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EDITORIAL ANALYSIS State of the economy — temper the euphoria

 

Source: The Hindu

  • Prelims: Indian Economy(GDP, BOP, GVA, Economic reforms etc
  • Mains GS Paper III: Indian economy and issues related to planning, mobilization of resources, Effect of liberalization on the economy etc

 

ARTICLE HIGHLIGHTS

  • Semi-annual report of IMF: World Economic Outlook, ‘Navigating Global Divergences’ October 2023:
    • It has revised its projected GDP growth rate for India for 2023-24 to 6.3(six point three)%, up from the earlier 6.1(six point one)%.

 

INSIGHTS ON THE ISSUE

Context

International Monetary Fund (IMF) projections:

  • India is currently the fifth largest economy in the world in U.S. dollar terms
  • It projects that India will be the third-largest economy by 2027.
  • India has registered the highest growth rate amongst G20 countries, surpassing China’s for two successive years.
  • IMF’s historical data shows that India took six decades (1947 to 2007) to cross the one trillion-dollar GDP mark in 2007 ($1.2 trillion).
    • It took India just seven years to become a $2 trillion economy in 2014.
    • It added another $1.2(one point two)trillion by 2021.
  • If India hits the IMF’s projected figure of $5.2(five point two)trillion by 2027: It would be adding $2 trillion in just six years.

 

GDP and per capita GDP in purchasing power parity (PPP)

  • It determines what a US dollar can buy in that country.
  • Measuring GDP on a PPP basis shows that India already has the third highest with a GDP of $13 trillion (PPP)
    • China is at the top ($33 trillion, PPP)
    • The US is second ($9(twenty six point nine)trillion).
  • PPP conversion ratios can vary widely across countries
    • The price levels of goods and services could differ significantly.
  • India’s conversion ratio from dollar to PPP is 3.5(three point five)-almost twice that of China at 7(one point seven).
    • Example: If a US dollar can buy a burger in its home country, the currency can buy 3.5 burgers in India and 1.7 burgers in China.
  • India’s per capita income is the lowest in G20 countries in both dollar ($2,601) and PPP terms ($9,073)
  • China’s one-child family policy from 1981 to 2016 has given the dividend of raising per capita GDP to $23,382 PPP,
    • The US is at the top with a per capita GDP of $80,035.

 

Other projections in IMF report:

  • IMF revised downwards world GDP growth projection, including China’s by 3(zero point three)percentage points, to 4.2%.
  • Economies that were worst affected during the COVID-19 pandemic were also the ones to record a steep recovery is widely acknowledged.

Projections for India:

  • During the second quarter of 2020, India’s GDP contracted by 6(twenty five point six)%, quarter on quarter.
  • The output contraction in 2020-21, at 8.5(eight point five)% over the previous year, was one of the worst among the world’s large economies.
  • India’s real (inflation adjusted) annual GDP growth rate slowed down from 8(six point eight)% in 2016-17 to 2.8(two point eight)% in 2019-20.
  • Real per capita income level in 2021-22, at ₹1.09 lakh, was higher than that in 2019-20 by about ₹600.
  • In 2022-23, recovery gained momentum as domestic supplies were restored and global supply chains were straightened out.

Present concerns:

  • Susceptibility to its soaring deficit with China: India’s economic frailty has increased even as the net exports (exports minus imports) to GDP ratio has declined sharply.
  • India’s dependence on Chinese imports of manufactures seems structural, and not easily corrected by changes in relative prices.
  • China accounts for 15%-16% of India’s imports and a third of India’s trade deficit.
  • Steady decline in industrial growth rate, from 1(thirteen point one)% per year in 2015-16 to negative 3.5% per year in 2019-20 (before COVID-19).
  • Industrial growth rates as per the Index of Industrial Production (IIP): It shows an alarming regression over a longer period.
  • From 2011-12 to 2021-22, gross fixed capital formation to GDP ratio at current prices, declined steadily from 3(thirty four point three)% to 28.9(twenty eight point nine)% — an unprecedented fall in post-independent India.
  • The public sector share has remained constant at 8% (National Accounts).
  • Net foreign direct investment (excluding disinvestment and outward foreign direct investment), to current GDP ratio fell from 6(three point six)% in 2008 to 2.4(two point four)% in 2022 (World Development Indicators).

Public investment has three parts:

  • The central government
  • The States
  • Central public sector undertakings (PSUs).
  • Public investment by State governments, based on the Centre’s loans and advances to States, is conditional upon policy reforms.
  • The rise in the Centre’s investment is due to the merging of extra-budgetary borrowing by central PSUs with the Centre’s own Budget.
    • Public investment seems around 6% of GDP — perhaps similar to its pre-COVID-19 levels.

Way Forward

  • Policymakers need to temper their optimism by taking a slightly longer view with a wider angle — appreciating the fast-changing geopolitical underpinnings of economic policy making.
  • The value of India’s HDI index moderated from 0.645 in 2018 to 0.633 in 2021; Its global rank went down by one rank during 2015-21 — meaning that other countries have performed better than India.
  • The strategic threat posed by an unrelenting rise in trade deficit with China, despite government’s best efforts; its mirror image is a decline in industrial output growth rates, especially capital goods’ decimation;
  • Report by NITI Aayog: A remarkable decline in the prevalence of multidimensional poverty in India;
    • 5(thirteen point five)crore Indians are estimated to have escaped multidimensional poverty between 2015-16 and 2019-21
    • Rural areas largely drive the decline in the headcount ratio of the Multidimensional Poverty Index.
  • The National Family Health Survey for 2019-21 provides ample evidence of a significant improvement in an array of indicators concerning the:
    • quality of rural lives
    • including access to electricity
    • improved drinking water sources
    • coverage under health insurance schemes.
  • The government’s support for agriculture has led to fruits, vegetables, the ‘dairy and livestock products combined’, and fishery growing at unprecedented growth rates.
  • India is aware of the long road ahead to achieve high-income status and a high quality of life for a majority of its citizens.

QUESTION FOR PRACTICE

Do you agree that the Indian economy has recently experienced recovery ? Give reasons in support of your answer.(UPSC 2021) (200 WORDS, 10 MARKS)