Opinion: Poonam Gupta and Barry Eichengreen:
India’s annual GDP growth 7% plus is the continuation of an ongoing acceleration. The question is whether this can last.
One country stands out from the gloomy overall tone of the International Monetary Fund’s (IMF) recent update of its World Economic Outlook. Against the backdrop of tepid 3.2% global growth in 2022 the IMF expects India’s gross domestic product (GDP) to expand by 7.4%. This is the fastest growth of any large economy except Saudi Arabia which is the incidental beneficiary of upward pressure on global oil prices from Russian President Vladimir Putin’s war against Ukraine. India may be buying Russian crude oil at a discount but as the world’s third-largest oil importer it is still burdened by high oil prices.
One might quibble that India had an exceptionally difficult pandemic so its economy now has exceptional scope for bouncing back. But other countries hit hard by covid such as Mexico are not doing nearly as well. One might also note that with India’s still-rapid rate of population growth per capita incomes are rising more slowly than its aggregate GDP figures. But a population growth rate of 1% does not fundamentally change the story.
India’s annual GDP growth in excess of 7% is in fact the continuation of an ongoing acceleration from roughly 5.7% in the 1990s to 6.2% from the turn of the century to the 2008 global financial crisis and then to 6.9% from the crisis to the eve of the covid pandemic. The country has benefited from a buoyant tech sector surprisingly robust agricultural productivity gains and decent manufacturing growth. With the worst of the pandemic now behind it the country’s economy is firing on all cylinders.
The question is whether this can last. Unfortunately there are good reasons to believe that given the current set of economic policies the answer is ‘no’.
To maintain its growth momentum India needs to export a lot more. The country has never been an export powerhouse to put it mildly. Exports of services do help but the outsourcing of back-office and customer-facing services is now poised to slow as firms ‘friend-shore’ more of their operations. The current Indian government’s commitment to investing in logistics seems promising but only time will tell how investment projects pan out. Rupee depreciation can make merchandise exports more competitive and limit consumption of imports. But the Reserve Bank of India (RBI) treating exchange rate stability as an important totem has been reluctant to let the rupee fall.
In the future Indian exporters will face a less favourable external environment. China’s economy has slowed. The US may not be able to avoid recession and Europe is already in one. So it is not clear whence demand for India’s exports will come. Every Asian economy that has successfully expanded its manufacturing sector has scaled up by exporting but this avenue may no longer be available to India.
The country can of course borrow abroad to finance its current-account deficit and domestic investment. But India continues to underperform as a destination for foreign direct investment which is deterred by bureaucratic obstacles to doing business. Having discarded suggestions that it issue dollar bonds the government now seeks to encourage foreign investors to purchase local currency bonds. But this revised strategy is no less risky. Foreign investors in local currency bonds tend to cut and run at the first sign of trouble since they otherwise will be hit by the double whammy of falling bond prices and a falling exchange rate.
Nor does India’s government have space to borrow from residents to finance additional spending on the infrastructure healthcare and education needed to sustain long-term economic growth. General government debt is already around 90% of GDP. The primary budget deficit which excludes interest payments is 3% of GDP. The government pays an average of 8% interest on its debt.
But Indian authorities are able to keep interest rates at that level and maintain a veneer of debt sustainability only by requiring banks and other institutional investors to hold government bonds. This in turn limits the ability of Indian banks to provide essential investment finance to the private sector. Meanwhile much of what the government takes in as revenue goes to entitlements and interest payments. Additional capital spending will therefore have to come from the private sector. And private savings are low by international standards.
Most fundamentally the government seems to have found it hard to implement structural reforms. Having experienced pushback from vested interests it has basically taken significant reforms of labour and product markets off the table.
Given its favourable demography democratic polity and its large and diversified economy India could in principle grow at 7% or higher for years to come. But the only route to such growth that remains open runs through structural reforms that relax all of the aforementioned constraints at a stroke.
Barry Eichengreen & Poonam Gupta are respectively professor of economics at the University of California Berkeley and a member of the Economic Advisory Council to the Prime Minister of India.