After nose-diving to a five-year low of 6.7% in 2017-18, India’s GDP growth is projected to grow at over 7% in 2018-19. Most of the GDP growth projections by international development bodies and domestic analysts are showing a sharp rise in GDP in 2018-19 followed by an equally if not higher, growth next year.
Higher GDP growth projections
India’s GDP is expected to grow at 7.3% in 2018-19 and 7.5% in the following two years, the World Bank has forecast recently, attributing it to an upswing in consumption and investment. The bank said India will continue to be the fastest growing major economy in the world.
In its latest World Economic Review, the International Monetary Fund (IMF) earlier had predicted India’s GDP to increase by 7.3% in 2018-19 and by 7.4% next year. Moody’s Investors Services in its Global Macro Outlook 2019-20 has predicted India’s GDP to grow 7.4% in 2018 -19.
Back home, the industry body CII has observed that despite external vulnerabilities arising out of rising oil prices, trade wars between major global trading partners and monetary tightening by the US in 2018, India stood out as the world’s fastest growing major economy and will grow in the range of 7.5%.
The RBI has retained its GDP forecast at 7.4% for 2018-19 and expects the growth to speed up further to 7.5% in the first half of 2019-20, driven by acceleration in investment activity. The government’s own growth projection is however, a little lower. According to the first advance estimates of GDP, released by CSO early this month, GDP would grow by 7.2% in the current year.
These are good news for India, especially, since the growth projections for major countries have been cut by both the World Bank and the IMF. The World Bank has downsized its forecast for the global economy following a slowdown in trade growth, investment and rising interest rates, especially in emerging markets. China’s GDP is projected to grow at 6.6% and 6.2% in 2018 and 2019 respectively. The global GDP growth is projected at 2.9% this year – down from 3% in 2018 and a reduction of 0.1% point from the World Bank’s forecast in June.
Factors to help boost GDP growth
If the impact of demonetisation and the implementation of GST impacted economic activities negatively, particularly that of the unorganised sector, and had brought down the GDP growth rate in 2017-18, the near neutralisation of these factors is expected to boost the economy in 2018-19.
To add to it, moves by the GST council to reduce rates of a number of items and increase the exemption limit of GST would help the small and medium businesses. GST council has reduced rates on 23 items from 28% to 5%. On some items, tax is now nil.
Service providers and suppliers of both goods and services up to a turnover of Rs. 50 lakh would be eligible to opt GST composition scheme and pay a tax of 6%. The council has increased the GST exemption limit to Rs. 20 lakh from Rs. 10 lakh for the north eastern states and Rs. 40 lakh, from Rs. 20 lakh, for the rest of the country.
Another significant development has been the steady fall in retail inflation. Retail inflation plunged to a 17-month low of 2.33% in November, 2018 against 4.88% in the same month a year ago. Retail inflation, which is calculated on the consumer price index, is a key input for the RBI to decide on its monetary policy. A steady fall in retail inflation is expected to induce the RBI to cut its policy rates in the coming months, easing out the borrowing cost.
Bottlenecks to growth
This will, however, be a tall task for India since after growing at an almost four-year high of 8.2% in the first quarter of the current year, the GVA growth slowed down to 7.1% in the second quarter. The growth in the second quarter was below that of RBI’s estimate of 7.4%. Almost all major sectors of the economy saw a moderation in growth. The GVA by mining, manufacturing and construction grew at a slower pace in the second quarter as compared to the previous quarter. That is, to achieve a 7.3% growth for the full year of 2018-19, the economy has to outperform its previous quarter’s performance handsomely.
Much of this will depend on the performance of agriculture. According to the advance estimates the GVA of agriculture is expected to grow at 3.8% in the current year – up from 3.4% last year. The manufacturing GVA is projected to grow by 8.3% in the current year against 5.7% in the previous year. Incidentally, the manufacturing output has grown 5.6% during the first seven months of the current year, between April and October 2018.
Even the performance of the eight key industries so far has been indifferent. After growing at over 7% for two consecutive months in June and July, the growth rate decelerated to about 4% in the next three months. In November 2018, the growth rate has plunged to 3.5%. This is disturbing, for the key sector’s growth, which includes steel, cement, fertilizers, oil and electricity is indicative of future industrial activity. In fact, factory production took a breath in December as the Manufacturing Purchasing Managers’ Index (PMI) slowed down to 53.2 in as against 54 in November.
