Will we sustain rapid growth beyond FY23?

The headline numbers need to be seen in perspective. They derive from the base effect of two successive years of sharp decline: growth of 3.7% in 2019-20 and shrinkage of 6.6% in 2020-21, when the economy reeled under the shock of a stringent covid lockdown. When this base effect is factored in, the numbers show that in real terms, India’s GDP last fiscal year was just 5.7 % higher than what it was in 2018-19, yielding an average annualized growth of just 1.9% over that three-year period.

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A V-shaped recovery is usually defined as one that recoups output loss. The IMF’s latest projections for our economy, however, translate into a permanent output loss of 4.9% over four years on an assumed conservative trend/potential growth rate (the average of the two years preceding the pandemic) of 5.1 % per annum. The World Bank’s estimates of 8% and 7.1% respectively point to a similar output loss. On the other hand, more recent estimates by the Organization for Economic Cooperation and Development (OECD) of 6.9% and 6.2% translate into a far higher output loss.

Calculations of output loss are sensitive to the potential or trend-growth estimate. As this is a moving target, it is difficult to determine. The baseline of 5.1% used above includes 2019-20, when growth was well below potential (3.7%). India’s average growth during the five years preceding the covid outbreak (2015-19) was 6.6%. If this is taken to be India’s potential/trend GDP growth rate, the output loss is 12.6%. It is widely believed that India’s GDP growth was overestimated under the revised GDP series, as it was not corroborated by a host of alternative indicators strongly correlated with growth. If the five-year average is lowered from 6.6% to 6%, the estimated permanent output loss comes to 9.5%,. This is among the highest in G-20 economies. Bear in mind that this outsized loss in output and growth potential in recent years is reflected in measurements of economic activity that are strongly correlated to growth.

While unemployment rates fluctuate, as people keep exiting or entering the labour market, a more robust and durable medium-to-long-term measure of employment trends is the country’s labour force participation rate. Data from the Centre for Monitoring Indian Economy shows that this fell secularly from 47.7% in January 2016 to 41.9% in March 2020, and further to 40.19% in April 2022. The number employed has not risen in absolute terms since January 2016, even as our population, and consequently the labour force, has increased. More worrisome is that at over 30%, India’s youth neither employed, nor in education or training, is twice the G 20 average.

Various economic activity indicators monitored by the CSO also show that except for rice production, the external sector, metallic minerals and railway freight, the average annualized growth over the last three years (2019-20 to 2021-22) was below 3% per annum. Several indices are still to recover to pre-pandemic levels. While comparing these growth rates with GDP numbers, it must be kept in mind that unlike GDP, some of these indices are not adjusted for inflation. National income is estimated by the CSO by both income and expenditure methods. An analysis of both trends can offer us a good idea of the sources of growth. The income method indicates that the agricultural sector weathered the pandemic well, growing at an average annualized rate twice that of GDP. Other sectors did not. Trade, hotels and transport communications had an average annualized negative growth of 1.9%. as these suffered the most from covid-related restrictions. Financial and real estate services and also public administration and defence continued to grow at over twice the GDP growth rate, but only a thin elite at the top benefit directly from this. The expenditure method tells us a lot about our economy’s engines of growth. Over the last three years, government expenditure has been the chief engine, as its average annualized growth was twice that of GDP. Private consumption, investment and exports grew at roughly the rate of our economy as a whole. Both investment and exports, however, staged a smart recovery in 2021-22 after several years of stagnation and decline.

India’s potential growth was dropping sharply in the pre-covid period. It grew at an average of 7.7% over 14 years between 2003-04 and 2016-17, as all three growth engines, namely exports, investment and consumption were firing. But growth started to decline as the export and investment engines started sputtering. The third engine, private consumption, also started flagging over the last three years with the covid pandemic. Thus, based on average long-term trends and averages, India’s current upturn in growth is not V-shaped. Several years of declining growth appear to have reduced the growth potential through hysteresis. It may therefore be difficult for the Indian economy to grow at an average significantly above 5% in the foreseeable future, unless the green shoots visible in investment and exports in 2021-22 can be sustained and private consumption bounces back. Going forward, growth also faces strong headwinds from high oil prices, monetary tightening in the US, worsening fiscal imbalances, a stagflationary environment and rising interest rates.

Alok Sheel is a retired Indian Administrative Service officer and former secretary, Prime Minister’s Economic Advisory Council