Virendra Pandit
New Delhi: “Ill-conceived, biased, and premature.” This is how a research report from the State Bank of India on Tuesday dismissed former Reserve Bank of India Governor Raghuram Rajan’s warning that the country is “dangerously close to the Hindu rate of growth,” in view of the recent GDP numbers and the available data on savings and investments.
“Interpretations of GDP growth based on noisy quarterly numbers is a game of smoke and mirror,” said the SBI’s research report, Ecowrap.
The report appeared within days of the ex-RBI chief arguing that India is “dangerously close” to the “Hindu rate of growth” of just 4 percent, based on data about subdued private sector investment, high-interest rates, and slowing global growth.
Rajan said the sequential slowdown in the quarterly growth, as revealed by the latest estimate of national income released by the National Statistical Office (NSO) last month, was worrying.
Indian economist Professor Raj Krishna coined the phrase “Hindu rate of growth”, in 1978 to describe slow economic growth rates from the 1950s to the 1980s, averaging 3.5 percent.
“India’s quarterly Y-o-Y GDP growth has been in a declining trend in FY23 sequentially, prompting arguments that India’s growth is reminiscent of a pre-1980 Raj Krishna coined growth rate,” the report said.
Apart from the fact that quarterly growth numbers are “noisy and should be best avoided for any serious interpretation (on an average, India’s GDP growth has witnessed Rs 2 lakh crores upward revision for the 3 years ended FY23), “we find such an argument ill-conceived, biased and premature at its best when weighing the recent GDP numbers against the available data on savings and investments.”
The investment and savings data for the past decade reveals interesting points, said the report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
The government’s gross capital formation (GCF) touched a high of 11.8 percent in 2021-22, up from 10.7 percent in 2020-21.
“This also had a domino effect on private sector investment that jumped from 10 percent to 10.8 percent over the same period,” it said.
The trends in GCF to gross output ratio or the plow back of funds for the creation of fresh capacity shows that for public administration the ratio attained a fresh peak in 2021-22 owing to the emphasis on capital expenditure in recent budgets.
At the aggregate level, GCF is supposed to have crossed 32 percent in 2022-23, the highest level since 2018-19.
According to the report, in 2021-22, gross savings have risen to 30 percent from 29 percent in 2020-21.
“The ratio is supposed to have crossed 31 percent in 2022-23, the highest since 2018-19. The household savings increased sharply during the pandemic period on account of sharp accretion in financial savings such as deposits,” said the report by SBI’s Economic Research Department.
While household financial savings have since then moderated from 15.4 percent in 2020-21 to 11.1 percent in 2022-23, savings in physical assets have grown sharply to 11.8 percent in 2021-22 from 10.7 percent in 2020-21.
“Prima facie, a careful analysis shows that Incremental Capital Output ratio (ICOR), which measures additional units of capital (investment) needed to produce additional units of output, has been improving.
“ICOR which was 7.5 in FY12 is now only 3.5 in FY 22. Only half of the capital is now needed for the next unit of output,” it said.
Such reducing ICOR in the current years reflects a relatively increasing efficiency of capital. The talk on ICOR becomes relevant and shows that the economy is on a sound footing, it added.
The report said it is also now clear that the potential growth of the Indian economy (a global phenomenon) is now lower than earlier.
“From that point of view, future GDP growth rates even at 7 percent could still mean a decent number by any standards!” it said.
The Gross Domestic Product (GDP) in the third quarter (October-December) of the current fiscal slowed to 4.4 percent from 6.3 percent in the second quarter (July-September) and 13.2 percent in the first quarter (April-June).
The growth in the third quarter of the previous financial year was 5.2 percent.