In search of a growth driver

DIFFICULT TO IDENTIFY A SECTOR THAT HAS POTENTIAL TO LIFT ECONOMY TO A HIGHER TRAJECTORY

- RENU KOHLI

The shockingly low 5.4% growth in July-September 2024 compelled the Reserve Bank of India (RBI) to sharply cut its growth forecast to 6.6% for FY25. It remains sanguine about growth prospects though, projecting a sharper recovery ahead. Believing the low outturn is an outlier, the central bank cautioned it would be inappropriate to judge the trend growth rate by one data point. However, the question is not the single data point but the sheer range of forecast error. If this slowing was due to short-term idiosyncratic factors, then why did most nowcast models miss it by such a wide margin? The curiosity therefore is to not ignore the outlier but look within for any hidden message we must discern.

The context is clear. The brisk post-pandemic recovery generated optimism in some quarters, including the central bank, about a trend lift in India's growth. Stable macroeconomic conditions, cleaner corporate and bank balance sheets, and settled reforms triggered hopes the growth momentum would sustain. Perhaps, this unanticipated crash indicated the economy could be normalising to pre-Covid potential? If yes, it calls for earnest dissection.

Historically, economies witnessing a trend growth shift were often driven by few leading sectors—the so-called growth engines. The sectors' performance would be visible, sustaining for long periods to lift the rest of the economy. A better way, therefore, would be to look at India's individual sectors to see if any fits the bill.

We look back at the post-2000 quarterly growth rates to isolate phases of high, sustained growth rate exceeding 8.0% for four consecutive quarters to distinguish differences in the high-growth phase of the first decade and years thereafter.