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Perception War over GDP Overshadows Need for Growth Strategy

MARCH 09, 2023

By TIOL Edit Team

GROSS Domestic Product (GDP) has become a pendulum in the political narrative. It is lately swinging between two extremes of perception, leaving impoverished masses confused.

One extreme view projects GDP growth rate in India as a bright spot and as beacon of hope for the world. The other standpoint sees the slowing average yearly growth in GDP as the slide-back towards the alarming Hindu rate of growth witnessed for decades before big-bang economic liberalisation unveiled in mid-1991.

Both extreme perceptions represent facts in the context against which they are mentioned. They are, however, nothing but just two parts of the whole, bigger truth. The bane of public discourse is that it is never holistic. The narrative is usually driven by orchestrating one or few parts of the whole truth and avoiding uncomfortable facts.

Growth rate of GDP is a mere number. It should be accompanied by regular disclosure as to how GDP growth is facilitated by the Government revenue and debt. Is the imbalanced mix of revenue and debt creating growth and welfare bubble?

Is growth in GDP leading to worrying rise in the current account deficit. How much of GDP growth is driven by sheer size of population and continental nature of India economy?

Before drawing whole and big picture of GDP, consider a few quotes that reflect the feel-good perception. The Managing Director of International Monetary Fund (IMF) Kristalina Georgieva has repeatedly lauded India as "bright spot" amidst disheartening global economic outlook. In her speeches, she does not mention that IMF is concerned about India's growth strategy and its reluctance to undertake certain reforms.

Other multilateral institutions also frequently appreciate the growth in Indian GDP. So do stock market-linked global investment advisors. They largely laud Indian economic recovery from the lockdowns-worsened pandemic.

Both the Prime Minister and the Finance Minister have cited adulation by IMF & the World Bank on different occasions to articulate Government's success in managing the economy.

Addressing Madhya Pradesh Global Investors' Summit in Indore, Prime Minister Narendra Modi, for instance, pointed out that IMF sees India as a "bright spot" in the global economy.

He noted the World Bank believes the country is in a better position to deal with global headwinds than many other countries. "This is because of India's strong macroeconomic fundamentals".

The opposite extreme view is that average, annual economic growth is slowing down after disruptions resulting from demonetization, uncertainty resulting from tax in works - Goods and Services Tax (GST) - and certain other developments.

Former RBI governor Raghuram Rajan flagged this concern keeping in view latest GDP data released by the Government. A PTI news quoted him as saying that India is "dangerously close" to the Hindu rate of growth with private sector investment subdued, interest rates high and global growth slowing.

As explained by PTI, "The Hindu rate of growth is a term to describe the low Indian economic growth rates - averaging around 4 per cent - from the 1950s to the 1980s. It was coined by Indian economist Raj Krishna in 1978".

This calls for dispassionate scrutiny of multi-dimensional GDP to understand whether growth process is wholesome, speedy and adequate. It requires focus on half a dozen vital factors. Of these, two GDP enablers require focus. These are: Tax-GDP ratio and Debt-GDP ratio. We urge the Government to release data regularly on these two metrics along with the quarterly GDP statistics.

According to latest Statements of Fiscal Policy presented as component of Union Budget 2023-24 documents, Tax-GDP ratio has improved from 10.7 per cent in BE 2022-23 to 11.1 per cent in RE 2022-23 and BE 2023-24.

It is pertinent to note that 11% was attained in 2018-19. This implies that the Centre's Tax-GDP ratio has been stagnating or moving within a range that is well below the one required to remove poverty over five years.

Ideally, one should have periodic updates on Tax-GDP ratio of Centre, States & Local Government bodies to understand whether the economy is generating revenue to take on not only poverty but also the mountain of debt.

As put by a World Bank blog penned by team of experts in December 2018, "Tax revenues above 15 percent of a country's gross domestic product (GDP) are a key ingredient for economic growth and, ultimately, poverty reduction". The blog has cited a comprehensive research study to back this conclusion.

As tax and non-tax revenue is inadequate to meet basic needs of people and to finance Government's capital and non-capital expenditure, the dependence on borrowings becomes a key enabler of GDP growth. Excessive reliance on debt, both by the Centre and the States and its potential, adverse risks have been studied by 15th Finance Commission (15th FC).

Unfortunately, the Union Budget 2023-24, like the previous one, has maintained studied silence on key fiscal recommendations contained in 15th FC report submitted in October 2020. We have touched this in earlier editorials too (Budget prep - Challenges Many & Fiscal Options Few (Time for Centre & States to Pull Up Socks on Fiscal Front

We would again appeal to the Government take a call on whittling down Tax-GDP ratio to improve quality and robustness of economic growth.

This brings us to the core issue: Is the GDP growth adequate to eliminate poverty and if so when? Neither the GDP growth rate nor the drivers of growth are adequate to remove poverty. Should we run away from asking reasons for the country's inability to achieve Mr. Modi's goal for poverty-free India by 2022?

The economy has to grow at sustained 8-10% at constant prices over a decade to eliminate extreme poverty as defined by the World Bank. It, last year revised extreme poverty line to daily income of $ 2.15 per head from earlier $ 1.90.

The Government has neither applied this revised definition nor the one applied by the World Bank for lower middle-income countries in which India is placed. The World Bank last year revised poverty line for LMI nations to .65 from .20 per day.

The Government has not unveiled functional or working definition of poverty - a job that Mr. Modi assigned to experts in 2015. In July 2016, a Task Force failed to arrive at a consensus on this issue. It recommended this issue should be studied by an expert committee.

A glance through all parliament questions on poverty yield a common answer: The UPA Government estimated poverty in July 2013 on the basis of a Large Sample Survey on Household Consumer Expenditure (HCE) conducted by the National Sample Survey Office (NSSO) in 2011-12. NSSO initiated steps for conducting such a new survey in August 2022.

More initiatives ought to be taken regularly to update data on all economic activities to improve robustness of growth of GDP.

Time is also ripe for the Government to unveil strategy to accelerate GDP growth rate with clear-cut underlying objectives including PM's vision to transform India into a developed country by 2047.