NEW DELHI: Two prominent financial institutions on Tuesday dismissed former RBI governor Raghuram Rajan’s remark that India is dangerously close to “Hindu rate of growth”. Without naming Rajan, State Bank of India (SBI), in a report, called his argument ‘ill-conceived’, ‘biased’ and ‘pre-mature’ at its best when weighing the recent GDP numbers against the available data on savings and investments.
On the other hand, Moody’s Analytics said the country’s domestic economy, rather than trade, is its primary engine of growth and the slowdown in economic activity late last year will only be temporary. As per the government data, India’s GDP growth slowed to 4.4% in October-December, 2022, from 6.3% recorded in the previous quarter on account of low private consumption expenditure and contraction in the manufacturing sector due to decline in manufacturing and low private consumption expenditure.
“Apart from the fact that quarterly growth numbers are noisy and should be best avoided for any serious interpretation …We find such argument ill-conceived, biased and premature at its best when weighing the recent GDP numbers against the available data on savings and investments,” said SBI in its research report.
According to SBI, gross capital formation (GCF) by the government touched a high of 11.8% in financial year 2021-22 (FY22), up from 10.7% in FY21. This also had a domino effect on private sector investment that jumped from 10% to 10.8% over the same period. At the aggregate level, gross capital formation is supposed to have crossed 32% in FY23, the highest level since FY19.
In addition, the report said in FY22 gross savings rose to 30% from 29% in FY21. “The ratio is supposed to have crossed 31% in FY23, the highest since FY19. “Prima facie, a careful analysis shows that incremental capital output ratio (ICOR), which measures additional units of capital (investment) needed to produce additional units of output, has been improving. ICOR, which was 7.5 in FY12 is now only 3.5 in FY22. Clearly, only half of capital is now needed for the next unit of output,” the report added.
“Our take is that the slowdown late last year will be temporary and even salutary, helping to wring some of the demand-side pressures out of the economy without stopping it wholesale. On the external front, better growth in the US and Europe’s incipient recovery will propel India at the mid-year mark,” Moody’s Analytics said. “While high interest rates have slowed the domestic economy and curbed imports, external imbalances have widened, putting pressure on the rupee and adding to inflation,” Moody’s Analytics added.