5 days ago
India may still cross the ‘miracle economy' benchmark of 7% GDP growth
India's economic growth story keeps getting better. I've long been cautious about cheering data that show extraordinary improvements. Later data revisions can present a very different picture. But at least two cheers, if not three, are warranted by the latest GDP growth rate for FY25 has been revised upwards from 6.3% to 6.5%. Readers might view this as a good, but not remarkable, improvement. The picture improves dramatically when we look at the upward revision for growth in FY24, the previous year, from 8.2% to 9.2%. Thereby hangs quite a tale.
Chief economic adviser V Anantha Nageswaran believes India is on a growth trajectory of 6.5%. He had predicted 6.5% growth at the start of both FY24 and FY25, continuing the trend of the last two decades. That provides the background to judge the latest estimates of 9.2% for FY24 and 6.5% for FY25. Critics have argued that the extraordinary performance in FY24 was misleading. The first advance estimate (AE) for that year was 7.4%. It was upped to 8.2% in the second AE, and now to 9.2% in the provisional estimate. The final estimate is yet to come. Many readers are confused by as many as four revisions, which are so large as to stoke suspicions of data fiddling. However, Pronab Sen, India's elder statesman in statistical issues, says that while data collection suffers from several flaws that need correction, they are not official inflation rate is currently based on CPI. But a different inflation rate - GDP deflator - is used to measure GDP growth. The two are often similar, but can also be very different. Since services account for three-fifths of GDP, they are given much bigger weightage in the GDP deflator than in CPI. In FY24, GDP deflator seems to have shrunk dramatically to just 0.6%, far lower than the 4.6% inflation indicated by large anomalies in two measures of inflation are rare, but not unheard of. Critics said GDP deflator had seriously distorted reality in FY24. The corollary of such fears was that, if GDP was statistically exaggerated in FY24, it would be statistically underestimated in FY25 as the deflator rebounded from 0.6% to 3.2%. The underlying trend would be the average for the two average turns out to be 7.85% - way above the 6.5% long-term trend. It is also way above the officially predicted average of 6.5% for the two years. It is well above the 7% benchmark for a 'miracle economy'.One does not know if further revisions will change the picture radically. But at this stage, India seems to be performing well above expert expectations. In a world filled with economic and geopolitical uncertainties, this is a good sign of resilience.
In FY24, economist Larry Summers declared, 'The world is on fire,' reflecting Third World problems that led to IMF rescues in India's three neighbours - Pakistan, Sri Lanka and Bangladesh. In FY25, Donald Trump has created enormous geopolitical uncertainties, and the old economic order created after WW2 is eroding fast. This will tend to slow world growth. That makes India's performance look that much better.
GoI's emphasis on manufacturing is not working well. Manufacturing is growing more slowly than GDP. So, its share is falling - now 18% - despite large incentives. The one area of success has been mobile phones, where Apple and Samsung have become huge exporters. Chinese major Vivo is outsourcing its phones to the Noida-based Indian company, Dixon Technologies. This sector is surrounded by uncertainty because of Trump's threat to Apple to make phones in the US, or be hit by high import tariffs. Investment, a major driver of growth, is doing well. Gross fixed capital formation grew at 9.4% in FY25. This raised the annual rate to 33.7% of GDP - the highest since FY13. Higher investment is required for sustaining higher growth, and the two have accelerated in tandem - a good sign. High government capex appears to have crowded in private investment.
Net exports have also contributed. The merchandise trade gap has narrowed, and services surplus improved. Global capability centres (GCCs) continue to expand, creating a hi-tech high-income structure that bodes well for the future. A record rabi cop is in the offing. This should kindle rural consumer spending. A good monsoon is forecast, raising hopes for a bumper kharif harvest. Even as climate doomsters keep predicting disaster, agricultural performance keeps improving.
India's macroeconomics looks good at a time when other emerging markets are in trouble. Fiscal deficit and trade deficit are both well under control, as is inflation. Many old and deep problems continue, such as lousy education and a dysfunctional police-justice system. Nevertheless, India may still cross the 'miracle economy' benchmark of 7% GDP growth in the foreseeable future.
