India’s growth story is different: Underlying strengths pushing productivity by Dr. Barendra Kumar Bhoi, Former Principal Adviser and Head of the Monetary Policy Department of RBI

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According to the latest data released by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), India’s real GDP growth grew by 7.8% in the first quarter of 2023-24 (FY24Q1), marginally lower than 8% projected by the Reserve Bank of India (RBI). Besides the favourable base effect, India’s growth story indicates remarkable resilience amid global headwinds mainly due to the services sector growing at double digits. Within the services sector, the highest growth was observed in the case of ‘financial, real estate and professional services’ (12.2%), followed by ‘trade, hotel, transport & communication (9.2%), and construction/ ‘public administration, defence and other services’ (7.9% each). In FY24Q1, normalcy seems to have been restored in these contact-intensive sectors, which were most affected since the Covid-19 pandemic. Although India’s real GDP growth is expected to decelerate in the next three quarters ranging between 5.5% and 6.5%, the overall GDP growth at 6.5% in FY24 projected by RBI is feasible. India would maintain its status as the fastest-growing major economy in the world.  

The underlying strengths of the Indian economy are many. First, private final consumption expenditure as a proportion to GDP at current prices improved to 59.7% in FY24Q1 from 59.2% in the same quarter last year although, in terms of real GDP, it was modestly lower. Similarly, gross fixed capital formation as a proportion to GDP at current prices rose marginally to 29.3% from 29.1% during the same period while in terms of real GDP, it remained steady (34.7%). Both consumption and investment demand seem to have maintained their resilience despite the tight monetary policy, currently pursued by the RBI. Second, as the capacity utilization is currently above the long-period average, private investment can pick up going forward. The much-awaited virtual cycle of private investment might have already set in as evidenced by the pickup in non-food credit notwithstanding rise in lending rates following successive hikes in repo rate. Third, the consistent buoyancy in tax collection, particularly GST revenues, is also an additional source of comfort about the manufacturing sector doing well. This could be partly due to better tax compliance following tax reforms. Fourth, corporate balance sheets are now much better leading to a stock market rally amidst volatility. These strengths are commonly visible and mostly sighted while narrating Inda’s growth resilience.    

There are several hidden strengths of the Indian economy, which one cannot understand without a deep dive into the development process. In the absence of an appreciable increase in investment, India’s growth resilience points towards productivity improvement. We do not have reliable data on India’s total factor productivity (TPF). Even if it is estimated, the accurate picture is unlikely to emerge due to Covid-related distortion in real GDP since FY20. Multiple factors might be contributing to the improvement of TFP in India. These are a) large capital expenditure by both central and state governments even during the Covid-19 pandemic for providing modern infrastructure, b) second generation reforms like introduction of GST, big push to digitisation, new framework of monetary policy (flexible inflation targeting), cleaning of the banking system through asset quality review, Insolvency and Bankruptcy Code (IBC), innovative NPA management etc., c) reigniting industrial activities through encouraging startups, redefining MSMEs, providing MUDRA loans, offering production-linked incentives (PLI), ease of doing business, introducing one-district one-product scheme, deregistering shell companies etc., d) integrating marginalized sections of society into the mainstream through strengthening social security systems such as direct benefit transfer, national health protection scheme, Atal Pension Yojana, national food security scheme, Pradhan Mantri Awas Yojana, and through inclusive growth like employment guarantee programme, financial inclusion, reskilling of unemployed people, rural electrification/cooking gas connection/water supply etc., and e) rejuvenating agriculture through soil health card, revamped minimum support prices (MSP) for farm products, diversification/rotation of crops, new crop insurance, electronic national agriculture market (e-NAM), push to the post-harvest technology etc., and g) climate compliant growth through green energy, net zero emission programme, organic agriculture, electric vehicles that are environment friendly for sustainable development. Moreover, reforms in the education system and health sector, initiated recently, have great potential to improve TFP.

The demographic dividend is a debatable issue. It can emerge as an underlying strength of the economy, provided the unemployment problem is resolved. New India requires skilled manpower. The old education system is unable to provide required skills to all the young people to be absorbed. Reskilling has become a good business for many private organisations besides government initiatives. The formalisation of the economy is certainly absorbing many young people. Ultimately, employment is a function of growth. It would be difficult to reap the demographic dividend unless growth is high on a sustainable basis.

Downside risks to growth are mostly external. The contribution of the external sector to GDP growth is unlikely to be substantial in the near term due to the prevailing global situation – global growth slowdown, deglobalization, geo-political risks, uncertainty about commodity prices and capital flows to the developing countries. According to the WTO, world merchandise trade volume is projected to grow by 1.7% in 2023 compared to 2.7% in the previous year. India’s merchandise trade deficit may widen, particularly if crude oil prices remain elevated. Given the robust services export and workers’ remittances, India’s current account deficit may be manageable through normal capital flows. India’s large foreign exchange reserves provide strength to the external sector. Moreover, India continues to be an attractive destination for foreign investment even in an adverse global situation.  

Both consumption and investment are needed for sustainable growth. Besides consumption and investment, India has to improve TFP further to push the GDP growth to a higher trajectory, particularly when external headwinds are strong. The government’s medium-term strategy should be to sustain structural reforms and remain focused on improving productivity to ensure a bigger cake, which can be shared as equitably as possible among the people. The contribution of inclusive growth to productivity gain is well recognized.

*The author is currently RBI Chair Professor at Utkal University and former Principal Adviser and Head of the Monetary Policy Department, RBI. The views are personal.

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