- June 23, 2023
Six remarkable aspects of India’s thriving economy
RBI warned of eroding Rs 1,000 note value, hinting at a Rs 10,000 note. India’s remarkable journey since.
The value of the Rs 1,000 note is being eroded by inflation. This is what the Reserve Bank told the Public Accounts Committee in 2014, shortly after the Narendra Modi government was elected. And so, Raghuram Rajan, then the governor of the Reserve Bank, said that India should start printing Rs 10,000 notes. This was not reported in the media at the time. It came out only in 2017. And very quietly even then.
But why? Beginning in 2013, we all know that Rajan had started looking at the balance sheets of public sector banks. He needed to know how many bad loans there really were. So how bad was the situation? What did Rajan see that he thought the Rs 1,000 note was becoming worthless? And that Indians would soon need a Rs 10,000 note. Did the UPA government leave India on the edge of hyperinflation? Did Rajan expect in 2014 that Indians would soon have to go to the market with shopping bags full of banknotes? Like they do in Venezuela or Zimbabwe. Today a Rs 10,000 note, maybe tomorrow a Rs 1 lakh note. And then what?
We will never know. Nine years later, the Reserve Bank is even getting rid of the Rs 2,000 note. There is no chaos or confusion. Because nobody uses the Rs 2,000 note anyway. Whatever inflation crisis Rajan foresaw in 2014 never came to pass. It was stopped in its tracks.
What a difference a decade makes. Back in 2013, analysts at Morgan Stanley had placed India among the Fragile Five economies. Instead, we proved everyone wrong and made it to the top five economies! And there is a new Morgan Stanley report out now in 2023. It talks about just how well India has done, and how bright the future looks. Normally, such reports come and go, without meaning much. But would you believe that three of the other countries on that old Fragile Five list (Brazil, South Africa and Turkey) now have economies that are actually tinier than they were in 2011? Would India have gone the same way, perhaps if things had not changed in 2014? Again, we cannot say. But at $3.75 trillion today, here are six things about the Indian economy that everyone can feel good about.
India has firmly established itself as the world’s fastest growing economy
In a world where recession is everywhere, India did something unusual. For the first quarter of 2023, India’s GDP growth beat expectations, coming in at 6.1 per cent. For comparison, China was at 4.5 per cent. For the last financial year, growth is now at 7.2 per cent. Meanwhile, Germany has just slipped into recession. The IMF estimates that in 2023, the German economy will see negative growth of 0.3 per cent, while the UK will contract 0.1 per cent. China is estimated to grow at 5.2 per cent. For India, the IMF forecast is 5.9 per cent for 2023. And most analysts, including the RBI, expect it to be much higher. This means that for the near future at least, India’s lead looks secure.
This leads to two important observations. First, India has been the world’s fastest growing major economy for most of the nine years since 2014. Between 2004 and 2013, there was only one such year, which was 2010. More importantly, this means that it is now routine for India to grow faster than China. Ten years ago, this was seen as a near impossible feat. But not anymore. Of course, China’s economy is now much bigger. But with each successive year, we chip away at China’s lead.
India’s latest GDP growth is coming off a high base
Much of the world was in lockdown due to the pandemic in 2020. So when the economies opened up in 2021, most countries showed GDP growth that looked quite strong on paper. One obvious doubt was whether they could sustain the growth momentum. And they could not. In the United States, growth fell from 5.7 per cent in 2021 to 2.1 per cent in 2022. In China, it crashed from 8.1 per cent to 3 per cent. In European countries such as France or the United Kingdom, it fell from the 6-7 per cent range to the 2-4 per cent range.
But not in India. Our growth of 7.2 per cent is coming off the high base of 9.1 percent the year before. In fact, revised estimates show that India actually did better than what was previously reported. For the 2021-22 fiscal, the NSO said last year that GDP growth was 8.7 per cent. But now it has been revised upwards to 9.1 percent. For 2020-21, the year of the pandemic, the GDP was supposed to have contracted by 7.3 per cent. But then it was revised upwards to a contraction of 6.6 percent. And now it has been revised upwards again to a contraction of 5.8 per cent.
