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This is a complicated question. No one data point can give the complete picture. For example, merely looking at the annual Gross Domestic Product (GDP), which is the total market value of all finished goods and services, provides only limited understanding. That’s because if the prices go up by 10 per cent across the board (without any additional goods or services being produced), the GDP, too, can go up by 10 per cent.
As such, one has to look at a broad set of variables that provide an understanding of what happened to the income levels of an average Indian, what has happened to employment levels, what has happened to inflation, what happened to levels of poverty and inequality, have people’s health parameters improved, is the financial system (read: banks) healthier, is the economy transforming in a desirable manner (from being predominantly agrarian to manufacturing and services), so on and so forth.
But even such an analysis may not be enough. That’s because while there is merit in looking at an economy in isolation and comparing it to where it was say a decade ago, one must also evaluate the economy in a broader context — that is, compare it to where it stands relative to other (preferably comparable) economies.
When evaluating an economy relative to the rest of the world, the above-mentioned questions also change accordingly. For instance, one might not be satisfied by knowing if India’s GDP or per capita GDP have grown or not but how they compare with that of our neighbouring countries, be it Pakistan, China or Bangladesh.
An additional factor in an economy’s evaluation is the government’s agenda for economic reforms; often existing standalone variables fail to capture the potential of an economy — especially if it is a developing economy such as India — if one ignores whether reforms are being undertaken to fuel the next round of economic growth.
Looking at the following variables, and from both these points of view, will help readers form a fuller, more nuanced understanding of the current state of India’s economy and how it is positioned for the future. This is of course not an exhaustive list.
- GDP
- GDP per capita
- Inflation
- Employment & structural transformation of the economy
- Poverty and Inequality
- Financial Stability
- Dollar exchange rate and Forex
- Reforms
GDP — absolute level and growth rate
According to the last official estimates of GDP released on February 28, the absolute level of India’s GDP at the end of March 2023 was pegged at Rs 159 lakh crore. India’s GDP at the end of March 2014, just before this government took charge, was Rs 9.8 lakh crore. That means India’s GDP has grown by 63% over the past nine years since Prime Minister Modi took office. To see this growth in historical context, in the immediately preceding nine years (2005 to 2014), India’s absolute GDP grew by 97%.
In terms of annual GDP growth rates, the nine-year period can be neatly divided into three distinct phases.
India’s GDP grew at around 8% every year for the initial three years (FY15 to FY17). But after that its growth rate decelerated sharply over the next three years (FY18 to FY20), falling to below 4% in FY20. In the past three years (FY21 to FY23), the GDP growth rate first contracted by over 6% thanks to the Covid pandemic in FY21 and then, thanks in part to a much lower base, grew by almost 9% and 7%, respectively, in FY22 and FY23. These spectacular growth rates, especially as many of the comparable economies struggled with low growth and recession, made India regain its status as the fastest-growth major economy.
As the low base effect wears off things stand, India’s growth rate is expected to moderate to anywhere between 5.5% to 6.5% in the current financial year.
Income level of an average Indian
In 2013-14, per capita GDP (read average incomes) was Rs 78,348, and at the end of 2022-23, it had risen to Rs 1,15,490. This means that as against a growth of 63% in the overall GDP, income of an average Indian went up by 47% in the past 9 years. This is based on RBI data and based on constant prices (that is, after taking away the effect of inflation).
To get internationally and historically comparable figures, one can use IMF’s data using current US dollars.
As CHART 1 below shows, India’s estimated per capita income in 2023 is around $2,600. Crucially India has just overtaken Bangladesh, thanks to a dip in the fortunes of that economy in the wake of the war in Ukraine. Bangladesh had overtaken India in this crucial metric in 2019. However, it is also important to note that the IMF projects Bangladesh to retake the lead and be considerably ahead in the next five years.
China at $13,720, United Kingdom at $46,370, Brazil at $9,670 and Indonesia at $5,020 provide some context of where India stands at present.
Historically, the IMF data shows that India’s per capita income grew by 67% between 2014 and 2023 and by 145% between 2004 and 2014.
Inflation
India had been facing persistently high (double-digit) inflation months and years leading up to the BJP taking over in 2014. A big part of the problem was the high price of crude oil. As crude oil prices crashed — from over $90 a barrel to less than $30 a barrel — between mid-2013 to early-2016, domestic inflation also subsided.
As CHART 2 shows, barring the last four years — when retail inflation has been uncomfortably high even by RBI’s standards — inflation has been well controlled. Crucially, for the current financial year, inflation is expected to fall close to the RBI’s target of 4%.
Employment & structural transformation of the economy
For the longest time, India had the world’s second-largest population. Today, it has even overtaken China. For such an economy, job creation has always been even more important than just increasing the overall GDP. That’s because that is how such economies can reduce widespread poverty in a sustainable manner.
It is in this context that economies are expected to bring about a structural transformation whereby more and more people move away from predominantly agrarian work (which often pays little) and move to more productive and better-paying sectors such as manufacturing and services.
The BJP government has been trying its best to bring about the structural transformation — be it in the form of the now repealed farm laws or the policies like Make in India and Production-Linked Incentives (PLI) that aim to increase India’s manufacturing capacity while using this chance to soak up excess labour from the farm sector.
