Does GDP Growth Reflect the Real State of Economy?
In the developed world, GDP-linked growth is linked to ‘social security ‘, but in India, the government has flagged an early end to what is commonly branded as ‘freebies ‘. The Supreme Court too is now seized of the matter. The following participated in the discussion: Dr D K Srivastava, Chief Policy Advisor, Ernst & Young India, Dr Venkatesh Athreya, Adjunct Professor, Rajiv Gandhi National Institute of Youth Development (RGNIYD) and Mr KT Jagannathan, Business & Financial Journalist.
Dr D K Srivastava, Ernst & Young India
The topic, ‘Does GDP Growth Reflect the Real State of Economy,’ is both intriguing and challenging. It is true that making reference only to the magnitude of growth numbers can be quite misleading. One has to be very careful in understanding and appreciating growth numbers which come out routinely as summary indicators of a country’s economic performance. I would argue that it is useful to appreciate growth numbers by placing them in a suitable context. For example, given the current situation, we can look at India’s contemporary growth performance and prospect by placing it in a global context; or in the context of domestic economic challenges; or in a time perspective. Recently, the IMF has come up with its forecasts covering medium term prospects of India’s growth in a global context; it is highlighting that India over the period from FY 23 to FY 28, which translates roughly to calendar years 2022-2027, will grow at an average above 6.5 percent. If you look at world growth, it is only 3.2 percent, which is to say that India is going to perform in growth terms, nearly double that of the global growth. Advanced economies are going to perform much worse. By end of 2027, their performance would be less than 2% – Japan at about 0.4%; Russia at 0.7% and China at 4.6%. So India is probably in a very significant phase of growth and prosperity.
Ten Mega Threats
But we must recognize the kind of turmoil through which the global economy is now passing through. Nouriel Roubini, an Italian macro economist, who had correctly predicted the 2008 global crisis, has come out with his recent book in October 2022, titled ‘Mega Threats: The 10 trends that imperil our future and how to survive them.’ These threats include climate-related environmental risks, risks pertaining to economic and financial global instability, geo-political challenges such as the supply-side barriers in the wake of the Russian-Ukraine conflict, risks pertaining to pandemics and epidemics, risks from excess money supplies and debilitating country debt profiles which have rendered both monetary and fiscal policies ineffective globally. Thus whatever growth rate India is able to achieve, it should be interpreted in the perspective of the global economic environment which is challenged by these mega threats which are unfolding. Those also include technological changes including AI and robots, which may throw human population out of employment. And India may not be immune to that. We are possibly going to go through one of the best phases of sustained, high growth. But at the same time, these mega threats can be interpreted in two ways: One is that global growth even at 3.2% on average maybe an over estimate, because many economists are now predicting that some of the large advanced and large emerging economies may crash shortly in the wake of these challenges. In fact, the US and the Chinese economies measure much lower growth than what is being predicted here. The IMF may even be generous on this account. And, therefore, in that global context, India may do very well if we can sustain a growth rate of about 6.5 percent for five years or beyond. But then, it is also imperative that we recognize these megatrends and build cushions and buffers against these challenges.
The first quarter growth in FY 23 provides a very high real GDP growth estimate. If you look at just one quarter, that growth is 13.5 percent. That’s a very excessively high growth. In a normal year, this does not look to be that high. In fact, the most problematic sectors—trade, hotels, transport, etc—have a growth figure of 25.7% in the first quarter. It is the contact intensive and employment intensive sector that had suffered the largest during Covid. This is a sector in which it is still showing in negative growth as compared to the corresponding growth in 2021. This is why some people argue that India is getting a K-shaped growth with some part of the economy shooting ahead and a large segment of employment /contact intensive sectors still suffering from unemployment and shocks suffered during Covid time. So when we are able to emerge out of the immediate impact of Covid and assume a normal growth profile, then only this 6.5% IMF growth projection would have some promise.
Let us take a much longer perspective and this will allow us to bring together a global as well as domestic set of constraints. Let us say we talk about India’s Amrit Kaal, which is 25 years from now or even beyond. The outstanding feature of this period is very special for India because we have an emerging demographic dividend and that gives us an advantage as compared to most of our peer countries including China and other emerging markets, as well as the advanced economies. Growth is yet to be determined and it will respond to the policy initiatives that will be undertaken during the period that is going to unfold. There are a number of perspectives that we can consider. First, we argued overall global growth is going to slow down and our exports also will go down. We will have to depend largely on domestic demand and domestic growth dynamics. Whether we will be able to show that kind of growth through domestic growth dynamics is an open question.
Capital Inflow
Another perspective that we can draw is that if everybody else is going to grow at a relatively subdued rate, then global capital will flow towards those countries with high growth and India would be one. So with India’s high growth prospects and a stable currency, we will be able to attract foreign investment and foreign capital into the Indian economy and we might then be able to enjoy the benefits of shifting supply sources, from our neighbouring countries to our domestic economy. Therefore, we may be able to sustain the possibility of a high level of growth. Third, we can also question if the technological progress takes place such that it becomes quite a challenge to take advantage of the burgeoning working age population that India is going to experience and employ them productively. This burgeoning working-age population can be employed only if we can educate and keep them in good health.
