ExplainSpeaking | Global bright spot or the one-eyed king: Making sense of India’s GDP growth projections

At one level, these updates have only brought the IMF’s April projections in line with what almost every other economist has been saying: India will grow slower and slower than the pace previously expected. The RBI, for instance, expects India to grow at 7.2%.

However, given the polarised nature of our polity, the news was seen from two contrasting prisms. They are summarised below.

Global bright spot

IMF’s dialling down growth projection was met with mild euphoria in several quarters within India. The contention was that, despite the reduction, India’s projected growth rate was the highest among major economies of the world. It was pointed out that, in percentage terms, India grew at almost 9% (8.7% to be precise) in 2021-22 (or Financial Year 22). That too when India suffered from a vicious second wave of Covid at the start of the FY22.

If India were to grow at over 7% in the current year, despite high inflation and a global slowdown thanks to the war in Ukraine, it would conclusively prove India to be the brightest star among global economies. At a time when all the major economies are struggling to grow and many such as the US are teetering on the brink of a recession, India’s fast growth is very commendable.

One-eyed king

In 2016, when many such as the IMF had referred to India as one of the bright spots in the global economy, then RBI Governor Raghuram Rajan received much attention — both wanted and unwanted — when he said the following: “I think we have still to get to a place where we feel satisfied. We have this saying — ‘In the land of the blind, the one-eyed man is king’. We are a little bit that way”.

For many, this quote is an apt description of India’s economy in 2022 as well. In other words, while it is true that purely on the metric of GDP growth rate, India is indeed better but it is not as if that is good enough by itself. A higher growth rate is attributed to a lower base in the previous year, and it is argued that with each passing year, India’s growth rate is decelerating — from 8.7% in FY22 to 7.2% in FY23 and further to 6% in FY24. In fact, some rating agencies have even bleaker projections for India. For the calendar year 2023, Nomura expects India to grow by less than 5% (4.7% to be precise).

As seen from this lens, while India could have a higher growth rate than the rest of the world and appear like a bright spot, the fact is India is also losing its growth momentum. It can be argued that had it not been for the war in Ukraine, the same economies (say the US) would have continued to grow at a rapid pace. For instance, after contracting by 3.4% in 2020, the US economy bounced back quite sharply in 2021 and posted a growth rate of 5.7%.

How to read the GDP growth data?

Factually, both the positions are correct. India’s growth rate is much faster than other major economies but it is also true that it is coming down from one year to another.

But here are a few details that are lost in such a polarised debate.

1) Downgrade over a downgrade:

While the IMF’s GDP growth rate projection for India in the current year has been revised downwards by 80 basis points — from 8.2% (in the April WEO) to 7.4%, the fact is that the April projection itself was marked down from the January WEO update. That revision too was by 80 basis points — from 9% to 8.2%. Read this piece for more details on the April WEO.

2) A misleading GDP growth rate:

The most often quoted GDP growth projection is not that of the IMF but that of the RBI. In its June monetary policy review, the RBI Governor explained how the 7.2% growth will be achieved in FY23.

He stated: “…the real GDP growth for 2022-23 is retained at 7.2 per cent, with Q1 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent.”

The crucial thing to mark here is that in the second half (Q3 and Q4) of the current financial year, even the RBI expects India’s growth to be just 4%. This is not too different from the growth rate India had just before the Covid pandemic. Readers may recall that India’s GDP grew at just 3.7% in 2019-20, even before the impact of the Covid pandemic.

In fact, according to Sergi Lanau, Deputy Chief Economist of the Institute of International Finance, India’s “output hasn’t even grown at a 4% average rate since the shadow banking crisis” (see Chart).

Chart: India’s actual GDP and trends from 2018 to 2022

3) Questionable robustness of the 7.2% growth projection by RBI:

It is further noteworthy that in July 2019, when current Finance Minister Nirmala Sitharaman presented the Union Budget of the new government, she projected a GDP growth rate of 8%. The eventual growth rate turned out to be less than half of that. The point being that India’s growth projections have wavered considerably in the recent past and even without the disruption of Covid.

In this regard, RBI’s projection of 7.2% for the current year deserves attention. RBI first arrived at the 7.2% GDP estimate in the April policy review. It had downgraded the growth from 7.8% projected in the February policy review.

Here’s the crucial bit.

In April, its inflation projection for FY23 was just 4.5%. By June, this inflation projection had gone up to 6.7%. But despite such a spike in inflation projection and the ensuing interest rate hikes, RBI did not alter its GDP growth projection from 7.2%.

What’s more, in June the RBI Governor stated that the increased inflation projection does not take into account the effect that increased interest rates will have on inflation through the year.

“…the baseline inflation projection of 6.7 per cent for 2022-23 does not take into account the impact of monetary policy actions taken today,” he stated.