However, India continues to face considerable employment-related stress. In 2017-18, according to the government’s own data, unemployment levels had risen to a 45-year high. Further, even elevated levels of unemployment do not adequately capture India’s unemployment woes because the proportion of people seeking (or demanding) work itself has been coming down. As such, despite the population continuing to increase, the employment rate (the total number of people with a job as a proportion of all the working-age people in the country) has fallen sharply.
TABLE 1 uses data from CMIE’s (Centre for Monitoring Indian Economy) to look at how many people are employed in different sectors of the economy. The standout statistic here is the sharp fall in the number of people employed in manufacturing. In 2016-17, 51.3 million people worked in India’s manufacturing sector. As the economy slowed down, this number fell sharply from 2017 onwards. At the end of March 2023 it stands at 35.6 million — 31% fewer than 2016-17.
Poverty and Inequality
The last official estimates of poverty go all the way back to 2011. There have been several attempts by individual researchers to assess poverty levels in India. Depending on the methodology, these estimates vary and are not comparable.
However, according to the World Bank’s latest poverty report, published in October last year, two things stand out:
1. As a country, India has the most number of people still living in abject poverty. According to World Bank’s data, as of 2019, as many as 137 million Indians were living at Rs 46 per day and as many as 612 million were living at Rs 78 per day (See CHART 3; in purchasing power parity terms $1 equals Rs 21.30).
2. Covid made matters worse; poverty numbers went up from anywhere between 23 million to 56 million in 2020.
On inequality, the World Inequality Report 2022 pegs India as one of the most unequal countries in the world. It states that the incomes of the top 10% of India’s population are 22 times that of the incomes of the bottom 50%. The divergence has increased since the early 1990s as the economy liberalised.
Financial Stability
When the BJP government took office, there were two main stumbling blocks facing the economy. One, Indian companies were over-leveraged (read heavily indebted) and two, Indian banks were saddled with a growing pile of non-performing assets (NPAs or loans that were not getting paid back). Together, these two factors held back new investments in the economy. In both these matters, the BJP government has succeeded remarkably.
As CHART 4, 5 and 6 show, corporate leverage is at a 15-year low, banks have reduced their NPAs and their capital adequacy ratio (a key measure of their financial health) is close to an all-time high. Not surprisingly, the announcements of new projects have started to trend upwards.
Exchange Rate
Since bulk of India’s trade with the rest of the world happens in US dollars, Rupee’s exchange rate against the dollar often captures the realities of India’s trade performance and its ability to attract foreign investors. To be sure, India’s exchange rate weakens (more rupees required to buy a single dollar) if we import more than we export and vice versa. Similarly, it strengthens if we attract more foreign investments and vice versa.
CHART 7 shows the path of rupee-dollar exchange rate over the years. To be sure, a sustained weakening of the rupee is not necessarily a bad thing for a developing economy such as India.
Economic reforms
The BJP government under Prime Minister Modi has unleashed a whole host of economic reforms in these nine years. Many of these were stuck for decades thanks to the compulsions of a coalition government. In 2014, Modi led the first government since economic reforms were initiated in 1991 that had a single party majority. This meant the government could follow through with its economic agenda without the fear of being pulled down before the regular term. The Modi government has made full use of its majority to finally legislate long-pending economic reforms such as:
- The Goods and Services Tax (which aimed at simplifying indirect taxation)
- The Insolvency and Bankruptcy Code (which aimed at making the process of insolvency quicker and more efficient)
- Aadhaar (which not only provided a unique identity to each resident in India but also enabled a framework around which services, especially financial ones, could be provided directly to the intended beneficiaries)
- Digital transformation: the government has led the charge on making India a vibrant and robust digital economy. This essentially includes increasing availability of high-speed internet to more and more citizens and using that platform to empower them so that they can access services and facilities both from the government (such as direct cash transfers) and the private sector (such as UPI)
- Disinvestment of public sector undertakings: the successful sale of loss-making Air India, which had been stuck for the better part of two-decades, underscored this government’s commitment to moving out of those PSUs which are either loss-making or where the government can afford to stay away
- Corporate tax cut: it had long been argued that India needs to cut tax on firms in order to boost private sector investments and in 2019, the government brought about a historic cut
- Capital expenditure: In the past, governments focussed more on revenue (read daily like salaries) expenditures and very little on capital expenditure (one that boosts the productive capacity of an economy, like roads). In the last three Budgets, the government has successively ramped up its capital expenditure — Rs 10 lakh crore for the current year — often by reducing revenue expenditure so that fiscal deficit does not worsen.
Upshot
When the BJP took charge in 2014, India’s economy was classified as one of the fragile five. There were many reasons why. In the wake of the Global Financial Crisis and its aftermath, domestic inflation was persistently high, while growth had lost its momentum. Further, rupee’s exchange rate was getting increasingly weak, banks were saddled with NPAs and firms were over leveraged. Moreover, there were many reforms (GST, Aadhaar etc.) that the previous governments had worked towards but failed to clinch the issue.
After nine years, and in a global context where many big economies are struggling to grow, India’s growth rate has made it shine like a bright spot. It has regained its status as the fastest-growing major economy. However, internally, there’s lots of ground to cover. Creating more jobs and making Indians more employable (through skilling) as well as raising per capita incomes are the key metrics to target in the future.
Until next time,
Udit
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