Growth rebounds, comparison with China unrealistic

The Indian economy gave a positive surprise last week. According to data released by the Central Statistics Office (CSO) on February 28, the economy recorded 7.2 per cent growth in October to December quarter of 2017-18. As per the latest official estimates, GDP growth for FY 18 will be marginally higher at 6.6 per cent, against the earlier estimate of 6.5 per cent. The third quarter headline number is also 60 basis points (0.6 per cent) higher than the revised 6.6 per cent growth recorded in the second quarter. However, GDP growth for the current fiscal at 6.6 per cent, a four-year low, will be lower by 0.5 per cent as compared to 7.1 per cent recorded in FY 16-17.

The rebound in growth, helped by manufacturing, services and farm output, is the fastest growth in five quarters. It will also help India regain the status of the fastest growing economy in the world, overtaking China which grew by 6.8 per cent in the October-December quarter. After declining from 9.2 per cent in Q4 of 2015-16 to the lows of 5.7 per cent in Q1 of 2017-18, growth trajectory has also picked up in the last two quarters. At 7.2 per cent, this is also the best rate of expansion and a good sign of the economy moving into the faster lane, despite a favourable base effect. If current growth momentum remains intact, there is a possibility of GDP growth nearing 7 per cent for the full fiscal in FY-19.

So, has the GDP growth really picked up from the slowdown caused by the twin effects of demonetisation and the messy transition to GST? The numbers certainly show a broad-based recovery, particularly in core segment of economy. Despite distress in agriculture sector, 4.1 per cent growth in farm sector from 2.7 per cent in Q2 of FY-18 and manufacturing recording 8.1 per cent growth, against 6.9 per cent in the earlier quarter, have helped the headline GDP number record 7 per centplus growth. The highest contribution has come from the services-related sector, which accounted for 24.7 per cent of total year-on-year real GVA (gross valued added). Other sectors, which have contributed to growth include real estate, construction and public consumption, though the government’s fiscal deficit has hit 113.6 per cent of the budgeted figure for the full fiscal year.

Improvement in investment climate is one of the key highlights of the broad-based recovery in growth: fresh investment grew 12 per cent during the third quarter. However, growth in private consumption has slowed to 5.5 per cent, against 6.6 per cent in the earlier quarter, despite the pickup in farm sector and in manufacturing. Modest growth in exports at 2.5 per cent, despite favourable external environment, and imports at 8.7 per cent is a concern because of expansion in trade deficit. So, granular data suggests recovery in key sectors as well as a few points of concerns. As quarterly growth is measured relative to growth in the comparable quarter of the previous fiscal, growth in Q4 of the current fiscal will once again be better because of low base effect.

Though growth is back on track, it may be too early to celebrate because there is a risk of oil prices, US Fed Reserve interest rate hikes and inflation putting pressure on the economy, which may make it difficult to sustain the growth trajectory. As India has pulled ahead of China once again, there is also a lot of celebration that India has regained the fastest growing major economy status. Often, encomiums come quick and fast whenever India overtakes China. In the last three years, the government has also never missed an opportunity to gloat over the fact that India has superseded China as the world’s fastest growing large economy. The Western world has also highlighted this regularly. It is true that Indian economy has been growing faster in the new millennium, while China, after breath-taking growth earlier, has slowed down.

There is little doubt that India has the potential to become a significant player in global economy. But China, the second largest economy in the world, is already an economic power. Therefore, the tendency to compare Indian and Chinese economies is unrealistic because China is well ahead of India and it’s not going to be easy for India to outgrow China at the current rate of growth. From a macro perspective, China’s GDP in 2016 was US $ 11.2 trillion, which is around five times as much as India’s US $2.3 trillion. The contrast is also reflected in the per capita GDP of the two countries: it is US $8,260 for China, for India it is US $1,718. In 2016, China’s economy decelerated to 6.9 per cent, thus slipping below 7 per cent for the first time in 25 years. Given the sheer size of Chinese economy, even if it grows at a rate lower than India’s, the value of domestic product that China adds in a year is several times more than what India adds in the same period.

The stark contrast does not end here. India lags behind China on the level of several infrastructure and social development indicators: power, water supply, public transport, roads, literacy rate, life expectancy at birth, healthcare and poverty. These ingrained problems make it difficult for India to play a dominant role in the international economic arena, while China is a recognised economic power. The gap between India and China may be narrowing gradually, but China is still way ahead of India in terms of economic and social development. It is often argued that China’s post-1978 brisk growth and development is a product of top-down authoritarian command economy, while India’s is a result of a messy democracy. It is partly true, though there is no clear consensus on the relationship between democracy/autocracy and development.

Western Europe, for instance, has had rapid development and economic prosperity under liberal democracy. There are several countries – like Singapore, Thailand, Malaysia, Chile and Taiwan – that are examples of rapid economic growth under authoritarian rules. On the other hand, there are economies like Philippines, Zimbabwe and North Korea that have been ruined under autocratic regimes. While democracy is desirable for society, neither democracy, nor dictatorship is the pre-condition for growth and development. It is the mix of policies that encourage enterprise and create demand besides social and political stability and inclusive growth that help economies to grow and societies to prosper. China’s growth miracle is built on infrastructure, investment and manufacturing muscle. Even if India matches China’s annual growth rate, in relative terms India lags far behind China.

India lags behind China on the level of several infrastructure and social development indicators: power, water supply, public transport, roads, literacy rate, life expectancy at birth, healthcare and poverty.