NOTES

Indias Recent Growth

Miracle or Mirage?
Sumit K Majumdar

Comparing across 42 countries,

it is argued that Indias gross
domestic product growth rate,
which is the highest in the world,
does not appear to reflect in other
key indicators of the economy,
where the country fares
relatively poorly.

Sumit K Majumdar (majumdar@utdallas.edu)

teaches Technology Strategy at the University
of Texas, Dallas, US.
Economic & Political Weekly

EPW

SEPTEMBER 3, 2016

ndias contemporary gross domestic

product (GDP) growth is considered
remarkable, perhaps even a miracle.
Her GDP growth rate is considered one
bright spot of economic data in an otherwise gloomy global scenario. This is
what the facts suggest.
Some data have been released recently
by the Economist, the British weekly
magazine on economics and business.
A comprehensive suite of data for several countries are also presented by the
weekly. These country-by-country data
permit a comprehensive and comparative assessment of the economic performance of the worlds largest and most
important economies.
Data for 42 countries show that India
has topped the GDP growth rate among
countries in the first quarter of 2016
(Figure 1, p 66). She has had a growth
rate of 7.3%, followed by that of China at
6.8%, which is considerably larger than
the average for all the 42 countries
growth rate of 2%.
India and China lead the cluster of
emerging economies that include Philippines, Turkey, Pakistan and Indonesia in
defining the growth parameters in our
present times. Relatively, the growth of
the United States economy has only
been 2%. There are some rather appalling cases; Brazil where GDP shrunk by
5.9%, and Venezuela where GDP shrunk
by 8.8%. These cases are, however, not
of immediate interest to us.
It is worth evaluating if Indias growth
performance is sustainable in the long
run, and to ascertain that there is no real
mystery behind the growth performance, or whether such a strong growth
performance is rather a mirage.
First of all, there has been some disquiet as to whether the true growth
rates are over 7%, as released, or lower,
and the head of Indias central bank has
vol lI no 36

suggested that the true rates could be

plus or minus 1%. For the moment, however, let us take the GDP growth rates as
given. India is an important economy,
and the data cannot be that badly off
the mark.
The many thousands of statisticians in
the Central Statistics Office, the Reserve
Bank of India, the Directorate General
of Commercial Intelligence and Statistics, and the Labour Bureau are all to be
given the benefit of the doubt. Indias
statisticians are not crooks. They have
not fudged the figures. They have not
cooked the books.
Where Does Growth Come From?
Since Indias statisticians are public
servants, surely deserving their salaries
and pensions, who have produced reasonably accurate data, where has the
Indian growth come from? A recent visit
to India, and during that visit, conversations with large corporate sector firms,
smaller businesses, and numerous individuals in public and private life, did not
leave with me a sense that the economy
is doing well.
Businesses and individuals were not
positive, citing inflationary pressures
as compromising their business models
and the quality of their lives. Asset quality,
whether of public or private assets, was
not improving and lives and businesses
were not being more efficiently run.
Whence, therefore, the positive numbers
if the vibes were of an opposite kind?
The principal and primary source of
Indias GDP growth has been the rise in
private consumption. Indias population
of over 1.2 billion persons wants to
survive, do at least a bit better every
period as compared to the previous
occasion, and would (like all human
beings) want to enhance the quality of
life of their families through being
able to provide the means that improve
lifes chances.
Through schemes such as the Mahatma
Gandhi National Rural Employment Guarantee Act, the government has been
able to continue to provide public monies to the rural areas, which have been
badly hit by drought, and these public
65

NOTES
Figure 1: Gross Domestic Product Growth Rate for First Quarter 2016

7.3

6.8

6.3
5.7 5.5

4.5 4.5 4.3

3.7 3.5
3.4 3.3
3.1

2.8 2.8

2.5 2.3
2.1

2.0 1.9 1.8

1.6 1.4 1.4
1.3 1.3 1.1

0.7 0.6 0.5

0.4 0.4

0.1
-0.5 -0.7

-3.8

-5.9

India
China
Philippines
Turkey
Pakistan
Indonesia
Sweden
Malaysia
Czech Republic
Poland
Spain
Saudi Arabia
Colombia
South Korea
Australia
Egypt
Thailand
Israel
Mexico
Argentina
UK
US
USA
Average
Hong Kong
Singapore
Netherlands
Belgium
France
Germany
Chile
Austria
Italy
Japan
South Africa
Canada
Denmark
Switzerland
Norway
Taiwan
Greece
Russia
Brazil
Venezuela

