National Council of Applied Economic Research
Opinion: Poonam Gupta.
A growth trajectory of 6.5 to 7.5 %, centred around 7 %, is reasonable in the coming years, barring the eventuality of simultaneous external shocks.
In view of its robust growth of 7.7 per cent during the first half of the current fiscal year, the Reserve Bank of India (RBI) has upgraded the full-year growth forecast for the Indian economy to 7 per cent. The erstwhile estimates by multilateral agencies and the private sector, which have hitherto varied between 6.3 and 6.5 per cent, are also likely to get revised soon to align more closely with the RBI’s estimate.
What explains this resilience of the Indian economy? Besides global demand for goods and services, the Indian economy is largely impacted by five key shocks: Deficient or erratic rainfall; a sharp increase in the price of oil; political or policy uncertainty; macroeconomic instability, including any originating in the financial sector; and global risk aversion resulting in abrupt withdrawals of capital flows and an increase in the cost of external finance.
The Indian economy has become relatively more immune to each one of these shocks.
First, the agriculture sector is less impacted by routine deficiency or erratic patterns in rainfall. This is due to crop diversification, expanded irrigation networks, and the availability of more advanced and accurate weather information, which allows for a timely policy response to shocks. This is not to say that we have overcome all the challenges emanating from climate change or weather-related events, but simply that when confronted with the same shocks as witnessed before, agricultural growth, productivity, and resilience are now higher than before.
Second, the Indian economy has achieved more insulation from sharp increases in oil prices. The oil intensity of gross domestic product or GDP (consumption of oil per unit of GDP) has been declining consistently. This trend is likely to continue as the country moves towards renewables, and with increased economic prosperity, the economy transitions toward less energy-intensive activities such as services. This insulation is partly the reason why it has been possible to maintain the current account deficit below 2 per cent of GDP over the last five years, and why it has been seemingly disconnected from global oil prices. Interestingly, with the reduced importance of oil as a source of energy worldwide, sharp spikes in oil prices may themselves become less frequent in coming years.
Third, in India’s mature democracy, elections in recent years have been conducted without any contention, as the electorates have been delivering decisive mandates. The recently concluded Assembly elections in five states further confirmed the trend that the days of a hung Parliament, hung Assemblies, or complex alliances seem to be over. This phenomenon will strengthen the perception of political and policy stability in the country, providing a more conducive environment for long-term investments.
Fourth, macroeconomic stability and a safe and efficient financial sector matter for growth. India has done well on both counts. The banking sector has fully emerged from a decade-long shadow of distressed balance sheets. Under the watchful eyes of the banking regulator, the RBI, and their partial owner, the government, the sector has supported economic growth by attaining double-digit credit growth. The non-banking parts of the financial sector have also stabilised after the mini-crisis they experienced during 2019-20.
Be that as it may, hereon, the competing objectives of growth and risks need to be balanced keenly, with neither being compromised for the sake of the other. Consumer finance is an important segment of an economy that is steadily becoming more prosperous and inclusive. It is imperative to find ways to manage the risks better and ensure that consumer finance and private consumption growth are not impaired as engines of growth in the pursuit of safety.
Finally, despite implementing prudent policy frameworks, the emerging markets economies remain susceptible to the reversals of external capital flows for reasons beyond their control. India lost nearly $40 billion worth of portfolio flows during 2021-22. Leveraging past experiences, and using the cushions built during quiet times, the RBI and the government now respond promptly to these shocks. This has further insulated the real economy from the disruptive impacts of such reversals.
All these factors do not imply that the economy is completely insulated from all kinds and severity of shocks or extreme events, whether occurring singly or simultaneously. All it means is that the economy has become much more resilient to isolated shocks of the magnitudes seen in the past.
Immunity to known shocks will likely continue to strengthen in coming years as the economy becomes more prosperous. Yet, new challenges will also emerge: An inevitably ageing population; climate-related events; technology and skills replacing labour in labour-intensive activities; and a heavily indebted world, in need of deleveraging. It would serve India well to focus on accelerating sustainable growth while continuing to reduce its susceptibility to existing and emergent shocks.
So, what might the growth numbers eventually look like during this year and the next?
Drawing from the statistical regularities highlighted by past data, GDP growth this year may turn out to be even higher than 7 per cent. These regularities are as follows: First, during the decade before Covid, the growth rate in the second half of the fiscal year lagged behind that in the first half of the year by only about an average 0.5 percentage points. Second, about 48 per cent of the economic activity was generated during the first half of the year, and the remaining 52 per cent in the second half.
Combining these two observations with the fact that no new shocks or adversities are likely to materialize during the rest of this year, one could conceive growth of about 7 per cent during the second half of the year, yielding an annual growth rate of about 7.4 per cent.
In view of its increased resilience, barring the eventuality of multiple shocks hitting the Indian economy simultaneously, a growth trajectory of 6.5 to 7.5 per cent, centered around 7 per cent, seems like a reasonable baseline scenario for next year too.
The writer is director general of NCAER, and a member of the Economic Advisory Council to the Prime Minister of India. Ayesha Ahmed contributed to this piece