The National Statistical Office recently released estimates of the GDP for Q1 2019-20. As per the release, India’s GDP in the first quarter grew by 5 per cent. This was one of the slowest quarterly growth rates in the recent past and it comes in the backdrop of a consistent slowdown in growth for the last five quarters.
The release has kicked off intense speculation on the state of the economy. Picking on the recent data releases, certain sections of stakeholders have concluded, rather hastily, that the Indian economy is in a recession and that the country is staring at a “financial emergency”. Is the economic situation really this worrisome? Is panic and fear mongering over the health of economy really justified? Perhaps a dispassionate assessment of hardcore economic data is needed to understand if indeed there is any merit in the doom and gloom scenario being painted by those sections.
Consider the macro fundamentals first. First, in 2011-12, India’s GDP grew at 5.2 per cent. Compared to that, during the last 5 years (2014-15 to 2018-19), GDP grew at an average annual growth rate of 7.5 per cent. Growth touched 8.2 per cent in 2016-17 before moderating to 6.8 per cent last year. At this rate, India’s economic growth surpassed most large and developed economies across the world. Moreover, this economic expansion was accompanied by significant moderation in inflation and deficits on the fiscal and current account.
Second, annual inflation has been brought down from more than 10 per cent prior to 2014-15 to 3.4 per cent in 2018-19, one of the lowest in recent times. In fact, the average inflation (over the period 2014-15 to 2018-19) stayed at 4.4 per cent. Third, the fiscal deficit, that had reached unsustainable levels of about 6 per cent of the GDP in 2011-12, was brought down to 3.4 per cent in 2018-19. The current account deficit was also halved from 4.2 per cent of GDP in 2011-12 to 2.1 per cent in 2018-19.
Effectively, at the close of 2018-19, the annual GDP growth was 7 per cent, inflation was 3.4 per cent, the fiscal deficit was at 3.4 per cent and the current account deficit was 2.1 per cent. It is, therefore, not surprising that global investors and multi-national corporations saw merit in committing their hard-earned monies into India. Foreign direct investment increased from $34 billion in 2012-13 to $65 billion in 2018-19 (as per the Union budget).
Let’s consider the external environment next. Globally, most economies are facing downward pressures to growth. The annual growth rates of large economies like the US, Germany, Japan, UK (excluding China) remained below 3 per cent during the last 5 years. To make matters worse, trade remained sluggish because of tariff wars between the US and China. As a result, Indian exports stayed more or less flat growing from $310 billion in 2014-15 to $330 billion in 2018-19. The less than desired growth in exports did put a stress on the Indian economy. Despite this, India’s trade balance stayed at comfortable levels due to increased import substitution and softening of crude oil prices.
Data and arguments presented in the above paragraphs indicate that the economy today is “structurally” robust and stronger than it has been in the recent past. In other words, the vitals of the economy like inflation, deficit levels, trade balance are well within the comfortable range. These key indicators allude to the long-term stability and soundness of the Indian economy and that it is resilient enough to withstand the short to medium term domestic and external headwinds.
At the same time, the economy today is facing pressures from multiple quarters. This is evident from the slowing growth rate and other indicators such as PMI, core industry growth. While reduced domestic demand and global externalities may be contributing to this, the signs of a slowdown are evident. That said, fortunately, the government has not buried its head in the sand and has taken several proactive policy initiatives to tackle the slowdown head on. Some of these include merger of public sector banks, credit expansion through NBFCs, bank recapitalisation and easy loans to MSME’s, faster dispute resolution and so on. Consultations are also on with stakeholders of other major sectors such as auto and real estate to urgently devise ways to address sector specific issues.
The above moves show that the government is cognisant of the urgency of the situation and its responsiveness is evident from its proportionate and swift action. It is listening, assessing and willing to take decisive steps to safely navigate the economy through the current turbulence. One may expect that the recent initiatives as well as those taken in the last few years should start bearing desired results pretty soon. While the next one or two quarters may still be difficult, the structural soundness of Indian economy will help weather the cyclical downturn. While economic alarmists from certain quarters may continue to spread the not so festive cheer, hard facts point towards a healthy Indian economy well on its way towards a decisive turnaround.
This article first appeared in the print edition on September 13, 2019 under the title ‘Poised for a turnaround’. Malviya is National Convener, Technology Cell, Bharatiya Janata Party and Desai is a former Officer on Special Duty at Economic Advisory Council to the Prime Minister and NITI Aayog.