Why 8 per cent GDP growth will be a challenge

In an environment of fragile global growth, India’s growth rate stands out as a bright spot. For the past decade India’s GDP has averaged over 7 per cent; in 2015-16 fiscal it was 7.6 per cent, a five year high. A decade ago, India’s GDP growth was even more robust – 9.5 per cent in 2005-06, followed by 9.6 per cent and 9.3 per cent in subsequent years. Latest World Bank report estimates India’s economic growth at 6.8 per cent in 2016-17, nearly 1 per cent lower than last fiscal growth because of demonetisation impact. But growth rate will pick up modestly to 7.2 per cent in FY 17-18, while the World Bank projection for FY 18-19 is 7.5 per cent. Policy makers have targeted an ambitious growth rate of 8 per cent over next 15 to 20 years for achieving an economic transformation. But can 8 per cent growth be achieved on sustained basis for such a longer period?

Opinions are divided among policy experts, economists and academics. While some like the Niti Ayog vice chairman Arvind Panagariya believe that 8 per cent GDP growth is possible, others like Ruchir Sharma, chief global strategist and head of the emerging markets equity team at Morgan Stanley and author (Breakout Nations: In Pursuit of the Next Economic Miracles and The Rise and Fall of Nations: Forces of Change in a Post-Crisis World), are of the view that achieving even 7 per cent GDP growth would be very challenging in coming years. In recent years, India has also achieved macroeconomic stability, though it does not make India completely invulnerable to unfavourable changes in global macroeconomic factors.

If there is no unanimity in long term GDP growth rate prospects, the current GDP figures are also contentious because of the new methodology adopted by the Central Statistical Organisation (CSO), along with the change in base year from 2004-05 to 2011-12 in January 2015. The change in base year is said to have added, according to economists, extra GDP to actual GDP rate calculated at 2004-05 base year. For instance, the new value added method had lifted GDP growth for financial year 2013-14 to 6.9 per cent from 4.7 per cent estimated earlier by old method and base year.

Experts and economists are baffled as to how such robust growth could go unnoticed when the ground reality is different with businesses in several sectors struggling with weak demand, high debt and low profits for the last few years. Their contention has been that the new methodology does not capture the ground reality accurately and therefore is in conflict with certain economic indicators like manufacturing or industrial growth, weak investment, lacklustre capex and high NPAs of banks.

In the pre-Lehman crisis times in early 2000s, according to a global survey, there were as many as 50 countries with 7 per cent GDP growth rate; the number dropped by 50 per cent to 25 countries in 2008. In 2016 there were only six countries that delivered 7 per cent growth. India is one of them; others in the list include small and inconsequential nations like Philippines, Myanmar and Tanzania that are opening up to economic reforms. All developed nations, including the US and the European Union countries, are grappling with less than 2 per cent GDP growth since 2007-08 financial crisis. It’s going to be a painfully slow and long process for these countries to return to their best economic performance.

According to the recent IMF update on World Economic Outlook, growth will pick up from 1.6 per cent in 2016 to 1.9 per cent in 2017 and to 2 per cent in 2018 in six advanced countries – US, Germany, Spain, UK, Canada and Japan – though in the Euro region growth will largely be unchanged. In developing economies, growth is unlikely to pick up. IMF has revised down growth rate in India from 7.6 to 6.6 per cent in 2016 and from 7.6 to 7.2 per cent in 2017. Growth projection for 2018 at 7.7 per cent remains unchanged. In a globalised world, no major economy is insulated from the impact of external economic instability. Weak growth in developed world will have an adverse impact on developing and under-developed countries, including India.

Apart from weak global growth, the wave of de-globalisation sweeping the Western world is another challenge for developing economies. Protectionism is a buzz word in US president Donald Trump’s vocabulary. Sentiment against immigrants, jobs for locals and loud noise against outsourcing of skilled jobs in manufacturing and IT space are big issues in advanced Western world. Slowdown of foreign capital flows into emerging economies, which indicates poor investor confidence in these economies, will further impact growth. To keep its growth trajectory intact, India needs policy and structural reforms that will help attract private capital on a big scale needed by the government to meet its investment target in infrastructure and public utilities.

Apart from external factors, India is also saddled with domestic issues. Delayed policy reforms, slow structural reforms, excessive red tape, poor infrastructure, lack of big time investment in infrastructure development, struggling manufacturing industry, labour reforms, power shortages and bad roadways are big dampeners. In many ways, India has done away with socialist-inspired policies but too many gaps still remain in its growth story. More than half the population of India is dependent on agriculture for livelihood. Their survival depends on an unpredictable factor – monsoon. Manufacturing, considered as the cradle of growth, accounts for only 16 per cent of GDP as compared to 20 per cent in Brazil, China and Indonesia.

In the short to medium term India appears to be in position to sustain current growth momentum, but in the long term challenges remain. Growth can be of two kinds – one, that translates into numbers and the second which creates jobs. Much of India’s growth in the recent past has been jobless growth. Experts wonder why an economy that’s theoretically growing at 7 per cent is not creating enough new jobs. It could either be because manufacturing has become less labour-intensive or the growth is more capital intensive. But India badly needs labour-intensive growth that will create jobs for one million people who reach the employment age each month. That’s a pretty daunting task for any government, though.

As a growing economy three things that favour India are its demographic advantage, robust domestic consumption and cheap labour. But against a few positives, there are too many domestic and global negatives that will disrupt India’s growth story. Even if the government resolves some of the domestic negatives over a period, the global challenges are not going to go away in the near future and hence will upset the growth narrative.

GROWTH can be of two kinds — one, that translates into numbers and the second which creates jobs. Much of India’s growth in the recent past has been jobless growth. India badly needs labour-intensive growth that will create jobs for one million people who reach the employment age each month. That’s a pretty daunting task for any government, though.