As per official estimates, the Indian economy achieved annual GDP growth rates of 7.2 percent, 7.9 percent and 7.1 percent for the financial years 2014-15, 2015-16 and 2016-17, respectively. With the Chinese economy slowing down in recent times, India has attained the status of the “fastest growing major economy in the world” under the present regime. Speaking at the Fund-Bank spring meeting, the Indian Finance Minister reminded the members of the IMFC that high GDP growth in India has also been accompanied by moderate retail inflation (currently below 4 percent), improving fiscal and current account balances, rising FDI inflows and accretion of foreign exchange reserves.
These indicators have also provided the basis for very optimistic long-term projections. The Niti Aayog, which has been recreated as a think tank for the Government after dissolving the erstwhile Planning Commission, has rolled out a fifteen year vision of transforming the Indian economy. It has been claimed that by 2031-32, the country will attain universal literacy and access to healthcare, besides ensuring housing with toilets, LPG connections, electricity and digital connectivity for all citizens. Even two-wheelers/cars and air conditioners would be available to “nearly all”. This vision is premised on a projected real GDP growth rate of 8 percent annually over a fifteen year period and maintaining annual government expenditure at around 27 percent of nominal GDP (Niti Aayog estimates provided in table below).
Are these optimistic long-term projections for the Indian economy justified, given the current macroeconomic and financial conditions? At least three factors need to be taken into account in assessing the resilience and sustainability of India’s economic performance.
First, high growth is being witnessed in India in recent times despite a marked slowdown in private investments, which itself is an outcome of a huge corporate debt overhang. The Economic Survey (2016-17) notes that private investment (real gross fixed capital formation) had started shrinking from 2015-16 and experienced negative growth in the first half of 2016-17, also dragging down growth of total investments to negative territory. This is in contrast to the earlier phase of growth acceleration witnessed between 2003-04 to 2007-08, when private corporate investment had witnessed a sharp increase, fuelled by a marked rise in credit flow from public sector banks. The excesses of the expansionary phase of the last decade eventually led to bad loans piling up in the banking system, primarily on account of the sectors like infrastructure (power, roads, telecommunications) and iron & steel. Consequently, the public sector banks in India, which account for nearly two-thirds of annual credit flow, suffered negative profit growth in 2015-16, with credit growth witnessing a secular decline since 2011-12 (RBI’s Financial Stability Report, December 2016). How can a growth trajectory be sustained when it is accompanied by declining investment and credit growth?
The Indian government claims that public expenditure has taken the place of private investment in driving growth in the current phase. However, this phase has also witnessed fiscal consolidation with the fiscal and revenue deficit brought down to 3.5 percent and 2.1 percent of GDP, respectively, in 2016-17. This could be achieved through additional revenue mobilisation, mainly through a sharp increase in indirect tax collections. Rather than passing on the drastic fall in international crude oil prices in the last three years to the domestic consumers, the government has chosen to increase excise duty collections from the petroleum sector from 0.7 percent of GDP in 2013-14 to over 1.4 percent of GDP in 2016-17 (Petroleum Planning & Analysis Cell, GoI). The hardening of international oil prices makes this revenue mobilisation strategy of the government unsustainable. Recent steps like demonetisation, income disclosure schemes, the policy thrust towards digitisation of payments and the rollout of the GST are all aimed at increasing revenue mobilisation. It remains to be seen whether these measures can lead to an increasing trend in revenue mobilisation, enabling higher levels of public investment and expenditure. Evidence so far does not reflect any such trend.
Hardening international oil prices alongside increasing interest rates in the US and other advanced economies, in the backdrop of a growth revival, can also have adverse impact on India’s current account balance, exchange rate and inflation. The improvement in the external balance seen in the recent years has mainly been on account of declining oil prices, coupled with a rise in FDI inflows. Portfolio investors, however, have already changed direction with FPI outflows bringing the rupee under pressure. While the government has embarked on an ambitious export promotion strategy under the ‘Make in India’ initiative, the rise of protectionist trends within the US and other advanced economies do not provide a conducive environment for an export-driven growth strategy for India. The political-economic developments around the globe rather add to the uncertainty in India’s external economic environment.
Whether India has entered into another phase of high economic growth, as was witnessed in the last decade, is not clear at this point of time. It will depend much on how the three factors discussed above play themselves out.