Apr 11th 2024|mumbai
Periodically, optimism about India surges. In 1996, shortly after the country welcomed foreign capital, property prices in Mumbai, its financial epicenter, skyrocketed to unprecedented levels. By 2007, India’s economy boasted an annual growth rate of 9%, sparking speculation of reaching double digits. However, with each boom came subsequent disappointment as the late-2000s surge paved the way for financial instability in the 2010s.
Presently, India appears to be on the cusp of another upward trajectory. In the year leading to the fourth quarter of 2023, GDP growth surged to 8.4%. Nonetheless, such statistics are viewed with skepticism. Economists, both within and beyond the government, are engaged in a discourse regarding the true pace of economic growth—a discussion amplified as a general election slated for April 19th approaches. Consequently, the question arises: What is India’s genuine growth rate, and is the economy indeed accelerating?
Optimism regarding India’s economic growth periodically surges. For instance, in 1996, following the country’s opening to foreign capital, property prices in Mumbai skyrocketed, reaching unprecedented levels. Similarly, in 2007, India boasted an annual economic growth rate of 9%, sparking speculation of reaching double digits. However, these booms were often followed by disappointment, as seen in the financial turbulence of the late 2000s.
Presently, India seems poised for another upswing. In the year leading to the fourth quarter of 2023, GDP growth surged to 8.4%. However, these figures are met with skepticism due to the intricate nature of India’s GDP calculation methodology. In 2015, India transitioned to a new GDP calculation method, which led to debates regarding the accuracy of growth figures. In fact, a paper published in 2019 suggested that India’s GDP growth from 2011 to 2016 had been overestimated by a few percentage points annually.
One major concern lies in the choice of deflator and the method of deflation. India predominantly uses wholesale producer prices as its deflator, which may not accurately reflect the growing importance of service sectors in the economy. Additionally, India employs a single deflation method, which can mask the impact of changing input prices on productivity.
Despite these challenges, there are signs of improvement. Since the COVID-19 pandemic, the discrepancy between wholesale producer prices and consumer prices has narrowed. However, caution is warranted when interpreting quarterly GDP figures, as they can be influenced by one-time factors.
Moving forward, India aims to incorporate services into its price indices and adopt a double-deflation method. However, this transition may be hindered by the reluctance of some companies to share cost data and the challenges of collecting accurate data on service prices.
While recent data suggests a robust economy, with annual growth rates expected to reach 6.5% over the next five years, the true growth trajectory remains uncertain. Nevertheless, the overall economic outlook appears positive, with strong alternative indicators and forecasts indicating potential acceleration.