How’s the world’s new 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 the British pound, respectively, and the US 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, now behind Germany’s $4.2 trillion.

If India grows at 7 per cent per annum, and the German economy stands still, then India will overtake Germany in four years. At 5.5 per cent growth, it will take five years. 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’ (PPP). It adjusts exchange rates to reflect the “true” purchasing power of the respective currencies. Thus 80 rupees to the dollar makes the rupee look weak.

Actually, one dollar in India gets you much more than one dollar in America. After applying this correction, India’s GDP becomes the third largest in the world, and has been so for at least five years. Similarly, China’s economy in PPP terms is already bigger than America’s. And due to their fast growth rates and huge population sizes, the two Asian giants will dominate the 21st century’s economic picture. This has been well known since at least 20 years, 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 it will attain the magical $5 trillion GDP size is not very interesting, because it will certainly get there. For the past 40 years (except for the pandemic years), the average growth rate of India’s economy in real terms is 7 per cent, and there has never been a year of contraction (i.e., negative GDP growth) since 1980, except in 2020-21. Such is the strength of India’s growth process.

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 Rs 36.85 lakh crore. This is the real GDP, stripping out the effect of inflation. This number is 13.5 per cent higher than the real GDP for the 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 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 per cent looks good, though in fact it was expected to be above 15 per cent by professional forecasters.

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 Rs 35.67 lakh crore, which means that in three years, quarterly GDP has inched up only by 3.3 per cent, i.e., less than 1.1 per cent per year. This is worrisome. Much of this slender growth has been fuelled 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 per cent, 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 had festival spending like Deepavali and Christmas. As if by confirmation, the IMF, and other analysts like Crisil, have revised their growth forecasts downward for India, which will nonetheless still 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 Reserve Bank of India, too, is concerned that India is entering a phase of high inflation coupled with weakening economy.

The RBI’s forecast is a 4 per cent growth in the last quarter of this fiscal year. And the rate tightening 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 Rs 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 retail loans, too. There is thus, as always, a case for cautious optimism in the medium term.

(The writer is a noted economist) (Syndicate: The Billion Press)