Rewriting India's Growth Story

The latest official Indian government data suggests that India is set to become the world’s fastest-growing emerging economy. While there are indications that India’s “growth story” may be back on track, there are also concerns about factors that might come in the way. For now, optimism with some caution seems to be the order of the day.

The latest economic growth figures

According to data released on February 9 by the Central Statistics Office of India, the country’s gross domestic product (GDP) growth rate in the last two quarters of 2014 was 8.2 percent and 7.5 percent, ahead of China’s growth rates. In the current fiscal year, the government expects GDP to grow by 7.4 percent, a significant increase from the 6.9 percent of the previous year.

Earlier this year, the World Bank and International Monetary Fund (IMF) also made positive predictions about the Indian economy. While the IMF expects India’s growth rate (6.5 percent) to overtake China’s (6.3 percent) as soon as 2016, the World Bank predicts that it will not happen until 2017, when India’s growth rate (7 percent) will outpace  China’s (6.9 percent). 

These prognostications, which have boosted the sentiments of policymakers and industry leaders alike, are clearly substantiated by marked improvements in India’s fundamentals. The economy is showing strong signs of recovery (following the dismal growth, high inflation, volatile currency and investor pessimism of 2011-2014). The stock market is booming with foreign investors eagerly purchasing Indian assets. The rupee has been relatively stable, and is being ably supported by the Reserve Bank of India (RBI) which has increased foreign exchange reserves to a record $330 billion to keep the currency from rising. India’s trade deficit narrowed to an 11-month low in January, aided by a plunge in global oil prices, which global credits agency Moody’s believes that India will be a major beneficiary of, among the G-20 nations. And perhaps the most significant indicator of economic recovery has been the RBI’s acknowledgement – through an interest rate cut – that inflation is under control. 

Reasons for optimism

In light of these rapidly strengthening indicators, the economy is indeed better placed for growth than it has been in at least the last five years. Firmly on the economy’s side is a stable government. 

The hopes of investors, businesses and consumers are pinned on the ability of Prime Minister Narendra Modi’s pro-growth government to push reforms by virtue of its strong majority. In the nine months since it has come to power, the government has already made some headway on its reform agenda. Recognizing the importance of foreign direct investment (FDI) in promoting employment and manufacturing, it has raised FDI caps in a host of sectors including defense, railways, construction and medical devices. It has already passed three major ordinances (executive orders, which still need to be accepted by the Parliament): to relax land acquisition norms, to raise the FDI cap in the insurance sector and to allow the sale of public sector stakes in coal mining. 

On the government’s short-term agenda to realize its optimistic growth forecasts is a slew of reforms. In the Budget Session of Parliament (which begins on February 23), it plans to pass the major ordinances. To contain fiscal deficit, the government has already raised taxes on gasoline and diesel, and the Finance Minister has expressed his intention to swiftly proceed with the divestment of public sector stakes. In the medium term, the government is emphasizing manufacturing on Indian soil through its umbrella “Make in India” program. 

Perhaps most significantly, the optimistic growth outlook could be bolstered by this government’s unprecedented encouragement of private business. The Prime Minister has often underscored his government’s strong commitment to improving the ease of doing business through land and labor reforms, a stable tax regime and effective e-governance. The government’s first full-fledged budget (to be released on February 28) will be a significant marker of its capacity to support its growth agenda.  

So why the caution?

A quick look at the major economic indicators, and a cursory reading of the government’s strident statements point towards a lucid growth story. Yet, at this stage, unequivocal optimism seems premature. 

Already, there is some concern that the new growth figures, which were calculated through a new system of GDP accounting, are misleading and do not accurately reflect the state of the economy. The government’s own chief economic adviser, Dr. Arvind Subramanian, commented that he was “puzzled” by the latest GDP growth numbers: “The revised numbers show GDP growth rose from 4.7 percent to 5.1 percent for 2012-13 and from five percent to 6.9 percent for 2013-14. This means acceleration in GDP growth of 1.9 percentage points in 2013-14, just by comparing the new numbers across time. This is mystifying because these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy.”

Understanding the new calculation

  • Base year of measurement has been changed from 2004-05 to 2011-12
  • From now onward, economic growth will be measured in terms of the gross value added (GVA) at basic prices instead of at factor cost
  • The new method was recommended by the United Nations System of National Accounts in 2008
  • According to Dr. Pronab Sen, Chairman of the National Statistical Commission, the new methodology is in line with global methodology

For more details, click here.

Dr. Subramanian clarified that he believes that there have been significant improvements in data, methods and analysis saying, “please don't get me wrong. I am not saying these estimates are wrong in any way, only that these bear further scrutiny.” The debate among economists about the accounting methodology is only symptomatic of the hesitation that currently looms in the environment about India’s growth story.

There are three important reasons behind the hesitation. First is the country’s high fiscal deficit. At the end of December 2014, with two months to go until the end of the fiscal year, the fiscal deficit stood at 100.2 percent of the target the government set in July. Even though the global decline in oil prices has helped the government contain oil subsidies, net tax revenue collection has been slow. Going forward, containing the fiscal deficit will continue to be a challenge because, of all the macroeconomic variables, it is the most politically sensitive. The government is keen to reduce subsidies, cut expenditure and increase tax collections, but its success will be determined by its ability to manage the competing priorities of a variety of interest groups including consumers, farmers, oil producers and industry at large.

The second reason behind the reluctance to accept the growth story unquestioningly is the government’s minority position in the Upper House (Rajya Sabha) of Parliament. This could limit its ability to implement reforms despite strong political will. 

Lastly, for growth to remain on the upswing, the country will have to overcome past actions that sent a chill through investors. Through the past, investors have found it difficult to trust that public political statements will translate into specific actions in India. Over the last few years, investors have often been disappointed by regulatory ambiguity, policy paralysis and half-measures. To convince investors that India is indeed ready to rewrite its growth story, the government will need to implement long-called for reforms and reassure investors that the reforms are not short term or easily undermined by potential court action.


India’s macroeconomic fundamentals are rapidly strengthening and the economy looks poised for growth. It is too early, though, to say whether the Modi government will be able to deliver the reforms necessary for a successful growth narrative. Given the uncertainty of Indian politics, investors should be cautious in their optimism.