The official estimate of India’s GDP for the first quarter of the current financial year (Q1 FY 27) at 7.8% reflects a strong, impressive growth momentum which has rarely dipped below 7% over the last 13 consecutive quarters. The current performance was particularly creditable because it occurred despite global uncertainties, an oil price shock and supply chain disruptions caused by the west Asian conflict. What explains this feat? Unlike other major economies of the world, India was fiscally much more conservative in its spending during the Covid 19 pandemic. It kept its public spending and fiscal deficit within limits. It therefore found it easier than other western countries to return- with a small time lag- to its pre-pandemic economic growth trajectory. Today, as a consequence, growth recorded in various sectors in Q1 FY 27 is impressive ( figures in brackets indicate corresponding figures for in Q1 FY26): manufacturing-9.2% ( 8.3%), construction-7.7%(5.2%), trade, hotels and transport-8.5% ( 9.8%), finance and real estate -12.1% (8.8%); agriculture-3.6%(4.4%); and finally, mining and quarrying- (-)2.4% (12.4%). Now examine the picture from another angle- that of what economists label “aggregate demand:” during this quarter exports grew by12% (6%); gross fixed capital formation by 11.9% (5.8%); private final consumption expenditure (PFCE) by 6.8% (7.1%); government final consumption expenditure (GFCE)- 4.5%(4.3%). This year’s Q1 data appears to suggest that about 55% of our national income comes from services.
We consume about 55 to 56% of our national income; about 34% is invested; and about 11% is spent by the government. Note the negligible contribution of exports in this mix. The overall impression you will get – irrespective of whether you are a lay person or an expert- is that of an economy, dominated by the services sector, that creditably invests a third of its income and which seems to be much more reliant on internal consumption and domestic markets rather than exports. In the language of the now largely forgotten M.I.T. developmental theorist W.W. Rostow (Stages of Economic Growth, University Press Cambridge, 1960) you could say that the Indian economy is well past take off. It is currently accelerating slowly but surely on a flight trajectory that will with time make us a developed country. How much time is anyone’s guess? P.M. Modi expects to achieve his vision of Viksit Bharat by 2047. Despite the impressive performance, can the country do better? Of course, it can; there is always room for improvement. Is the economy operating at optimum levels? It is not. You could argue that to realise P. M. Modi’s vision you need to reach closer to the economy’s potential growth rate of 8.5%. This is not possible currently inter alia because there is not enough accountability for outcomes either in the bureaucracy or the judiciary- two large areas of low productivity.
Also, right since Independence, we have focussed on hard, physical infrastructure (dams, roads, highways, ports, bridges, etc.) to the detriment of soft infrastructure or human capital needed for rapid economic growth (values, attitudes, quality schools, colleges, institutions and teachers). Compare, for example India’s current expenditure on education, of 4.1% of GDP, with some of its peers: Brazil-5.6%, South Africa-6%, South Korea- 5.4 %, Israel-6%. Also, missing is a focus on R and D. India spends only about 0.74% of its GDP on this activity. Compare this figure to Brazil- 1.2%, 0.E.C.D countries-2.7%, U.S.-3.5%, South Korea-4.8% and Israel-5.4%. Although we need a large number of good teachers and researchers, we don’t get enough because there are few takers for these professions. They are not attractive enough. People- especially young people- also ask “if the economy is doing so well why don’t we feel it?” One explanation could be that although the official unemployment rate is only 3.1%, most of the employment is informal. Even when it is formal, it is often contractual and without job security. Also, there is a serious mismatch between the skills required for the jobs available and skills that job seekers possess. Often this gap is aggravated by attitudes. Young people often ask for white collared jobs; they find it demeaning to sully their hands on the shop floor. Now, compare this attitude back home with that of the same person when he studies abroad. He doesn’t mind working as a part time janitor of a building if that helps him pay his fees for obtaining a Ph.D. The person is the same, the system and incentives are different. This is as a good a time as any to ponder over how we as a society need to address these issues.
*The writer was Chief Commissioner of Income-tax and is the author of the Moral Compass: Finding Balance and Purpose in an Imperfect World, Harper Collins India, 2022.