Why economic growth can’t be taken  for granted

GDP growth forecasts are being revised downwards. On Saturday, the NCAER cut its forecast for 2019-20 to 4.9%. Mint takes a look at what is happening

Vivek Kaul
Updated17 Nov 2019
Nomura has also cut its GDP growth forecast for the September quarter to 4.2% against 5% earlier.
Nomura has also cut its GDP growth forecast for the September quarter to 4.2% against 5% earlier.

GDP growth forecasts are being revised downwards. On Saturday, the National Council of Applied Economic Research cut its forecast for 2019-20 to 4.9%. Several other institutions, too, have revised their growth forecasts. Mint takes a look at what is happening

How do quarterly growth forecasts look?

Other than NCAER, Nomura Financial Advisory and Securities has slashed India’s gross domestic product (GDP) growth forecast for 2019-20 to 4.9% from its earlier 6%. This is a huge 110-basis point cut. One basis point is one-hundredth of a percentage point. Nomura has also cut its GDP growth forecast for the September quarter to 4.2% against 5% earlier. State Bank of India, meanwhile, expects the Indian economy to grow by 4.2% during the July-September period. Given that economists like to move in a herd, these initial cuts should lead to more cuts of a similar kind in the days to come.

Why are GDP growth forecasts being cut?

The high-frequency economic indicators—car sales, two-wheeler sales, commercial vehicle sales, lending to industry, gross tax revenue generated by the government and new home sales—seem to suggest that the economic activity during the July-September period has slowed down. In this scenario, it is but natural that economic growth (measured by GDP growth) will slow down as well. The cuts in GDP growth forecasts are basically adjusting for this new reality. The economic growth in 2019-20 is likely to be less than 5%— something that hasn’t happened in a decade.

How does sub-5% growth look compared to the past?

If we look at GDP growth since 2004-05 (see chart), the only year during which the economy grew by less than 5% was in 2008-09, when it clocked 3.1%. This was the year the global financial crisis started. This time the fall in GDP growth has more to do with local factors than external ones. Of course, the government continues to be in denial mode.

Is sustained 5%-plus growth possible?

As Abhijit Banerjee and Esther Duflo write in Good Economics For Hard Times: “Many economists worry that there may be such a thing as the middle-income trap, an intermediate-level GDP where countries get stuck or nearly stuck. According to the World Bank, of 101 middle-income countries in 1960, only 13 had become high income by 2008.” Even growing at a sustained rate of 5% or more is very difficult. Only two countries, Taiwan and South Korea, have grown at greater than 5% for five decades.

What does this mean for India?

Many countries which were expected to grow fast in the past have not done so. This list is a long one and includes countries like Iran, Iraq, Sri Lanka and Myanmar. As Banjeree and Duflo write: “India should treat it as what it is: no more than a warning.” And that’s primarily because history clearly shows us that economic growth cannot be always taken for granted. The sooner we realize this, the quicker we will be able to tackle the current slowdown.

Vivek Kaul is an economist and the author of the Easy Money trilogy.


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