Is India's Economic Boom a Mirage?

Over the past year, India emerged from its economic slump to record its highest rates of growth since 2011.  In fact, India’s economic growth rate overtook that of China in the first quarter of this year, raising hopes that India will finally be able to match and exceed its more successful giant neighbor in terms of economic growth in the years ahead.  Nevertheless, India’s recent economic surge has been taken with a major degree of skepticism by many of the world’s leading economists.  This is due to the fact that India’s government statistics office has adjusted its methodology for calculating GDP in India, causing widespread confusion, as India’s new GDP data does not correlate with other economic indicators.

Under the new GDP calculation methodology, the Indian economy expanded by a strong 7.5% on a year-on-year basis in the first quarter of this year.  Moreover, as this new methodology was used to recalculate the growth rates of previous years, the average rate of economic growth in India over the past seven quarters is now calculated to have been 7.1%, well above previous estimates which had placed GDP growth in India at closer to 5% per quarter.  Thanks to these recalculations, the Indian economy is now shown to have expanded at a faster rate than the Chinese economy over the past year, something that has long been the target of successive Indian governments. 

Unfortunately, many other economic indicators in India suggest that the Indian economy is not doing as well as this GDP data would indicate.  For example, domestic demand has remain subdued and this has forced the country’s central bank to continue to enact a series of interest rate hikes, something that an economy that is supposedly growing by 7.5% per quarter would not need to do.  In fact, such a surging economy would normally force central banks to raise interest rates in order to prevent the economy from overheating.  Meanwhile, inflation rates have been falling, another sign that domestic demand is far from robust.  Moreover, business investment levels remain very weak in India, while corporate profits have been growing at a very slow pace in recent months, all signs of a sluggish economy.  Finally, export revenues have also been falling in India, showing that export demand has not been able to offset the weaknesses in India’s domestic market, raising questions about where India’s robust economic growth is being generated.

While India’s GDP data is generally considered to be painting a much too rosy picture of economic activity in India, there is nevertheless a growing sense of optimism surrounding the future of the Indian economy.  For example, economic reforms enacted by the Modi government, together with much-needed improvements in the country’s infrastructure, are likely to boost foreign investment and exports in the coming years, helping to further boost economic growth in India.  Moreover, India’s domestic market holds the potential for substantial growth and it is expected that domestic demand will return to its role as the key driver of the Indian economy in the near future.  As a result, India’s recent run of high economic growth rates needs to be taken with a grain of salt, but there is little doubt that the Indian economy is on an upward trend.