Arvind Subramanian’s paper, ‘India’s GDP Mis-estimation’, published in June this year, caused a lot of controversy. I was initially sceptical of his argument. But now, having heard him at the India Policy Forum at NCAER, on July 10, where he presented more data on India’s slowdown, I am convinced about the significance of his research. The lessons I take away from his papers and new work are not exactly the ones he would emphasise, but the general message is important for India and the nation’s policymakers.
What he showed was, if you take 17 major items, like electricity consumption and airline traffic, that correlate well with India’s growth and track them, you will see that their growth slows down after 2011-12 and drops substantially below levels consistent with the official GDP growth. This leads him to conclude that India’s recent GDP growth is slower, by as much as 2.5 percentage points, from what the official data suggest.
I do not think that India’s GDP computation has obvious flaws. What the divergence demonstrated by Subramanian reveals instead is underlying disturbances in the economy. India’s economy has many fundamental strengths and is capable of taking on this challenge but it requires skillful policy maneuvers. Before I go into this, let me point to some evidence beyond that in Subramanian’s paper, which are signals of an impending slowdown.
To start with a little history, the first time India’s GDP growth rate crossed the 9 per cent mark was in 1975, the year of India’s Emergency. It is possible that the shock of the Emergency caused this growth spike. Before anyone jumps to the conclusion that authoritarianism is good for growth, let me point out that the following year growth slumped to 1.2 per cent, and by 1979-80 it had dropped to negative 5.2 per cent, which is the lowest recorded growth in India since 1947. While it is true that there are some examples of authoritarian regimes leading to high growth (China being the most prominent), there is overwhelming evidence from history of dictatorial control leading to disaster.
India’s true transformation occurred after 1993, when growth became stably high and foreign exchange reserves rose exponentially. The economy’s most remarkable period was 2003 to 2011, when annual GDP growth was approximately 8.5 per cent. Within this, the most significant stretch was from 2005 to 2008, when India grew by over 9 per cent each year.
The slowdown began in 2012, reversed in 2015, but over the last two years it has slowed again. The last official quarterly growth data, pertaining to the first quarter of 2019, shows GDP growth to be at 5.8 per cent. The examination of micro data suggests a genuine risk of a further slowdown in the short run. It is time for policymakers to sit up.
Subramanian already pointed to the fact that from 2011-12 to 2017-18, India’s export growth was zero per cent. Six consecutive years of average zero per cent growth in exports does not augur well. For emerging economies raring to grow, exports are important. During the same period, Vietnam’s exports grew over 300 per cent.
Of as much concern, since this is one of the big drivers of growth for developing countries, is the performance of investment rates, the percentage of GDP that consists of expenditure on items like infrastructure, machines and technology. All the Asian super-performers had investment rates over 35 per cent. India crossed the 30 per cent line in 2004. This had never happened before and was quite a landmark for the nation. By 2007-8 India’s investment rate had reached 38.1 per cent, putting India in the Asian super-performer league. Unfortunately, it has fallen steadily, and is now back to just above the 30 per cent line.
Turning to other micro data, India’s automobile sector is stalling, and the balance sheets of Indian corporations have worsened. Companies’ combined borrowings were up 13.2 per cent in FY19 but their net worth did not rise comparably. Another figure is the relationship between home prices and buyer incomes. According to the RBI, house price to income ratio has risen from 56.1 in March 2015 to 61.5 in March this year. This in itself is not a problem, but if home prices make a downward correction, this can cause general demand to stall.
What should the government do to ward off short-run risk and strengthen long-run, sustainable development? For the former, it is time for some Keynesian demand boost. We should be prepared to make a measured increase in fiscal deficit for a year or two. This will boost demand for goods and be a much-needed shot-in-the-arm for India’s firms and farms. If the extra expenditure is directed at the poor and the agriculture sector, that will help those who need it most. Another item on which the government can step up expenditure is on building infrastructure. This can simultaneously boost demand and raise investment.
Turning to more long-run matters, we must continue to cut bureaucratic costs. It is true that important steps have been taken in the last three years, such as the new Insolvency and Bankruptcy Code 2016. There are also improvements in the ease of doing business. However, the latter was done mainly to appease the World Bank by taking steps exactly on indicators that the World Bank tracks. What is needed is to cut the culture of permissionism. There is a reason governments allow this to persist. If citizens and businesses do not have to repeatedly turn to the government for permission, this clips the government’s power, and most governments have a tendency to resist this.
Finally, the long run belongs to nations that promote higher education, creativity and scientific temper. Among developing nations, India was an outstanding performer on these scores. This advantage has been eroding in recent years. I hope we will have the sagacity to reverse the trend.
[All GDP data cited in this article are from Government of India’s Economic Survey 2018-19.]
The writer is C. Marks Professor at Cornell University and former Chief Economist and Senior Vice President, World Bank