Indi :$2 trillion economy - Ajit Ranade - Mumbai Mirror

$2 trillion economy

India is twice as big as it was six years ago, so some growth slowdown is inevitable

Ajit Ranade, Mumbai Mirror – 9^th February 2013

Six years ago India became a trillion-dollar economy. That meant it joined a select club of a dozen other economies of the world. There was much celebration of having crossed an important psychological mark. The economy’s GDP, i.e. output is measured in rupees, and then converted into dollars at the prevailing exchange rate. If the exchange rate is expensive then the dollar size of the economy looks small. So if the dollar races faster than the rate of growth of GDP, then in dollar terms the Indian economy grows slowly, or may even shrink. But thankfully the dollar rupee relationship is quite stable.

Ten years ago in May 2002, the value of $1 was about Rs 50. Today it is about Rs 53. So in ten years the dollar has become only six percent more expensive, i.e. it has become dearer at an average rate of 0.6% per year. But India’s economic size (in rupees) has grown much faster. In recent years, due to high inflation, our economy has been growing at close to 20 per cent per year. Of course in ‘real’ terms, i.e. net of inflation the average growth has been about 7 per cent. So it is not surprising that we are now almost double the size we were in 2007.

When economies are measured in dollars, it is easier to do comparisons. This is even if you don’t correct for the difference in purchasing power. One dollar in America is less valuable than one dollar (or Rs 53) in India. You can get a decent meal, or a haircut in 53 rupees in India, but not so in America. Thus the exchange rate of $1= Rs 53 overstates the weakness of the rupee. To correct for this, we apply the purchasing power correction, called purchasing power parity (PPP). But forget about PPP. Let’s keep this simple. Even without PPP correction, India will soon become a $2 trillion economy.

During the days it was close to 1 trillion size, the GDP growth rate was 9 per cent. This was the growth rate achieved during 2003 to 2007. Since we had an NDA government from 1999 to 2004, and UPA thereafter, credit for that high growth phase is contested by both political factions.

Maybe the reforms of 1991 finally paid off in 2003. The fact is that since 2008, partly due to a global financial crisis, India’s growth has gone down steadily.

From 9 we have come down to 5. But wait. Simple math tells us that an economy of size 1 trillion growing at 9% is the same as 4.5% growth for an economy twice the size. As the base grows larger and larger, in percentage, the addition of the same amount of ‘real’ growth means lower and lower growth rate. And by the way we are growing at 5.5 per cent, which is more than 4.5.

So let’s stop the breast beating about the slowdown. It’s bad, but not disastrous. We live in a world in which most western economies are struggling to avoid a recession. They have high unemployment. (Spain has 26 per cent).

In Japan they are craving for some high inflation, because they have deflation.

In most European countries the fiscal deficit is much higher than India. Of course we don’t need to become complacent.

Anything below 5 per cent should be treated as recessionary in India, since this becomes jobless growth.

We are $2 trillion size, but we also have 1.2 billion mouths to feed. We also need to narrow the widening gap between the rich and poor.

Thankfully the outlook for investment, food production and fiscal deficit for next year is much brighter than this year. And if we keep up the tempo, we will double our size again in the next six or seven years.