Arvind Virmani, NITI Ayog member. File
| Photo Credit: Special arrangement

“The Indian economy will grow around 7% in the current fiscal year and is on track to maintain a similar growth rate for several years,” NITI Aayog member Arvind Virmani said on July 12.

Mr. Virmani said there are new challenges facing the country and they will have to be dealt with. “Indian economy will grow at 7% plus minus point 0.5%… I expect that we are on track to grow at 7% for several years from today,” he told PTI in an interview.

Last month, the Reserve Bank of India (RBI) pegged the FY25 gross domestic product (GDP)growth rate at 7.2%. Responding to a question on the decline in private consumption expenditures in the last fiscal year, Mr. Virmani said it is actually recovering now.

“The effect of the pandemic was to draw down savings… and very different from previous financial shocks,” he said. Explaining further, Mr. Virmani said it is like what he calls a double drought situation.

“We also had, of course, El Nino last year, but what the pandemic did was that it resulted in people having to draw down their savings… So, the obvious reaction is to rebuild your savings, which tend to reduce current consumption,” he noted.

“If people were buying branded goods, they will buy less branded or ordinary goods and save part of that money,” he said, explaining that this shows a slide in consumption.

Mr. Virmani said history shows that coalition partners can slow privatisation in States in which the regional ally is in power, but that is not a big issue.

“I see no reason why privatisation cannot happen in the other States and it may also happen in these States (where coalition parties are in power). I am just giving you a historical example,” he said.

With support from N. Chandrababu Naidu’s Telugu Desam Party (TDP) and Nitish Kumar-led JD(U), along with other alliance partners, the NDA crossed the halfway mark in the recently held Lok Sabha elections to form the government at the Centre.

On the decline in foreign direct investments (FDI) to India, despite it being the fastest growing economy, Mr. Virmani said riskless return of investment is much higher in the U.S. and other developed countries than in emerging markets.

“As soon as interest rates begin to come down in the U.S., I expect the FDI into emerging markets, including India, to increase,” he said.

The problem of high food inflation will be “less severe” in India going ahead, as modern supply chains with diversified sources can help quickly address sudden spikes in prices of specific food items, RBI Monetary Policy Committee (MPC) member Ashima Goyal said on April 25.

Stressing that the share of food in the household budget is high in India, Ms. Goyal said policy needs to focus on increasing agricultural productivity, since stable agricultural prices are important for non-inflationary growth.

Also Read | Extreme weather may pose risk to inflation, says RBI Bulletin

“As India develops, this problem (high food inflation) will get less severe, for a number of reasons. Modern supply chains with diversified sources respond quickly to large spikes in specific items,” she told PTI.

Ms, Goyal further pointed out that one does not hear of tomato or onion prices spiking in advanced economies.

“We naturally have diverse geographic regions, better integrated markets sourcing from different regions can help mitigate climate change induced food price spikes,” she said.

Moreover, as the weight of food in consumption falls and food consumption itself becomes more diversified, the impact and size of future food price shocks falls, she noted.

Ms. Goyal stressed that under flexible inflation targeting, expectations get better anchored.

She cited the example of East Asia, where food prices were allowed to rise and agriculture was subsidized only after food budget shares fell.

Also Read | Inflation drops to 10-month low in March, but no relief on food bills yet

“India unfortunately opted for a distorting system of subsidies to farmers as well as to consumers,” she said, adding that given India’s huge population this was very expensive and reduced the space for government investment in agriculture.

Besides, Ms. Goyal said it also kept inflation high as procurement prices rose each year.

She said agricultural productivity is finally rising supported by a policy reset, along with the availability of new technologies even though further policy adjustment is required, she stressed.

According to official figures, retail inflation declined to a five-month low of 4.85% in March, mainly due to cooling down of food prices. The inflation in the food basket was at 8.52% in March, down from 8.66% in February.

RBI Governor Shaktikanta Das has recently said that the baseline projections show inflation moderating to 4.5% in 2024-25, from 5.4% in 2023-24, and 6.7% in 2022-23.

Replying to a question on India’s current macroeconomic situation, Ms. Goyal said conditions have been created for sustainable and inclusive growth.

“We are seeing results since 2021 with continued robust growth, reduction in multi-dimensional poverty, more assets and infrastructure sustainably helping the lower income groups, more opportunities for youth,” she said.

