The prospects for faster growth

While the economy is well poised, key macro numbers and structural constraints continue to weigh

- T N NINAN

Successive years of rapid economic growth have encouraged commentators to suggest that the economy may at long last be on a higher growth track. This is because growth in the last five financial years (2021-26), taking into account the advance estimates for the current year, averages a handsome 8.1 percent — the best on record.

But this number should be seen in context. The latest five-year record is on the back of a depressed base, because the economy had shrunk in the Covid year, 2020-21. If one takes the pre-Covid year (2019-20) as the base, growth in the latest six years has averaged a less flattering 5.7 per cent. That is slower than the growth record of the previous 19 years, from the turn of the century to the pre-Covid year, a period that averaged 6.5 per cent growth.

‘The key question is how much of the latest growth record represents recovery from the 2020-21 downturn, and what is the sustainable growth rate now. Some published growth forecasts for next year hover around the 6.5 per cent level. On that basis, looking at the three-year cycle (2024-27), growth would average 6.8 percent. That is the same as in the first term of the Modi government. This suggests that there is as yet no marked increase in the sustainable growth rate.

Going beyond the headline growth numbers (which in any case raise questions about data quality), one needs to look at several other numbers to understand the economic situation. For, at most times in earlier periods, one or other economic indicator was often out of kilter. Either inflation was high, or the trade deficit was large, as was the fiscal deficit, or banks and companies had troubled balance sheets. In contrast, the economy today has been characterised as being in a Goldilocks phase, with low inflation, balanced trade, a reduced fiscal deficit, and with bank and corporate balance sheets in their best-ever shape.