-8.8

spending amounts have been translated

eventually into private consumption expenditure by hundreds of millions of
people in rural India.
Whatever investment is occurring,
however, takes place in the public
sphere. The large amount, now being
belatedly spent on roads, bridges, ports,
defence installations and railway infrastructure, will have percolated into the
economic system and through the means
of externalities and have now created a
positive growth impact.
Indias private sector businesses have
failed abjectly, it seems. Private investment has been very low, and not a growth
contributor. Indias weakness is its private
real sector, and firms, in the last several
years, have simply been shown to be
completely wanting in their contribution to the national economic product.
Failure of the Real Sector in India
To understand if the real sector in India
is culpable of incompetence, let us evaluate comparative data, released by the
Economist, for China and India. As
remarked, China is second in the contemporary GDP growth stakes and India
is first out of the 42 countries listed.
What are the other data for the two
countries like? Table 1 highlights key
figures. The first row shows the gross
66

size of the Indian and Chinese economies. The Indian economy is only the
10th largest in the world, at a value of
about $1.5$2 trillion. The Chinese
economy is now the second largest in the
world and is valued at $10 trillion. China
is economically five to six times larger
than India.
On the all-important current account
dimension, India fares appallingly, and
comes 34th out of 42 with a current account deficit of $22.6 billion, while China
is first with a current account surplus of
$330.6 billion. In other words, China has
made $350 billion more money, as compared to India, in the first quarter of
2016. It is Chinas firms that have made
the money, by manufacturing and selling goods and services that the world
wants. Conversely, the sale of Indian
goods and services do not even cover her
own expenses. This is clearly not an indicator that India has a vibrant and

successful business sector. It is a sign of

business incompetence.
Let us take industrial production growth
next. In the same period, Indias industrial production growth has been 2%,
hence providing further credence to the
argument that Indias growth has been
consumption-led. She has ranked 15th
out of the 42 countries. Chinas industrial
growth rate has been 5.4%, and China has
ranked seventh out of the 42 countries.
On the important macroeconomic indicators of interest rates and inflation,
India with an interest rate of 7.44% has
ranked 11th out of 42, while Chinas lower
interest rate of 2.6% gives it a rank of
18th out of 42. On the inflation front,
India has a higher inflation rate of 4.8%,
giving it a high rank of ninth out of 42
while China with a lower rate of 2.3%
ranks 18th out of 42. Thus, on the macroeconomic front China fares much better
than India.

Table 1: A Comparison of Key Parameters between China and India for the First Quarter of 2016
Key Economic Parameters

Size of economy
GDP growth rate
Current account balance
Industrial production growth
Interest rate
Inflation

Actual Performance
of India

Indias Rank among

the 42 Countries

Actual Performance
of China

Chinas Rank among

the 42 Countries

$1.5 trillion
7.30%
$(22.6) billion deficit
2.00%
7.44%
4.80%

10
1
34
15
11
9

$10 trillion
6.80%
$330.6 billion surplus
5.40%
2.60%
2.30%

2
2
1
7
18
18

These economy size data are obtained from a news article (http://www.firstpost.com/business/india-can-indeed-begrowth-engine-but-modi-must-stop-overselling-the-story-2822666.html) and not the Economist. All other data are from
the Economist.

SEPTEMBER 3, 2016

vol lI no 36

EPW

Economic & Political Weekly

NOTES

Comparing China and India

This is not an article about India versus
China, but a small comparison is apposite. Indias GDP growth is first at 7.3%,
and Chinas second at 6.8% in the first
quarter of 2016.
Indias growth is 1.07 times more than
Chinas, but Chinas growth is investment- and production-led and solidly
sustainable, while Indias growth is
consumption-led, and an ephemera. It is
a mirage.
On every other dimension of economic performance, China wins. China
makes more than 14 times the sums of
money relative to India by producing
and selling goods and services not only
to her own people but, more importantly, to the world. The world wants
Chinese items.
The world does not want Indian items.
It seems India cannot, or does not, produce the goods and services that others
want, and it is principally her own people who have to survive and subsist
in some way by consuming things that
in the aggregate produce her growth
figures.
That Indias macroeconomic policy is
a disaster is well known, and Chinas
interest rate, which is just 35% of Indias
rate, and Chinas inflation, which is less
than half (48%) of Indias, provides further credence to this assertion. It is also
likely that Indias economic policy may
have badly constrained its businessmen
from achieving what they believe they
can achieve. Table 2 lists the relative
assessment of the parameters.

