Is the GDP growth rate an accurate reflection of India’s economic health, considering the IMF’s concerns?
With the BJP-led government exuding over-confidence on the state of the economy.
The interim Budget presented earlier this month has shifted focus to fiscal consolidation.
Finance Minister Nirmala Sitharaman has projected that the fiscal deficit; which was expanded to 9.2% of GDP in 2020-21.
Deal with the pandemic-induced recession; would be brought down to 5.8% by the end of the current financial year and 5.1% by next year to reach the targeted 4.5% of GDP by 2025-26.
The interim Budget signals significant cutbacks in public expenditures, slashing effective capital expenditure by ₹1 lakh crore and reducing welfare and subsidy allocations.
Despite a nominal GDP growth of 9%, down from the previous year’s 10.5%, the government faces challenges with a slowdown in economic activity.
Real GDP growth stands at 7.3%, above last year’s 7.2%, while the IMF questions the accuracy of official growth estimates, recommending statistical upgrades.
The fiscal situation is complicated by rising debt liabilities, marking a formal withdrawal of post-pandemic stimulus in the interim Budget.
Added to this is the prospect of a slowdown in economic activity, regarding which the government seems to be in denial.
Despite the nominal GDP growth rate falling to 9% in the current year from 16% last year, real GDP growth (at constant prices) has been estimated at 7.3% (advanced estimates), slightly above the 7.2% registered last year, implying that the value of the GDP deflator.
Official data, on the other hand, shows the monthly average of consumer price inflation (Consumer price index-CPI-combined) at 5.5% for 2023-24.
This anomaly has once again revived the debate over the accuracy of official growth estimates.
The IMF, in its latest staff report on India (November 2023) has pointed out several defects and deficiencies in real sector data, particularly that of national accounts, employment, and prices, recommending an upgradation and expansion of official statistics.
It is noteworthy that in its January 2024 Update of World Economic Outlook, the IMF has projected India’s real GDP growth as 6.7% for 2023-24 and 6.5% for 2024-25, reflecting a deceleration of economic activity.
Has there been an economic turnaround as claimed by the Finance Ministry in the ‘White Paper’ in the past ten years compared to the situation under the NDA’s predecessor?
The Finance Minister has sought to divert attention from this debate over the present direction of change in economic activity, by presenting a “White Paper” in Parliament on the past twenty years.
The white paper alleges that the United Progressive Alliance (UPA) had left behind a “deeply damaged economy” marred by “governance, economic and fiscal crises” in 2014.
It is claimed to have “turned around” and “rebuilt” from its foundations in the past 10 years by the National Democratic Alliance (NDA) regime.
The evidence presented in support of this macroeconomic narrative, however, is a concoction of cherry-picked data, half-truths, evasions, and counter-factual assertions.
Over the past 20 years, fiscal trends show no clear pattern between UPA and NDA regimes.
NDA-I reduced expenditures as a percentage of GDP, while NDA-II increased spending significantly post-pandemic.
NDA-II’s expenditure record is mixed compared to UPA, with improvements in certain areas but declines in others.
The NDA-I government had reduced expenditures relative to GDP on most major heads compared to the UPA regime, including capex, subsidies, defence, education and rural development.
NDA-II increased the outlays on those heads significantly vis-a-vis NDA-I.
However, the expenditure record of the NDA-II government vis-a-vis the UPA era remains mixed; outlays on capex, food subsidy, agriculture.
Urban and rural development improved, while outlays on education, defence and subsidies on fuel and fertilizer fell, as per cent of GDP.
Health expenditure as a share of GDP saw no change at all between the UPA and NDA rule, despite the pandemic.
On the revenue front, gross tax revenues in GDP showed minor improvement during the NDA rule compared to UPA’s.
Non-tax revenues deteriorated.
Overall there was a decline in the Centre’s revenue receipts as a share of GDP.
It is partly due to the increase in the State’s share in Central taxes following the
implementation of the 14th Finance Commission recommendations.
In sharp contrast, however, corporate tax collections fell as a share of GDP, from the UPA era average of 3.5% of GDP to 3.3% under NDA-I and further to 2.8% under NDA-II.
Aggregate income tax collections are projected to surpass corporate tax collections by over ₹1.13 lakh crore in 2024-25.
CBDT data show the number of companies paying positive taxes rising from 3.45 lakh in 2012-13 (assessment year) to 4.57 lakh in 2021-22 (assessment year).
Data from the “Statement on Revenue Impact of Tax Incentives under the Central Tax System”, annexed with the Receipt Budgets, show that the effective corporate tax rate, which inclusive of the dividend distribution tax had risen from 24.2% in 2012-13 to 30.4% in 2018-19, had fallen sharply to 22.2% in 2020-21.
The withdrawal of the dividend distribution tax and sharp reduction in the corporate tax rate through the new tax regime introduced in 2019-20.
Such a revenue mobilisation strategy, while transferring income from the poor (through enhanced indirect taxes) and middle classes (through income taxes) to the profit-making corporate sector, besides exacerbating income inequality.
As a result, the revenue deficit has eventually bloated to an average of 4.3% of GDP under NDA-II and the fiscal deficit averaging at 6.6%, raising the central government’s debt from 52% of GDP at the end of UPA rule and around 50% under NDA-I to the current level of 58%.
Annual interest expenditure has also risen from the low of 3.0% earlier to 3.6% of GDP in the current period, which the government is now trying to reckon with, by slashing capex, subsidies and welfare expenditure in the interim Budget.
It is also noteworthy, that despite the enhanced level of resources transferred to the States in the past 10 years, combined debt of the State governments have grown faster than that of the Centre under the NDA rule than the UPA era.
This underlines the inadequacy of current level of fiscal transfers to the States, given their expanding expenditure commitments.
What were the contrasts in the economy between the NDA and the UPA regimes?
Official data on the real economy under the NDA regime has been criticised from several quarters for overestimating its own macroeconomic performance and undervaluing that of the UPA regime.
Even then, the simple truth which is evident from the official data is that on average, real GDP growth was at least one percentage point higher during the UPA decade than that of the NDA.
Not only did the deep slump following the pandemic and lockdown cause major disruption during NDA-II.
The slowdown in the economy was already evident under NDA-I after the successive policy shocks of demonetisation and GST rollout.
The UPA era had also witnessed the global financial crisis and consequent worldwide recession in 2008-09, which was also a major external shock.
Gross value added growth in basic prices also reflect the same trend as real GDP, with the average growth rate first rising during UPA I, then falling during UPA II, rising again in the NDA I period and then falling sharply during NDA II.
Most importantly, the ten years of NDA rule could not provide any break with the sectoral pattern of growth witnessed during the UPA era.
Agricultural growth remained way below the overall GVA growth rate, with its share in overall GVA falling continuously.
With the share of manufacturing and industrial sectors remaining largely the same under UPA and NDA periods, the services sector’s share in GVA increased from below 48% in 2008-09 to over 54% in GDP.
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