Assessing the Recent Indian Economic Growth

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Assessing the Recent Indian Economic Growth

Commentary

Vol. 57, Issue No. 34, 20 Aug, 2022

Updated on 22 August 2022

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Although the headline growth in 2021–22 and the projections for 2022–23 following the disastrous COVID-19 pandemic are impressive, indeed the highest among major economies, this is not the hoped-for V-shaped recovery as the output loss is far from being recouped. India’s output loss is among the highest in major G20 economies. It may be difficult for the Indian economy to sustain an average growth above 5% in a business-as-usual scenario because its potential growth has declined through hysteresis, and it faces several headwinds going forward.

Following the sharp decline of -6.6% in real growth in 2020–21, the Central Statistics Office (CSO) has provisionally estimated that the headline growth in 2021–22 would recover smartly to 8.9%.¹ Further, in its April 2022 World Economic Outlook (WEO), the International Monetary Fund (IMF) projects that India would grow at 8.2% in 2022–23 and by 6.9% in 2023–24.² (For comparison with other countries, the IMF’s growth estimates for India during 2022 and 2023 are 8.9% and 5.2%, respectively.) The IMF expects India to be the fastest growing major economy during both these years. Is this the much-talked-about V-shaped recovery that has at long last put the faltering Indian economy back on track?

While there also appears to be a strong bounce back in headline growth, revenue, and exports over the near term, it is a challenge for economists to interpret the headline numbers and assess the recovery on account of three separate base effects. There was, first, a declining growth trend prior to the COVID-19 pandemic that saw the annual growth fall serially from 8.2% in 2016–17 to 7.1% in 2017–18, 6.3% in 2018–19, and to 3.7% in 2019–20. Second, this was followed by the precipitous fall of -6.6% in 2020–21 on account of the pandemic when the economy reeled under the twin shocks of a sudden and stringent lockdown during the first phase of COVID-19, followed by a disastrous second wave. Third, interpreting the growth rates in some economic indicators in Table 2 (p 19) for 2021–22 cannot be taken at face value as these are distorted by high levels of underlying price inflation.