The Economy and the People

If one were to go by the real gross domestic product (GDP growth rates for 2017–18 and 2018–19 expected/forecasted in the Government of India’s Economic Survey 2017–18 (ES)—6.75% and 7%–7.5% respectively—and accept the Central Statistics Office’s figures that suggest an average 7.5% GDP growth rate between 2014–15 and 2016–17, then India would perhaps turn out to be the fastest-growing economy in the world over the five-year period. Moreover, that the stock market, as reflected in the upward climb of the Bombay Stock Exchange Sensex and the Nifty 50 Index, has been booming. “India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines—private investment and exports,” the ES recommends. The authors want the Indian economy to return to the high growth witnessed from 2003–04 to 2007–08, and sustain it over the long term. But they do not seem to know how. It would entail an understanding as to why that growth process came to be undone and what were the problems with it that could not be addressed. This is found wanting, even though there is an attempt to learn from investment and saving slowdowns in other countries.

From the figures cited in the ES, it seems that on the demand side of the economy, investment has faltered quite badly, though this is not reflected in terms of an expected sharp deceleration in real GDP growth. Only if the incremental capital–output ratio has declined significantly could one go along with the officially claimed authenticity of the high GDP growth rate figures. But there is nothing to suggest that this has happened. The investment data is available only up to 2015–16. This shows a consistent reduction of the investment rate—gross capital formation as a percentage of GDP from around 39% in 2011–12 to 33.3% in 2015–16. Indeed, the fixed investment rate—gross fixed capital formation as a percentage of GDP—declined by 5 percentage points over the period, and by another 2 percentage points in 2016–17. This seems to continue to decline in 2017–18, at a time when the private corporate sector (PCS) has become the main investment engine of the economy. The ES ascribes the faltering of investment partly to the “twin-balance sheet problem”—the financial distress of over-leveraged private companies and bad-loan encumbered public sector banks.