09 December 2023 – The Hindu

Latest Report of World Economic Outlook

The Indian economy’s performance:

• It is often known that the economies that had the greatest damage during the COVID-19 epidemic also experienced the steepest recoveries. India, among the most severely impacted, has adopted the same method.
• India’s GDP shrank by 25.6% quarter over quarter in the second quarter of 2020, making it the worst performing major economy in the world. Taking a broader view, shortly before the pandemic, India’s real (inflation adjusted) annual GDP growth rate decreased from 6.8% in 2016–17 to 2.8% in 2019–20.
• With ₹1.09 lakh, the real per capita income level in 2021–22 was approximately ₹600 more than that in 2019–20. The recovery picked up speed in 2022–2023 as domestic supplies were replenished and international supply lines were reorganised.

Consequences warrant concern:

• Recovering output is undoubtedly a good thing, but as many opponents have pointed out, there are still reasons for concern over its consequences on employment, quality, and the ongoing inflation of necessities that disproportionately affect the poor. But even concentrating on output recovery—a sectoral perspective with a trade component—might reveal weaknesses in the defence.
• By adopting a somewhat longer perspective and a wider angle and realising how quickly the geopolitical foundations of economic policy are changing, policymakers need to temper their confidence. Reiterating that 2022–2023 marked the end of globalisation as we have known it (since the fall of the Berlin Wall in 1989) and revealed India’s ongoing susceptibility to food and oil shocks may be necessary.

Rising trade imbalance with China:

• But the real worry is how vulnerable India is to its widening trade deficit with China. India’s economic vulnerability has grown despite a substantial reduction in the country’s net exports to GDP ratio (exports less imports).
• India’s reliance on Chinese imports of manufactured goods appears to be systemic and difficult to address through adjustments in relative prices. In an effort to reduce Chinese imports of vital industrial goods during the Galwan crisis, the government launched the Atmanirbhar Bharat Abhiyan in May 2020. 15%–16% of India’s imports and 33% of the country’s trade deficit come from China.
• India loosened import limits without much thought, as the country’s output was suffering from a shortage of vital Chinese components. Despite its limitations, the Index of Industrial Production (IIP) indicates an alarming regression in industrial growth rates over an extended period of time. Throughout the boom years (2004–05 to 2013–14), the manufacturing sector had average annual growth of 5.7%.
• The gross fixed capital formation (GFCF) to GDP ratio at current prices fell significantly from 34.3% to 28.9% between 2011–12 and 2021–22, an unparalleled reduction in India after independence. Additionally, its 8% public sector share has not changed (National Accounts).
• According to World Development Indicators, the ratio of net foreign direct investment (FDI) to current GDP decreased from 3.6% in 2008 to 2.4% in 2022 (FDI excluding disinvestment and outward foreign direct investment). Based on budgetary numbers, the official positive picture of growth in public investments since FY22 appears dubious.

There are three components to public investment:

• government investment.
• central undertakings in the public sector (PSUs).
• PSUs in states.
• Policy changes must occur before State governments may make public investments, which are dependent on loans and advances from the Centre to the States. The integration of central PSUs’ extrabudgetary borrowing with the Center’s own Budget appears to be the cause of the much-reported increase in the Center’s investment. Therefore, the anticipated increase in government spending appears spurious. When the three components are combined, public investment appears to be about 6% of GDP, which may be comparable to levels seen before COVID-19.

Trustworthiness of the HDI:

• Regarding socioeconomic development, debates have erupted about the validity of the Multidimensional Poverty Index (MPI) and the Global Hunger Index’s (GHI) lack of representativeness. Alternatively, the Human Development Index (HDI) of the UN Development Programme could be a more reliable and appropriate metric.
• India’s HDI index score decreased from 0.645 in 2018 to 0.633 in 2021; moreover, the country’s global ranking decreased from 2015 to 2021 by one spot, indicating that other nations outperformed India.

Issues:

• In summary, we have worries about our sluggish economic recovery.
• Despite the government’s best efforts, there is a persistent rise in the trade deficit with China, which poses a strategic concern.
• Its opposite is a slowdown in the growth rates of industrial output, particularly in capital goods.
• An unheard-of ten-year drop in the economy’s fixed investment rate, with the public sector’s portion remaining constant,
• India’s HDI standing is declining.

In summary:

• Instead of trying to gain favour with their detractors by pointing out how serious the recent economic failures have been, official commentators might be better off discussing the IMF’s short-term growth estimates.