Ms. Goyal said inequality has risen but the famous ‘Kuznets inverted U-curve’ tells us that this is normal in a period of high growth and should come down over time.

But for the economy to continue on such a path, the eminent economist said policy continuity is very important.

“Policy lessons on what worked must be internalized, domestic policy shocks avoided and external shocks smoothed, even as supply-side enabling reforms continue,” Ms. Goyal suggested.

She emphasised on the need of enhancing the economy’s resilience and diversity saying, “we live in troubled times of geopolitical, geoeconomic and climate fragilities.”

Also Read | Indian economy projected to grow 6.5% in 2024: UNCTAD

During 2023-24, the economy is likely to record a growth rate of near 8% on account of good performance of manufacturing and infrastructure sectors.

Recently, the International Monetary Fund (IMF) raised India’s growth projection to 6.8% for 2024, from its January forecast of 6.5%, citing bullish domestic demand conditions and a rising working-age population.

The Asian Development Bank (ADB) also raised India’s GDP growth forecast for the current fiscal to 7%, from 6.7% earlier, saying the robust growth will be driven by public and private sector investment demand and gradual improvement in consumer demand.

UN Trade and Development (UNCTAD) in its report released on Tuesday said that India grew by 6.7% in 2023 and is expected to expand by 6.5% in 2024, continuing to be the fastest-growing major economy in the world.
| Photo Credit: REUTERS

India’s economy is projected to grow by 6.5% in 2024, according to a report by the UN which noted that multinationals extending their manufacturing processes into the country to diversify their supply chains will have a positive impact on Indian exports.

UN Trade and Development (UNCTAD) in its report released on Tuesday said that India grew by 6.7% in 2023 and is expected to expand by 6.5% in 2024, continuing to be the fastest-growing major economy in the world.

“The expansion in 2023 was driven by strong public investment outlays as well as the vitality of the services sector which benefited from robust local demand for consumer services and firm external demand for the country’s business services exports,” the report said, adding that these factors are expected to continue to support growth in India in 2024.

The report also noted the increasing focus by multinationals on India as a manufacturing base as they diversify their supply chains, a reference to China.

“In the outlook, an increasing trend of multinationals extending their manufacturing processes into India to diversify their supply chains will also have a positive impact on Indian exports, while moderating commodity prices will be beneficial to the country’s import bill,” it said.

Last week, the flagship ‘2024 Financing for Sustainable Development Report: Financing for Development at a Crossroads’ launched at the world body said that investment in South Asia, particularly in India, remains strong.

It added that India is benefiting from growing interest from multinationals, which see the country as an alternative manufacturing base in the context of developed economies’ supply chain diversification strategies, making an apparent reference to China.

The UNCTAD report said the Reserve Bank of India is expected to keep interest rates constant in the near term, while restrained public consumption spending will be offset by strong public investment expenditures.

In other Southern Asian countries, however, economic growth remains more subdued. Three countries in the region – Bangladesh, Pakistan and Sri Lanka – are currently under IMF programmes, the conditionalities of which necessitate the application of tight monetary policies and fiscal austerity measures whose impacts are most severely felt by low-income households, it said.

Global growth is projected to be 2.6% in 2024, slightly slower than the 2.7% in 2023.

This makes 2024 the third consecutive year in which the global economy will grow slower than before the pandemic when the average rate for 2015–2019 was 3.2%, the report said.

The UNCTAD report added that the risks that substantially threatened to slow down global economic growth in 2023 did not fully materialise.

“Some economies – including large ones, such as China, India, Indonesia, the Russian Federation, the United States, among others – escaped the financial trouble that loomed earlier in the year,” it said, adding that as a result, the world economy grew 2.7%, just 0.2 percentage point more than the threshold of 2.5% that is often associated with a global recessionary phase.

“This positive dynamic is now being squandered. Policy discussions continue to centre on inflation, conveying confidence that anticipated monetary easing will heal the world’s economic woes. Meanwhile, the pressing challenges of trade disruptions, climate change, low growth, under-investment and inequalities are growing more serious,” it said.

The report said that China’s economy, projected to grow 4.9 per cent in 2024, has been facing some headwinds such as external uncertainties, a troublesome housing market, an under-performing labour market and subdued consumption.

