Context

Setting aside the gloomy projections based on short-term economic trends, the long-term and comparative evidence reveal interesting trends about the health of the Indian economy.

Performance of the Indian economy after 1991

• Higher growth plateau reached after 1991: After the 1991 economic reforms, the Indian economy reached a higher growth plateau of 7% compared to a prior rate of 3. 85%.
  • The high growth rate during 2003-2011: India witnessed a high growth momentum during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05) or 7% (base 2011-12).
  • Ups and downs after 2012: The momentum lost steam in 2011-12 and 2012-13, gradually picked up again gradually to reach the 8% mark in 2015-16, and then started falling consistently to reach 6.63% in 2018-19.
  • Structural dimension? This trend suggests that India’s current growth challenge has a structural dimension as it began in 2011-12.
• Comparison with China and the world
  • Average at 7.07% after 2011-12: Despite these fluctuations from 2011-12, on average, India clocked a growth rate of  7.07% from 2011 to 2019, a decent figure compared to China’s and the world’s economic growth rates.
  • Whereas like India, the growth of the world economy was fluctuating since 2011, China’s growth declined consistently from 10.64% in 2010 to 6.60% in 2018.

Why couldn’t India’s growth momentum be sustained after 2010-11?

• Analysis of five variables: To answer the above question, an in-depth analysis of trends in five key macroeconomic variables was done for two different periods: 2003-04 to 2010-11 and 2011-12 to 2018-19.
  • Consumption.
  • Investment.
  • Savings.
  • Exports.
  • Net foreign direct investment (NFDI) inflows.
• What emerged from the analysis: The results reveal that compared to 2003-2011, investment and savings rates and exports-GDP ratio declined in the 2011-2019 period.
  • How much the investment declined? The investment rate declined from 34.31% of GDP in 2011-12 to 29.30% in 2018-19.
  • Household vs. corporate sector decline: The investment decline was caused mainly by the household sector and to some extent by the public sector, but not the corporate sector.
  • The decline in investment compensated by NFDI: The slump in the domestic investment rate in the 2011-2019 period was compensated by increased NFDI inflows.
  • On average, NFDI inflow was 1.31% of GDP during 2011-2019 compared to 0.89% during 2003-2011.

Why tax-cut not help the economy

• The justified policy of reviving the housing sector: The decline in household sector investment justifies the package of measures introduced by the Central government to revive the housing sector.
• Why corporate tax cut won’t help much? The questionable policy, however, is the steep cut in the corporate income tax rate from 30% to 22%, aimed at boosting private investment.
  • Given that the corporate investment rate has not eroded severely during 2011-2019, the tax cut would help economic revival.
  • Lost opportunity to spur rural consumption: A part of the largesse offered to Corporate India could have been used to spur rural consumption.

What the decline in saving rate mean?

• Importance of savings: The savings rate declined almost consistently from 27% of GDP to 30.51% between 2011 and 2018.
  • This was also caused by a significant fall in the savings of the household sector in financial assets. Corporate savings did not fall.
  • Why the fall in household financial savings needs to be increased? The fall in household financial savings is alarming and needs to be arrested.
  • Savings are required to meet the requirements of those who want to borrow for their investment needs.
  • Saving-investment relation: Lower household savings imply lesser funds available in the domestic market for investment spending.
• Economic growth powered by consumption: The decline in household savings has pushed up private final consumption expenditure consistently
  • Private final consumption rose from 56.21% of GDP in 2011-12 to 59.39% in 2018-19.
  • Consumption driven economic growth in 2011-19: The increase in private consumption suggests that economic growth during 2011-2019 was powered by consumption, not investment.
  • Investment driven growth during 2003-2011: In contrast, during 2003-2011, growth was powered by investments.
• So, declining saving rate means a slowdown in the economy may not be due to structural issues.
  • Re-examination of popular view: Thus, the popular view that economic slowdown was caused due to a slowdown in consumption demand needs to be re-examined.
  • There is no concrete evidence to suggest that the economy is facing a structural consumption slowdown.

Export-GDP ratio decline and what it means

• Export-GDP decline from 24.54% to 19.74%: India’s exports-GDP ratio declined from 24.54% to 19.74% during 2011-2019.
• A trend similar to the rest of the world: The decline started from 2014-15, coinciding with a similar trend in the world export-GDP ratio.
  • However, the drop in India’s exports was significantly larger than the world, a cause for concern.
  • The exports- and NFDI-GDP ratio has deteriorated sharply and consistently in China after 2006.
• Indian economy doing better than China: Sharp decline in China’s export-GDP and NFDI-GDP, together with the consistent fall in China’s GDP growth after 2010, proves that the Indian economy is doing better than China.

Conclusion

The popular view that the slowdown in the Indian economy is due to the structural problems needs a re-examination in the view of the decline in investment in tandem with the world.

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