Thunder from the East

India’s economic engines are roaring once again. Last week, two sets of data showed that India’s economy is on the mend. Data released by the government on August 31 showed the economy grew by a healthy 13.5 per cent in the first quarter of 2022-23, from April to June. Later that week, Bloomberg reported that India had overtaken Britain to become the world’s fifth largest economy. Slowly but steadily, India is moving away from the shadow cast by the Covid-19 pandemic that led to an extreme economic slowdown in the world.

The growth was powered by a rise in consumption that went up by 25.9 per cent on a year-on-year (yoy) basis com­pared to the same quarter last year. Consumption stood at nearly 60 per cent of GDP as compared to 55.5 per cent of GDP in the same period last year. Similarly, investment grew by 20 per cent com­pared to Q1 in 2021-22 and accounted for 34.7 per cent of GDP. This ratio was 32.8 per cent in the same quarter last year. Consumption growth had fallen precipitously between Q1 of 2019-20 and that of 2020-21. During this period, consumption fell by 26 per cent. The last ‘normal’ year before the pandemic was 2019-20. When compared with Q1 of that year and the April to June quarter this year, consumption went up by 11.8 per cent, showing that India’s economy may finally be healing from the scars of that period.

A similar story is repeated with investment. Together, con­sumption and investment are the drivers of any economy. Of late, exports have grown at a fast rate and in this quarter they grew by 14.6 per cent (yoy). But they were outpaced by imports that grew by 37 per cent. While exports have had a decent run in 2021-22—they grew by a phenomenal 36.7 per cent—in a world economy marred by the Ukraine war and expected economic slowdown, they are unlikely to have a continued good run.

In the days after the first quarter data was released there has been plenty of commentary on how the 13.5 per cent growth is breeding an “illusion”. While it is true that the Reserve Bank of India (RBI) had pegged its estimate of Q1 growth at 16 per cent and various market participants expected a number around 15.5-15.8 per cent, the growth could possibly be an underestimate.

HSBC India reported that growth could “likely” be an underes­timate. It said that “it is possible that GDP growth in the June quar­ter was underestimated because of the CSO’s practice of single deflation instead of double deflation at a time of rising oil prices.”

This is due to a technical issue pertaining to the manner in which growth figures are calculated by the official statistics agency. There are two different ways to calculate GDP. One measure is what is known as Gross Value Added (GVA). GVA is simply economic output minus input. The observed GVA is in nominal terms and is then “deflated” to get “real” growth, netting out the influence of prices. What is done is to deflate nominal GVA with a single deflator instead of separate deflators for output and input prices.

In normal times this does not matter. But at the moment there is a huge variance in input prices and increases in such prices (measured by the Wholesale Price Index or WPI) and inflation in output. In June, for example, WPI stood at 15.7 per cent and retail inflation—measured by the Consumer Price Index or CPI—was 7.3 per cent. The result of using just one set of prices distorts and underestimates growth. This factor will cease to matter when WPI “cools down”.

Apart from these technical issues, how should these numbers be interpreted? One way to look at them is as achievements in a deeply uncertain world. For example, let’s take the Q1 GDP data. As has been pointed out by a number of experts, it is quite likely that growth will taper in the coming months. This is a simple statistical fact: starting from a low base, a big number appears impressive. Even with continuous moderation through the year, annual GDP growth is expected to be anywhere from 6.7 per cent to 6.9 per cent in 2022-23. In comparison, the world’s economic powerhouses, China, the US and the eurozone, are expected to grow at 3.3 per cent, 2.3 per cent and 2.6 per cent, respectively (‘Cal­endar 2022’, based on IMF’s World Economic Outlook, July 2022). The global economy is expected to grow at 3.2 per cent.

There is, however, a political economy angle that is often missed: the very manner of interpreting these numbers. In case of the Q1 GDP data, this takes two forms. On the one hand are those analysts who stress the base effect and the overall “low” growth number, never mind the fact that even 6.7 per cent growth is relatively high in a world beset by war and uncertainty. On the other hand are people who underplay uncertainties that may require a careful calibration of monetary and fiscal policies to maintain high growth.

