This paper comes as a follow-up to the one Mr. Subramanian published last month, in which he had argued that India’s GDP growth in the 2011-17 period had been overestimated by 2.5 percentage points and that the actual growth rate was about 4.5%.
The original paper drew a lot of criticism over its methodology and assertions. The follow-up paper, the key highlights of which Mr. Subramanian had presented in a lecture earlier this month, is an attempt to address those criticisms. While the paper goes into some detail in addressing the statistical issues raised about the original, it also highlights certain cognitive arguments made against it and tries to show why those are unfounded. The first question raised, Mr. Subramanian said, was how India can, right now, grow at the same rate as it did in the pre-1980 Hindu rate of growth period, when the economic condition was clearly much worse.
“To begin with, today’s 4.5% translates into a per capita growth rate of about 3%,” he said. “In the pre-1980s era, the GDP growth rate was about 3-3.5% and the population growth rate was 2%, yielding a per capita growth rate of 1-1.5%. So, today’s 4.5% represents more than a doubling of the old “Hindu” per capita growth rate.”
Further, he said, the 4.5% growth rate was all the more impressive because the size of the economy now is five times of what it was in the 1980s. “Most impressively, a 4.5% growth rate is a notable achievement in the current, post-Global Financial Crisis world,” he added.
“In fact, if we take all the large major economies of the world, say those with GDP greater than $1 trillion [there are 13 of them], India, at 4.5% real GDP growth, would be the second-fastest growing economy in the 2012-2016 period, just as it was in the 10 years preceding.” The second issue he sought to address was that the cognitive benchmark during India’s boom years was 8% growth and that this benchmark has not changed over the years.
He argued that this benchmark of 8% failed to take into account a number of factors that took effect in the years following the boom years, such as the twin balance sheet (TBS) problem, the export collapse, rising oil prices, loss of macroeconomic stability under UPA-II, drought in 2014-15, and finally, demonetisation.
“One reason that cognitive benchmarks have not changed is that these shocks have produced not dramatic crises but persistent bleeds, which have gradually sapped the economy’s strength,” Mr. Subramanian said.
“Another reason why people underestimate the impact of the TBS and deglobalisation problems is that India has never experienced anything similar in its recent economic history,” he added. “Apart from conventional macro-economic crises, the country has only experienced small financial crises, each of which it has managed to overcome quickly.”
A related point he raised was that maybe India will have to revise downwards its “potential” growth rate in line with new realities.
“The third benchmark is a notion of India’s potential, which some believe is 7-8% or more,” Dr. Subramanian said. “But this benchmark may also need to be revised. All the other G-20 countries had to reduce their estimates of potential after the Global Financial Crisis, to reflect the completely changed economic environment internationally and domestically. India may have to do so, as well.”