Amidst the flood of commentary that followed the finding that the world’s fastest-growing large economy had become its fastest-shrinking one, an observation that stood out was that India’s growth potential had dropped from 6 per cent to 5 per cent. Now, it has been obvious for some time that India will emerge from the Covid-19 recession with a record fiscal deficit, record public debt (both in relation to GDP), a fresh lease of life for the “twin-balance sheet crisis” confronting banks and companies, complex monetary challenges, and consequently reduced growth potential — once reckoned at 7-plus per cent. But 5 per cent? Surely not!
Calculations of an economy’s growth potential can be simplistic journalism (investment rate divided by the ICOR, or incremental capital-output ratio) or complex maths with many assumptions. It is also intrinsic to a data-poor emerging economy that such estimates of growth potential comprise soft, not hard, numbers. Still, no one until now had said that India’s growth potential would be lower than the growth rates achieved in the 1980s and 1990s (between 5.5 per cent and 6 per cent). If so, those rosy BRICS scenarios would have to be radically re-cast. Per capita income in inflation-adjusted rupees in 2022-23 is likely to be no bigger than in 2019-20 — translating into three lost years. Consider what that means: Surplus capacity in all directions, and a collapse of new investment.
Then there is that new letter to describe the future growth trajectory: Not V-shaped (a quick down and then up), as two optimistic government economists have forecast this past week, or U-shaped (recovery after a time lapse), or W-shaped, or L-shaped, but K-shaped. This last has two lines diverging from a perpendicular. It is this year’s discovery by the global commentariat to describe what has been happening in varying degrees since the financial crisis of 2008: The growing gap between winners and losers among countries, economic sectors, companies, and, of course, people.
Examples are aplenty. Among countries, China has been on an incredible buying spree since 2008, gobbling up strategic companies and crucial ports across the globe, and liberally financing governments that become vulnerable to Beijing’s diktats when they run into debt-servicing difficulties. Within the country, investors in India’s stock market are in clover while millions have lost their jobs and private consumption has collapsed — as the National Statistical Office has just reported.