Overview of Economic Growth in India

India has experienced rapid economic growth in recent years, with an average growth rate of 8.1% over the last five financial years (2021-26), marking the best performance on record. However, this figure should be contextualized against a depressed baseline from the COVID-19 pandemic year of 2020-21.

Growth Rate Contextualization

• The growth rate of 8.1% is based on a lower base year; if we consider 2019-20 as the base year, the average growth over six years is 5.7%.
• This is slower than the average growth rate of 6.5% from 2000 to the pre-COVID-19 year.

Sustainable Growth Projections

• Forecasts for the upcoming year suggest a growth rate around 6.5%, with a three-year average of 6.8%, similar to the first term of the Modi government.
• This indicates no significant increase in the sustainable growth rate.

Economic Indicators and Challenges

Goldilocks Phase

• Low inflation and balanced trade characterize the current economic phase.
• Fiscal deficit stands at 4.4% of GDP, higher than the government's first term average of 3.6%.

Investment and Savings

• Gross fixed capital formation at 30% of GDP is lower than the 34% average for the period up to 2012-13.
• Merchandise exports have reduced, indicating potential challenges for faster growth.

Human Development and Economic Management

• India is expected to move from the "medium" to "high" category on the UN's Human Development Index this year.
• Tax rates have become more reasonable, and digital public infrastructure can improve productivity.
• Recent free trade agreements could provide future benefits.

Structural Constraints and Consumption

Consumption Challenges

• Sluggish growth in consumption affects private corporate investment.
• Household financial liabilities have doubled, increasing from ₹8.99 trillion to ₹18.79 trillion in two years.
• Consumer demand is not significantly rising due to high consumer debt and slow growth in sectors.

Structural Changes Needed

• Industry's share of GDP remains constant, with agriculture's share declining.
• The service sector dominates, largely unorganized, with gig jobs not substituting for formal employment.

Required Structural Changes

• To boost productivity, India needs a larger manufacturing sector, greater formalization of the economy, and rapid urbanization.
• Evidence of these changes is currently insufficient, with some indicators suggesting urbanization may have slowed down.