Why India’s Post-Pandemic Economic Bounce-Back Will Exceed Projections

Will a third wave of the Covid-19 pandemic stall India’s economic recovery? How strong is the current trajectory of that recovery?

The answer to the first question is a qualified no. To answer the second question, consider the economic numbers and the gradient of their trajectory.

All signals point upwards. The composite Purchasing Managers’ Index (PMI) rose from 49.2 in July 2021 (implying a slight contraction in economic activity) to a seasonally adjusted manufacturing PMI of 55.3 (implying a significant expansion in manufacturing).

Merchandise exports in July 2021 surged to a record $35.43 billion, putting a $400-billion annual export target in financial year 2022 (FY22) well within reach. Services exports meanwhile rose from $17.35 billion in May 2021 to $19.72 billion in June 2021. India’s total exports will therefore likely cross $600 billion this year — a healthy 20 per cent of gross domestic product (GDP).

Foreign direct investment (FDI) and foreign institutional investment (FII) continue to pour into Indian corporates — from startups like Zomato to legacy firms like Reliance Industries. Foreign exchange reserves (over $620 billion) are at record highs.

Yamini Aiyar, president and CEO of the Centre for Policy Research (CPR), has a predictably contrarian — and gloomy — view of India’s economic prospects. She warned in an op-ed for the Hindustan Times (14 August 2021): “Recently published data on key indicators of the Indian economy are a sobering reminder of the diminishing economic future that most Indians confront and the stubborn refusal, indeed abdication, by our policymakers to craft an appropriate policy response.”

Aiyar’s flawed analysis is based almost entirely on the third round of the Periodic Labour Force Survey (PLFS), conducted between July 2019 and June 2020. She concludes that the survey — which covers the national lockdown period due to the Covid-19 pandemic — points to a secular decline in manufacturing activity. To extrapolate a trend exacerbated by a once-in-a-century event is obviously unwise.

More rational estimates by foreign institutions, the Reserve Bank of India (RBI) and the Ministry of Finance all converge to a figure of around 9.5 per cent for real GDP growth in FY22. Given the 7.3 per cent contraction due to the pandemic in FY 21, that would imply a net growth of just 2 per cent in Indian GDP over two financial years.

This needs to be qualified. The International Monetary Fund (IMF), which recently revised down its estimate of India’s real GDP growth in FY22 from 12.5 per cent to 9.5 per cent, uses nominal GDP as a metric to rank countries.

Nominal GDP growth is real GDP growth plus inflation. In the West and Japan where inflation usually averages between 0 per cent and 2 per cent, the difference between real and nominal GDP growth is negligible.

Not so in India. Inflation during UPA-2 climbed to over 10 per cent. Today, the Consumer Price Index (CPI) has cooled to 5.6 per cent on the back of lower food prices. Assuming an average annual CPI of 5 per cent, India’s nominal GDP growth rate in FY22 would be 9.5 per cent (real GDP) plus 5 per cent (CPI) or 14.5 per cent.

This is obviously on a low base of FY21 but it changes overall GDP projections significantly.

If the post-pandemic Indian economy continues to fire on all cylinders — exports, FDI, corporate profits, startups — real GDP growth in FY23 could easily rise to 8 per cent. Add a lower CPI of 4 per cent as the demand-supply gap narrows and nominal GDP growth will still average 12 per cent a year through much of this decade.

India’s nominal GDP on 31 March 2022 is estimated to be Rs 225 lakh crore ($3 trillion at an exchange rate of Rs 75 to a dollar). At an average growth of 12 per cent a year, nominal GDP would double in six years to Rs 450 lakh crore by FY28.

Historically, the rupee has depreciated at 3 per cent a year against the dollar. That may no longer be the case going forward. A likelier rate of rupee depreciation is 1.5 per cent a year — leading to a possible exchange rate in FY28 of Rs 80-82 to a dollar. On a nominal GDP of Rs 450 lakh crore, India’s dollar-denominated GDP in FY28 would therefore be around $5.50 trillion.

By purchasing power parity (PPP), India’s GDP in FY21, according to the IMF’s latest projections, is already the world’s third largest at $10.21 trillion behind China ($26.66 trillion) and the United States ($22.68 trillion). Japan ($5.59 trillion) and Germany ($4.74 trillion) make up the top five global economies.

What about the lingering impact of Covid-19 as India opens up? The country has currently vaccinated over 425 million people. More than 300 million have received at least one dose. Around 125 million have received both doses. India’s adult population is 940 million. Thus nearly 14 per cent of Indians are fully vaccinated while 32 per cent have basic protection against severe Covid infection with one vaccine dose.

The present rate of 5 million vaccine doses administered on average a day will need to rise to an average of 7 million a day in September and 9 million a day in November. Even then, only roughly 75 per cent of all adult Indians would be fully inoculated by 31 December. That, however, is a figure which will deliver herd immunity and prevent economic disruption in the event of a third wave of the pandemic.

It is time too for serious economic reform. With Parliament dysfunctional, the government must move forward rapidly on privatisation. The direct tax code (DTC), mothballed for over two years, needs to be implemented. The reduction in corporate tax to between 15 and 22 per cent was a brave move. Along with cost rationalisation, it has helped Indian companies post record profits.

A cut in personal income-tax rates recommended under the DTC could similarly boost consumer spending. With supply reaching pre-pandemic levels, demand now needs to catch up. Lower taxes could be a silver bullet.

Few remember that China’s nominal GDP was only $3.55 trillion as recently as in 2007 — similar to India’s GDP today. China found a sweet spot in the next decade to nearly quadruple its GDP to $13.89 trillion in 2018.

India stands at a similar inflection point. The time for bold economic reforms is now.