How is the world’s 5th largest economy doing?

Measured in dollar terms, the size of the Indian economy surpassed that of the United Kingdom, as per data from the last quarter of 2021. The calculation uses the current exchange rates between the rupee and British pound respectively, and the U.S. dollar. The GDP data is as per the International Monetary Fund. This makes India now the fifth largest economy in the world, behind the United States, China, Japan and Germany. As per the same data, India’s GDP is 3.2 trillion dollars, now behind 4.2 trillion dollars of Germany. If it grows at 7 percent per annum, and the German economy stands still, then India will overtake Germany in four years. At 5.5 percent growth it will take five years.

The gains of the GDP growth gap are partly undone by a depreciating currency

There is a catch however, even if you assume that the German economy will be at zero growth. That catch is exchange rates. If the rupee dollar rate depreciates faster than the euro dollar exchange rate (since Germany’s currency is the euro), then it becomes harder to overtake Germany quickly. The gains of the GDP growth gap are partly undone by a depreciating currency. If India’s currency gets stronger vis-à-vis the dollar, then of course its economy measured in dollars will grow faster. However, a strong currency may not be in India’s favour, since that may hurt our exports.

If the international comparisons are too sensitive to exchange rates, the World Bank has devised another method, called purchasing power parity. It adjusts exchange rates to reflect the “true” purchasing power of the respective currencies. Thus 80 rupees to the dollar, makes the rupee look too weak. Actually, one dollar in India gets you much more than one dollar in America.

Due to their fast growth rates, and huge population sizes, the two Asian giants will dominate the twenty first century’s economic picture

After applying this correction factor, India’s GDP becomes the third largest in the world, and has been so for at least for five years. And China’s economy in PPP terms is already bigger than America. And due to their fast growth rates, and huge population sizes, the two Asian giants will dominate the twenty first century’s economic picture. This has been well known, and there is a demographic inevitability to it. No wonder the world’s investors are looking at these two large consumer economies (never mind the emerging tech cold war between the West and China).

Hence whether India is ranked fifth or third, and how soon will it attain the magical 5 trillion dollars size is not very interesting, because it will certainly get there. For the past forty years (except for the pandemic years) the average growth rate of India’s economy in real terms is 7 percent, and there has never been a year of contraction (i.e. negative GDP growth) since 1980. Such is the strength of India’s growth process.

If you want to remove the effect of the last two pandemic affected years, you need to compare the GDP data of April to June during 2019. That was 35.67 lakh crore, which means that in three years quarterly GDP has inched up only by 3.3 percent i.e., less than 1.1 percent per year.  This is worrisome.

The pertinent question to ask is how is this economy doing? This means looking at the short term, and examining prospects for output expansion, job creation, inflation control, and fiscal and trade deficit sustainability. When asked about the economy, we can consult data numbers that are trotted out, some daily like the stock market updates, some monthly like the imports and exports or industrial production index, some quarterly, like the GDP and some annually. Last week the National Statistics Office reported that India’s GDP during the April to June quarter was 36.85 lakh crore.

This is the real GDP, stripping out the effect of inflation. This number is 13.5 percent higher than the real GDP for April to June quarter of last year. This high growth rate seemed to call for celebratory chest thumping. However, we need to see this data in its proper perspective. Last year we suffered from a devastating second wave of Covid, which had spread to rural areas, and caused great hardship and large-scale deaths. There were lockdowns and constraints, so business was down. Hence on that low base, 13.5 percent looks good and was in fact expected to be above 15 percent by professional forecasters.

This is a slowing phase, as growth drivers need to pick up along with investment sentiment. There are some hopeful signs such as consistently high GST collection (four months above 1.4 lakh crore), and double-digit growth in the industrial production index for May and June

If you want to remove the effect of the last two pandemic affected years, you need to compare the GDP data of April to June during 2019. That was 35.67 lakh crore, which means that in three years quarterly GDP has inched up only by 3.3 percent i.e., less than 1.1 percent per year.  This is worrisome. Much of this slender growth has been fueled by fiscal expansion, which was of course necessary. Another way of analysing the current data is to look at momentum, i.e., how is GDP accelerating from quarter to quarter? Here too the data does not look promising.

As per a Barclays report, the quarter-on-quarter growth from January-March to April-June was a contraction of 3.3, i.e. negative growth. Of course, some of this could be due to seasonal effects.  But the Jan-March quarter had seen a sequential expansion over the previous quarter which has festival spending like Diwali and Christmas. As if by confirmation, the International Monetary Fund and other analysts like Crisil have revised their growth forecasts downward for India, which will of course remain the fastest growing large economy in the world. This is in sharp contrast to the recession in both America and Europe, and slowdown in China. India’s fate is affected by what is happening globally.

The stock markets too are reflecting the sentiment and bracing themselves for some correction

The Reserve Bank of India too is concerned that India is entering a phase of high inflation coupled with weakening economy. Their forecast is for a 4 percent growth in the last quarter of this fiscal year. And the rate tightening tight monetary policy is a further growth dampener, but unavoidable in light of inflation. The stock markets too are reflecting the sentiment and bracing themselves for some correction.

So, the assessment for the fifth largest economy is that this is a slowing phase, as growth drivers need to pick up along with investment sentiment. There are some hopeful signs such as consistently high GST collection (four months above 1.4 lakh crore), and double-digit growth in the industrial production index for May and June. Even bank credit growth as per the data this August is the highest in 11 years and keeping pace ahead of bank deposits. That includes housing and retails loans too. There is thus, as always, a case for cautious optimism in the medium term.

(Dr.Ajit Ranade is a noted economist)

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