Bumpy ride ahead
THE TRIBUNE DEBATE INDIAN ECONOMY
FOR much of 2022, Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman and many of the economists in the government had harped on the theme that India was the fastest-growing large economy in the world in the post-Covid period, and that this was no mean achievement. And it was also implied that if the country was the fastest-growing economy, then it cannot be the case that anything can be seriously wrong with the economy. But soon the little warts hidden by the big picture came to the forefront. The first issue of concern to emerge was that of inflation.
The Reserve Bank of India (RBI), which had been taking a fuzzy view of the economy, began to realise that inflation was getting to be a problem. This was something that could not be downplayed any more. And the RBI, which had wanted to keep interest rates low to boost the Covid-hit economy, had to make the hard decision to increase interest rates. This went unnoticed as attention shifted to the prospect of many businesses leaving China — an after-effect of the pandemic — and relocating to India. The narrative envisioned India emerging as the global hub of manufacturing, poised to assume the role previously held by China, the engine of global economic growth. But this did not turn out to be so in a big way. It was hoped that the Production-Linked Incentive (PLI) would be the magic wand to turn manufacturing around but it did not have the significant impact expected. The only sector that was growing in a way that translated into export earnings was the services, but it was still a modest growth because the global economy was stuttering.
To divert attention from the subdued economic growth, Prime Minister Modi has unveiled a new vision: India becoming a developed economy by the time Independent India turns 100 in 2047. In many of his public statements, he emphasises this goal, seemingly looking beyond the quarterly and annual growth rates, immediate inflation rates and immediate roadblocks. This is perfectly suited to fighting an election away from the irritants of what is really slow economic growth despite being much more than other countries in the world. As a matter of fact, there is an unstated caveat. A World Bank report had said India is the fastest-growing economy among its peers in the emerging market economies (EMEs) to avoid the false inference that India is growing faster than the US and China — the two top economies. China’s GDP is six times that of India, and that of the US eight times. It would not make much sense to claim that India’s growth is faster than that of the US and China.
The RBI has paused the interest rate hike at 6.5 per cent, and it hopes that the rate hike effected through 2022 would have a disinflationary impact, but the apprehension of volatile food prices and its effect on inflation remains. Though the inflation rate had stood at 4.9 per cent in October this year, it is expected to rise. The success that the Modi government had in the run-up to the 2019 Lok Sabha elections will not be there for the next summer’s General Election. Economists who had been supporting the government boasted of his achievement on the economic front of high growth and low inflation in the period between 2014 and 2018. The GDP growth rate in 2014 was 7.4 per cent and the inflation rate was 6.67 per cent; in 2015 the GDP grew at 8 per cent and the inflation rate was down to 4.91 per cent; in 2016 the GDP grew at 8.3 per cent and the inflation rate was 4.95 per cent; in 2017 the GDP growth rate was 6.8 per cent and the inflation rate 3.33 per cent; and in 2018 the GDP grew by 6.5 per cent and the inflation rate stood at 3.94 per cent. It is evident that in 2015 and in 2016, the growth rate was a respectable 8 per cent, and the inflation was just below 5 per cent. It is in 2017 and 2018 that the GDP growth rate moderated quite significantly, and the inflation rate was much below the 4 per cent range. The last five years have been bad in more ways than one. In 2019, the GDP growth rate was 3.87 per cent and the inflation rate was 3.73 per cent.
In the Covid year of 2020, the economy plunged; the GDP growth rate was – 5.8 per cent and the inflation stood at 6.62 per cent. In 2021, the economy bounced back, partly due to the low base effect, reaching 9.1 per cent growth, while inflation decreased to 5.13 per cent. And in 2022, the GDP growth rate was 7 per cent and the inflation rate was 6.7 per cent. The RBI projection for the GDP growth rate is pinned at 6.5 per cent, and there is uncertainty over the inflation rate. The central bank hopes that it will remain under 6 per cent in the mandated 2 per cent to 6 per cent range. But an inflation rate of 5 per cent and a GDP growth rate of 7 per cent cannot be termed a happy scenario. It could be that in the next five years, the situation could change, but 2024 does not promise to be the inflection point.
The global economy will continue to grapple with the challenge of regaining momentum lost in the post-pandemic period, amid the ongoing conflicts in Ukraine and Gaza that cast a grim shadow over the political outlook. It’s not surprising that Prime Minister Modi is directing attention towards the Ram temple in Ayodhya, providing free ration to 80 crore people for the next five years and distributing thousands of government appointment letters, given the less-than-promising job growth in the manufacturing sector. Then there are promises aplenty of how the AI (artificial intelligence) sector would boost economic growth in India, and the prospect of India rising to be the third largest economy in the world. India’s economic problems would not vanish by the growth of the GDP size. Double-digit growth, which could bring about perceptible change in the lives of the people, seems a distant dream.
