It is clear that the Indian economy is not 'growing fast’ and the government needs to increase its capacity for growth and employment

I amOver the past four decades and more, the structure of India’s economy has changed quite dramatically. Compared to 1980-81, using current prices, the share of „agriculture and allied activities” in GDP declined from 38 per cent to 21 per cent, while services grew from 37 per cent to 53 per cent.

Industry (including construction and utilities) remained more or less unchanged at 26 percent. Thus, agriculture, the slowest growing sector of the economy, has shrunk relative to others, while the service sector (which is growing the fastest) dominates.

What does this structural change mean for overall economic growth? Assuming sector-wise growth rates remain unchanged, the dominance of the fast-growing service sector means that overall economic growth should have accelerated.

Based on weighted shifts between the three sectors, average growth of 5.5 percent in the 1980s should translate to at least 6.3 percent growth now.

Now factor in other variables like life expectancy. It was estimated at 54 years in 1980 and 70 years now. In other words, the average Indian will not die of working age. The rapid spread of education, including post-school education, has led to sharp growth in student enrollment levels – although quality of education is an issue, which should have improved productivity.

Along with an increased rate of investment in fixed capital (from 19.7 per cent of GDP in pre-pandemic 1980-81 to 28.6 per cent), and the spread of digitization will boost efficiency.

Some of these may have contributed to sector change. Correcting that, it can be reasonably argued that the potential annual growth of the Indian economy should have been at least 7 percent – ​​well beyond the threshold for a country to be considered to have achieved rapid growth. In fact, in the two decades before the pandemic, through many ups and downs, India’s average annual growth was not far from that magic number.

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It is surprising (and perhaps not surprising) that the International Monetary Fund (IMF) considers India’s growth prospects to have suffered, due to the pandemic and other reasons.


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I amIn fact, IMF chief economist Pierre-Olivier Gourinchas, commenting on global growth prospects last month, argued that India’s growth this year (estimated at 5.9 percent by the IMF) is close to its potential limit. There is no „output gap” between actual and potential growth.

Mr Gourinjas’ word is not gospel; In fact, the growth estimates of the government and RBI this year are high. But domestic commentators should seriously engage with the issue of growth rates for India without an „output gap”.

Is it really as modest as 6 percent, significantly lower than what has been achieved for two decades?

In addressing that question, one must take into account the medium-term economic impact of Covid, with more people retreating to low-productivity agriculture for subsistence, a lower labor force-to-total population ratio, damage to small and medium-sized enterprises, and, from all of this, a lack of consumption and (its Consequently) investment is required.

Consider also the very high level of public debt flowing from the high fiscal deficit as the government tries to compensate for the shortfall in private spending.

A global environment of slow economic and trade growth also means. and thereby increasing the impact of environmental impacts; The more capital-intensive nature of growth, the more investments that need to be made in transport infrastructure.

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Add the cost of risk factors such as government policy errors (such as staying out of regional trade agreements) and war and its fallout.

All things considered, some reduction in the country’s sustainable growth rate must be accepted. The fact that India is a fast-growing large economy is certainly commendable, but it is only a relative yardstick. An important absolute criterion is whether an economy can qualify as a fast-growing one, and India is now clearly lagging behind.

Whether sustainable growth is set at 7-minus percent or 6-plus percent, the government’s mission is reduced: to raise the country’s capacity to generate growth and employment.

By special arrangement with Business Standard.


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