On Monday, the Indian government released its latest estimates of economic growth for the most recent fiscal year which ended in March 2021. Gross Domestic Product (GDP) of India contracted by 7.3% in 2020-2021. To understand this decline in perspective, remember that between the early 1990s and the pandemic that hit the country, India experienced an average growth of around 7% per year.
There are two ways of looking at this contraction in GDP.
The first is to view this as an outlier – after all, India, like most other countries, is facing a once-in-a-century pandemic – and wishing it was gone.
The other way would be to look at this contraction in the context of what has happened to the Indian economy over the past decade – and more specifically over the past seven years since the government led by Prime Minister Narendra Modi just completed its seventh birthday. Last week.
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Seen in this context, the latest GDP data suggests that it is not an outlier. Instead, if one looked at some of the most important variables in the data, India’s economy had steadily worsened during the current regime even before the Covid-19 pandemic.
So has the Indian economy performed better during the seven years of the current government?
Perhaps the best way to come to such a conclusion is to look at the so-called “economics fundamentals”. Essentially, this term refers to a set of economy-wide variables that provide the most robust measure of the health of an economy. This is why, during times of economic upheaval, one often hears political leaders reassuring the public that “the fundamentals of the economy are strong”.
Let’s look at the most important.
Gross domestic product
Contrary to the perception of the Union government, the GDP growth rate has been a point of increasing weakness during the last 5 of these 7 years.
Let’s take a look at Chart 1, provided in the Reserve Bank of India or RBI Annual Report for FY21 released on May 27. The chart plots the turning points in India’s growth.
Two things stand out. After the decline following the global financial crisis, the Indian economy began to recover in March 2013 – more than a year before the takeover by the current government.
More importantly, this recovery has turned into a secular deceleration in growth since the third quarter (October to December) of 2016-17. Although RBI won’t say it, the government’s decision to demonetize 86% of India’s currency overnight on November 8, 2016 is seen by many experts as the trigger that plunged India’s growth into a downward spiral. .
As the ripples of demonetization and a poorly designed and hastily implemented Goods and Services Tax (GST) spread through an economy that was already struggling with massive bad debts in the banking system, the rate of GDP growth steadily fell from over 8% in fiscal 2017 to around 4% in FY20, just before Covid-19 reached the country.
In January 2020, as GDP growth fell to its lowest level of 42 years (in terms of nominal GDP), Prime Minister Modi expressed his optimism, declaring: “The strong absorptive capacity of the economy India shows the strength of the fundamentals of the Indian economy and its ability to rebound ”.
As an analysis of key variables suggests, the fundamentals of the Indian economy were already quite weak even in January of last year – well before the pandemic. For example, looking at the recent past (Chart 2), India’s GDP growth pattern looked like an ‘inverted V’ even before Covid-19 hit the economy.
GDP per capita
Often times, it is helpful to look at GDP per capita, which is total GDP divided by total population, to better understand how well an average person is in an economy. As the red line in Figure 3 shows, at a level of Rs 99,700, India’s GDP per capita is now where it was in 2016-17 – the year the slide started. As a result, India lost to other countries. A case in point is how even Bangladesh has overtaken India in terms of GDP per capita.
This is the metric on which India has perhaps performed the least. First, there was the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 – the year after demonetization and the year after demonetization. saw the introduction of the GST. Then, in 2019, there was the news that between 2012 and 2018, the total number of people employed fell by 9 million – the first case of total employment decline in the history of independent India.
Contrary to the norm of an unemployment rate of 2% -3%, India began to regularly record unemployment rates close to 6% -7% in the years leading up to Covid-19. The pandemic, of course, has made matters considerably worse.
What makes unemployment in India even more worrisome is the fact that it happens even when the participation rate – which is the proportion of people who are even looking for a job – declines.
With poor growth prospects, unemployment will likely be the government’s biggest headache for the remainder of its current term.
During the first three years, the government profited greatly from the very low crude oil prices. After remaining close to the $ 110 per barrel mark throughout 2011 to 2014, oil prices (India basket) fell rapidly to just $ 85 in 2015 and below (or around) $ 50 in 2017 and 2018.
On the one hand, the sharp and abrupt drop in oil prices allowed the government to completely tame the high retail price inflation in the country, while, on the other hand, it allowed the government to collect additional taxes. on fuel.
But since the last quarter of 2019, India has faced persistently high retail inflation. Even the destruction of demand due to the lockdowns induced by Covid-19 in 2020 could not quench the inflationary surge. India was one of the few countries – among comparable advanced and emerging market economies – to have experienced an inflation trend consistently above or near the RBI threshold since late 2019.
Going forward, inflation is a big concern for India. It is for this reason that the RBI should avoid lowering interest rates (despite slower growth) during its next credit policy review on June 4.
The budget deficit is essentially an indicator of the health of public finances and tracks the amount of money a government has to borrow from the market to meet its spending.
Generally, excessive borrowing has two disadvantages. First, public borrowing reduces the investable funds available to private companies (this is called “crowding out the private sector”); it also drives up the price (ie the interest rate) of these loans.
Second, additional borrowing increases the overall debt the government has to repay. Higher debt levels mean that a higher proportion of government taxes will pay off past loans. For the same reason, higher debt levels also imply a higher level of taxation.
On paper, India’s budget deficit levels were just a little above the norms set, but, in reality, even before Covid-19, it was an open secret that the budget deficit was much more than this. that the government declared publicly. In the Union’s budget for the current fiscal year, the government admitted that it had underestimated India’s budget deficit by almost 2% of GDP.
Rupee vs dollar
The exchange rate of the national currency with the US dollar is a robust measure for capturing the relative strength of the economy. One US dollar was worth 59 rupees when the government took over in 2014. Seven years later, it is close to 73 rupees. The relative weakness of the rupee reflects the reduction in the purchasing power of the Indian currency.
These are some, not all, of the parameters that are often considered the fundamentals of an economy.
What are the prospects for growth?
The main driver of growth in India is the spending of ordinary people on a private basis. This “demand” for goods represents 55% of the total GDP. In Figure 3, the blue curve shows the per capita level of this private consumption expenditure, which fell to levels last seen in 2016-17. This means that if the government does not help India’s GDP may not return to its pre-Covid trajectory for several years. It is for this reason that the latest GDP should not be considered an outlier.