Is the Tag of Fastest Growing Economy Justified?

Thu, 24 Dec Pre-Open

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According to Harvard researchers, India has the potential to be the world's fastest growing economy over the coming decade. The research shows that India will be well ahead of China as well as the other emerging economies. Projections presented by Harvard researcher states that India will grow at 7%. Further, a professor at Harvard Kennedy School states that India has made significant gains in productive capabilities and has been able to diversify its exports portfolio into more complex products such as pharmaceutical, vehicles and even electronics.

However, one should always keep in mind that India's higher growth is due to a lower base. To simplify it, while India is a US$ 2 trillion economy, China is worth US$ 10 trillion. China's economy growing at 6% will add way more as compared to India's economy growing by 7%. The Chinese economy is little over five times the size of the Indian economy. So the increase in gross domestic product (GDP) in India in absolute numbers is actually way smaller than the increase in GDP in China.

To add to this, as per the latest data, India's exports have fallen for twelfth consecutive month in a row. Merchandise exports (goods exports) for the month of November 2015 were down by 24.4% YoY. Engineering goods are currently India's number one export followed by gems and jewellery. In the last one year, while the former has fallen 28.6% YoY, the latter has fallen 21.5% YoY. A simple explanation here is that the global economy as a whole has not been doing well and that is bound to have an impact on Indian exports as well. However, fall in exports can also be attributed to structural issues. Falling competitiveness is one of the structural factors restricting export growth. For key export items such as gems & jewellery and textiles, revealed comparative advantage has come down over the years. So Indian exports have come down also because their competitiveness vis a vis goods from other nations has gone down over the years. It's not just about slowing global economic growth.

To worsen the situation, the Parliament is headed for another washout of the winter session. The reluctance of the opposition parties to pass key reforms such as 'Goods and Service Tax', 'Land Acquisition Act' is hurting the economy. The corporate earnings season showed some dismal performance by the large heavyweights. Of course, these are short term headwinds and corporate earnings should start improving once the economic recovery picks up pace and the reforms process gets going. In the longer term, the Indian economy is expected to do better than the developed world. But whether it will turn out to be the fastest growing in the decade remains to be seen.

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