Sunday, October 08, 2006

Understanding the amazing GDP growth

What an amazing period of high economic growth this has been in India! I have never seen such a set of 3 years (12 quarters) of GDP growth:

QuarterGDP growth (%)
Jun-Sep 2003 (Q2) 8.88
Sep-Dec 2003 (Q3) 11.33
Jan-Mar 2004 (Q4) 7.90
Apr-Jun 2004 (Q1) 7.87
Jun-Sep 2004 (Q2) 6.65
Sep-Dec 2004 (Q3) 6.97
Jan-Mar 2005 (Q4) 8.55
Apr-Jun 2005 (Q1) 8.54
Jun-Sep 2005 (Q2) 8.38
Sep-Dec 2005 (Q3) 7.48
Jan-Mar 2006 (Q4) 9.30
Apr-Jun 2006 (Q1) 8.90

In this period, the mean and median of growth is roughly 8.4%. Three years at 8.4% has never happened before. The interquartile range of these 12 numbers is just 1.11 percentage points. See details on the CMIE website.

On 4 October, I wrote a column in Business Standard titled Understanding the amazing GDP growth where I argue that a lot of what is going on is owing to procyclical (i.e. destabilising) macro policy. I emphasise the distinction between the long-term trend and the business cycle. What we have seen for three years is the high of the business cycle, exacerbated by poor policies, and should not be mistaken for an acceleration of Indian trend GDP growth.

Update: Andy Mukherjee writes about this and mentions Chetan Ahya on pro-cyclical fiscal policy. Ila Patnaik writes about pro-cyclical fiscal policy, advocating a fiscal stance which achieves FRBM targets in the down of the business cycle while achieving surpluses in goods years like these.

High GDP growth should give a happy citizenry and should make it possible to do economic reforms that hurt a few people and hurt in the short run. Tasting the fruits of success by doing rational things in economic policy should embolden politicians to go further with rational thinking on economic policy. But in India that has not been happening - we are very focused on subsidy programs and an interventionist State, and structural reforms are endangered in the present political climate. Mr. Chidambaram recently pleaded for more `political space' for economic reforms, particularly in finance and pensions.

It sounds paradoxical - can you inflict pain when a lot of people are hurting, when asset prices are inducing a negative wealth effect? The answer seems to be Yes: India made more progress in the down part of the business cycle than it is making today.


  1. Dr. Ajay,

    Money supply is at 20%.

    Should we really laud this 8.5% GDP growth ? When put into perspective, is this a great figure ?

    Please clarify....

  2. At the top economic policy level attempts are made to show skewed picture to the people. The ills are not reflected rather they are made obliterate over time. One such instance is changing the base year for calculating inflation, instead of acting in true terms to contain inflation. Also an step is mooted to bring services under the basket of CPI index. Will that reflect a true picture of the realities face by the majority population. In the last two quarter the price rise in edible commodities has been more than the increase in inflation rate. When we are shown skewed pictures of the economy then no doubt we cannot expect to see an economic growth other than the lopsided one.

  3. Your last paragraph says it all. India can take more pain during high growth cycle but, as you say, there is no political will as long as commies are partners in power. Manmohan is just not fighter - he just knows how talk the right talk and be in power doing nothing (or worst, damage) for the economy or otherwise. Some one has to pick up the pace of reforms three years from now, probably during the next biz cycle trough. Till then we should pray things will continue to look bright - whether due to excess money supply or excess unaccounted for inflation.


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