Need to Temper Euphoria Over Economy


Need to Temper Euphoria Over Economy

In its semi-annual report, World Economic Outlook, ‘Navigating Global Divergences’ October 2023, the International Monetary Fund (IMF) has revised its projected GDP growth rate for India for 2023-24 to 6.3%, up from the earlier 6.1%. For India’s policymakers, it is a vindication of their short-term economic management. The success is sweeter, writes R. Nagaraj (was with the Indira Gandhi Institute of Development Research, Mumbai) “as the IMF revised downwards world GDP growth projection, including China’s by 0.3 percentage points, to 4.2%. Official spokespersons have sought the IMF’s endorsement to silence its critics.”



That the economies, including India’s,  that were worst affected during the COVID-19 pandemic were also the ones to record a steep recovery is widely acknowledged. And by 2022-23, recovery gained momentum as domestic supplies were restored and global supply chains were straightened out.

While output recovery is welcome, Nagaraj points out “yet its effects on employment, its quality and persistence of inflation of essential food items affecting the poor the most remain causes of concern — as many critics have highlighted. However, even focusing on output recovery, a sectoral view with trade dimension, would perhaps expose chinks on the armour…...Policymakers need to temper their optimism by taking a slightly longer view with a wider angle — appreciating the fast-changing geopolitical underpinnings of economic policy making….”

Growing deficit with China: However, “the immediate concern is India’s susceptibility to its soaring deficit with China. India’s economic frailty has increased even as the net exports (exports minus imports) to GDP ratio has declined sharply. India’s dependence on Chinese imports of manufactures seems structural, and not easily corrected by changes in relative prices.”

China accounts for: 15%-16% of India’s imports and a third of India’s trade deficit. The trade deficit continues to rise, despite the government’s decision to curb Chinese imports of critical industrial products.

Declining industrial growth: Willy nilly, writes Nagaraj “India undid many import restrictions, as domestic production was getting throttled for lack of critical Chinese inputs. The mirror image of rising Chinese imports is a steady decline in industrial growth rate, from 13.1% per year in 2015-16 to negative 3.5% per year in 2019-20 (before COVID-19). Industrial growth rates as per the Index of Industrial Production (IIP), despite its limitations, shows an alarming regression over a longer period. During the boom period (2004-05 to 2013-14), manufacturing grew at an annual average rate of 5.7%; the rate declined to 3.1% during 2014-15 and 2022-23 — the fall is acute in capital goods, plummeting from 9.7% to 1%."

Gross fixed capital formation: From 2011-12 to 2021-22, “gross fixed capital formation to GDP ratio at current prices, declined steadily from 34.3% to 28.9% — an unprecedented fall in post-independent India. And its public sector share has remained constant at 8% (National Accounts). Net foreign direct investment (excluding disinvestment and outward foreign direct investment), to current GDP ratio fell from 3.6% in 2008 to 2.4% in 2022 (World Development Indicators).”

Social development  concerns: On social development also there are concerns, particularly on poverty. The UN Development Programme’s Human Development Index may be more credible and an acceptable measure. “The value of India’s HDI index moderated from 0.645 in 2018 to 0.633 in 2021; and, its global rank went down by one rank during 2015-21 — meaning that other countries have performed better than India.”



In conclusion, Nagarajan writes “a few stark facts come into focus. These are: the strategic threat posed by an unrelenting rise in trade deficit with China, despite government’s best efforts; its mirror image is a decline in industrial output growth rates, especially capital goods’ decimation; and a decade long, unprecedented, decline in the economy’s fixed investment rate; with an unchanging public sector’s share in it, at least up to 2021-22; India’s HDI ranking slipped by one…..”

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