One outcome of growth, which was not so much of a constraint for many of the peer countries, is the fact that we have to be climate conscious. We have to go for a growth which is characterized by a non-polluting set of characteristics. One possibility is that we focus on service sector growth / exports which is less carbon emission intensive.
In order to understand the performance of growth and promise of growth, we have to be conscious of the context in which we are discussing this and in the emerging context for India, we have to go for a profile of growth which is much different from other countries. It is going to be internally oriented. It is going to be dependent largely on domestic demand and domestic growth dynamics. It is going to be dependent on service sector growth and it is going to take advantage only on service sector exports, whereas exports of goods may be highly competitive. The growth has to be climate-friendly, which would mean that we have to aim for a lower growth than what was hitherto experienced by our peer countries.
Dr Venkatesh Athreya, Adjunct Professor, RGNIYD
What is the point of just some numbers of GDP growth without understanding its impact on the various sections of the population? What has high growth in the reform period meant for a vast majority of Indians? A very pleasant prospect of urban growth is pretty nice to hear. But I’m afraid that is not the entire picture. If you take a larger picture of Indian growth over thirty years and particularly over the last eight years, there’s some very disturbing features of the growth, which is why the question arises: What is GDP growth on the one hand and the state of the real economy on the other? The state of the real economy is about how people, farmers, factory workers, service sector people are doing. We also have Zomatos and a whole new tribe of gig workers who have extremely precarious conditions of employment. We want to get rid of labour laws and let capital rule supreme. There is a tendency to abandon all regulations necessary for ensuring a minimum level of welfare for the population and focusing solely on some metric called growth or profits. Profits or growth is not bad but are we going to take an uncritical attitude to growth?
The growth of the Indian economy in the 1980s—that is the decade before the reforms—was about 6% per annum. According to Mr Chidambaram, then Finance Minister, the rate of growth of the Indian economy from 1980-81 to 2013-14 was 6.1 percent. So my first proposition is that there is no distinct increase in the rate of economic growth, post reforms. Six percent growth rate for about 30 years is very impressive and it is nothing to be dismissed but to pretend that liberalization was the magic potion that delivered fantastic growth will be misleading.
Reforms & the Three Arms
The reform period consists of three main elements: Deregulation (Liberalisation), Privatisation and Globalisation. Liberalization is a nice word. But the intent was not liberalization, but to remove all the regulations and let big capital—domestic and foreign—be free to pursue its profits.
Privatization consists of two parts. One is the disinvestment in public sector enterprises—something which is continuing to this day and, in fact, with increased vigour under the present regime. But the other part of privatization, which is not often noticed, is that the state abdicated its responsibility for domains like education, infrastructure and health care, all of which was essentially commercialized. Privatization means commercialisation which made access to education, infrastructure and healthcare far more difficult for the poorer sections. That’s a fact of life. Then finally we had globalization, which as an economist, I see it in two ways. One is the trade. We liberalized imports and exports. We have a huge merchandise trade deficit, year after year in the last 30 years. That is the difference in the value of exports of physical goods from India, as against the value of imports of physical goods from abroad. We are partly managing it because we have a net earning of foreign exchange in the service sector, especially IT enabled services and tourism. We also have remittances into India by ordinary people working in the Middle East, sending what little savings they make and helping the families build a house or educate their siblings. This has been a huge factor in helping us with our BOP, but it is hardly recognized as such in official circles. But even that is not sufficient. So we still have a large deficit. This year, the current account deficit (CAD) is likely to be of the order of about 2.5 to 3 percent of GDP. That’s a huge amount. What does it entail? As a nation, we are desperate for constant influx of foreign exchange. Our survival depends on being able to attract Capital to the extent of about 2.5 to 3% of the GDP. That’s also very important because it has policy implication that we will do anything possible to keep foreign Capital happy. Even if it is merely speculative finance capital that comes and plays in the stock or commodities market and goes out, you don’t want to offend them.
Three Macro Worries
There are at least three macro data sources which suggest that the growth that has occurred both in the longer span of 30 years and in the present ultra-liberal, neoliberal regime. The PLFS Survey done in 2017-18 or 2018-19 as compared with the 2011-12 survey shows a huge increase in unemployment. That’s important because in India, unemployment is not an easy thing to deal with.
First of all, ‘half our workforce is self-employed.’ There’s no social security. They have to survive somehow. This segment of the population has done quite badly and the numbers have increased over this period. All these data are from the pre-pandemic period. There are various components of the workforce. So the demographic dividend that is often talked about can be a demographic disaster as well, if we are not able to create employment adequately and quickly across the board. That’s a challenge we face as a nation.
The second important report for the government is the consumer expenditure survey. Between 2011-12 and 17-18, you have data from the consumer expenditure survey carried out by NSSO. It tells you that the per capita monthly household consumer expenditure declined in rural India by 9%. Even in urban areas, the rise in per capita monthly consumer expenditure was only 2.2%.