The UNCTAD report comes even as the International Monetary Fund said in its latest edition of the World Economic Outlook released on Tuesday that growth in India is projected to remain strong at 6.8% in 2024 and 6.5% in 2025, with the robustness reflecting continuing strength in domestic demand and a rising working-age population.

Moody’s corporate headquarters in New York. File
| Photo Credit:
Reuters

Moody’s Analytics on April 12 projected India’s economy to expand 6.1% in 2024, lower than 7.7% growth clocked in 2023.

It said output in India remains 4% lower than it would have been without the COVID pandemic and its various aftershocks — from supply snags to military conflicts abroad.

“Economies in South and Southeast Asia will see some of the strongest output gains this year, but their performance is flattered by a delayed post-pandemic rebound. We expect India’s GDP to grow 6.1% in 2024 after 7.7% last year,” Moody’s Analytics said.

In its report titled ‘APAC Outlook: Listening Through the Noise’, Moody’s Analytics said the region overall is doing better than other parts of the world. “The APAC (Asia Pacific) economy will grow 3.8% this year, which compares with a growth of 2.5% for the world economy,” it said.

Moody’s Analytics said looking at the GDP relative to its trajectory prior to the pandemic shows that India and Southeast Asia have seen some of the largest output losses worldwide and are only beginning to recover. With regard to inflation, it said the outlook for China and India is more uncertain.

“Inflation in India is at the opposite extreme, with recent consumer price inflation rates hovering around 5%, close to the upper end of the Reserve Bank of India’s target range of 2 to 6% and without clear evidence of a trend towards slowing price pressures,” said the report authored by Stefan Angrick, Senior Economist, and Jeemin Bang, Associate Economist at Moody’s Analytics.

Earlier this month, the Reserve Bank said food price uncertainties continue to weigh on the inflation trajectory going forward, and retained 4.5% retail inflation projection for the current fiscal 2024-25.

“Continuing geopolitical tensions also pose upside risk to commodity prices and supply chains,” RBI said. RBI forecast June quarter inflation at 4.9% and September quarter at 3.8%. For December and March quarters, inflation is projected at 4.6% and 4.7%, respectively.

“Indian GDP data are not seasonally adjusted, and they are also revised multiple times before they are finalised three years after the close of the relevant financial year,” the Finance Ministry said. File
| Photo Credit: PTI

The Finance Ministry on September 15 scotched aspersions cast by “certain sections” on the credibility of Indian GDP data, which showed a 7.8% uptick in the first quarter of this year, stressing that Indian GDP data is not seasonally adjusted and is finalised three years later so “it is wrong to look at the underlying economic activity based on GDP indicators alone”.

“Ideally, critics would have done well to look at several other growth indicators to see if other data match their conclusions. Purchasing Managers’ Indices indicate that the manufacturing and services sectors are growing. Bank credit growth is in double digits. Consumption is improving, and the government has vigorously ramped up capital expenditure,” the Ministry said in a long post on social media platform X, formerly known as Twitter.

“Higher frequency data must be relied upon to form a view of the strength of the economic activity,” the Ministry said, adding that “if anything, India’s growth numbers might understate the reality because manufacturing growth indicated by the Index of Industrial Production (IIP) is far lower than what manufacturing companies are reporting”.

“Indian GDP data are not seasonally adjusted, and they are also revised multiple times before they are finalised three years after the close of the relevant financial year… Many international agencies have revised up their growth forecast for FY24 (financial year 2023-24) after the first quarter data for FY24 was released. They would not have done so if the underlying economic activity was weak,” the Ministry asserted.

The Ministry also called out references to nominal GDP growth being lower than real GDP growth as “a new bogey being spread to discredit the GDP numbers and indicate that underlying economic activity is quite weak” and said both do not stand up to scrutiny.

“India’s GDP deflator is dominated by the Wholesale Price Index (WPI) [which] peaked in the first quarter of 2022-23 due to the oil and food price increases in the wake of the war in Ukraine and supply-side disruptions. Prices began to come down from August 2022 onwards. Hence, WPI is now contracting year on year. It will soon pass once the statistical base effect disappears,” the Ministry statement noted.