These empirical regularities would

have substantial implications for assessing
the contemporary Indian growth story.
Table 3 lists the results of the statistical
analysis. These are simple correlations,
for a cross-section of countries at one
point in time, and should not imply
causation of any nature. The number of
observations cover all major countries of
the world.
Table 3: Key Correlations for a Group of the
Worlds 42 Key Countries for the First Quarter
of 2016
Key Economic Relationship

Interest rate and inflation

Inflation and GDP growth
Interest rate and GDP growth
Interest rate and current account balance
Current account balance and GDP growth
Interest rate and industrial production
Industrial production and GDP growth

Correlation
Coefficient

0.38
-0.56
-0.17
-0.15
0.07
-0.18
0.51

First, there is a strong positive correlation between interest rates and inflation. High interest rates lead to high
financing costs which are passed through
to consumers.
Second, there is a high negative relationship between inflation and GDP
growth, as the 42 countries data show.
As prices go up, people consume less, as
only to be expected.
Third, there is a negative relationship
between the level of interest rates and
GDP growth. If the price of money is
high, growth is low.
Given that India is a high interest rate
and high inflation country, as the preceding comparative data for the 42 countries have shown, the high GDP growth
rate of India in the present quarter is acHas Indian Economic Policy Failed? tually quite a mystery! But, let us not
To address the issue of conceptual gaps cast aspersions on Indias statisticians.
in Indias economic policymaking, I
Fourth, there is a negative relationconducted a relatively simple statistical ship between the interest rate and the
analysis on the data of the 42 countries, current account balance. Simply put, in
so as to assess the key economic a high-cost-of-money economy, firms
relationships that recent data for the cannot, or will not, produce goods and
world shows.
services that can be competitive in a
global economy. The goods
Table 2: A Relative Assessment of India versus China on Certain
Key Economic Parameters
and services emanating
Economic Parameter
Relative
Winner in
Performance
the Category from India are hardly likely
to be of such a high quality
GDP growth rate
1.07 times Chinas growth
India
Current account balance
14.39 times Indias balance China
that people will pay overIndustrial production growth 2.70 times Indias growth
China
the-odds as prices, simply
Interest rate
35% of Indias interest rate
China
because they have cost
Inflation
48% of Indias inflation
China
more to produce because of
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EPW

SEPTEMBER 3, 2016

vol lI no 36

the high money costs in India. Unsurprisingly, there is a positive relationship

between a countrys current account
balance and GDP growth.
Fifth, the 42 countries data show a
negative relationship bet ween interest
rate and growth of industrial production. Again, common sense suggests that
this will be an appropriate relationship.
The more the cost of funds, the lower
the incentives to produce, in general,
since the level of costs passed through to
the final consumer can create problems
of generating sales.
Sixth, the most important relationship found is of a very strong statistical
relationship between industrial production and GDP growth. This is, of course,
quite obvious. Industrial production encapsulates value addition, in the manufacture of goods, whether they be physical goods or digital goods, and such
value provision by firms in an economy
attracts customers.
Take the case of laptops. Not without
reason, Lenovo is one of the worlds largest selling brands of laptops. Is there an
Indian brand of a laptop computer? The
sales of Lenovo laptops, and a whole
host of other items, in every conceivable
product and service space, are undertaken by Chinese firms and these are
sold globally as well as domestically.
These sales generate the GDP growth
that the Chinese economy enjoys.
India hardly makes and sells anything. Is there a branded product made
by an Indian company with global appeal?
Her current account balance record is
appalling and her industrial production
record is pathetic. It seems policy
failures have been substantial. Hence,
Indian growth has been consumption-led
and unsustainable.
Additional Analysis
I perform a simple numerical calculation. Indias overall GDP growth rate is
7.3% while her industrial production
growth has been 2%, suggesting that
consumption growth might have been
around 5.3%. Comparatively, Chinas
overall GDP growth rate is 6.8% while
her industrial production growth has
been 5.4%, suggesting that consumption
growth also might have been around 1.4%.
67

