Is India booming at 76? GDP’s failure to recover fully indicates otherwise

The perception of rating agencies discounts the fundamental and structural weaknesses that have plagued the Indian economy for long.

Employees working in an information technology firm at Rushikonda in Visakhapatnam, Andhra Pradesh.  | Photo Credit: K.R. Deepak

On the completion of 76 years since Indian Independence, a wide range of “informed” opinions from government spokespersons, non-government analysts, and large sections of the domestic and foreign media, enthusiastically or grudgingly declared that, as an economy, India is doing very well. Some of the assessments also suggest that there is a new dynamism visible in the years since the National Democratic Alliance came to power in 2014.

The evidence on offer to support these claims are figures of GDP growth, placed at 9.1 per cent in 2021-22 and 7.2 per cent in 2022-23. The IMF projects growth to slow in the subsequent two years but remain in the 6.1 to 6.3 per cent range, which is well above projections of China’s growth of 4.5 to 5.2 per cent. This bounce back from the (minus) 5.8 per cent contraction during COVID year 2020-21, is presented as a return to a 7 per cent annual trend rate recorded over 2014-2020. It is also seen as indicative of a smart recovery from the depths of the COVID depression and as proof that India is doing much better than even long-time global growth leader, China.

When making this assessment, what is conveniently forgotten is that a range of economists of varying persuasions, including some who have served the government, have argued that questionable changes in data sources and methods adopted when the National Accounts series was revised to move the base year up to 2011-12, had resulted in significant overestimation of the level and rate of growth of GDP. Particularly contentious was the decision to adopt the corporate finance database of the Ministry of Company Affairs as the basis for computing GDP in the organised manufacturing sector.

In addition, the informal sector, which accounts for a substantial chunk of non-agricultural economic activity and was badly damaged by both the demonetisation experiment and the handling of the pandemic, is largely excluded from the numbers used to arrive at the aggregate. This too tends to impart an upward bias to the growth numbers. Yet, while the government or its supporters have held back or criticised data from the National Sample Survey Office or the National Family Health Survey on grounds that they are methodologically or otherwise poor, they have been happy to cite the National Accounts numbers.

Even ignoring the arguments suggesting that the GDP figures with 2011-12 as base year tend to overestimate the level and growth of GDP, the evidence on the revival of growth is not as clear-cut as the hype makes it out to be. It is indeed true that GDP, which declined 5.8 per cent in 2020-21, is estimated to have bounced back in 2021-22 and 2022-23. However, closer scrutiny of this growth performance points to certain disconcerting features.

To start with, GDP in absolute terms has not recovered significantly. A comparison of the absolute value of GDP in 2022-23 with that in 2019-20 reflects an increase of 10.1 per cent over a three-year period. That amounts to an average annual increase of just 3.4 per cent. This must be seen in the context of the fact that over the nine quarters preceding 2020-21, the year-on-year rate of growth had fallen almost consistently from 8.9 per cent in the first quarter of 2018 to 2.9 per cent in the first quarter of 2020, before collapsing (minus) 23 per cent in the April to June quarter of the latter year. The post-COVID recovery is far less dramatic than it is made out to be.

Highlights

• While the government or its supporters have held back or criticised data from the NSSO or the NFHS on grounds that they are methodologically or otherwise poor, they have been happy to cite the National Accounts numbers.
• Manufacturing alone, which neoliberal economic reform was expected to revitalise and the NDA government had promised to boost, accounted for just 18 per cent of the increase in GDP over this long period.
• A comparison of the absolute value of GDP in 2022-23 with that in 2019-20 reflects an increase of 10.1 per cent over a three-year period. That amounts to an average annual increase of just 3.4 per cent.

To bolster the credibility of the “dynamism” plug, other soft and speculative indicators are periodically referred to. One is reportedly the perception of foreign investors and private rating agencies that India is doing well, leading to large inflows of foreign portfolio investment. The second is the speculative claim that changed geopolitical circumstances would help India become a major beneficiary of the China-plus-one strategy of investors from the developed market economies to find new offshoring partners and reduce their “over”-dependence on China. That is expected to open the way for India to emerge as a global manufacturing hub.

The first of these is without basis. Being a favoured destination for whimsical financial speculators investing in stock and bond markets is no certificate of dynamism. The second neglects the structural weaknesses that have kept India a minor exporter to global markets despite more than three decades of “reforms” that were supposed to unleash the country’s manufacturing export potential.

If we take the period from 2011-12 to 2022-23, the years covered by the current series of National Accounts Statistics, 61 per cent of the increase in GDP has been on account of services. Agriculture and allied sectors accounted for another 11 per cent and industry for 28 per cent. Manufacturing alone, which neoliberal economic reform was expected to revitalise and the NDA government had promised to boost, accounted for just 18 per cent of the increase in GDP over this long period.

The poor performance of manufacturing is not because of the drag exerted by the unorganised sector. Most data related to manufacturing largely cover the organised sector, which is stagnating despite the high profits recorded by a few conglomerates. Fundamental structural weaknesses that have plagued the Indian economy for long persist, challenging claims that India will achieve developed country status in the foreseeable future, led by a manufacturing export boom.

The government is, of course, conscious of this. It has also realised that mere promotional propaganda in the form of the “Make in (a resurgent) India” campaign is not yielding results. So, the emphasis in recent times has been on the provision of direct subsidies to those increasing production in chosen industries through the “production linked incentive” (PLI) scheme launched in March 2020. Originally meant to be targeted at a few sectors, the scheme has been extended to cover 14 areas with a proposed total outlay of Rs.1.97 lakh crore.

But the allocation of those resources has been uneven across sectors and gains limited. The Union Budget 2023-24 allocated Rs.8,083 crore for PLI schemes, of which Rs.4,499 crore was for large-scale electronics manufacturing. Much of that goes largely to the mobile phone and component sectors, increasing production to cater to domestic demand and only marginally for exports. That outright subsidy for manufacturers, including transnational firms, is regressively financed with resources diverted from other crucial areas that could benefit the poor and middle classes. But there is no evidence to suggest that these “freebies” for the big players is delivering a manufacturing boom.

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.