What is your perspective on the 13.5% GDP growth figure for Q1 and all of the commentary that has come in since? People are pointing out that the 13.5% or the double digit number is because of a base effect and is lower than the RBI forecast of about 16%?
Let me make two key points on this GDP growth numbers. Firstly, to take into account the argument that this is driven by base effects, let us look at the growth rate over a three-year horizon and let us do that in a cross country perspective, because the entire globe has suffered from first Covid crisis and then Ukraine. Therefore, a comparative perspective is extremely important.
If we look at the GDP for Q1 2022 vis-à-vid Q1 of 2019, then among the top 10 economies for which we have the data, currently India is by far the highest at 3.83% growth over a three-year horizon. The United States has had a growth of 3.78%, marginally lower than that of India but keep that together with the fact that the United States is now having unprecedented inflation – 9.1% in July and now they are expecting a print of 8.5% even at 8%. That inflation was 400% higher than average.
In contrast, India’s inflation is trending sharply downwards. We are having a three-year growth rate that is higher despite the fact that the United States printed money like there is no tomorrow and that is being seen in inflation. Now let us also look at other countries. I am going to mention these countries in descending order of their growth rates. Canada at 2.6% over a three- year horizon, UK 1.06%, France 0.7%, Italy 0.2%, Germany 0.1%, and Japan minus 1.3%. These are the top 10 economies. Compared to them, India at 3.8% with a much lower inflation, stands out very well and that is point number one.
Let us look at the second point which is analyse the components of the GDP. We know very well that GDP comprises consumption, investment, and exports and imports and of course government expenditure as well. What is really important to look at is that the parts of the GDP reflect the strength of the economy and includes consumption, investment and exports. Imports are demand which are catered to by other countries.
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If we look at the GDP components, consumption has grown at 26% year on year. Investment has grown at 20.1% year on year and exports have grown at 14.7% year on year. Let us look at these from a three-year perspective.
Consumption has grown at 9.1% over a three-year horizon, investment at 5.5% and exports at 19.6%. Exports are up almost 20% compared to the pre-Covid numbers. If you look at the combination of these three, which is consumption plus investment plus exports compared to last three years back we are at 9% higher and just compared to last year we are at 22% higher. Part of the lower number is because imports have grown at almost 38% and government spending has grown at only 1.3%. That is an aspect the government absolutely needs to focus on.
The government spending is growing only 1.3% year on year. This is the second point. The aspects of the economy which are reflective of the strength of the economy – consumption, investment and exports – have grown very well even over a three-year period and certainly on a year-on-year basis.
Let me just conclude this part of the comment by saying that if imports had grown at the rate of exports and if government spending had grown at the rate of the other items, the actual growth would have been 20% and not 13.5%. That is reflective of the strength of the economy even on a cross country basis and fundamentally, this is a very good growth print. We should stop this practice of always focussing on the glass half empty.
Why then do you think that a slew of agencies like Moody’s, Citi have downgraded the annual forecast? One of the concerns they have mentioned is the impact of rising interest rates on demand and consumption going forward. Do you share those concerns?
I cannot speak for others but I always like examining it very rigorously, Components like consumption, investment and exports are reflective of the strength of the economy and in my opinion, many of these assessments are overblown on the negative side.
If you take the impact of interest rates on demand, oftentimes, commentary does not make a difference between the impact on consumption demand and the impact on investment demand. When you look at impact on consumption demand, it is only consumer durables and real estate or personal housing, which are the only two items of consumption that change, based on interest rates because in India people do not borrow to eat, people do not borrow to go on a vacation; people borrow may be to buy a two-wheeler or a car, a fridge or a house. These are the only aspects of consumption that are impacted by interest rates.
If you look at the proportion of consumption that is accounted for by these durables and housing, it is a very insignificant proportion. I think this kind of granular analysis looking at what aspect of consumption is indeed going to be impacted by interest rates is missing in a lot of the commentary and that is why you find a lot of wishy-washy comments on this.
Investment definitely gets impacted by higher interest rates because not only is investment done by borrowing, also a lot of promoters pledge their equity to take on debt and therefore there is clearly an impact of interest rates on investment. However, there is usually a lag. So I do have a concern that the raising interest rates may impact on investments going forward but the impact on consumption is clearly overblown and these are wishy-washy commentaries.
You talked about how India has grown in the last three years compared to other nations in the world. Could we have done better? Is this the best economy India could have?
