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Former RBI Governor Raghuram Rajan’s argument that India’s growth rate could slip to the Hindu rate is ill-conceived, biased and pre-mature, says the SBI Ecowrap
The report emphasised that gross capital formation GCF by the government touched a high of 11.8 per cent of GDP in 2021-22, up from 10.7 per cent in 2020-21.
The argument that India’s growth rate could slip to the Hindu rate of growth of around 4 per cent is ill-conceived, biased and pre-mature, according to State Bank of India’s economic research report Ecowrap. The report emphasised that the economy is on a sound footing.
This observation comes in the backdrop of former Reserve Bank of India Governor Raghuram Rajan recently cautioning that India is “dangerously close” to the Hindu rate of growth (of 4 per cent) in view of subdued private sector investment, high interest rates and slowing global growth.
Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, observed that India’s quarterly year-on-year GDP growth has been in a declining trend in FY23 sequentially, prompting arguments that India’s growth is reminiscent of a pre-1980 Professor Raj Krishna coined (Hindu) growth rate.
“Apart from the fact that quarterly growth numbers are noisy and should be best avoided for any serious interpretation (on an average, India’s GDP growth has witnessed ₹2-lakh-crore upward revision for the 3-year ended FY23), we find such argument ill-conceived, biased and pre-mature at its best when weighing the recent GDP numbers against the available data on savings and investments,” he said.
While it is now clear that potential growth of Indian economy (a global phenomenon) is now lower than earlier, Ghosh underscored that future GDP growth rates even at 7 per cent could still mean a decent number by any standards.
Gross capital formation
The report emphasised that gross capital formation (GCF) by the government touched a high of 11.8 per cent of GDP in 2021-22, up from 10.7 per cent in 2020-21. This also had a domino effect on private sector investment that jumped from 10 per cent to 10.8 per cent over the same period.
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“In fact, the trends in GCF to gross output ratio or the plough back of funds for creation of fresh capacity shows that for public administration, the ratio attained fresh peak in 2021-22 owing to the emphasis on capital expenditure in recent budgets,” Ghosh said.
At the aggregate level, gross capital formation is supposed to have crossed 32 per cent in 2022-23, the highest level since 2018-19.
The report noted that in 2021-22, gross savings have risen to 30 per cent from 29 per cent in 2020-21. The ratio is supposed to have crossed 31 per cent in 2022-23, the highest since 2018-19, it added.
The household savings increased sharply during the pandemic on account of sharp accretion in financial savings such as deposits.
SBI’s economic research team underscored that while household financial savings have since then moderated from 15.4 per cent in 2020-21 to 11.1 per cent in 2022-23, savings in physical assets have grown sharply to 11.8 per cent in 2021-22 from 10.7 per cent in 2020-21.
Health of the economy
The economy is on a sound footing as evident from the Incremental Capital Output ratio (ICOR) that has improved from 7.5 in FY12 to 3.5 in FY22, per the report.
Clearly, only half of capital is now needed for next unit of output, the report said.
“Such reducing ICOR, which measures additional unit of capital (investment) needed to produce additional unit of output, in the current years reflects a relative increasing efficiency of capital,” Ghosh said.