Beyond the ‘fastest-growing economy’ tag

While the economic growth CAGR of 3.1% over the 2019 level is impressive for India, the fact is that the growth rate needs to be a lot higher to generate the jobs needed.

economy, gdp
Not surprisingly, as countries started to come out from the lockdowns, there was a tendency for the growth rates to get pushed up due to the negative base effect. (IE)

The epithet of ‘fastest-growing economy’ for India has been a confidence-booster, especially since the world economy is poised for a major slowdown in 2023, according to the International Monetary Fund (IMF). While the IMF forecasts 5.9% growth for India in FY2023 against RBI’s 6.5%, the number is still very impressive. Without going into the intrinsic quality of the growth rate of 7% or it’s thereabouts for 2022, it would be interesting to compare growth rates with other countries.

Based on IMF data, what strikes us is that there are some smaller economies that are part of the group of emerging economies which also registered fairly impressive growth rates in 2022. Ireland, for example, is the fastest-growing country with 12% recorded for the year. It would not have been significant but for the fact that it was part of the infamous PIGS group which was responsible for the euro crisis in the early part of last decade. In fact, growth was very impressive even during 2020, the Covid year, at 6.2%. Quite clearly, being small has its advantages.

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The other three countries that are much smaller in size than India and had impressive growth rates in 2022 were Philippines (7.6%), Malaysia (8.7%) and Bangladesh (7.1%). A comparison with these nations may not be proper but should be recognised.

Single-year comparisons can always be misleading as base effects play a major role. Such distortions began in 2020, when Covid ensured lockdowns of various magnitudes across several nations. This was the time when negative growth was the norm is most economies as economic activity had halted for a period of 2-4 months depending on the intensity of the disease there. It was coincidental that no country had an alternative solution to a lockdown, and this caused GDP to fall.

Not surprisingly, as countries started to come out from the lockdowns, there was a tendency for the growth rates to get pushed up due to the negative base effect. Therefore, positive effects were felt across the board in 2021 and, further, in 2022. This added impetus to these smaller nations in 2022.

In 2020, negative growth was the norm. Turkey, Taiwan, Bangladesh, China and Ireland were the only nations not to witness a fall in GDP as growth rates were positive. The UK witnessed a 11% de-growth as did Spain (11.3%). This helped bring about buoyant growth in 2021 (7.6% and 5.5%, respectively) as well as 2022. Growth in the UK was 4% and 5.5% in Spain in 2022. But the UK will draw little comfort from the same as it is expected to register negative growth in 2023 once again.

Argentina witnessed 9.9% de-growth in 2020 and 10.4% and 5.2% in 2021 and 2022, respectively. Even in the case of US, growth fell by 2.8% in 2020 but recovered to 5.9% in 2021 before moderating to 2.1% in 2022. Therefore, the important conclusion is that growth rates over 2021 have a base effect—this has propped up growth numbers across countries.

How does then one look at growth rates, given that base effects distort numbers in both directions? One way is to look at growth over a neutral year, say 2019. By calculating a compound growth rate for these nations a better picture emerges on the recovery process. Here the results are interesting as the growth now pertains to average annual for a period of three years.

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Ireland continues to be the best performer with 10.5% CAGR growth. This is followed by Turkey with 6.2%, Bangladesh 5.8%, Taiwan 4.1%, China 4.5% and India 3.1% (this will be slightly higher if 2022 is taken at 7% instead of 6.8% as per IMF). The Indian performance is still very impressive, given, other than China, the countries in the pool are much smaller to warrant comparison.

India would rank third in terms of size going by PPP, with China being the largest. Turkey would be around 29% of India’s GDP and is the largest among the other nations which have witnessed higher growth rates. Taiwan is around 12% the size of India, Bangladesh 10% and Philippines 6%. Intuitively, it may be seen that with a smaller size of GDP it is easier to post higher growth rates, which is what has happened for the smaller nations.

While a 3.1% CAGR for economic growth for three years is creditable, it will still take some time for India to clock the 8% growth rate that it requires on a sustained basis to create more jobs and ensure that poverty is under check. Job creation is important, given, the debated on whether poverty has come down or not notwithstanding, the fact that the government gave ‘free food’ under the Pradhan Mantri Garib Kalyan Yojana till March 2023 to over 800 million indicates that the number of needy requiring support from the government is high. This can only be addressed by creating more jobs.

Hence, while the epithet of fastest-growing economy should be inspirational, there is still a lot of work to be done and should not lead to complacency. Growth of 6-6.5% in FY24 is achievable but will only be improving, albeit marginally, the status quo.

The writer is chief economist, Bank of Baroda

Views are personal

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First published on: 01-05-2023 at 04:00 IST