The week that passed was the annual meetings of the World Bank-International Monetary Fund (IMF). The IMF updated its growth forecasts for the global economy and individual countries. Estimates are gloomy and downside risks dominate. For India, it has lowered its GDP growth forecast for 2022-23 from 7.4% to 6.8%. Nevertheless, India is growing faster than other countries in the G20 except Saudi Arabia. In 2023-24, according to the IMF, India’s GDP is expected to grow by 6.1%, the highest in the G20.
In general, India’s trend growth is estimated by many international organizations to be closer to 6%. In the current global context and in many possible scenarios for the rest of the decade, it would be an achievement if India’s real GDP growth averages 6% and nominal GDP growth averages 10% to 11%. But India can and will do better.
India’s average annual real growth could be between 6.5% and 7.0% instead of being closer to 6%. I’m making this case based on the notable parallel between 1998 and 2002 in the years between 2018 (or 2016) and 2022.
In 1998, India tested a nuclear device and faced sanctions. Drought twice in a row. A technology investment boom ended and several countries went into recession in 2001. Then, 9/11 happened, creating fresh geopolitical uncertainties. Like the corporate sector, the Indian financial system was undergoing a balance sheet repair. The debt level had to be brought down. But, under these issues, many structural reforms were quietly underway. Interest rates were deregulated. Many state-owned entities were privatized and many of them have been performing well since then. Moreover, with the announcement of the Golden Quadrilateral project of national highways, a symbol of India’s focus on physical infrastructure, infrastructure reforms were truly embarked on.
However, these reforms did not manifest themselves in higher economic growth as they were overshadowed by the temporary setbacks described above. Also, economic policies always operate with a lag. Eventually, restrictions were eased, the drought eased and the balance sheet recovered. Improvements in infrastructure began to contribute to more significant economic activity. When the global boom began in 2003 due to China’s entry into the World Trade Organization and the slashing of interest rates in the developed world, India was ready to participate. Indian economic growth between 2003 and 2008 was between 8% and 9%. As the subsequent banking crisis showed, high economic growth resumed in 2009, but was unsustainable.
Fast forward to 2018 and 2022. In general, in the latter half of the last decade, India’s real economic growth was below its potential. Not far to seek an explanation. The financial sector stress that follows the credit boom always leads to long periods of slow economic growth. India’s banking, non-banking and non-financial corporate sectors had to fix balance sheets and increase their equity. By the time this process was completed, the pandemic had spread, followed by a geopolitical setback and a corresponding tightening of global financial conditions.
But, under these setbacks, India’s structural reforms have progressed rapidly. The Goods and Services Tax introduced in 2017 is maturing well. This saves more than tax revenue for the states and the central government. The Insolvency and Bankruptcy Code was introduced. The Real Estate Regulation Act was passed, and the sector is becoming less cash-based. Privatization has made a comeback. The government streamlined and reduced direct taxes for businesses and individuals. India’s public digital infrastructure (India Stack) seems to have passed a turning point. It is starting to improve access to finance for individuals and businesses and opening up growth opportunities for the latter. The government increased capital expenditure, giving the private sector the time and space to repair the balance sheet. Public investment spending grew 2.8 times between 2015-16 and 2021-22.
In the past two years, there have been one-off setbacks on these measures. As the impact of these shocks subsides – as in the case of the pandemic shock on India’s economy – growth outcomes will begin to reflect the cumulative effects of these reforms and other structural economic growth. The private sector will really start investing. The stir has already started. This could add 0.3 to 0.5 percentage points to Indian growth, as would be the case on the digital front, pushing growth to between 6.5% and 7.0%. If external demand becomes favourable, then at least in a few years, the result of growth can reach 8% and above.
Therefore, there is a case for optimism with caution. Premature celebrations can be postponed. History, including ours, cautions against this. The risks are many. For one, being a global economic power can increase geopolitical risks. After one year there is no compromise between economic stability and economic growth. Globally, in these terrifying times, sustainability gets as much attention as development. Delayed gratification will bring sustainable growth dividends. If we continue to pull away as we did before 2014, the economic consequences will speak for themselves, as they have already begun.
V. Ananth Nageswaran is the Chief Economic Adviser to the Government of India
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