The third aspect is the agricultural distress. Large-scale suicides of farmers reflect the sustained rural distress. These three aspects—of the decline in consumer expenditures of household in general, the decline in purchasing power of our population during a period with a fairly high growth and agricultural distress brook some doubt about the growth numbers we have. It also says something about the nature of the growth. That the market will take care of everybody is just not true for us. We need to question the model of economic of growth we have had. As if all these were not bad enough, the present dispensation also added its own bit – demonetization and the absolutely unprepared management of GST introduction. There is a prohibition of cattle trade, which has had an impact on assets of farmers in large parts of the country side.
GST Taxes the Poor
GST is basically an indirect tax and falls heavily on the poor. That’s more than 65 percent of total tax revenue—paid in a large part by ordinary people including the poor. We come down on so-called freebies but don’t look at the concessions by tax cuts to the corporate sector. We have not done any cost-benefit analysis till this day, for the concessions given.
GDP as you all know is the annual value of output of goods and services produced in a given territory / nation. Usually the period is a year. Post-2014, the government made an important change, which was planned earlier. We moved from GDP at factor cost to GDP at market prices. The present regime has repeatedly increased indirect taxes. So the apparent growth in the last 8 years is illusory. What we need to do is to look at the nature of the growth.
One of the important consequences of all these is that we cannot have a large fiscal deficit. But we can live with fiscal deficit for some time. The US used to have a much higher fiscal deficit. We are obsessed with the fiscal deficit because foreign Capital might leave. The consequence of this has been that our fiscal deficit management has been mainly driven by expenditure reduction and not by effective taxation of the rich. As a result, the government has had less and less to spend on key infrastructure. We need to have a more balanced economy, where the government is able to spend on all activities which are more profitable to the private sector and for which government must raise resources from the rich and not from the poor. It also means that we need to introduce some Capital controls and restructure our economic policies. We need to make sure that our market is accessible to the poor and the working poor because one thing we must remember is that the poor in India cannot afford not to work. The only people who can afford not to work is the rich. That is the reality of our economy.
Mr KT Jagannathan, Journalist
Does GDP growth reflect the real state of the economy? There was a famous Indian Express ad line in those days. It says that the truth lies somewhere in between. This sums up the position of India in the global stage. More than anything else, the sheer size in terms of the population has compelled many to convince themselves to take a positive view of India. India indeed, has edged out the UK to become the world’s fifth largest economy. A single number of GDP figure alone cannot assure all of us a sense of comfort and calmness for people at the bottom of the pyramid, which is very huge in Indian context. When viewed with other numbers, which are even more critical for the ground level happiness, the excitement over the GDP figure just evaporates. Retail inflation was five-month high of 7.41 percent in September, disconcertingly above the upper tolerance limit of 6 percent fixed by the RBI. The food inflation which has a political implication was 8.6 percent, which is even higher than 7.62 percent in August. The rising price hurts a common man more than anything else. We have seen governments fall because of onion price escalations. The RBI is very keen on holding the price. Inflation is like the Aladdin genie. It is difficult to put it back into the bottle. It is rather simplistic to assume that answers to the problem of inflation lie with the Reserve Bank of India and not the North Block, where the finance ministry sits.
Sliding down the Hunger Index
Look at the other disconcerting numbers. India’s rank in the global hunger index went down to 107 from 101 in 2021, out of 123 countries surveyed by the European NGOs. Though we may keep debating these numbers, they tell us a significant tale. A single GDP number does not tantamount to all round happiness at the ground level. In a rising inflation situation, the RBI has little option, but to increase the interest rate further. This will have a cascading effect down the line. The EMI for home loan and vehicle loan goes up. There is considerable erosion in people’s disposable income and this will have a negative fallout on the demand for industrial goods and a multiplier negative effect on the economy as a whole. India’s drop in the rank in the global hunger index requires seriously introspection. The central stockpile of 44.1 billion tons of food grain at the end of the September 22 is down from 49.28 billion tons before September 2022. This depleting food grain stocks indeed rises a lot more concern.
The Double Whammy
Indirect tax is the most regressive tax. Everybody knows that such a tax is collected from even the poorest of the poor. GST is higher and there is inflation. All these have a double whammy on the poor. With the new unfolding global dynamics, the rising fuel price is a significant factor of pain for a common man. The visible impact aside, the invisible cost of fuel is also loaded on the common citizen, as it is passed down across the purchases, resulting in the prices of consumer goods escalating considerably.
GDP just measures the production capacity and economic growth. It is an aggregate measure that improves the value of goods and services produced. GDP measures everything but it does not discount for the value of forests they replace. The Delhi winters are increasingly filled with smog. The Chennai streets are inundated with water during the rainy season. But GDP does not say anything about them nor can it explain all these.
GDP is a flashy term that the common man may find it hard to comprehend. What a common citizen wants is a sense of happiness and a feeling of comfort. It requires more than a robust GDP number to get him this privilege.