The week that went by was of the World Bank-International Monetary Fund (IMF) annual meetings. The IMF updated its growth forecasts for the global economy and individual countries. The estimates are sombre and downside risks dominate. For India, it has lowered its gross domestic product (GDP) growth forecast for 2022-23 to 6.8% from 7.4%. Yet, India is growing faster than other nations in the G20 except for Saudi Arabia. In 2023-24, according to IMF, India’s GDP is likely to grow 6.1%, the highest in the G20.
In general, India’s trend growth is estimated to be closer to 6% by many international organizations. In the current global context and many likely scenarios for the rest of the decade, it would be an achievement if real GDP growth in India averages 6% and nominal GDP growth averages 10% to 11%. But India can and will likely do better.
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India’s average annual real growth could be between 6.5% and 7.0% rather than close to 6%. I make this case based on the remarkable parallel that the years between 2018 (or 2016) and 2022 have with those between 1998 and 2002.
In 1998, India tested a nuclear device and faced sanctions. There were two successive droughts. A technology investment boom ended and there was a recession in many countries in 2001. Then, 9/11 happened, creating fresh geopolitical uncertainties. The Indian financial system was undergoing balance sheet repair, as was the corporate sector. Debt levels had to be brought down. But, beneath these issues, many structural reforms were quietly afoot. Interest rates were deregulated. Several government-owned entities were privatized and many of them have been performing far better since then. Further, infrastructure improvements began to be taken up in the right earnest, with the announcement of the Golden Quadrilateral project of national highways, symbolizing India’s focus on physical infrastructure.
However, these reforms did not manifest themselves in higher economic growth as they were overshadowed by the temporary shocks detailed above. Also, economic policies always operate with a lag. Eventually, sanctions eased, droughts receded and balance sheets became healthier. Infrastructure improvements began to contribute to more significant economic activity. When a global boom started in 2003 on the back of China’s admission to the World Trade Organization and synchronized interest rate reductions in the developed world, India was ready to participate. Indian economic growth was between 8% and 9% between 2003 and 2008. As the subsequent banking crisis showed, high economic growth resumed in 2009, but was unsustainable.
Fast forward to between 2018 and 2022. In general, in the second half of the last decade, India’s actual economic growth was below its potential. The explanation is not far to seek. Financial sector stress coming on the back of a credit boom always leads to a long period of slower economic growth. India’s banking, non-banking and non-financial corporate sectors had to fix balance sheets and shore up their equity. By the time this process was completed, the pandemic had struck, followed by a geopolitical shock and a synchronized tightening of global financial conditions.
But, beneath these shocks, India’s structural reforms have proceeded apace. The goods and services tax introduced in 2017 is maturing well. It delivers more than tax revenues for the states and Union government. The Insolvency and Bankruptcy Code was introduced. The Real Estate Regulation Act was passed, and this sector is becoming less cash-based. Privatization has made a comeback. The government streamlined and lowered direct taxes for businesses and individuals. India’s public digital infrastructure (India Stack) appears to have crossed an inflexion point. It is beginning to improve access to finance for individuals and businesses and open up growth opportunities for the latter. Providing time and space for the private sector to repair balance sheets, the government ramped up capital spending. Public investment spending grew 2.8 times between 2015-16 and 2021-22.
Over the last two years, these measures have been overshadowed by one-off shocks. As the impact of these shocks fades—as is the case with the pandemic shock on India’s economy—growth outcomes will begin to reflect the cumulative effects of these reforms and other structural economic developments. The private sector will begin to invest in right earnest. It has already started to stir. It can add 0.3 to 0.5 percentage points to Indian growth, as would developments on the digital front, pushing growth to between 6.5% and 7.0%. If external demand turns favourable, at least in some years, the growth outcome could reach 8% and beyond.
Therefore, there is a case for optimism overlaid with vigilance. Premature celebrations are avoidable. History, including ours, cautions against that. Risks are plenty. For one, being a global economic power could elevate geopolitical risks. There is no trade-off between economic stability and economic growth beyond a year. Stability warrants as much attention as growth in these globally fraught times. Delayed gratification will bring lasting growth dividends. If we keep plugging away as we have been since 2014, economic results will speak for themselves, as they’ve already begun to.
V. Anantha Nageswaran is chief economic advisor to the Government of India.
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