Facts about India’s GDP growth challenge the narrative of critics

The real investment rate for 2023-24—a high 35.8 %, is one of the highest levels achieved for a six-month period.
The real investment rate for 2023-24—a high 35.8 %, is one of the highest levels achieved for a six-month period.


  • An objective look shows investment-inflation low, real investments high and India’s GDP growth exceeding expectations.

The narrative of India’s low GDP growth, overstated growth, mis-measured growth, K-type growth, etc, reached a crescendo just before news broke that economic growth was 7.4 % in the first six months of fiscal 2023-24; much like Virat Kohli getting out, critics were rendered silent. And then the double whammy of state election results endorsing the current path of development and growth. Critics will need to regroup, re-assess and re-formulate. Of course, as general elections near, one should expect more disinformation and narrative peddling till May 2024.

Expert commentary on the Indian economy has changed since May 2014, and a convenient short-hand is the classification BM (Before Modi) and AM (After Modi). AM has a nice waking-up ring to it. Expert critics during the AM period are a who’s who of economists and former policymakers. These experts, at various points, have emphasized the following ‘facts’ about the economy in the post 2014 period.

One, GDP data no longer reflects reality; GDP growth is significantly less (about 2 to 3 percentage points) in ‘expert’ reality. Think of arguments made by Arvind Subramanian, former chief economic advisor, that were echoed by many.

Two, the recovery since covid, and perhaps continuously since May 2014, has been K-shaped; for those alphabetically challenged, this means the rich are getting richer and the poor are getting poorer. Kaushik Basu, former chief economist, World Bank; and also echoed by many.

Three, women have been particularly hard hit since 2014; there is the rich ‘evidence’ provided by a private data agency, CMIE, that female labour force participation rates in India are the lowest in the world, at 8-10 percentage points (ppt) lower than even Yemen. Raghuram Rajan, former RBI governor; also echoed by many.

In striking contrast, C. Rangarajan, former RBI governor and major economic advisor to Prime Minister Manmohan Singh, makes a legitimate query about Indian growth by stating that, “The potential for India to grow at 7% exists. We need an appropriate strategy to quicken the pace of investment," where the pace of investment is defined as the rate of nominal gross fixed capital formation (Growth, Fiscal Policy and Monetary Policy in India, Rangarajan and Srivastava, 2023).

Previously, the debate on growth in India was oriented around policies, reforms and broad political philosophies (crudely, socialism versus capitalism). I remember writing sometime in the late 1980s that Indian economic policy was socialism for the rich and capitalism for the poor. Starting in 1991, a broad consensus appeared among both the economic and political glitterati that economic reforms were productive, so we should do more reforms. Hence, the discussion was about which party did what. Now that growth is solid, and reforms entrenched, the debate, unfortunately, has shifted to narratives—a polite term for dis- and mis-information.

Narrative peddlers rely on questioning data. Whether it is employment, female labour force participation, nutrition, wages, prospects for employment, GDP growth, the list of alleged “false government data" is very long. One data-set that has, so far, not been questioned is on the prime driver of growth—investments. The importance of investment for growth is recognized by academics, the government and critics. Indeed, a common refrain (also expressed by Rangarajan-Srivastava) is that India is investing considerably less as a proportion of GDP than in the strong (and unquestioned) growth era of 2004-2013 (under the United Progressive Alliance or UPA).

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While analysing growth, it is not the nominal investment ratio that matters, but the real investment ratio: i.e. the ratio of real investments to real GDP. Only if the price of capital goods increases at the same rate as the price of GDP (the GDP deflator) will the nominal and real ratios be broadly the same. As seen in the table, this is manifestly not the case. It has data for three time-periods: the UPA ‘high growth’ period of 2004-13 (Period I), the Prime Minister Narendra Modi-led National Democratic Alliance (NDA) growth period of 2014-23 (Period II) , and for fiscal year 2023-24 to date (Period III of April to September 2023). One of the major achievements of the Modi administration has been a strong and persistent decline in average inflation between Periods I and II: The consumer price index (CPI) is down 3.4 ppt per annum, and wholesale price index (WPI) is down by 2.6 ppt per annum. Investment goods (the deflator for gross fixed capital formation) had a decline of 2.6 ppt per annum. This results in only a real marginal decline in the real investment to GDP ratio—from 32.6% in period I to 31.8 % in period II.

The growth rate, however, is lower by 2 ppt—from 7.2% in period I to 5.2% in period II. Is this because there has been some inefficiency in the growth process? Two facts to note before any hasty conclusions are drawn about GDP growth post 2014. First, despite demonetization in November 2016 and the GST launch in July 2017, GDP growth between the second quarters of calendar year 2014 and 2015 averaged a robust 7.4% per annum. No decline there, or inefficiency. As a footnote, what matters for prosperity (and elections) is per capita growth, and population growth has averaged a lower 0.4 % per annum post 2014.

Two important factors explain the lower growth in period II. First is the unusual tightening of monetary policy starting in 2018-19, a period when real policy (repo) rates reached the highest levels on record in India (upwards of 2.5%). In October 2019, the IMF had forecast GDP growth of 6.7% for 2019-20. Actual GDP growth that year was a low 3.7%. The second ‘exogenous’ shock to the growth process was the covid pandemic.

Fiscal year 2023-24 is the first ‘clean’ year after the covid dip and recovery. Note the nominal investment rate: a low 30.3 % in 2023-24. A magnitude close to the lamented 29% average for period II and one that Rangarajan emphasizes needs to be increased to the mid-30s for India to achieve its potential of 7% growth. But wait, India is already there; the realized GDP growth for 2023-24 to date (first two quarters of 2023-24) is 7.4 %. Also, and more importantly, note the real investment rate for 2023-24—a high 35.8 %, one of the highest levels achieved for a six-month period.

All the data points to a new sustained growth period for India. In my view, growth exceeding 7% and the highest per capita growth ever. Surely, the narrative must change. Or is that politically and ideologically an unrealistic expectation?

These are the author’s personal views.

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