There is a lesson here for some experts who have been out of favor since 2014. No, the Modi government did not cook the books to make the GDP growth look higher. If anything, it was the opposite. Almost always, the media buzz is only about the GDP growth in the current year. When you revise upwards the numbers for previous years, you make the base higher. This makes the headline number for the current year look smaller!
India has held back inflation in a way nobody else could
In April 2023, inflation in India stood at 4.7 percent. In the US, it was 4.9 per cent. To understand just how incredible this is, look at the UPA 2 years, when inflation averaged 10 percent. For comparison, US inflation in the 2009-14 period stayed within the 1-3 percent range, which is standard for a developed country.
Most people do not realize just how much credit India deserves for containing inflation in the last few years. Last year, the US was roiled by inflation, which reached a 40 year high of 9.1 per cent at one point. In the UK, inflation currently stands at 8.7 per cent for April 2023. For most of 2022, it remained well above 9 per cent, reaching even a high of 11.1 per cent in October. But a developing country such as India managed to keep inflation in the 6-7 per cent range during the same period.
The current inflation boom is a direct result of faulty policies during the pandemic. Western countries printed lots of money. They kept interest rates too low. They gave huge stimulus packages, in the hope of keeping the economy going. It failed in almost every way. The GDP growth rates bounced back strongly in 2021, but the momentum was lost almost immediately in 2022. And now they have too much money chasing too few goods. Hence, inflation. So the Federal Reserve panicked and raised interest rates sharply. This led to a series of catastrophic bank failures in the US.
You can read all about this in one of Raghuram Rajan’s latest columns. There he explains how the Fed got almost everything wrong. However, Rajan does not explain why he himself appeared to have advocated similar high stimulus policies for India back in 2020. The government’s plan to conserve resources is self-defeating, he had said. But India held back. We sustained high GDP growth with low inflation. In the West, growth faltered and inflation soared. Talk about ‘self-defeating.’ And think about this. If those big stimulus packages could set off an inflation bomb in the West, what could have happened here? Perhaps that Rs 10,000 note would have been needed after all.
‘India’s once-troubled banks are generating huge profits’
That is the headline of a recent article in Economist magazine. That is not an outlet known for being kind to India. As the same article notes, public sector banks in the early 2010s were generating huge profits on paper, but the numbers looked “unbelievable”. In 2015, an Asset Quality Review or AQR began. The accounting practices of banks were checked. One by one, the bad loans were pulled out into the light of day. By March 2018, we came to know that the real non-performing assets of public sector banks stood at a shocking 14.6 percent. For the 2017-18 financial year, the public sector banks admitted to a loss of Rs 85,390 crore! In fact, for each financial year from 2015-16 to the year 2019-20, public sector banks admitted to losses, amounting to a cumulative total of Rs 2.07 lakh crore. The situation was so dire that at one point, 11 out of 21 public sector banks had to be put under the RBI’s Prompt Corrective Action (PCA) framework. That is technical jargon for saying that these banks were about to go bust.
That crisis is now almost over. The accounting practices were straightened out. Some banks were recapitalized. Others were merged to improve their quality and efficiency. As a result, the gross NPAs (Non-performing assets) of public sector banks have come down to just over 5 per cent. The profits of public sector banks taken together, stood at Rs 66,543 crore in the financial year 2021-22, and every single one of them made a profit.
For the last financial year, the picture is even more rosy. From a loss of Rs 85,390 crore in FY 2017-18, the public sector banks have now turned around to a profit of Rs 1.04 lakh crore in FY 2022-23. The State Bank of India leads from the front, with an astounding profit growth of 59 percent year on year. Some of us might remember that earlier this year, there were banners and placards by the opposition, calling to “Save SBI.” Worth a chuckle at least. Save SBI from what?
