High Q1 GDP, India’s rank as fifth largest economy mask ground reality

The government is gung-ho about Indian economy’s GDP figure which recorded a double digit growth in the first quarter this financial year, leading India ahead of Britain to become the world’s fifth largest economy. Such a development does give an impression of a significant achievement considering that the economy had gone into a dive during the last two years.

The real economic picture, however, is something else. There are some serious concerns about the economy and warning bells are already ringing. The government, then, will do well not to adopt an ostrich-like approach and ignore the signals. 

India may be better off than many other countries, but that does not mean everything is hunky dory. There are many worrying factors at play even though tax collections are buoyant and some sectors are showing signs of recovery. Inflation too may get checked as skyrocketing global commodity prices are likely to moderate in the face of recession in advanced economies. This will certainly help to rein-in prices as India depends heavily on imports of commodities like oil.

The first and foremost concern is the GDP not growing at a pace commensurate with the requirement. Though India clocked 13.5 per cent GDP growth in the first quarter of 2022-23, the numbers were much below the expectation of 15.5 per cent to 16.5 per cent. The RBI had forecast a growth of 16.2 per cent in the quarter. 

One may argue that this is not such a big deal, but this is not the right way to look at it. A below par performance in the first quarter of this financial year meant that there is likely to be a fall in the overall GDP forecast of 7.2 per cent for the whole of 2022-23. 

Now, the expectations are that overall GDP would be around 6.5 per cent and certainly not 7.2 per cent. This meant that the real GDP for the whole year would be around 4 per cent, which, according to former chief statistician and renowned economist Pronab Sen is a matter of concern.

On the face of it, one may argue that the figure of 4 per cent real GDP is still good when compared to other large economies including some advanced economies. This is no solace for us. For an economy like India, where people below 35 years of age account for over 65 per cent of the 1.4 billion population, jobless growth is a matter of serious concern. To take care of the millions entering the job market year after year, India should have a real GDP growth of at least 6-6.5 per cent. 

“We are not there,” rues Sen.

The fact that India’s real GDP growth is nowhere near that number is certainly worrying and immediate correctives are needed. MSMEs are the only sector that could provide the much-needed employment. But the sector is doldrums ever since demonetization in 2016. Eighty-five per cent of the workforce is employed in the informal sector. The COVID lockdown aggravated the problems for the MSME sector. 

According to Pronab Sen, MSMEs largely depended on informal lending and that virtually dried up after demonetization. Unfortunately, no alternatives have since emerged. 

Of course, with digitisation and formalisation of the economy some MSMEs, which are ancillary to large industries, have benefited. But a majority of the MSMEs which depended on informal lending do not get lending from the formal banking sector. This is something which the government has not been able to address so far

Many of the MSMEs which had closed down, particularly during COVID, did not get revived. The government is aware of this problem, but a solution is not forthcoming. The sooner it is addressed, the better for the health of the economy. MSMEs account for nearly half of the employment in manufacturing and exports in the country. 

The slowdown in exports too is a matter of concern. The recession in advanced economies and the geopolitical situation arising out of the ongoing Ukraine-Russia war too will contribute to the slowing down of exports. The depleting foreign exchange reserves and widening current account deficit are not good for the economy. India’s foreign exchange reserves have fallen $80 billion in eight months from around $630 billion to $550 billion. 

India has not had such a sharp fall since the global financial crisis in 2008. Though not alarming as yet, it is fraught with danger. Instead of trying to artificially arrest fall of rupee value to dollar, the government should allow the rupee to depreciate so that at least the exporters benefit. 

The chest-thumping over India now becoming the world’s fifth largest economy too is jarring. Going up the ladder from the 11th position to the fifth position, overtaking Britain and France in the last 7-8 years, may make us feel good. Overtaking Britain, our colonial masters, may in particular, seem something to celebrate about, but it means nothing as India’s per capita is still far below Britain. 

If India were to really compare, it should compare with China, which also has a large population. Growing in double-digit every year during the past two or three decades, China today is a $21 trillion economy as against India’s $3.6 trillion. China is only next to US which is a $26 trillion economy. Of course, the US population is just one fifth of China and hence their per capita income is far higher. 

Instead of gloating over such small milestones, it would be better if real issues in the economy are addressed. 

(IPA Service)

Views are personal