Revelers watch a firework during Diwali celebrations in Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Can We Celebrate High GDP Growth Alone?

An exercise by a committee of the National Statistical Commission to provide back-data on a new GDP series adopted by India in 2015 has found itself in political crosshairs.

An extension of the new series data till 1994-95 showed that the India economy had grown in double digits twice in recent years—2010-11 and 2007-08. In both these years, the United Progressive Alliance (UPA) was in power. Now in opposition, UPA representatives claimed that it must get due-credit for overseeing a high growth phase in the economy. The ruling National Democratic Alliance responded by saying that the data is not ‘official’ yet.

While the political-economy debate drags on, economists say that looking at growth in isolation is not the best way to judge the health of the economy.

The 2010-11 Period

The years following the global financial crisis are a case in point.

Going by the new series, GDP growth (in constant prices/market prices) was at 10.78 percent in 2010-11. However, a look at other macroeconomic variables in the same year shows that the economy was also plagued by high inflation in this period.

The fiscal and monetary stimulus provided after the global financial crisis of 2008-09, led to considerable imbalances in the economy. The twin deficits soared and inflation jumped. The IMF’s average consumer inflation indicator has been used for the analysis since India has seen changes in its CPI and WPI indices over this period of time.

“The fiscal stimulus did push up the growth rate to 10.8 percent in FY11 from 4.2 percent in FY09 but it did not sustain for long with a jump in inflation,” noted Soumya Kanti Ghosh, chief economic adviser at State Bank of India in a report on Monday.

Arvind Virmani, former chief economic adviser to the Government of India said that it is important to distinguish between ‘sustainable growth’ and bubbles.” While referring to the high growth of 2010-11, Virmani, who was chief economic adviser till 2009, said this was a consequence of the stimulus that had been given to the economy post the financial crisis. The stimulus should have been withdrawn once growth hit 7.5-8 percent but was not. This not only led to high growth but also high inflation and wide twin-deficits, Virmani argued.

Can We Celebrate High GDP Growth Alone?

Watch the video below to understand the broader macroeconomic conditions in high growth years:

The 2007-08 Period

The Indian economy also showed double digit growth in 2007-08, a year before the global financial crisis hit.

To be sure, this was a period when the twin deficits were more stable than in the 2010-11 period. However, inflation was high at above 9 percent. This was also a period of high global growth. According the projections made by the IMF in January 2008, global growth was projected at 4.9 percent in 2007 and 4.1 percent in 2008.

According to Bank of America-Merrill Lynch, the back-data reiterates the importance of global growth for India.

Growth rose from an average of 5.7 percent in NDA-1 to 8.5 percent in the first four years of UPA-1 on global tail winds, fell to 4.2 percent on the ‎global headwind of the Great Financial Crisis and recovered to 7.4 percent during UPA-2 (excluding the FY10 base effect) and 7.3 percent in the current Modi-led NDA-2 regime.
Indranil Sen Gupta, Economist, Bank of America-Merrill Lynch

Virmani also pointed out that while looking at growth in any particular year, it is also important to keep in mind reforms that may have been implemented in previous years.

“I look at reforms and the connection of reforms to growth. I call it the ‘J-curve’ of reforms, growth and productivity. If you have major reforms, there is always a lag to the impact of reforms on growth,” Virmani said.

Can We Celebrate High GDP Growth Alone?

The Current Economic Conditions

Apart from looking at past growth rates, the availability of a back-dated GDP series also allows economists to get a better handle on the potential growth rate for the Indian economy.

Earlier this month, the IMF, in its assessment of the Indian economy, said that the economy’s potential growth rate was at 7.3 percent in 2017-18 and is expected to rise to 7.75 percent in the coming years.

Based on the new data, Bank of America-Merrill Lynch estimates India’s potential growth rate to be closer to 8 percent. This slack in the economy backs our call of preferring consumption over investment, said the research house.

Can We Celebrate High GDP Growth Alone?

Former chief economic adviser Arvind Virmani shares his view on the new GDP data in this interview: