[Editorial Analysis] The sobering reality of the India growth story

Mains Paper: 3 | Economic Growth and Development

Prelims level:  Growth indicators

Mains level: Sustained non-inflationary growth around the 7.5% level will help create conditions for an up move



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• 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.

What says the historical data?

• 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.”

• The data put out by the committee shows that—compared to the old series—India grew at a higher pace during 2004-14.

• 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.

Outlook on India’s past economic crisis

• The 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.

• India had a near currency crisis in 2013.

• 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.


• On 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.

• 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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