India is now the world’s fifth largest economy, its highest point since 1950
By now, you must have heard about this. But why mention 1950? Because in 1950, India started out as the 6th largest economy. The economic policies of the first 40 years took us downwards, not upwards. By 1990, we had slipped to 12th position. Never let anyone explain this with racist myths such as the “Hindu rate of growth”. Put the blame where it belongs, with the Nehruvians. But since the 1991 reforms, we have recovered. By 2014, we were in 10th place. Now we have made it to the 5th. The IMF expects India to become the 3rd largest economy by 2027.
Of course, India lags behind severely when it comes to per capita GDP. But again, we are doing a lot better than we used to. In 1950, India’s per capita GDP was about 18 per cent of the world average. By 1991, this had shrunk to only 6 per cent. This means that compared to the rest of the world, Indians were about three times poorer in 1991 than in 1950. But things have changed. By 2014, this had increased to 14 percent. Now it is a little over 18 percent. This might feel discouraging. To know that in both situations, we are only a shade above the 1950 level. But look at the bright side. We will never make the mistakes of the 1950-91 era ever again.
India has met its fiscal deficit target
For 2022-23, the fiscal deficit was at 6.4 percent, down from 6.7 percent of GDP last year. This meets the target that the government set in the budget. For the next fiscal, India now aims to bring this further down to 5.9 per cent.
There are many reasons why this happened. For one, economic activity expanded more than what was expected. As a result, direct tax collection was Rs 16.61 lakh crore, higher than the expected Rs 16.5 lakh crore. The increased economic activity also shows in GST collections, which are up 22 percent year on year. Further, the use of technology such as direct benefit transfers through Aadhaar has removed fake beneficiaries from the system. This now saves the government more than Rs 50,000 crore each year.
“I would give credit to this government for its single-minded focus on containing the deficit, and the debt management,” former Finance Minister P Chidambaram said on a public forum a few months ago. The day-to-day political squabbles will continue. But it is reassuring to see our political class come together on the most significant issues.
India has proved the experts wrong
This is not one of the six good things about the economy mentioned earlier in the article. But it is important for future reference. So that we know who we can trust. When the current RBI governor Shaktikanta Das was appointed, there were a number of snarky comments about him not having an economics degree. But he has delivered where it matters. He has helped hold down inflation in an extraordinary era when most Western countries saw it rise to double digits. As an aside, did you know that the current heads of central banks in the US, France and the UK also do not have degrees in economics?
Perhaps we as a nation are too easily impressed by experts. When the pandemic began in 2020, a number of hotshot professors, led by Yogendra Yadav, formally proposed to treat all private property of citizens (cash, real estate, bonds, etc) as “national resources.” In other words, it seems they wanted to use this opportunity to turn India into a totalitarian Communist state. These were big experts, from JNU, Brown, NYU and Berkeley. Never listen to these people again. Even if some of them made excuses later, question marks over their competence remain. Then there was the Magsaysay award winner who wrote that the government should take over all private companies and force them to run as non-profits. Both the expert and the Magsaysay award are a joke. Now we know.
Of course, several challenges remain
The global situation is bad, even to put it mildly. The war in Ukraine may feel like a stalemate, but it really is not. Both sides are escalating. Both sides are keenly aware of history, but have their eyes wide shut. Are they sleepwalking into World War 3? We don’t know. Closer home, our neighborhood is as bad as ever. With Sri Lanka and now Bangladesh in economic crisis, there is not much room for trade even with friendly countries. It is not going to be easy.
But then, there will always be problems. But remember this. When in doubt, always bet on India. For the first time, the rest of the world is also counting on us. On our young people for big new ideas. For economic growth. Against China’s totalitarianism, everything. We cannot let everybody down. We won’t.
Written by Abhishek Bannerjee. The writer is an author and columnist.
Views expressed are personal and do not represent the stand of this publication.