“If inflation were higher, critics would argue that nominal GDP growth is much higher because of inflation and that there was little underlying activity. MoSPI calculates quarterly GVA in real terms first, and then, using the deflator, nominal values are obtained. No wonder nominal growth rates have slowed, with WPI contracting in recent months. This will normalise in the coming months,” the statement pointed out.

Editorial |An uneven rebound: On the economy

“India’s real GDP growth was 7.8% year on year in the first quarter of 2023-24. This is as per the Income or Production Approach. As per the expenditure approach, it would have been lower. So, a balancing figure – statistical discrepancy – is added to the expenditure approach estimate. These discrepancies are both positive and negative. Over time, they wash out,” the Ministry pointed out.

“In fact, in FY23 and FY22, the ‘statistical discrepancy’ was negative. In other words, growth as per the Income Approach was lower. Using the expenditure approach, it would have been higher than the 7.2% reported for FY23 and higher than the 9.1% reported for FY22,” it emphasised.

“India consistently uses the Income Side approach for calculating GDP growth for various reasons. It does not switch between the two approaches depending on which one is favourable,” the Ministry underlined.

“So, arguing that nominal GDP growth is more reliable because India has issues with its calculation of GDP deflator is to invent an argument where none exists. This is just to justify the liking for nominal GDP growth because it has been moderating in recent quarters after the high growth in the first fiscal quarter of FY23. In other words, critics want to latch on to anything that does not paint the Indian economy in a good light,” the Ministry concluded.

Official rhetoric on India becoming a $5 trillion dollar economy has resumed, with the Prime Minister’s remarks at the BRICS conference last week. However, these claims are riddled with problems.
| Photo Credit: Reuters

Addressing the BRICS Business Forum Leaders’ Dialogue at Johannesburg last week, Prime Minister Narendra Modi said, “Soon, India will become a $5 trillion economy.” In 2018, a working group under the Ministry of Commerce and Industry set 2025 as a deadline for achieving the same. The economic slowdown induced by the COVID-19 pandemic has upended the target deadline.

With the revival of the economy now, and the general elections on the horizon, official rhetoric on this count has resumed. While addressing the nation on the 77th Independence Day from the Red Fort, Mr. Modi noted that India was the world’s 10th largest economy in 2014, but now stands at fifth spot. He has also invoked a “third term” in office saying that India would be among the world’s top three economies by then.

Even if one ignores the political hubris and sidesteps the serious debate over the methodological rigour of India’s GDP estimates, the problems with the Prime Minister’s economic claims are manifold.

First, Mr. Modi is using nominal Gross Domestic Product (GDP) estimates to make claims about the size of the Indian economy relative to other national economies. This is wrong. Nominal GDP gives an estimate of the national output for a year at the prices prevailing in that year. However, the actual size of the economy is reflected in real GDP, which is adjusted for price changes. In other words, India can become a $5 trillion economy in nominal terms through high inflation, even without any significant changes in the economy’s output. It is for this reason that national governments, the United Nations, and other international agencies such as the World Bank and International Monetary Fund base their economic growth estimates on real GDP (price adjusted) and not nominal GDP (estimated at current market prices).

Second, international comparisons between national GDP estimates get further complicated because of exchange rate conversions. Researchers have long held that market-based exchange rates are not the appropriate way in which national GDPs can be converted into a common currency for comparison because of the existence of a substantial share of non-tradable commodities in national outputs as well as the innate volatility in market-determined exchange rates.

Going by nominal GDP, the Indian economy, valued at $3.39 trillion in 2022, ranked fifth in the world, as Mr. Modi said. However, in terms of real GDP, India’s economy in 2022 was $3 trillion and ranked sixth in the world. PPP-based GDP estimates (in terms of purchasing power parities estimated through price surveys of a common basket of commodities across countries) show that the Indian economy’s size was over $10 trillion in 2022. India’s PPP-based GDP has consistently expanded since the 1990s. India surpassed Germany in 2005 to become the fourth largest economy in the world and Japan in 2009 to become the third largest, a rank that has remained unchanged till date. 

Table 1 | The table shows the rankings for the 10 largest economies in the world in terms of PPP-based GDP, real GDP, and nominal GDP in 2022.

Chart appears incomplete? Click to remove AMP mode.

