Bad News For Cassandras: India's 2023-24 GDP 'Surprise' Was Driven By Reforms, Not Freebies

The unexpectedly high GDP print of 8.2 per cent in 2023-24, driven by two quarters of higher-than-expected economic buoyancy, constitutes a superb achievement for the Modi government at the fag end of its second term.

This comes in the context of two other understated achievements: growth has come without letting fiscal spending get out of hand in a pre-election year (in fact, it is better than anticipated), and keeping inflation tethered to a level under 5 per cent now. 

For the record, the National Statistics Office’s provisional estimates for fiscal 2023-24 reported a fourth-quarter real GDP growth (that is, adjusted for inflation) of 7.8 per cent when most private projections were talking of sub-7 per cent growth. This is the second straight quarter in which GDP numbers have surprised on the upside.

Gross value added (GVA, which is GDP minus net taxes) in the fourth quarter (January-March 2024) was 6.3 per cent. The 1.5 per cent difference between GDP and GVA is indicative of a substantial increase in tax collections, which is what enabled a sharp reduction in the fiscal deficit from the budgeted 5.8 per cent to 5.6 per cent.

Retail inflation in April printed at 4.83 per cent, indicating that it is largely under control, though still above the mid-range of 4 per cent that the Monetary Policy Committee was expected to maintain over the medium term. In the context of the huge disruptions in global supply chains after Covid and two unending wars in Ukraine and West Asia, this is a stupendously positive outcome.

As S Krishmamurthy, former chief economic advisor (CEA) to the Modi government, noted in a post on X: “At a time when advanced economies have faced 2.5-4x their average inflation, India’s inflation has been lower than average. Government of India under PM @NarendraModi deserves maximum credit for this wonderful performance.”

While pre-election years usually tend to be good for the economy due to higher spending, both by governments and private parties, the remarkable thing this year is that the Modi government made practically no new freebie announcements, in contrast with what the opposition is offering.

If the BJP comes back to power, it is not only good for the economy, but also for democracy itself. It shows that when a government performs reasonably well and delivers growth and positive outcomes to the voter, it does not need to break the bank to bribe the voter excessively to return to power.

The high growth of 8.2 per cent follows the 7 per cent and 9.7 per cent GDP growth reported in the previous two years, with the last figure being an artificial jump from the Covid slump of 2020-21.

The provisional GDP/GVA estimates and fourth-quarter results of 2023-24 suggest that 7 per cent growth in the current fiscal (2024-25) is entirely achievable, given many positive developments.

One is political, with Modi expected to return to power on 4 June, with the only question being the size of his majority. Political stability is very good for growth.

Two, tax revenues are robust, with both personal taxes and the goods and services tax (GST) showing great buoyancy. In April, which refers to economic activity in March 2024, GST revenues crossed 2.1 lakh crore — the highest ever. This augurs well for continued government spending on infrastructure and social safety nets.

Three, the Reserve Bank of India sent the government a fat dividend cheque of Rs 2.11 crore for the last financial year, giving the government room for more productive fiscal spends.

Four, India’s retail investors are now driving stock market rallies by investing systematically in mutual funds. Average monthly investments are now of the order of Rs 20,000 crore every month. This makes it easier for corporates to raise money from the markets, lowering borrowing costs.

Five, as former CEA Krishnamurthy mentioned in another X thread yesterday (31 May), India’s growth is now being driven by higher productivity.

He quotes Penn World Tables to show that before 2013-14, India’s productivity growth was 1.3 per cent. Now it is more than twice that level, at 2.7 per cent. This has been driven by reforms, including many on the supply side. “Higher growth stems from higher productivity.”

This is the best kind of growth possible. India is on song. This year should be great for growth, assuming monsoons are okay and no major worldwide disaster strikes. But India should continue to remain an outlier in terms of economic performance this year anyway.

If 2023-24 was a bad year for Cassandras, 2024-25 may turn out to be another one if things go well.