Double-digit growth can be a pipe dream
Prime Minister Narendra Modi seems to be setting over-ambitious targets on economic growth. First he said India would get back to double-digit annual growth soon. Lately he made a claim that India would become $5 trillion economy by 2022.
Earlier he had promised to double farmers’ income by 2022. Though these are welcome announcements, they seem to be far from reality, given the domestic and global economic situation. Yes, India has now regained the tag of being the fastest growing economy and perhaps one of the sweet spots in the world for investments. Though macro-economic fundamentals have strengthened over the past 3-4 years, the vulnerability of the economy has now become more pronounced after demonetisation and the hasty roll-out of GST. Lately, global situation like the appreciating dollar, US-China trade war, Iran sanctions and rising crude oil prices have hit domestic economy badly.
As a result, fiscal deficit has come under severe strain; current account deficit has widened and is surging towards the dangerous level of 3 per cent of GDP. Trade deficits are surging to $200 billion. The free fall of rupee, now around Rs 73 to a dollar, along with rising crude oil prices has skyrocketed domestic fuel prices fanning inflation. This will also push up interest rates stunting growth prospects. Though India has had good monsoon for three consecutive years, a glut in farm production has not helped farmers to get remunerative prices. Higher MSP benefits only the rich farmers as they have capacity to hold stocks for a longer period, especially perishables.
World Bank and ADB have forecast India’s growth at 7.3 per cent in 2018-19 and Reserve Bank of India at 7.4 per cent. The rapidly worsening global economic situation has forced a few others to forecast a growth rate of below 7 per cent this financial year. Though India had grown over 10 per cent in market prices and a little over 9 per cent at factor cost for four consecutive years during 2004-08, it could not sustain the momentum due to poor infrastructure and lack of skill development leading to overheating of the economy. Subsequently, the 2008 global crisis pulled down the economy further and India is yet to get back to high growth path. This is despite the fact that the new method of GDP calculation has inflated growth by 1.5-2 per cent.
No country barring China has had high growth for a long period continuously. They achieved at best 8-9 per cent. “One swallow does not make a summer,” former RBI governor Y V Reddy, once said on China’s high growth. He, however, added India can at best achieve a sustainable growth of eight per cent, which is good enough to become a developed country in a decade or so.
Endorsing this viewpoint, Crisil chief economist D K Joshi said his rating agency has forecast that 10 per cent growth is not possible for India given the current global economic scenario. “Our forecasts do not support double-digit growth,” he said adding it can happen in an odd year but certainly not on a sustained basis. On a continuous basis, Joshi said India can grow at 7.5-8 per cent because of the structural reforms carried out by the Modi government.
Renowned international economists Nouriel Roubini and Brunello Rosa in a recent article painted a gloomy picture for the global economy next couple of years. They say by 2020, the conditions will be ripe for a global financial crisis followed by a global recession because United States is running large fiscal deficits and China is pursuing loose fiscal and credit policies. They have also warned that unlike in 2008 financial crisis, governments will lack the policy tools to manage it, indicating the situation would be worse than the 2008 crisis.
If India were to become a $5 trillion economy by 2025 as first announced by Modi at Davos in January, it will have to grow at 10.6 per cent, which, according to NIPFP economist N R Bhanumurthy is certainly overambitious if not impossible. A simple back of the envelope calculation shows that if we were to grow at 7.4 per cent that is projected by RBI this year and that is sustained over the next 7-8 years, then India will reach $5 trillion by 2027 in current prices. Even this 7.4 per cent growth looks difficult this year and with global recession looming large, India might not be able to sustain high GDP growth.
To be a $5 trillion economy by 2022, India will have to grow by at least 14.2 per cent annually for the next 4-5 years, which perhaps no country has achieved so far. Even China has not clocked beyond 12 per cent over a period of a few years. Given the external and domestic condition even 10 per cent growth is difficult in the foreseeable future, Bhanumurthy said, adding $5 trillion certainly looks difficult to achieve even by 2025. India is now one of large open economies and hence the contribution of external sector to growth is around 25 per cent. Given any disturbance in the external situation will knock out 25 per cent of growth, we need to be a little more careful in projecting such GDP numbers, he said.
Also with U S economy not growing beyond 4 per cent in best of times and China, now in the process of cooling down its economy by gradually slowing down growth in the coming years, the chances of India largely depending on foreign trade to boost growth further will be increasingly difficult. To achieve double-digit growth, which is essential to become $5 trillion economy by 2025, India would have to pursue export led growth like China, where 40-45 per cent of GDP was because of exports. India’s former chief statistician Pronab Sen said implying India is far from it at least in foreseeable future.
But several analysts felt government posturing is one thing, the reality is something different. When India grew at over 9 per cent during UPA regime, Global growth was around 5 per cent. Global growth is around 3 per cent now and is expected to slow down after a year or two. So, double-digit growth can at best be a pipe-dream.
The writer is a freelance journalist. Views are personal.