View: Why a middle-income status for India by 2047 is certain

The Q2 real growth figure of 6.3% isn’t completely unexpected. As the effect of the low base wore off, growth was bound to slow. There are two questions that remain. What’s growth likely to be in 2022-23 and what’s the trajectory of growth from 2023-24?

For both, I think, the range is between 6.5% and 7%, closer to the upper end of the band for the first question and closer to the lower end of the band for the second question. CEA has said he expects growth in 2022-23 to be between 6.8% and 7%, a reasonable guess, given the high growth in Q1. Recently, Morgan Stanley brought out a report (“Why This Is India’s Decade”), focusing on the slightly longer term and highlighting offshoring, digital differentiation and energy transition. There are different ways to slice the growth question.

Given what’s happening in the rest of the world, and India isn’t insulated, net exports cannot be a major driver. However, unlike economies that are excessively export-dependent, India has growth drivers in consumption, government expenditure and private investments. Consumption growth has been robust. This isn’t only repressed consumption compensating. It is more than that. Discretionary consumption is affected by uncertainty and is postponed.

Despite global uncertainty, certainty in government policies has ensured that consumption picks up. Consumption is also unfavourably affected by inflation and expectations about inflation. Those pressures are easing off and commodity prices aren’t as high as they were.

Despite fiscal consolidation compulsions, the Union government has focused on capital expenditure, with greater multiplier benefits than revenue expenditure, and that focus is bound to continue in the forthcoming budget, especially because tax revenues have been buoyant.

If one looks at the Q2 figures, questions can rightly be asked about manufacturing growth. However, capital expenditure figures show growth and as consumption leads to decline in excess capacity, manufacturing will also pick up, as services have already done.

Stated differently, since May 2014, the Union government has introduced several measures that can be interpreted as supply-side ones (PLI, labour, land, DBT, IBC, infrastructure, asset monetisation), and these enhance productivity. With a time lag caused by Covid and its consequences, this will lead to growth and in many sectors, India is already becoming a part of the global supply chain, a point also mentioned by Morgan Stanley.

Without looking at the efficiency of capital usage (the output/capital ratio), one shouldn’t consider the investment/GDP ratio alone. If one takes the incremental capital output ratio (ICOR) as 5, a 31% investment rate translates to a growth of 6.2%. That’s a lower bound and 6.2% is better than what many countries in the world will be able to achieve.

An all-India growth rate is a function of what states achieve and factor market reforms are largely contingent on what states do. A large chunk of public expenditure, including capital expenditure, is made by states. As states reform, recovering from Covid, aggregate growth rates should also increase. Had the world been more kind, one might have expected an 8.5% real growth. In a world that falls short of that ideal, 6.5% to 7% is not something to be scoffed at; it will change the face of development and prosperity. A middle-income status by 2047 is certain.