will help analysts and policymakers make more informed decisions until the official data is published.
The delay in publishing historical data is perhaps understandable. As the report explains, it was not easy to generate the back series, as some of the data sources that are now used, such as the MCA-21, were earlier not available. Therefore, the committee has used what is called the production shift approach to generate the numbers. Stability checks on data did not find any structural break in 2011-12, and there is not much deviation in terms of the trend. The committee has noted in its report: “One observation here is that in the case of GDP at market price, the revised series appear to be smooth and comparable to the new series. However, when we look at growth rates, there are some differences, although not significant and this is largely due to the ‘discrepancy’ variable, which is found to be highly volatile.”
Since the historical numbers are now available from a credible source, it is fair to argue that all the allegations of data manipulation were baseless and should have been avoided. There was no particular reason for anyone to doubt the integrity of professionals in the statistics department. Measuring economic activity is not a perfect science. GDP data is revised frequently all over the world, including in advanced economies. Changes in the methodology and revisions are made to improve the quality of data so that the government and markets are in a better position to make informed decisions.
The data put out by the committee shows that—compared to the old series—India grew at a higher pace during 2004-14, and the growth measured at market price crossed the double-digit mark twice during this period. However, these numbers have not changed the story. India could not sustain 8-9% growth for long. Growth in the years leading to the financial crisis of 2008 was pushed by the booming global economy. Growth in the Indian economy also collapsed after the financial crisis. Economic activity recovered sharply on the back of fiscal and monetary stimulus, but again, it could not be sustained.
In fact, both fiscal and monetary policy remained too loose for far too long in the aftermath of the financial crisis, which resulted in higher inflation and a higher current account deficit. As a result, India had a near currency crisis in 2013. Further, the pre-crisis economic boom and the push for higher growth after the financial crisis resulted in excessive borrowing by Indian companies. Their inability to repay affected banks and the twin balance sheet problem has become a drag on growth in recent years.
The economy is now recovering from a four-year low growth of 6.7% in the last financial year, and the question that needs to be debated is: Can India attain higher growth on a sustainable basis? The recent India report of the International Monetary Fund showed that it expects the economy to grow at 7.3% in the current, and 7.5% in the next fiscal year. It also said that the output gap is narrowing to -0.3%. The monetary policy committee of the Reserve Bank of India, in its last meeting, noted that the output gap has virtually closed. This is also getting reflected in higher core inflation.
Therefore, realistically speaking, the immediate target should be to sustain economic growth at around the 7.5% mark. Sustained non-inflationary growth around this level will help create conditions for an up move. To be sure, India has taken several steps in recent years, such as the implementation of the goods and services tax, which will help increase potential growth over time. But more reforms will be required to ease supply-side constraints. It is also critical that the ongoing revival in investment activity is sustained. Policymakers should not repeat the mistake of pushing growth through fiscal means. The sobering reality is that India was neither ready to handle double-digit growth in the last decade, nor is it fully prepared now.
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