Rajan's 'Hindu rate of growth' based on wrong premise

Story by  Sushma Ramachandran | Posted by  Aasha Khosa | Date 09-03-2023
Prime Minister Narendra Modi at World Economic Forum (File)
Prime Minister Narendra Modi at World Economic Forum (File)


Sushma Ramachandran

Former Reserve Bank Governor Raghuram Rajan’s latest salvo on the Indian economy warns that the country is hovering “dangerously close” to the Hindu rate of growth. The reference is to the growth rate of 3.5 to 4 percent, the average during the initial decades after independence. The term “Hindu rate of growth” was coined by economist Raj Krishna indicating that the slow pace was somehow integral to Indian culture.

Rajan’s comments reflect his view that the economy is not recovering from the crisis of the pandemic and instead is slowing down. Giving reasons, in an interview with a news agency, he points to the sequential slowdown in quarterly growth as given in the data released last month by the National Statistical Office. It revealed that the gross domestic product (GDP) in the third quarter of the current fiscal (October to December 2022) was estimated at 4.4 percent, down from 6.3 percent in the second quarter (July – September 2022) and 13.2 percent in the first quarter (April- June 2022). The growth in the third quarter of 2021-22 was 5.2 percent.

Rajan went on to add that a comparison with the third quarter in the pre-pandemic period three years ago would put the average annual growth in the third quarter at 3.7 percent. He felt there was little scope for optimism given the fact that private sector investment had failed to pick up, interest rates remained high and global growth was slowing down.

What is interesting about the former RBI governor’s comments is that these projections seem to have been made in haste. It must be recalled that the term “Hindu rate of growth” was used to describe an average growth rate over several decades from the 1950s to the 1970s. Rajan, on the other hand, has reached his conclusion after considering only data relating to a single quarter in the last fiscal. While there is no doubt those headwinds do exist in the areas mentioned by him, there is equally no doubt that the outlook is far more positive than has been outlined in his latest commentary.

Even the State Bank of India (SBI) in its latest research report has described Rajan’s views as “ill-conceived” while stressing that the Indian economy remains on a sound footing. One of the significant factors it mentions in this context is the rising trend in Incremental Capital Output Ratio (ICOR) which measures the additional unit of capital needed to produce an additional unit of output. The report noted that ICOR which was 7.5 in fiscal 2022 was now only 3.5 in 2022. It pointed out that only half of the capital is now needed for the next unit of output.

The other important indicator highlighted by the SBI has been the rise of gross capital formation by the government to 11.9 percent in 2021-22.  It argued that this has had a domino effect on private investment that rose from 10 to 10.8 percent over the same period.

As far as interest rates are concerned, the phenomena are being faced around the world as central banks have been aggressive to deal with inflationary pressures. India has been able to manage the situation relatively better than most developed countries as inflation is now only slightly higher than the tolerance band of 2 to 6 percent fixed by the RBI. Retail inflation had moderated to 5.7 percent in December and then rose again to 6.5 percent in January. The next monetary policy review is expected to see a small 25 basis points increase in the repo rate from the existing 6.5 percent.

As for the slowdown in the global economy, it has affected countries across the board. India has been able to insulate itself better from the repercussions of geopolitical events like the Ukraine conflict owing to a rebound in domestic consumption. Most key indicators have been showing an upward trend including revenue inflows from the Goods and Services Tax (GST)  that recently reached a record level of Rs. 1.5 lakh crore per month. Similarly, automobile demand has been buoyant with passenger vehicle sales growing by 22 percent in January year on year. Petroleum products consumption also went up in the same month with diesel sales rising by 12. 6 percent and petrol by 14.2 percent.

At the same time, the impact of sluggishness in the world economy has had an impact on the pace of merchandise exports which have plateaued in recent months. Even so, combined merchandise and services exports are set to reach record levels in 2022-23, according to Commerce Minister Piyush Goyal. He has declared that these are expected to cross 760 billion dollars this fiscal despite the global economic uncertainties. This is on the back of an all-time high of 676 billion dollars worth of total exports in 2021-22.

The picture is thus a far brighter one than outlined in Rajan’s remarks. India remains the fastest-growing major economy in the world in 2022-23 with growth expected to be in the region of 7 percent. This pace is certainly expected to moderate in fiscal 2024 but the outlook for next year is expected to be brighter. Global rating agencies like Moody’s, for instance, project 5.5 percent growth for FY 2024 but look forward to 6.5 percent in the financial year 2025.

Similarly, S&P Global has projected growth at 6.5 and 6.7 percent for these two years. In other words, the country is far from the so-called Hindu rate of growth, even going to estimates of international agencies. India has been an outlier in the world economy recovering more rapidly from the pandemic and geopolitical developments than many in the developed world.