India’s Growth Outperforms, Says India | American Enterprise Institute

One quarter of GDP growth doesn’t matter much. India this week announced 7.8 percent real GDP growth in its April–June quarter. If the true result is 5.8 percent, few will notice. The issue is longer term. Prime Minister Narendra Modi’s government took the result, which beat most expectations, as evidence of wise policy and its critics’ mistakes. As one critic, I could certainly be wrong. But India continuing to sing its own praises is not convincing.

An immediate problem is that last year’s base for GDP was reduced, enabling a better figure now. The government had reasons to make the revisions, but they unavoidably introduce another source of error. Revisions are also a standard tool for governments when they do want to manipulate data—I said as much about the US last year. And this isn’t the only question about India’s official economic figures.

The National Statistics Office put nominal GDP growth at 10.3 percent, for an implicit GDP deflator of 2.5 percent. Retail inflation was nearly 4 percent. This continues a pattern of low deflators allowing for high real-growth claims. At India’s stage of development, if the economy is growing rapidly, there should be inflation from pervasive supply-demand mismatches because markets are not yet deep enough to anticipate and meet fast-changing demand.

Modi’s India has supposedly solved this issue, though there aren’t policy steps to explain such a surprising historical break. Moreover, for this quarter in particular, there should be price pressure from interrupted oil supply. India is the world’s second-largest net crude oil importer, and import costs jumped 57 percent in the quarter. Nonetheless, the deflator expanded at an almost ideal pace.

The economic engine was said to be gross fixed capital formation, which accelerated to nearly a 12 percent gain. That speed is not supported by proliferation of high-profile transactions and implies the US-Iran war had no effect on sentiment. Rapid investment looks more plausible in light of sharp acceleration in bank credit, to a 16.5 percent rise by the end of the quarter. But loose money makes the deflator look that much less plausible.

Indian politicians and analysts are referring more to high-frequency indicators. Prominent among these are indicators that show not prosperity but rather activity switching from one medium to another. Goods and services tax revenue rising quickly as coverage expands is often portrayed as a telling success, while the combined center and state fiscal deficit is considerably larger as a percentage of GDP than it was pre-COVID.

Similarly, the digitization of payments is often implied to be a proxy for fast consumption instead of being recognized primarily as substitution from cash. Formalization of employment in employee payment schemes is treated as a jobs indicator when the pool of informal workers is so gigantic as to make formalization fairly easy and India retains a measure of joblessness that deliberately disguises the true state of the labor market.

External indicators are typically more reliable, because they can be checked. Net foreign direct investment was short of $5 per capita in the April–June quarter. Net foreign portfolio investment saw an outflow larger than the direct inflow, as capital holders found India wanting. Most importantly, the past 15 years have seen the rupee lose over half its nominal value against the dollar. When does a “world-beating” economy convince people its money is valuable?

For policy evaluation, factor markets are fundamental. Laws to prevent firing workers at all firms of size and pervasive collective land ownership show the lack of action there. Prime Minister Modi can also be judged by his own words. What he picks out as top reforms typically don’t spur growth and can even be reminiscent of the “bad old days”—for example, his urging Indians not to travel abroad or buy gold. Odd for a boom.

This is a long-term debate. By the end of the decade, life in India will be clearly better than at the start; the issue is how much. We see the world’s views, but ordinary Indians will be the arbitrators. Will they come to see the 2020s as transformative or disappointing? The same pace of growth can be more or less beneficial. And India’s size means great variations by state and industry. But even granting these unavoidable elements, Indian economic data look misleading.