Back on track, India's Growth set to outpace asian peers

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Despite being one of the worst-hit countries in the pandemic, the country has managed to get back on track with a spate of reforms.

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Published: Tue 26 Jan 2021, 10:24 AM

After a roller-coaster ride over the past decade, particularly in the aftermath of a tumultuous pandemic-inflicted contraction in 2020, India is back on the growth track, inexorably regain­ing the momentum to catapult its economy to a $5 trillion trajectory over the next five to six years.

The world's sixth largest economy, which has been toppled by the UK from the fifth position subsequent to a steep GDP contraction to $2.8 trillion just recently, is expected to shrink by 9.6 per cent in fiscal year 2020-21 ending March 31, before rebounding at variously estimated growth rates ranging up to 12.8 per cent through the rest of 2021.

Despite being one of the world's worst- hit larger economies in 2020, India has navigated the pandemic challenges successfully, and with the rollout of the Covid-19 vaccine and on the back of a spate of stimulus measures and reforms, economists and analysts are unanimous in their assessment that the second largest populous coun­try is, indeed, entering a vibrant growth phase.

Upbeat economists at Nomura say that India's growth is going to outperform other countries in Asia this year on the back of substantial monetary and fiscal stimulus and an effective virus contain­ment drive. "So in calendar year 2021, we are expecting close to 12.8 per cent growth which is partly base effects driven but from a fundamental standpoint, is a fairly solid growth number."

The UK-based Centre for Economics and Busi­ness Research observes that India will again replace the UK as the fifth largest in 2025 and race to the third spot by 2030, several years earlier than previ­ously estimated, while China will overtake the US as the world's largest economy before 2030.

According to a study that constructed GDP sce­narios using the working age population of coun­tries, the country of 1.384 billion people with the world's largest young population of 700 million under the age 30 years will benefit from its unique demographic dividend to overtake Japan as the third-largest economy on the planet by 2050 after the United States and China.

The study, published in the Lancet Medical Journal, took 2017 as the base year, when India was the seventh largest economy in the world, to calculate the growth prospects of Asia's third largest economy

With more than 50 per cent of the population below the age of 25 and more than 65 per cent below the age of 35, the median age of Indians is 29 years compared to 37 for China and 48 for Japan. It will jump 10 years to almost 35 by 2036, a recent official population projection report shows.

However, economists and experts believe India has a limited window to harness its human capital and absorb it in the workforce, as data shows that the number of older people in the population is expected to increase and their share in the total population shall jump to 15 per cent in 2036 from 8.4 per cent in 2011.

The medical journal's findings have been re­vealed as India's GDP contracted by 23.9 per cent in the April-June period quarter while the World Bank revised downward its forecast. It now sees an economic contraction of 9.6 per cent, sharper than earlier estimated, for fiscal 2020-21 in the backdrop of the devastating im­pact of the national lockdown and the income shock experienced by households and small ur­ban service firms.

The World Bank's grim forecast comes as a so­ber reminder that India's aspirations to propel its economy to $5 trillion by 2024-25 will be hardly achievable unless the country attains a growth rate of at least 12 per cent in nominal terms and 9.0 per cent in real terms.

Some economists argue that a growth of 7.0 per cent plus looks elusive for the foreseeable fu­ture albeit the economy has started showing signs of strong rebound.

They believe that to achieve the vision of build­ing a $5-trillion economy and transforming India into a next manufacturing hub, the government needs to have policies that attract more foreign investment into the country and remove stumbling blocks such as tariffs on imports of intermediates.

To accelerate growth to the desired level, the government must provide the necessary infra­structural support and an open trade environment that enables the free flow of goods and services. Improvement in infrastructure is also important for the successful use of the performance-linked incentive (PLI) launched for sectors like pharma­ceuticals, technology products, telecom and solar cells: PLI would be able to spur investment only when the supporting environment in terms of lo­gistics and infrastructure is well developed, ac­cording to economist and analysts.

The International Monetary Fund in a recent appraisal said India is gradually recovering, subtly endorsing a rather upbeat view of a V-shaped re­covery projected by the Finance Ministry in its latest forecast.

The bullish forecasts by both the IMF and the Finance Ministry come in the wake of a faster than expected rebound in the September quarter. A pick-up in manufacturing helped the economy clock a lower contraction of 7.5 per cent over 23.9 per cent in April-June quarter, holding out hopes for further improvement on better con­sumer demand.

Finance Minister Nirmala Sitharaman in a vir­tual address to the International Monetary and Financial Committee (IMFC) late last year said that a V-shaped pattern of recovery is being seen in several high-level indicators.

"This V-shaped recovery, evident at the half-way stage of 2020-21, reflects the resilience and robustness of the Indian economy. The funda­mentals of the economy remain strong as gradu­al scaling back of lockdowns, along with the astute support of Atmanirbhar Bharat Mission has placed the economy firmly on the path of recovery," the Finance Ministry said.

Under the Atmanirbhar Bharat campaign, touted as a post-pandemic developmental model, the government seeks to create as many as five to six million jobs within the six months in the formal sector but more will need to be done to help India's huge and ailing informal sector. The campaign aims at transforming India into a major player in the global economy, specifically, by enhancing the role of the manufacturing sector.

Noted economist and former RBI Governor Raghuram Rajan has been realistic in observing that the economy would not get back to pre-Co­vid levels before late 2022 even as New Delhi believes that India is on course for a V-shaped recovery.

However, Rajan believes that India would see a strong wave of growth. Any country has to grow after being down 25 per cent of GDP. "We will see a rebound. The question is, what are we doing to make up the lost ground? The World Bank es­timates that we would have lost $900 billion by the time this (pandemic) is over."

While the Indian markets have been hitting new records every day on the back of vaccine roll-out and a gush of liquidity, Rajan, who is currently a professor at University Of Chicago's Booth School, warns that structural problems of the economy are far from over and will come to light now de­spite bullish market sentiments on the back of vaccine development and a gush of liquidity.

According to Rajan, the deep problems in the informal economy have not yet been recorded properly and the job losses there could be more permanent in nature along with millions of re­corded losses in the formal economy. The infor­mal employment is probably down much more and guesstimates are, you know, maybe 80 million people are unemployed right now relative to what they were before the pandemic hit, former RBI chief said.

The informal sector, which accounts for four-fifths of employment, has also been subject to severe income losses during the pandemic. Recent high-frequency data indicate that the services and manufacturing recovery are gaining momentum.

Some economists also warn that the prolonged farmer protests taking place across the country against the three newly-enacted farm laws threat­en to dampen India's agricultural growth pros­pects going forward.

Agriculture remains the mainstay of the Indian economy and continued distress in the sector may potentially create severely adverse supply-side ripple effects. The quicker a breakthrough in talks between farm union representatives and the Cen­tre is achieved, the more likely it is for the nation to achieve its growth targets for the coming year, they said.


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