Advance estimate places India’s GDP growth at 9.2% with the level of GDP exceeding its pre-Covid-19 peak. Critics will argue that this high growth rate has come on the back of a low base. This is true. But then critics may be reminded that in its October 2021 forecast, the International Monetary Fund (IMF) placed India’s projected growth of 9.5% (not far from the advance estimate) at the top.
The writer is Professor, Columbia University, USWhen the chips are down, everything appears gloomy and messiahs of doom thrive. In matters of wider public interest, the media gleefully magnifies the messages of the latter, since negative news sells a lot better than positive one.
So, for example, in its lead editorial of October 23, 2021, issue, The Economist got a free pass from even its fact-checkers on its claim that the 2010s had been a ‘lost decade of low growth’ for India. Obsessed with inserting a negative comment on India in its stories regardless of whether the context calls for it or not, the editors feel free to make their own facts alongside their opinions. From 2010-11 to 2019-20, the decade prior to the onslaught of Covid-19, Indian economy grew a solid 7% annually, behind only China’s 7.7%.
A narrative similar to that of The Economist is also pedalled by many in the Indian media. They mislead the public by saying that GDP growth in India has declined every single year since 2016-17, while omitting to mention the crucial fact that the decline began from a high peak of 8.3% rate. True, growth rate then fell to 7% in 2017-18 and 6.1% in 2018-19, but the average growth during the three years was a solid 7.3%. That happened to be the highest in the world, with second-ranked China growing 6.8% annually.
To be sure, GDP growth did fall to worrisome levels of 4% in 2019-20 and -7.3% in 2020-21. But the former decline originated in the reckless lending and blind restructuring of loans by public sector banks (PSBs) during 2008-14. No country has come out of such sins unscathed, and India paid dearly for it as well. The latter decline, on the other hand, was due to the wholly exogenous shock of Covid-19. India was hardly alone in this. France (-8%), Italy (-8.9%), Spain (-10.8%), Britain (-9.8%) and Mexico (-8.3%) were hit even harder.
The good news, however, is that the declining streak is now over. Advance estimate places India’s GDP growth at 9.2% with the level of GDP exceeding its pre-Covid-19 peak. Critics will argue that this high growth rate has come on the back of a low base. This is true. But then critics may be reminded that in its October 2021 forecast, the International Monetary Fund (IMF) placed India’s projected growth of 9.5% (not far from the advance estimate) at the top. Second-ranked China trailed it by a solid 1.5 percentage points. For 2022-23, when the low-base effect will be gone, the IMF forecast places India once again at the top with a growth rate of 8.5%. The runner-up, Spain, is predicted to trail India by more than two percentage points.
Lag of, Not Lack of, Reforms
Is the IMF growth forecast for India credible? The short answer is yes, provided Covid-19 does not force significant lockdowns of economic activity. The reason is that the government has put in place a large number of robust reforms whose full effect is yet to be realised. Within India’s system of layered regulation and bureaucratic inertia, it takes 2-3 years just to implement the reforms enacted by Parliament. Added to this is the lag between implementation and investor response. Recall that the full effect of the reforms by P V Narasimha Rao and Atal Bihari Vajpayee was felt beginning in 2003-04 only.
The government has enacted at least four mutually reinforcing big-ticket reforms that prior governments had found politically challenging: Insolvency and Bankruptcy Code (IBC), goods and services tax (GST), new labour codes, and a globally competitive corporate profit tax rate. The country’s infrastructure, both physical and digital, has seen huge progress and is being continuously built.
The Real Estate (Regulation and Development) Act is reshaping the housing market. Coal mining, space, nuclear energy and parts of railways have been opened to the private sector. Defence, coal mining, ecommerce marketplaces and parts of agriculture and railways have been opened to foreign direct investment (FDI). Retrospective taxation has been ended. Privatisation of public sector undertakings (PSUs) has finally begun to move with the crucial privatisation of Air India behind us.
It is no accident that the economy has already returned to its pre-Covid-19 level with the total investment showing robust recovery in 2021-22. FDI had already seen a jump from $74.4 billion in 2019-20 to $82 billion in Covid-19 year of 2020-21. It amounted to $42.9 billion in the first half of 2021-22. The explanation that this jump is due to low interest rates in Western countries misses the obvious point that the world is a big place and capital flowing out of these countries has many possible destinations.
Practicals Follow Theory
The government’s job is, of course, not done. If it is to maximise the benefits from its reforms, it must open the economy wider through free trade agreements as well as roll back of high tariffs, fix the higher education system by replacing the archaic University Grants Commission (UGC) Act of 1956 by a modern law, and broaden the bases of both direct and indirect taxes.
Privatisation of PSUs must be accelerated and of PSBs begun. Eventually, it must also tackle the politically challenging reforms of the Land Acquisition Act and the Right to Education Act.