The third problem with Mr. Modi’s narrative regarding the size of India’s economy attaining new heights under his regime relates to its socioeconomic implications. Studies in economic development start with the premise that per capita income and output are the key indicators of a country’s standard of living, not the total size of the economy. Having surpassed China as the most populous country in the world, India’s per capita income (Gross National Income or GNI) and GDP continue to remain the lowest among all the countries in G-20, as depicted in Table 2. 

Table 2 | The table shows per capita income and GDP per capita for G20 countries.

This means that India is the poorest country in the G20 by per capita income. This is not to deny the importance of economic growth in advancing economic development but to underline the fact that being the most populous country in the world today, India needs to become not just the third largest but the largest economy in the world before it can claim to have attained a dignified living standard for the majority of its people. With almost equal populations in 2021, China’s per capita income (at 2017 prices) was PPP $17,504 while India’s was PPP $6,590; Brazil’s per capita GNI was PPP $14,370 and South Africa’s PPP $12,948.

Chart 3 | The chart shows the pre-tax national income by income groups in BRICS in 2021.

India’s low per capita income is further compounded by the skewed distribution of that income: 21.7% of its pre-tax national income went to the top 1% of the population in 2021 while only 13% went to the bottom 50% of the population (Chart 3). While in Brazil (9.1%) and South Africa (5.8%) the share of national income for the bottom 50% was even lower than India, China (13.7%) and Russia (15.7%) had higher income shares. This unfair reality of the top 1% cornering a disproportionate share of the national income in emerging economies gets concealed by official rhetoric on trillion-dollar GDPs and their growth.

Click to subscribe to our Data newsletter

If India aspires to catch up with China or the U.S. in terms of GDP and per capita income, it needs to move beyond rhetoric and augment resource mobilisation and real investments in physical and human capital to levels much higher than what has been achieved till date.

Prasenjit Bose is an economist and activist. Samiran Sengupta and Soumyadeep Biswas are data analysts at CPERD Pvt Ltd, Kolkata

Source: World Development Indicators Databank, the Huma Development Report 2021-22, and World Inequality Database

Also read | Data | India’s GDP was on a downward slope even before COVID-19 wreaked havoc

Listen to our podcast |Vital Signs Ep 3 | Does NEET’s curriculum serve only as entry filter or does it offer more? | Data Point podcast

The Monetary Policy Committee has unanimously decided to keep the policy repo rate unchanged, RBI Governor Shaktikanta Das said in Mumbai on August 10, 2023.
| Photo Credit: Emmanual Yogini

The Monetary Policy Committee (MPC) of the Reserve Bank of India on August 10 decided unanimously to keep the policy repo rate unchanged at 6.50%. 

Consequently, the standing deposit facility (SDF) rate remains at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. 

The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Explaining the MPC’s rationale for these decisions on the policy rate and the stance, RBI governor Shaktikanta Das in his statement said, “Headline inflation, after reaching a low of 4.3% in May 2023, rose in June and is expected to surge during July-August led by vegetable prices.”

“While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far. These developments warrant a heightened vigil on the evolving inflation trajectory,” he said. 

“The cumulative rate hike of 250 basis points undertaken by the MPC is working its way into the economy. Nonetheless, domestic economic activity is holding up well and is likely to retain its momentum, despite weak external demand. Considering this confluence of factors, the MPC decided to remain watchful and evaluate the emerging situation,” he added. 

Consequently, the MPC decided to keep the policy repo rate unchanged at 6.50% with preparedness to act, should the situation so warrant, Mr. Das said. 

He said the MPC remained resolute in its commitment to aligning inflation to the 4 per cent target and anchoring inflation expectations.

Taking all various factors into consideration, the Governor said the real GDP growth for 2023-24 is projected at 6.5% with Q1 at 8.0%; Q2 at 6.5%; Q3 at 6.0%; and Q4 at 5.7%. Real GDP growth for Q1:2024-25 is projected at 6.6%. The risks are evenly balanced.

Given the continuing external uncertainties, the latest CPI inflation projection for 2023-24, assuming a normal monsoon, has been revised to 5.4%, with Q2 at 6.2%, Q3 at 5.7% and Q4 at 5.2%. CPI inflation for Q1:2024-25 is projected at 5.2%. The risks are evenly balanced.

The Governor said considering the difficulties in major economies, the Indian economy is better placed. “India can become the new growth engine of the world,” he said.