At this time of the year, some obvious questions are important to most people. What will the calendar year 2023 be like? That question has many dimensions, including an economic one. The economic cannot be delinked from the political, and the global cannot be delinked from the domestic. The global scene doesn’t look that bright. Russia-Ukraine is far from over. Covid is far from over, too, and implications of what is unfurling in China, with legitimate scepticism about numbers emanating from that country, is unclear. With our vaccination levels, immunity and better preparedness compared to the second phase in 2021, there is no reason to be paranoid. The recession has a technical definition. Notwithstanding the definition, Europe is perilously close to one, and the US economy isn’t in great shape either. Food and energy prices have shot up, despite a slight levelling off. There have been supply-chain disruptions. Monetary policies have been tightened, leading to spill-over effects on India, not to mention volatility in forex and capital markets. Some of those countries, including some in our immediate neighbourhood, may be ranked higher than India in global happiness indices, but I think most Indians will rejoice they live in India and not elsewhere now. We don’t know how global growth and trade will fare in this uncertain world in 2023. Economic forecasters are as unsure as astrologers, and the track record of either set on past projections is far from perfect. But we do know world trade won’t do that well in 2023. Among others, WTO has recently told us this, lowering earlier forecasts.
It isn’t just the financial sector. India’s real sector isn’t insulated from what goes on in the rest of the world. There is no decoupling except as a figment of the imagination. World Bank’s figures are that, in 2021, India’s trade/GDP ratio was 45%, higher than figures for both China and USA. The figure for the US was 25%, underlining the fact that India isn’t as closed and insular as is often suggested. High real GDP growth requires both exports and imports. However, India isn’t dependent only on net exports as a growth driver. There are three others, too – consumption, investment and government expenditure. (In passing, plenty of internal trade occurs in a large country like India, not captured in cross-country trade/GDP ratios.) Symbolically, what’s likely to be the combination of X, C, I and G? The answer depends a bit on the benchmark and the timeline. Do we have in mind 2023-24 pertinent for the forthcoming Budget, the next three years, the next decade, or the next 25 years, leading up to 2047? As a benchmark, do we have in mind real growth of 5%, 7% or 9%? The oft-cited 2003 Goldman Sachs BRICS paper assumed an average real rate of growth of around 5.5% for India. Today, aspirations have changed. If India grows at 5.5%, there will be a sense of gloom and doom. In 2022-23, the year about to end, there is consensus, not just within government circles, that India will grow between 6.8 and 7%. Everyone also agrees that, with the bleak global growth and trade scenario, 9% is impossible, at least in the next three years. (It will take at least two years, if not more, for some global recovery.)
There are different ways to take a call on 2023-24 and the next three years beyond a gut feeling that it will be 5.5% or 7%. One can look at past trends of years when India has done 7% and more. I am not talking about 9%. If one does that, one will find that even if X doesn’t do that well, if the other three engines of C, I and G fire, 7% is possible, even approaching 8%. Indeed, there has been a slowdown from roughly 2017. Those who lean towards 5.5% extrapolate based on that slowdown. But the counter-argument is also fairly plausible. Since 2014, the government has put in place several reforms, which can broadly be described as supply-side. Despite Covid and its aftermath, there is no evidence there was anything wrong with those reforms. (That doesn’t preclude further tweaking of those reforms in the forthcoming Budget and otherwise.) Supply-side reforms work with a time lag, further extended because of the pandemic. If that time lag is out of the way, there should be a discontinuity from the trend of deceleration. An example of that difference in perception is how many economists view the savings or investment rate as a share of GDP, returning to basic growth theory. The incremental capital/output ratio (ICOR) is a measure of the efficiency of capital usage. It gives us the additional units of capital one needs to produce one additional unit of output. A basic growth theory equation is that the growth rate will be the investment rate divided by ICOR. In high growth years, India’s investment rate was around 38%. To illustrate the idea in a back-of-the-envelope kind of way, if the ICOR is 4.5, an investment rate of 38% gives us a growth rate of 7.6%. But the investment rate has dropped to 31%. With that same ICOR, we can only get real growth of 6.9%. And if, because of investments in infrastructure, the ICOR goes up to 5, we will only get a growth rate of 6.2%.
I have stated the issue with the investment rate, though it is often stated with a savings rate and the difference between the investment rate and the savings rate is explained by foreign savings. To state it simply, the current account deficit as a share of GDP. There is no denying the savings rate should be higher in India. There has been a stagnation in household financial savings. There is no denying that the investment rate should be higher, and the government’s reform initiatives are designed to boost domestic and foreign investments, the I part. The government’s capital investments (G) also stimulate I. In addition, reforms lead to efficiency and lower ICOR. Once we have eliminated X, the call is on C, I and G and their trends for the future. I think Cassandras, who say 5.5% is excessively pessimistic. CEA (Chief Economic Adviser) has mentioned 6.5 to 7% for the medium term. I think this is plausible.
Bibek Debroy
Chairman, Economic Advisory Council to the PM
(bibek.debroy@gov.in)