Abhijit Banerjee, who, along with Esther Duflo (his partner) and Michael Kremer, won the latest Nobel prize in economics, has warned that the Indian economy is ‘extremely close to a tipping point of a major recession’. He joins a growing list of eminent ‘expat’ Indian economists in raising the alarm about India’s poor short-run growth prospects. Thus, Raghuram Rajan, former governor of the Reserve Bank of India (RBI) and now at Chicago University, proclaims the persistence of a ‘growth recession’ and expresses considerable concern that ‘there are signs of a deep malaise in the Indian economy’. Arvind Subramanian, former Chief Economic Adviser to the Indian government and now at Harvard University, paints a poignant picture of a ‘great Indian slowdown’. He builds his case on previous contributions that the current GDP numbers paint a much more rosy picture and thus hide more than they reveal. Kaushik Basu, another former Chief Economic Advisor to the Indian government and now at Cornell University, notes that ‘all major indicators show that the economy is slowing down sharply’.
This represents a striking contrast to the recent past. For example, Basu notes that ‘between 2003 and 2011 growth averaged nearly 8.5 per cent’. All major international agencies ((ADB, IMF and World Bank) have downgraded their growth forecasts to 5-6 per cent for 2019 – see Table 1. India’s central bank (RBI) now concurs concluding that the best that can be expected is a growth rate of 5 per cent for 2019-2020. This is a rather sombre prognosis relative to the RBI’s reasonably optimistic October 2018 monetary policy report.
Table 1: India’s economic growth 2019-2020
|Agency||Growth estimate for 2019 (%)||Growth forecast for 2020 (%)|
Critics might argue that proclamations of an imminent ‘major recession’ in India are exaggerated, especially when seen from the perspective of long run growth. Figure 1 shows real GDP growth rates for India for a period of 57 years (1961-2018). The years of major recessions stand out (1965, 1972, 1979), while in 1991 the economy came perilously close to a recession. Compared with such calamitous episodes, growth forecasts of 5-6 per cent appear rather benign. Indeed, India’s long run growth rate, estimated from the vantage point of the 1960s, is just above 5 percent. Hence, one could argue that the 8 percent growth rate that one witnessed in the recent past was probably an outlier. Even if it grows at 6 percent in the medium-term, India would still be placed among the fastest growing economies in the world.
Figure 1: India, long run real GDP growth (%), 1961-2018
Source: World Bank.
While historical comparisons might provide succour and support to the government, it would still be wise to pay heed to the collective pessimism of Banerjee et al. To start with, one cannot reject Arvind Subramanian’s argument that, as a result of contentious methodological revisions, the current GDP numbers significantly overstate the underlying strength of the economy. Key components of aggregate demand – consumption, investment and net exports – have faltered badly making them seemingly incompatible with high aggregate growth rates.
What matters most is that labour market and poverty indicators reveal an economy in distress. Official figures suggest that the unemployment rate is at a 45-year high. Other indicators, such as the decline in the labour force participation rate, suggest a poorly functioning labour market.
A veteran economist, S. Subramanian, has compiled what is perhaps the most disturbing aspect of the current state of the Indian economy – a decline in the living standards of rural residents juxtaposed with a conspicuous rise in rural poverty between 2011-12 and 2017-2018 – see Table 2. Ironically, these numbers are based on a draft report prepared by the National Statistical Office (NSO) that the current government has decided will not be officially published ‘apparently on grounds of the questionable quality of the data’. This has understandably raised suspicions of an attempt by the government to ignore bad news.
Table 2: Real consumption and poverty in rural India, 2011-12 to 2017-2018
|Indicator||2011-12||2017-2018||Nature of change|
|Mean consumption (Indian Rupees:INR)||1429.96||1304.07||Declined by 8.8%|
|Poverty (based on official poverty line)||31.5%||35.10%||Increased by 12.68%|
|At-risk-of poverty (20% increase in poverty line)||42.29%||52.31%||Increased by 23.69%|
Source: Adapted from https://www.theindiaforum.in/authors/s-subramanian
In the latest World Economic Outlook, the IMF makes the following observations on the Indian economy.
India’s growth is estimated at 4.8 percent in 2019, projected to improve to 5.8 percent in 2020 and 6.5 percent in 2021 (1.2 and 0.9 percentage point lower than in the October WEO), supported by monetary and fiscal stimulus as well as subdued oil prices.
Those who worry about the nature of the current growth slowdown in India have a lot of culprits to aim at. They worry about the long-lived consequences of what are now considered to be serious policy mistakes – such as the November 2016 demonetisation exercise and the poor execution of a badly designed GST. They note that the domestic financial system is broke impairing the flow of credit to the private sector as well as adversely affecting the efficacy of the monetary policy transmission mechanism. They despair at the fact that the government has run out of the capacity to fight the growth slowdown because monetary policy is insufficiently effective while there is little room for large-scale fiscal stimulus. More importantly, they worry that the current government is pursuing a contentious majoritarian political agenda that has instilled a ‘climate of fear’ that is ‘causing low levels of investment and lending’. Only time will tell whether the government is prepared to listen to its critics or indeed whether the critics are being unduly pessimistic.
Iyanatul Islam is an Adjunct Professor at the Griffith Asia Institute and former Branch Chief, ILO, Geneva. The views expressed in this blog are the author’s own and should not be attributed to the ILO.