India reported slowing real GDP growth for the last quarter. This might turn out to be helpful. While the new numbers mean little for the economy, they may push policy-makers closer to realizing that only difficult reform will enable prosperity.
For the April to June quarter, the first in the fiscal year, on-year real GDP growth was 7.0%. The previous quarter saw a 7.5% gain. Seven percent still appears to be a strong result but it’s not clear how to interpret Indian GDP numbers.
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The country changed its methodology in January and “discovered” considerably faster GDP. The Central Statistics Office has not yet provided a full historical series, and it is hard to reconcile current GDP with other indicators that look sluggish, such as industrial production and investment.
Most pointed, implicit in the real GDP growth result was a rate of inflation of 1.8% – the deflator. Yet consumer price inflation averaged a bit over 5% for the quarter. If a rate halfway in between these two was used to deflate GDP, real growth would have been 5.4% and more consonant with corporate revenues and the like.
GDP itself can be misleading and is, in any case, far less important than commonly understood. It is an accounting tool that cannot cause job gains or anything else. What matters is living standards. The additional fact that Indian consumer inflation has been falling has effectively put more in people’s pockets, while GDP per person has no meaning.
Slower GDP could nonetheless have a policy impact. It reflects badly on two cherished Indian positions that must be discarded. The first is symbolic: the world will inevitably turn to India as the fastest-growing major economy. Notwithstanding Indian enthusiasm about China’s troubles, the world is unlikely to embrace an apparently slowing India, especially when acceleration has been promised.
The second is the constant refrain that interest rate cuts are the key policy step, even as reform stalls. The Reserve Bank has cut rates three times this year already, yet GDP growth weakened. Rates obviously matter to the economy but India faces fundamental challenges that a 50-point drop in capital costs will do nothing to meet.
Tax reform remains close but elusive, with a somewhat watered-down bill stuck in the legislature. A true land market with clear ownership rights is nowhere in sight. Labor reform has made little progress at the national level. Approximately three-fifths of registered workers are employed by national and state government – a horrifying number for a country in the midst of a demographic surge.
A new methodology, hoping China’s weakness is India’s boon, pushing more interest rate cuts while reform falters… policy-makers seem eager for the easy way out. A GDP disappointment changes little on the ground, but can clarify that the easy way out leads to a dead end.
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