Modinomics fails to buck the trend
Pulapre Balakrishnan and M. Parameswaran
There has been intense focus on India’s growth performance of late. First, on the occasion of the Delhi meetings of the G-20, the government announced that it was the world’s fastest growing major economy. It was met with a challenge from an independent economist on grounds that the government had relied on the income method of estimating GDP, and were the expenditure method to be used instead the observed growth rate would be lower. To this the Finance Ministry responded that the Government of India had been consistent in using GDP estimated by the income method throughout. This is correct. However, it may be noted that the contestation had been over economic performance in a single quarter, namely the first quarter of the current financial year. Soon after this exchange, Arvind Subramanian and Josh Felman investigated whether India’s growth rate is accelerating or decelerating after the COVID-19 year of 2020-21. They concluded that “after a strong recovery there has been a significant ebbing of dynamism over the last three quarters” (‘Business Standard’, September 14). The former Chief Economic Advisor and his co-author may well be right, but both the government and those challenging its narrative are focused on very short phases of growth. This can result in mistaking the cycle - a temporary fluctuation - for the trend, which is the long-term tendency.
Statistical considerations apart, right now there are good reasons for looking at a slice of time longer than a few quarters when studying economic growth in India. We are edging towards the general elections, which must be concluded by May 2024. A major issue in this election would be the impact the incumbent party has had in managing the economy. Though only one aspect of economic performance, the growth of GDP has become the main focus of attention. This shift in focus has been led by the Modi government itself. So, it should be open to an evaluation of its performance based on this indicator.
To ascertain the impact on the economy of the present government we investigate whether it has been able to raise its underlying rate of growth, termed the ‘trend’. As part of this, we study GDP growth from 1950 to the present. This enables us to see recent growth in relation to what has been achieved in the past. Also, we adopt a statistical procedure that identifies changes in the underlying rate of growth. And, what do we find? Studying growth upto the year 2019-20, which is the pre-COVID year, we find that the last time the growth rate increased in India was in 2000. The conclusion from this must be that the Modi government has not had success in raising the rate of growth of India’s economy while in office. This does not mean that the promised “achche din” have not come, for there has been growth of income per capita, but this government has not been able to quicken the pace at which they have been coming our way for decades. The finding does not surprise, for in the six years upto the COVID-19 pandemic the growth rate had slowed sequentially in three, immediately upon the demonetisation of 2016. As no major exogenous shock struck the economy in this period, it must be concluded that it is the demonetisation that caused the slowing.
The reason for our terminating our study at 2019-20 was that the COVID-19 epidemic which broke soon after was a shock external to the economy, caused as it was by natural factors. We want to exclude from our analysis any impact on GDP that was not under the control of the government. But what of the recovery since, for which the government takes credit? There is a way of assessing this claim. We may forecast GDP in the years after COVID-19 by projecting forward the growth rate achieved prior to 2019-20, and see how actual outcomes compare to these projections. So, we forecast the GDP in 2022-23 by extending the average annual growth rate of 6.5 percent achieved for the period 2000-01 to 2019-20. We found that actual GDP in 2022-23 is 11.1 percent less than predicted. So, the recovery from the pandemic may well have been ‘V-shaped’ but till last year GDP was yet below trend, so to speak. (All details of our study are available from us upon request.)
Finally, though focusing on GDP growth after the pandemic may show the Indian economy in a relatively good light compared to other major economies, it misses a crucial aspect of economic management during the present government’s term in office. This is how the economy performed during the COVID year of 2020-21. In that year, most BRICS countries and the US contracted less than India did. All these countries had also adopted a stronger macroeconomic stimulus. The stimulus adopted by the government of India then was astonishingly small. The contraction of GDP during the pandemic in India is very most related to that dogmatic refusal to stimulate the economy when needed. It accounts for the corresponding recovery that followed in 2021-22. In effect, that growth partly reflects the re-starting of production after the lifting of a very stringent lockdown, rather than an independent economic response to smart policy, which is how it is presented. Having left the economy to shift for itself for much of its tenure, recently Modinomics has swiveled to addressing growth frontally. Perhaps having realised that it has not had much success in stimulating private investment, the government has, over the last two budgets, hiked capital spending at historically high rates. The ideal of ‘minimum government’ seems to have been shelved in election season.
Pulapre Balakrishnan is an economist; M. Parameswaran is Associate Professor, Centre for Development Studies, Thiruvananthapuram