By Anjan Roy
After fiddling with the Indian economy for years, Raghuram Rajan, former governor of Reserve Bank of India, finds himself in a kind of Hamlet moment. Rajan had observed that India would be lucky to reach a 5% growth rate during the current fiscal year. He was heaped with criticism for his pessimism and downside projections.
Rajan is admittedly one of the most level headed and conservative economists who does not make wild kind of statement. However, there are probably some chinks in everyone’s armour and occasionally even the most astute lands in quagmires.
Rajan has landed himself in such a situation.. While he was taking of a sub-5% performance for the Indian economy, it turned out to be plus 7.2% growth in 2023-24, as revealed by the figures given out by the national statistical office. The difference between a sub-5% and plus-7% performance is immense for a large economy like India.
Rajan over enthusiastically sought to explain the more than expected performance of the Indian economy in terms of sheer luck. In an interview he sought to explain this robust growth performance to certain global developments over which India had no control. But these were nonetheless hugely positive for the Indian economy.
Of these, Rajan took two to explain the more than expected turn out. First, that the industrial economy of the developed countries did not land in a soup and recession as was widely being expected. Instead, they are merrily growing and showing healthy rates of employment growth. These should have generally buoyed up India’s exports and economic activity at home.
Secondly, Rajan referred to the slip shod functioning of the Chinese economy and the “muted” demand for commodities from China. Thus, China being the second largest economy in the world, its lacklustre growth and performance meant lower demand for everything and thus somewhat depressed prices in the global market. The Chinese situation had translated into lower commodities, particularly for oil, helped India majorly.
But looking a little closer, it will be noticed several factors are at play, not just the luck factor. The two principal points raised by Rajan. First, that the developed world did not melt down and thus helped India. However, India’s exports in the current year (2023-24) were not particularly buoyant, in terms of the GDP trends. These in fact flattened out at the same level. Maybe, that these did not drop, itself may have been helpful. But it does not typically work out that way.
As for oil imports, the oil prices did after all rise. Over last one year, the oil prices had inched up and in between, when the Israel war had raged, there were moments when the markets expected the oil prices to shoot. India, admittedly, got a rising part of its crude requirements from Russia and fairly at price levels. However, the oil prices and the total import bill has been rising.
If one looks at the GDP figures there are several trends. There is broad based and robust growth trends. The construction sector has grown by 10.7% during the last year, and this has critical importance. Construction creates the largest number of employment and additional economic activity. Double digit growth in the sector must have been an engine of growth.
The three major sectors of the economy have all shown resurgence. Agriculture grew by close to 2%, mining grew by over 8% and manufacturing by 6.5%. These create the ground for ripple effect for broad based growth.
Until now, several leading economists have warned against India’s growth engines. They had pointed out that India was riding on a single engine for growth — that is, domestic consumption expenditure. What we see in the national income statistics is the tapering trend in the consumption expenditure.
Private final consumption expenditure as a percentage of GDP slipped from around 58.5% in 2022-23 to 56.5% in 2023-24. This means that private consumption is less of a lever for the GDP. There is further development. While per capita GDP has grown by the same margin in 2023-24 as previously, but per capita private final consumption expenditure has grown by a much smaller extent.
So is the private consumption spurt slowing down comparatively? In that case, gross savings and investment should rise. Gross fixed capital formation (GFCF), which is a proxy for overall investment in the economy, has risen from around 32% in 2021-22 to close to 35% in 2023-24. This steady rise in the investment level in the economy must be contributing to the growth.
In this context, Rajan has referred to the stepped up infrastructure investment of the government. He has pointed out that this is going right and thus pushing up the growth potential of the economy. True, because infrastructure is an enabling condition which allows economic activity to granulate. Roads and bridges make it easy for products flow from say the farms to the markets and vice versa.
But then, there are other factors at work, as well, which have not been taken care of. A major contributing factor seems to the digital stacks.
If you are going to a market and buying vegetables or any other thing in the market, the small vegetable vendors or stationery seller would possibly ask you to pay “on-line”. Previously, none of these smallest of the small businesses asked for anything other than cash. They took the cash from buyers and rolled it over for the next day’s fares.
These trades or businesses until now never entered the formal channel. Now, these are entering the informal economic accounting world. This is no small measure of contribution. The aggregate volume of business of all these tradespeople are being captured in the official GDP enumeration now which never entered the stream until lately.
Secondly, these tradesmen are entering the formalised banking stream. Once the banker knows the banking net worth of these people, they would qualify for credit and other business facilities. Their turnover could rise several fold and taking the small-town and villages economies to the next higher level.
The credit-worthiness of the small businesses and their bankability is creating a new paradigm for the economy. The basis for the operation of the economy is structurally getting changed. It is transcending to a new higher level.
If nothing, this rising formalisation and the bankability of the smaller businesses is creating a situation which will further give boost to the prospects of the Indian economy. We can thus look forward to growth, when even the global economy might be under a cloud.
What we need is a ring-fencing of the Indian economy from the possible adverse turn in the global economy. Out economic managers are no strangers to handling such situation. The RBI had very effectively put guard rails to protect the Indian to a large extent during the global financial melt-down.
Maybe, we should expect such Chinese walls in the coming days when the global economy may face severe challenges. (IPA Service)