Typically when RBI raises interest rates to contain inflation it also restricts India’s growth rate. But as things stand today — the new policy review is due on August 5 — RBI’s GDP growth rate projection of 7.2% has not changed even when its inflation projection has gone up from 4.5% to 6.7%.

If one assumes that RBI was not deliberately projecting a low GDP growth rate of 7.2% in April, there is a very good chance that all other things remaining the same, RBI’s tighter monetary policy will pull back India’s growth rate below 7.2% in the current financial year.

4) How adequate is a 7% or even a 9% growth rate for India?

ExplainSpeaking has repeatedly alerted readers not to go by GDP growth rates in times of tremendous upheavals such as the Covid disruption. Read this explainer to understand why. Simply put, growth rates can often obscure the actual picture. For instance, when 100 is reduced by 25% and then the resulting number (ie 75) is increased by 25%, the final result (ie 93.75) is significantly less than 100 even though the percentage change was the same both ways.

But there are a few more reasons why direct comparisons of growth rate between India and a developed economy such as the US can be misleading.

For one, India has far too many poor people — not just in absolute terms but also in percentage terms.

For instance, while India’s GDP accounts for 7% of the world’s GDP, India’s population accounts for more than 18% of the world’s population. The US, in sharp contrast, accounts for just 4.3% of the world population while having a GDP that’s 15.7% of the world GDP. For one, this translates in not just much lower levels of per capita income and consumption in India compared to the US.

Moreover, it implies that India and the US do not have the same economic growth needs. The US doesn’t have to grow at 7% to be prosperous while a 7% GDP growth rate may be grossly inadequate for bringing prosperity to India.

Let’s look at this from the perspective of employment.

GDP growth rate versus job creation

Even when in the first two quarters of 2022 the US economy has contracted, the unemployment rate in that economy remains at a 50-year low. Compare that with the state of joblessness in India even when it grew at almost 9% in the last financial year.

Let’s take two stark examples.

First, let’s look at the MGNREGA data (see Table 1) for FY20 (pre-Covid), FY21 (Covid year) and FY22 (post Covid recovery). MGNREGA is a scheme where the government provides jobs to rural households when people in rural India can’t find jobs elsewhere in the economy. MGNREGA numbers are a good barometer for the health of the broader economy. If the economy does well, creating lots of varied jobs, MGNREGA demand should fall. When the economy is in the doldrums, unable to provide meaningful jobs, demand for MGNREGA jobs shoots up.

Table 1: MGNREGA data for FY20 (pre-Covid), FY21 (Covid year) and FY22 (post Covid recovery)

As can be seen in the Table above, while MGNREGA demand in FY22 came down from FY21, it was still considerably higher than the FY20 levels.

However, often the counter to MGNREGA data is that there’s widespread job creation happening in the formal or organised sector of the economy.

In this regard, there was a very revealing bit of data that Bank of Baroda’s Economics Research Department shared last week.

Bob pulled out the employment data from the Annual Reports of companies. It looked at a sample of 675 companies over more than 30 sectors. These companies had an aggregate of 4.12 million (or more than 41.2 lakh) employees (see Table 2).

Table 2: A look at industry-wise employment

BoB report finds that total employment for the sample companies increased from 37.4 lakh in FY21 to 41.2 lakh in FY22. In FY21 growth was flat as the headcount in FY20 was 37.3 lakh. On the face of it, the growth of 10.2% in FY22 is “quite impressive”.

But if one removes just three sectors — IT, Finance and Banking — the employment growth in other sectors falls to less than 2%. “Interestingly out of the net increase of 3.82 lakhs in employment witnessed for the sample companies, 93% was accounted for by the IT, banking and finance sectors. Therefore growth was not broad-based,” concludes the BoB survey.

Two things stand out from this result.

One, there is K-shaped (read unequal) recovery even within the organised economy, which by itself is the better performing part of the overall K-shaped recovery. It is quite telling that in 14 of the 32 sectors, total employment fell in FY22. In another 8 sectors, net new jobs were less than 1,000 in the whole year.

Two, an overall GDP growth rate of almost 9% in FY22 is entirely consistent with widespread joblessness whether in rural India or the urban and organised economy. To be sure, this is not the first time when India’s fast growth is not creating pro-rata jobs.

Summing up: There are several reasons — ranging from an increasingly challenging global growth outlook to a rather tired personal consumption revival within India — why India’s growth rate may remain closer to 5% or 6% in the coming years. What’s more, every percentage point of GDP growth that happens in the coming years is likely to create even fewer jobs, thanks to technological advancements. As such, while India should own the tag of the world’s fastest-growing economy, it is important to understand that being so is just the necessary condition for India’s prosperity, not the sufficient one.

Catch an insightful chat on India’s GDP outlook in the latest episode of The Express Economist which features Renu Kohli, a former RBI and IMF staffer and one of the most prominent commentators on the Indian economy.

As usual, I look forward to reading your views and queries. Share them at udit.misra@expressindia.com

Stay safe,
Udit