NOTES

Chinas consumption growth, at a

quarter of Indias consumption growth,
suggests that there is very considerable
slack still in its economy, while Indias
growth can plateau very soon. India may
not have any further slack, being consumption-driven, to grow much.
China, relatively, has 1.4 billion people
for whom consumption is still low. When
that rate of consumption explodes, its
overall growth can be near 14% per annum, given the vast sums of money
available from current account surpluses
to spend.
An Assessment
One can argue that the Indian economys
failure in global industrial production
and current account balance rankings,
both very important drivers of the GDP
growth rate, are due to the Indian
economys failure in the global interest
rate and inflation rankings. India has
been an economically mismanaged
country, and whatever growth has
resulted has happened in spite of the
government.
Fiscal policy management has been
a disaster as industrial production growth
has been about 2%. This is to be contrasted with the growth of industrial
production in China, where, in spite of
a slowdown, the growth of industrial
production has been more than two and
a half times that for India. Monetary
policy disasters in India have contributed to an unsustainable inflationary
situation. Thus, strong reality check is
in order.
The self-congratulatory approach of
Indias government gives the impression
that policymaking and administration
has been carried out in India capably
and efficiently. What the data, evidence
and facts reveal is something else entirely.
Congratulating oneself may not be a
good idea!
Had the development plans, policies,
programmes and projects been reasoned through, and implemented by
thoughtful and competent public officials, the quality of Indias growth
would have been stellar. But, that has
not been the case in India, and its high
growth rate at present is unsustainable
in the future.
68

While growth as a quantitative phenomenon is the most easily understood

economic performance construct for a
nation, it has to be sustainable and of
high quality so that the real quality of
life of citizens is enhanced. The range of
outcomes from the related activities that
lead to enhancements in the quality of
life indicators, and the enrichment of
personal experiences of life, are equally
important in our understanding of national economic performance.
A question as to where the Indian
growth came from suggested private
consumption. One could argue that
such private consumption desires have
been motivated not purely for acquiring
items necessary for conducting the activities of day-to-day living, but also by
Indias people to enhance their future
capabilities.
Growth has not occurred due to the
national institutional and infrastructural
capabilities making things better, making lifes activities more efficient, and
making lives productive. In spite of the
political rhetoric, India has grown because of private consumption and not
because public or private investment has
had much of a role to play.
The immense market of 1.2 billion
persons, all wanting to sustain their existence and improve their lives, and buying
and selling things, has driven growth. It
has been a desire for an enjoyment and
betterment of lives motive that has
motivated consumption and spending,
such that the economy has grown.
One can also suggest that the motivations of people for acquisition of
consumable and capability-enhancing
items might have been enhanced by
the knowledge which is now much more
easily-accessible because of the widespread diffusion of the cell phone and
mobile internet. The media and communications sector has been a global success story, of the diffusion of an important element of infrastructure, through
private and public investment.
Hence, a key policy issue for government would be to enhance the creation
and diffusion of knowledge that would
permit the acquisition of both consumable goods and capabilities by Indias
population.

The Way Ahead

Summing up, there might be no mystery
as to Indias recent growth. But, it can be
a mirage. India presently comes first in
the world in the most-recent short-term
economic growth stakes, and yet she can
be an abject long-term failure because
the position is completely unsustainable.
The economic fundamentals for India
are very weak. Inappropriate monetary
policies and fiscal management policies
might have led to this outcome.
The provision of tangible and intangible infrastructure, through public and private investments, are crucial for the sustainability of Indias growth. This is hardly
a new and radical thought, it is over 100
years old, and is really such an obvious
idea that it is banal, and the Indian data
show that this aspect is critical.
It is also best to avoid helplessness in
economic policymaking, and for that to
occur policymakers should be influenced by a powerful overarching mental
framework as to what sort of a society
and polity India is to become. Such a
model will help provide a road map for
evaluating future goal accomplishments.
Nevertheless, providing a viscerallydriven mental model is the prime task of
political leadership which has to set the
goal that India has not only to be the
first in the world in the GDP growth rate,
but also first in the size of the current
account balance, first in industrial production growth, in the top five in the
world in terms of the size of the economy, and last in the world in the rate
of inflation.
Such a model of an imagined India
has yet to be articulated.

SEPTEMBER 3, 2016

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