IEconomic growth in the April-June quarter has been below almost all forecasts, both official and private. Private forecasters have now lowered their expectations for full-year growth to less than 7 percent, something the government is reluctant to do. Where this figure will eventually stabilize, will be determined by the growth in the coming quarters- Modest forecast by the Reserve Bank as an average of 4 to 5 per cent. And the growth is expected to be around 6 per cent in the coming year (2023-24).
Such unimpressive numbers point to a slowdown in the pre-Covid year of 2019-20, when growth fell to 3.7 per cent. There was virtually no growth in the COVID-affected years between 2020-22. If the entire five-year period, 2019-24, is taken together, the growth rate would average only 3.6 percent – the slowest five-year period since the 1970s.
There are, of course, bright spots for the visuals – such as individual batsmen or bowlers performing in a cricket team, even when the entire team is not. Thus, one can rejoice at the improved transportation infrastructure, the productivity benefits of multi-faceted digitization, the ongoing energy transformation and the boom in tax revenues.
It is also true that in difficult times India is doing better than almost all major economies. Despite all this, the overarching goal of rapid economic growth (generally assumed to be at least 7 percent annually) does not appear on the map. Perhaps the explanation is that just as a “long covid” is now a medically recognized phenomenon because of the complex side effects of the virus, there is also a “long covid” in economics.
For example, the US and Europe (including the UK) are now paying the price of going overboard in dealing with the economic impact of Covid, combined with the backwash effect of sanctions imposed on Russia. Troubled by heavy public debt and high inflation, the two major continental economies are expected to slip into recession as their central banks focus on battling massive inflation with high interest rates that could remain high for a few years . Meanwhile, China’s growth rate in the April-June quarter was just 0.4 per cent. It is unlikely to ever return to the rapid growth rates of the past.
These three mega-economies account for more than two-thirds of world GDP. Therefore, while emerging markets may continue to grow, global growth will be modest overall. The current outlook for 2022 and 2023 indicates a clear slowdown, compared to the average world economic growth rate of 3 per cent in the inter-crisis period (financial crisis and pre-Covid). While the Indian economy is performing better than others, it is not located on any other planet and is bound to be affected by global constraints.
Read also: India has joined the race for the global chip. The question is, should it fly alone?
TeaThat domestic constraints are equally real. India’s public debt has climbed sharply, and inflation is out of line. Policy makers tend to focus on retail inflation (currently 6.7 per cent), but cannot ignore wholesale price inflation running at over 15 per cent. Therefore, interest rates have been raised, and will be raised further.
The impact of significantly higher public debt is also real. Back in 2010-11, the interest cost of central government debt ate 29.7 per cent of the revenue receipts. By 2014-15, this ratio had increased to 36.5 per cent, which remained the same till the time Covid hit. The expenditure required to deal with the fallout of Covid has now taken the public debt to a point where interest payments eat up 42.7 per cent of revenue receipts.
Higher interest rates may further increase this pre-emption at a time when the fiscal deficit is already high and needs to be brought down. In short, where monetary policy will put pressure on growth, there is little fiscal room to provide a booster shot. These macro-economic realities make a slowdown in growth inevitable. Whether the country can touch the 7 per cent mark this year or not. But, given the totality of global and domestic conditions, if India can grow at a sustained rate of 6 per cent annually, it will be a signicant achievement.
By special arrangement with Business Standard
Read also: Family man, confident investor and eternal India optimist – Farewell, Rakesh Jhunjhunwala