It isn’t just this year – India’s economy is going to be stuck in a jam for a while

Rohan Venkataramakrishnan
It is clear to everyone now that India is going through a severe slowdown, with Gross Domestic Product growth this year likely to be a woeful 5% – far below the expected 7.4%. But it is only beginning to become clear to those who don’t pay close attention to the economy that India will not only be affected in 2019-’20 alone. Growth is likely to be sluggish for some time.
“The strong absorbent capacity of the Indian economy shows the strength of basic fundamentals of the Indian economy and its capacity to bounce back,” Prime Minister Narendra Modi is reported to have said at a meeting of businesspeople, economists and policy experts this week.
But what this “bounce” will look like is uncertain.
No V-shaped recovery
A term you will hear occasionally from those who pay attention to economics is “V-shaped recovery”. This is the idea that the line graph of any particular indicator, like say a country’s Gross Domestic Product, may have nose-dived, but it will spike back up as well. An example might be India’s GDP growth figures right after the 2008 economic crash. The “V” is easy to spot here. Growth dropped precipitously in 2008. But it rebounded to nearly the same levels as before the following year. This suggests that the cause of the drop was a sudden factor – in this case the global economic crash – and that the government did enough to bring the economy back on track.
The phrase was also popular in India a few years ago when Modi decided to suddenly withdraw 86% of the country’s currency and replace it with new notes, a move that delivered a massive shock to the economy with no noticeable gain. They may have been right too. There is indeed a “V” lurking in the Gross Domestic Product growth numbers after demonetisation – albeit using a GDP calculation that has been criticised by a wide variety of economists and questioned by Prime Minister Narendra Modi’s former Chief Economic Adviser. But that only makes what happened afterwards even more worrisome.
Bigger slide: Here is the Reserve Bank of India’s quarterly projection of GDP growth, provided in the Monetary Police Committee’s report of December. The line represents the actual growth, whereas the shades are projected outcomes.
The “V” is there, bottoming out in the first quarter of Financial Year 2017-’18, which corresponds to April-June of 2017, presumably when the initial effects of demonetisation – which was announced on November 8, 2016 – had fully made themselves felt.
But beginning the first quarter of the next Financial Year, that is April-June 2018, the numbers have registered a continuous, steady decline, falling to 4.5% in the second quarter of Financial Year 2019-20, i.e. July-September 2019.
Both the Reserve Bank of India and the government now expect GDP growth for the year to be at 5%. The State Bank of India, the country’s largest bank, expects the final growth number to clock in at 4.6%. That wouldn’t just be deeply disturbing for a country that at the start of Narendra Modi’s first term in 2014 had double-digit growth in its sights. It also reflects something worrisome about the understanding that the government and other institutions have of the economy.The RBI began 2019 with a projection of 7.4% GDP growth for India, and it now expects that number to be just 5%. That is a huge gap, one large enough to fit the entire economy of Uzbekistan or Chhattisgarh.
The SBI report, in fact offers even more bad news.
“We now believe that the RBI projection of a 5.9-6.3 per cent GDP for FY21 could be on the higher side,” the report said. “We could be now staring at a sub-6-per-cent growth for two successive years.”Demonetisation bump
Indeed, there are two things to note here.
First, go back to the RBI graph. Although the “V” shape there is attributed to demonetisation, if you look closely, you’ll see that the decline begins before 86% of the currency was withdrawn, in the third quarter of Financial Year 2016-17.
A slightly earlier RBI graph makes this more evident. Here, the slide has begun in the first quarter of Financial Year 2016-17, i.e. April-June of 2016.
(To be contd)