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
• Bottom of Form
• 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.