Measured in dollar terms, the size of the Indian economy surpassed that of the United Kingdom, as per data from the last quarter of 2021. The calculation uses the current exchange rates between the Indian rupee and British pound respectively and the US dollar. The GDP data is as per the International Monetary Fund (IMF). This makes India now the fifth largest economy in the world, behind the United States, China, Japan and Germany. 

As per the same data, India’s GDP is 3.2 trillion dollars, now behind the 4.2 trillion dollars of Germany. If it grows at 7 per cent per annum, and the German economy stands still, then India will overtake Germany in four years. At 5.5 per cent growth it will take five years. 

There is a catch, however, even if you assume that the German economy will be at zero growth. That catch is exchange rates. If the rupee-dollar rate depreciates faster than the euro-dollar exchange rate (since Germany’s currency is the euro), then it becomes harder to overtake Germany quickly. The gains of the GDP growth gap are partly undone by a depreciating currency. If India’s currency gets stronger vis-à-vis the dollar, then of course its economy measured in dollars will grow faster. However, a strong currency may not be in India’s favour, since that may hurt our exports.

If international comparisons are too sensitive to exchange rates, the World Bank has devised another method, called purchasing power parity. It adjusts exchange rates to reflect the “true” purchasing power of the respective currencies. Thus 80 rupees to the dollar, makes the rupee look too weak. Actually, one dollar in India gets you much more than one dollar in America. After applying this correction factor, India’s GDP becomes the third largest in the world and has been so for at least five years. And China’s economy in PPP terms is already bigger than America's. 

And due to their fast growth rates and huge population sizes, the two Asian giants will dominate the twenty-first century’s economic picture. This has been well known, and there is a demographic inevitability to it. No wonder the world’s investors are looking at these two large consumer economies (never mind the emerging tech cold war between the West and China).

India's strengths and weaknesses

Hence, whether India is ranked fifth or third, and how soon will it attain the magical 5 trillion dollar size is not that relevant, because it will certainly get there. For the past forty years (except for the pandemic years) the average growth rate of the India’s economy in real terms has been 7 per cent, and there has never been a year of contraction (i.e. negative GDP growth) since 1980. Such is the strength of India’s growth process.

The pertinent question to ask is how is this economy doing? This means looking at the short term, and examining prospects for output expansion, job creation, inflation control, and fiscal and trade deficit sustainability. When asked about the economy, we can consult data numbers that are trotted out, some days like the stock market updates, some monthly like the imports and exports or industrial production index, some quarterly, like the GDP and some annually. Last week the National Statistics Office reported that India’s GDP during the April to June quarter was 36.85 lakh crore. This is the real GDP, stripping out the effect of inflation. This number is 13.5 per cent higher than the real GDP for April to June quarter of last year. 

This high growth rate seemed to call for celebratory chest thumping. However, we need to see this data in its proper perspective. Last year we suffered from a devastating second wave of Covid, which had spread to rural areas, and caused great hardship and large-scale deaths. There were lockdowns and constraints, so business was down. Hence on that low base, 13.5 per cent looks good and was in fact expected to be above 15 per cent by professional forecasters.

If you want to remove the effect of the last two pandemic-affected years, you need to compare the GDP data of April to June of 2019. That was 35.67 lakh crore, which means that in three years quarterly GDP has inched up only by 3.3 per cent i.e., less than 1.1 per cent per year.  This is worrisome. Much of this slender growth has been fueled by fiscal expansion, which was of course necessary. 

The real picture of the economy

Another way of analysing the current data is to look at momentum, i.e., how is GDP accelerating from quarter to quarter? Here too the data does not look promising. As per a Barclays' report, the quarter-on-quarter growth from January-March to April-June was a contraction of 3.3, i.e. negative growth. Of course, some of this could be due to seasonal effects.  But the Jan-March quarter had seen a sequential expansion over the previous quarter which has festival spending like Diwali and Christmas. 

As if by confirmation, the IMF and other analysts like Crisil have revised their growth forecasts downward for India, which will of course remain the fastest growing large economy in the world. This is in sharp contrast to the recession in both America and Europe, and a slowdown in China. 

India’s fate is affected by what is happening globally. The Reserve Bank of India, too, is concerned that India is entering a phase of high inflation coupled with a weakening economy. Their forecast is for a 4 per cent growth in the last quarter of this fiscal year. And the rate tightening tight monetary policy is a further growth dampener, but unavoidable in light of inflation. The stock markets too are reflecting the sentiment and bracing themselves for some correction.

So, the assessment for the fifth largest economy is that this is a slowing phase, as growth drivers need to pick up along with investor sentiment. There are some hopeful signs such as consistently high GST collection (four months above 1.4 lakh crore), and double-digit growth in the industrial production index for May and June. Even bank credit growth as per the data this August is the highest in 11 years and keeping pace ahead of bank deposits. That includes housing and retail loans too. There is thus, as always, a case for cautious optimism in the medium term.

(The author is a noted economist. Views are personal. By special arrangement with The Billion Press)