The other interpretative trick is to switch focus from growth to inflation as per one’s political outlook. Back in the summer of 2020, at the peak of the first wave of the pandemic, the emphasis was on a big stimulus package irrespective of its affordability and later costs. At that time, the various Atmanirbhar Bharat packages were designed to alleviate the stress building up in the economy. These packages, launched in mid-May 2020, had options for virtually all sectors of the Indian economy. These ranged from loan guarantees for MSMEs, increased expenditure on MGNREGA, the various iterations of the PM Garib Kalyan Yojana that targeted free foodgrains for migrant workers, loans in Jan Dhan accounts, especially for women and more. Each of these packages targeted a specific seg­ment of the population likely to be affect­ed by the pandemic-induced shutdowns and economic slowdown. The money for these programmes was not shelled out immediately but in tranches over time. No package was of such a large size that it could be ‘captured’ due to crony behav­iour at any level. These packages varied but the fiscal outgo never exceeded 0.4 per cent of GDP for any single sector. While the overall package was pegged at 10 per cent of GDP, the fiscal stimulus was at the most around 2 per cent of GDP. The heavy-lifting was left for the monetary authorities.

Almost all well-known economists had criticised the gov­ernment for not doing enough. The key argument was that the government should support consumption, especially among the lower deciles. This was necessary according to analysts to prevent inequality from soaring. Some even went so far as to ad­vocate a Universal Basic Income (UBI)-like scheme. In making these proposals, no one spared a thought to their feasibility, the government’s ability to sustain such large fiscal commitments in a revenue-constrained situation and, most importantly, the actual economic effects of such schemes. In 2021, data from RBI showed that household savings as a fraction of gross national disposable income rose dramatically by 3.6 percentage points to 11.5 per cent. People were not spending money and were saving given the extreme uncertainty of the moment.

But this did not prevent economists from comparing India with countries that had initiated very large stimulus packages, such as the one by Brazil that amounted to 8.3 per cent of its GDP.

Two years later, in the summer of 2022, these worthies changed track and instead of bemoaning the absence of “high growth”, they began worrying about high inflation. The infer­ence and innuendo were that the government had arm-twisted RBI into not taking inflation-fighting steps. It is another matter that economic conditions in countries greatly envied just two summers ago were conveniently forgotten. Brazil had an inflation of 10.7 per cent in July, the lowest in seven months. In Britain—another country with a fat stimulus—inflation is expected to be around 18 per cent in the coming months, a level unheard of since the “Great Moderation” in the West. The US is in no better condition. US Fed­eral Reserve Chairman Jerome Powell has repeatedly said that the Fed will continue to tighten monetary policy until the battle against inflation is won. In contrast, India’s inflation, as measured by CPI, stood at 6.71 per cent. No one says this is a comfortable situation and RBI’s contin­ued policy rate tightening shows that it is committed to bringing inflation within its prescribed inflation-targeting band.

Something similar was evident in the interpretation of India surpassing Britain to become the world’s fifth largest econ­omy. Even if one discounts the patriotic fervour that accompanied India over­taking its former coloniser in economic terms, it is a signal that India’s economy is among the largest in the world. In due course, it will overtake other countries as well. But even here, the significance is downplayed by using other facts. Two have been cited in most analyses on the subject. One, India is a highly unequal society and that its being bigger than the British economy does not mean much. Two, India needs to grow much faster before the fruits of growth can reach every Indian. Both are misplaced.

Consider inequality. A glance at data will show that India did not start turning unequal when it overtook the British economy last week. In fact, the process of rising inequality is much older and dates to 1980. There are ways to reduce inequality and these include better education and healthcare. On both counts, practi­cally every government that has been in power since 1980 has done nothing. It is not hard to understand the reasons. Spending on education and healthcare—and not merely personnel costs in these sectors—is dwarfed by expenditures on subsidies. At the state-level, the skew is even more alarming: subsidies on free elec­tricity, cheaply priced water and a plethora of other services out­weigh spending on school and health infrastructure and services. These spending patterns have real, negative, effects over time. Uneducated and sick individuals are unlikely to be in a position to exploit opportunities afforded in any economy. In India, this is all the more so. But none of these factors is remotely relevant to India’s becoming the fifth largest economy.

The issue of India needing to grow faster is similarly mis­placed. It is no one’s case that India should not grow faster. But this—again—has no link with its relative size among the world’s economies. If India has not been able to grow at a faster pace in recent years, it is due to a combination of shocks to its economy. But that has not prevented growth from picking up once again. What needs addressing are factors that can drive growth. In an uncertain age, no government can be content to think that its task ends with fixing macroeconomic aggregates like savings and investment. Today, with broken supply chains and increased geopolitical risks, governments have to intervene so that markets can run smoothly. To that extent, the Narendra Modi government is doing what it can, from ensuring oil and commodity supplies in a constrained environment to ensuring that domestic roadblocks to investment don’t end up derailing growth.

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