India has achieved much in the last decades. Yet an economic deceleration in the past few quarters has generated worried commentaries about India’s growth potential. However, our analysis of nearly five decades of data finds that
First, Thus, while growth averaged 4.4 percent a year during the 1970s and 1980s, it accelerated to 5.5 percent during the 1990s-early 2000s, and further to 7.1 percent in the past one decade. The acceleration of growth is evident not just for aggregate GDP, but even more strongly for per capita GDP. The average pace of per capita growth was 5.5 percent a year in the last decade. Interestingly, when compared with some of the world’s largest emerging economies, this steady acceleration of growth stands out as being unique to India.
Second, This is partly due to the stabilization of growth within each sector – agriculture, industry and services – and partly to the transition of the economy toward the services sector, where growth is more stable. Particularly interesting is the sharp increase in the stability of GDP growth since 1991. Before this, growth accelerated episodically, was punctuated by large annual variations, and often failed to sustain. Thus, growth has not just accelerated post liberalisation, it has also become more stable.
Third, growth has been broadly diversified. Growth has accelerated the fastest in services, followed by industry, and less so in agriculture. Over the long run, – both in labor productivity as well as in total factor productivity.
Finally, growth has been broadly resilient to shocks, both domestic and external. The resilience of India’s growth can be attributed to the country’s large and spatially diversified economy, as well as to its diversified production structure that is not dependent on a few products, commodities, or natural resources. It can also be attributed to India’s diversified trade basket and broad range of trading partners, wherein a slowdown in any one part of the world will not result in a large impact on India.
The resilience of India’s growth process was on display in recent years when the country recovered quickly from the impacts of two major policy events – demonetization and the implementation of the Goods and Services Tax (GST), an important indirect tax reform. We argue that the deceleration to growth rates below 7 percent between Q3 2016–17 and Q2 2017–18 was an aberration, attributed to temporary disruptions in economic activity as the economy adjusted to demonetization and businesses prepared for the implementation of GST. At present, there are indications that the economy has bottomed out and, in the coming quarters, economic activity should revert to the trend growth rate of about 7.5 percent. We project GDP growth to be 6.7 percent in 2017-18 and accelerate to 7.3 percent and 7.5 percent respectively in 2018-19 and 2019-20.
Yes, possibly, but more is needed. Let us elaborate.