It is not uncommon for countries to witness fluctuations in growth each year. But the growth is generally around a trend, following a defined path of sustainability. The Indian economy, during the pre-reform period, particularly during 1950-1980, witnessed a long-term steady growth of 3.5 per cent, often referred to as the Hindu rate of growth. Some considered it an outcome of an economy which was inward looking and did not wish to face competition. It was also seen as a fallout of rigid policies that lacked innovation.
Growth moved to an upward trajectory, averaging 7.4 per cent, during 2003-04 to 2010-11. However, post 2011-12, growth decelerated from its previous best medium-term average to 6.1 per cent from 2012-13 until the Q2 of 2024-25.
This period witnessed many changes, including demonetisation, introduction of a unified nationwide Goods and Services Tax and the pandemic, which caused the economy to virtually collapse for a year. But uncertainties and adverse happenings are only to be expected during the medium to long term in any economy. However, 6.1 per cent growth during the last 50 quarters is a stylised fact. The question, however, is whether this is stable neo-equilibrium growth or whether there is an upside possibility or a downside risk.
Volatile growth
Prima facie, growth during this period has been volatile with a mean of 6.1 per cent, but a very high standard deviation of 5.5, indicating possibility of it moving either way. However, the four key parameters of the expenditure side of GDP, comprising private final consumption expenditure (PFCE), government final consumption expenditure (GFCE), gross fixed capital formation (GFCF) and exports were more or less stable during this period, as indicated in the graph.
PFCE during the last 50 quarters averaged 59.5 per cent of GDP with a standard deviation of just 2.2, indicating very small volatility.
The ratio was lower at 57.5 per cent during the high growth phase of 2002-2011.
During the early phase of moderate growth, PFCE averaged over 78 per cent (1951-1981). Similarly, GFCE, which averaged 10.7 per cent in the last 50 quarters, had a standard deviation of only 1.6 (and a coefficient of variation of 15 per cent). Contribution of government expenditure, which witnessed an upsurge during the pandemic, reverted to its long term average of slightly above 10 per cent. Even the GFCF remained nearly stable at 29.7 per cent of GDP with moderate fluctuations.
Growth accelerators
Acceleration in growth during 2002-2011 came largely because of an increase in the rate of capital formation, independent of its source, either government, private corporate or foreign investment.
External trade has emerged as a new source of stimulus to production and investment, but exports-to-GDP ratio during the 50 quarters has moved in a narrow range averaging 21.2 per cent.
All the four parameters of growth during the current period show sustainability at current levels with coefficient of variation ranging between 4 per cent and 15 per cent. Have reforms during this period not produced the requisite efficiencies? Or have methodological quirks — especially the current method of calculating deflators and lack of availability of unincorporated sector survey at regular intervals — presented this picture?
Virtuous cycle?
The near stability of these parameters indicates that we are in a period of a virtuous (or vicious, if we conclude that the current GDP growth is pushing us into middle-income trap) cycle of a sustained 6 per cent-plus growth, but not into a bracket of 7 per cent or 8 per cent. One factor we notice in this stable growth is the structure of GDP itself besides the steady rate of capital formation. In manufacturing, the share of different industry groups like leather, textiles, apparels, food products and metals (40 per cent), machinery and equipment (20 per cent), other low value manufacturing (20 per cent) and high-end or intermediate technology products (20 per cent) have remained sticky. Even in services, the share of high-end services increased only marginally from 19 per cent to 22 per cent over last 12-plus years. Similarly, the credit-to-GDP ratio has also been stable.
With such all-round stability, accelerating growth would require an external push through deregulation, thrust on new technology industries, shift in consumption from predominantly food to manufactured products and services at the higher end, scaling up from low paid self-employment where the average monthly income stagnates at under ₹15,000 per person, and improved employability of persons in age group 15-29 years — a third of them are currently neither employed nor in training or seeking jobs.
The shift should be both economical and psychological, from promising and delivering to confidence-building, together with ease of doing business in its true sense.
Gopalan is former Secretary, Economic Affairs, and Singhi is former Senior Economic Adviser, Ministry of Finance. Views are personal