That question has to be definitely answered in the context of the global shocks that not only the Indian economy, but the rest of the world has witnessed. It would be very hypothetical and just a flight of imagination to answer this question without taking into account the context in which these growth numbers are being spoken about.
That is why I always do a cross-country examination because without it, the absolute number does not take into account the impact of these shocks. We have grown among the top 10 economies by far the greatest with a fiscal policy that was about spending less in a much more targeted manner. We did supply side measures and kept in mind that we had the most stringent lockdown in the first quarter of FY21 and that was important.
We have shown it very rigorously in the economic survey that actually led to an enormous number of lives being saved. Do remember that in the first wave, there was not enough known about how to handle the pandemic. Even the doctors did not know whether to use ventilators or not. The significant decline in the first quarter of FY21 happened because of the lockdown and the 3.83% growth is the impact of that lockdown.
Last year’s second Covid wave also had an impact on the economy. Economic activity was being restricted and that had an impact on GDP. That is not reflective of the structural strengths of the economy and this is where a lot of commentaries make the mistake that a lockdown is an enforced restriction on economic activity and not reflective of the structural strengths of the economy.
In that context, we have not spent the way other countries have spent and therefore we do not have the unprecedented inflation problem that other countries are facing. Despite the complete lockdown in the first wave, given the unique conditions that India has, I think it is still very good growth.
Going forward, what are the strengths and challenges that India faces? We have been seeing that K-shaped recovery that everyone has been talking about since pandemic, has that worsened?
This term K-shaped recovery is a disingenuous term because in any normal year or crisis year, there are always differences in growth rate that happens across sectors, across different industries and across the nature of funds. For instance, if you take the time of the global financial crisis, you did not have the service sector impacted as much, manufacturing was impacted significantly more. Now people did not call that a V-shaped or a K-shaped or any other term. So, why do that now?
The term V-shaped recovery was coined for looking at GDP growth itself. The K-shaped is about opening the black box. In any year, like the five fingers of the hand, growth is always different across sectors. I do not think is reflective of the recovery at any point in time. That is the key point to remember.
In terms of the challenges that you spoke about, I do not think that inflation is as big a problem for us as it is for the rest of the world. I would mention that there has been an increase in government spending, especially on infrastructure. I would actually put that out as the key area that the government needs to focus on because the government spending this quarter year on year has increased by 1.3% and we do not want a situation where the budgeted capital expenditure, budgeted infrastructure spending does not happen.
It is extremely critical as budgeted spending, especially in infrastructure and capital expenditure has a multiplier effect. I have written about this in the Economic Survey and it also crowds in private investment and therefore the capacities of ministries to be able to implement the budgeted spending is extremely important.
They need to ramp it up and that is the key challenge. At the same time, also following up on some of the reforms that were actually done, it is equally important that labour reforms that were two years earlier get implemented. The legislation has already been passed. So these and other privatisation efforts need to be accelerated too. I do not really think that inflation will be as big a concern for us as it is for us to push on infrastructure spending and also continue pushing on the structural reforms.
How do you define freebies and can freebies be or government welfare schemes be pegged as good or bad depending on who is putting them out? Which are the sections that need this aid and which ones do not?
In my mind, I am absolutely clear about how we should be defining freebies. In the Economic Survey, in the chapter on countercyclical fiscal policy, I had mentioned that if you look at revenue expenditures, the multiplier that you get for the economy – if the sovereign spends Re 1, the economy adds between 92 to 93 paisa and about 8 paisa gets lost. In contrast, if you take capital expenditures and Re 1 is spent by the government, between Rs 4.5 and Rs 5 is added to the economy.
The way to segregate what is the freebie versus what is not is very simple in my opinion. A part of the revenue expenditure would be basically the component that belongs in freebies and that needs to be reduced. Capital expenditure on human capital – be it healthcare, education etc – are very important aspects of creating human capital and therefore I would include that as capes because these have very beneficial effects.
For instance if you take a farm loan waiver from the government, the previous government in 2008, 2009 had actually had done a huge farm loan waiver, that is clearly a freebie. It is a revenue expenditure. Not charging for power is a freebie and it creates a lot of distortions. These are the kind of expenditures that will clearly belong in the revenue expenditure segment and therefore constitute freebies so to me the separation is basically revenue expenditure versus capital expenditure.
When we look at the FRBM Act, we should be looking at segregating and saying that there must be limits on revenue expenditure and capital expenditure should be encouraged. That is the easiest and the simplest way to really make policy actionable so that freebies are not indulged in by governments.