The Indian economy’s growth prospects, both actual and potential, have been in the news recently for a variety of reasons. The credibility of the GDP growth figures is crucial to the Budget estimates. All projections, expenditure as well as revenue, will look credible if the GDP growth figures are realistic. Though elementary, these comments are necessary because of certain recent developments.
As Finance Minister P. Chidambaram pointed out in his Budget speech, the Indian economy has witnessed much higher growth than what it seems capable of now. Between 2004 and 2008, and again in 2009-10 and 2010-11, the growth rate was over 8 per cent, and, in fact, crossed 9 per cent in four of those years. The average for the XI Plan was 8 per cent.
The big worry
That, of course, is old story. The economy has visibly slowed down since 2010-11. During the next year, it was 6.2 per cent. The Central Statistics Office’s estimate for the current year is 5 per cent. The big worry is whether such sub-optimal growth rates would become the new norm
Barely had Mr. Chidambaram delivered his speech, news came in of a below 5 per cent — 4.5 per cent to be exact — GDP growth during the third quarter (October-December, 2012) of the current fiscal. In the first two quarters of the current fiscal, it was 5.5 per cent and 5.3 per cent, respectively — an average of 5.4 per cent. Simple arithmetic suggests that economic growth during the last quarter (January-March, 2013) should be significantly higher to bring the year’s growth rate to something around the RBI’s forecast of 5.5 per cent. The pronounced dip in the growth rate has not dissuaded the policymakers from aiming high.
While the Finance Minister hopes that the country has the potential to grow by 8 per cent, a rate which one should strive for, the XII Plan has been much more ambitious.
Implicit in such a claim is that the dip in the third quarter notwithstanding, the economy will, beginning fiscal 2013-14, start climbing back to a higher growth trajectory.
In what now seems to be a highly fanciful exercise, the Planning Commission projected a growth rate of 9-9.5 per cent during the XII Plan (2012-17). Last year, after the National Development Council meeting with State chief ministers, it was lowered to 8.2 per cent, and finally pitched at 8 per cent. The Prime Minister had called this ‘aspirational’ while some chief ministers had found it lacking in ambition. For those closely watching the trends, an 8 per cent GDP growth rate seems beyond the realm of possibility.
A leap from a 5 per cent rate during the current year (the first year of XII Plan) to an average 8 per cent, a full three percentage point increase, and that on a sustained basis is going to be an incredibly difficult task. The Economic Survey projects next year’s growth between 6.1 and 6.7 per cent. (The wide range indicates uncertainty that the statisticians face). So, assuming that the actual rate will be around 6.5 per cent during 2013-14, the second year of the XII Plan, the economy should grow by something like 9.5 per cent during each of the last three years. It is time to be realistic over GDP growth rates. For, it is not some numbers that the policymakers are juggling with but a whole of macro-economic data which are based on growth rates. Growth in tax revenues, for instance, is a function of GDP growth. Practically every major macro-economic indicator correlates with the growth figures.
Two questions are relevant here: Has the economy bottomed out, and Is it possible to aspire for growth rates of 8 per cent or more given the present constraints.
Answer to the first question will depend on not just the growth assumptions coming true but also on other factors such as sustained increase in investments, improvement in consumer spending and so on.
Regarding the second question, aiming for a growth rate of above 9 per cent may stoke inflation because of large constraints such as infrastructure bottlenecks.