On the external front, India’s current account deficit in July-September 2018 hit 2.9% of gross domestic product or $19.1 billion, the highest since April-June quarter of 2013. In July-September 2017, the current account deficit was $6.9 billion or 1.1% of GDP, RBI data showed. However, the current account deficit is likely to fall due to a sharp drop in crude prices that will take pressure off a depreciating rupee, analysts said. However, the oil prices have started rising of late putting pressure on rupee value and by turn, on current account deficit.
India’s obsessions with GDP figure
That India’s GDP is projected to grow at a higher rate is good news but the prospect of higher GDP growth tells only a part of the story. Maybe India will see higher GDP growth in 2019. But the question is: Does higher GDP growth benefit the Indian masses equally?
Every democratic government faces this dilemma at some stage of the development process. The supporters of both higher growth and better distribution have their own logic. Supporters of higher GDP growth argue that unless the wealth is enhanced the distributive benefits would end up in trivial numbers. Those supporting better distribution first, suggest that unless the distribution of wealth is given priority, the gains of higher economic growth would go to a few hands distorting the income distribution equation further.
India has always taken the middle path. It has given priority to boost GDP growth but at the same time, has initiated different development schemes to augment the income of the economically deprived population and to make them participants in the growth process.
Rapid pace of growth is unquestionably necessary for substantial poverty reduction, but for this growth to be sustainable in the long run, it should be broad-based across sectors, and inclusive of the large part of the country’s labour force, World Bank advocated.
Whether higher GDP growth reduces poverty is a controversial issue. It was generally believed that benefits of economic growth would trickle down to the poor and thus alleviate poverty. This trickle-down effect of economic growth was thought to operate through an increase in employment opportunities and rise in real wages as a result of increase in productivity of workers.
But this has not happened. Higher output generation has not translated into higher employment generation. Government’s own statistics show that fewer new jobs were created in the post-2014 years. In 2015, a year after Modi took charge; some 1.35 lakh new jobs were created in India. It was the lowest in seven years, very much lower than 4.19 lakh new jobs created in 2013 and as many as 11 lakh two years ago, in 2011. The situation has not changed much in later years. During the first nine months of 2016 only 2.31 lakh new jobs were created.
Plight of farmers
If job creation in the organised sector has faltered, the rural sector, where the larger part of India’s workers is engaged, too has failed to translate Modi’s rhetoric. Calling for converting farmer’s challenges into opportunities, Prime Minister Narendra Modi had urged giving priority to implement the ‘roadmap’ for boosting the agriculture sector with a target of doubling the income of the farmers by 2022. But there has been little improvement in farmers’ earnings so far.
The current problem faced by farmers is essentially agricultural distress and not a generalised rural distress, and farmers’ distress is largely emanating from shrinking agricultural margins.
Government, as promised in the Budget, has raised MSP for kharif crops. The demand of farmers, based on the Swaminathan committee recommendations, was MSP at 1.5 times of the C2 cost (total cost including imputed cost). But what has been announced is 1.5 times the A2+FL cost (paid out cost plus family labour cost). And thus, this will ease only a part of the farmers’ problem.
Despite leading the world’s GDP growth chart, India is home to the largest number of hungry people. India has witnessed high economic growth in the past two decades.
GDP has grown 4.5 times and per capita consumption by three times and food grains production has doubled during this period. However, despite phenomenal industrial and economic growth and sufficient availability of food to feed its population, it is unable to provide access to food to a large number of people, especially women and children.
India ranked in the 103rd position – behind Bangladesh and Nepal – among 119 countries on Global Hunger Index (GHI) 2018 prepared by Washington-based International Policy Research Institute (IPRI). India has slipped three positions this year.
But if India’s GHI ranking has worsened, the number of billionaires or the super-rich has gone on rising signifying that higher GDP growth itself will not improve ‘ease of living’ index for the common people, let alone ‘sabka vikas’. India is now home to world’s fourth largest number of billionaires with more than 100 super rich living here, according to the 2017 list of world billionaire of Forbes magazine.
This apparently inconsistent existence of affluence and poverty at the same time is reflected in the poor ranking of India in the Inclusive Development Index. India is ranked at the 62nd place among the emerging economies on the World Economic Forum’s Inclusive Development Index, two points below its previous year’s ranking of 60. India is way behind China and Pakistan.