With the Reserve Bank of India (RBI) revising the GDP growth rate estimate upwards to 7 percent in the current fiscal, Neelkanth Mishra, a member of the Prime Minister’s economic advisory council (PM-EAC), has said that India may even exceed that figure as the total factor productivity (TFP) continues to be strong due to growth in services. TFP, a measure of the total output (GDP) by the total value of inputs, is considered a key determinant of the GDP growth rate.
“We can even exceed 7 percent. India’s growth estimate is based on a 1 percent growth in labour productivity, a 4 percent growth in capital formation, and a 2 percent growth in TFP. If we break down the TFP, the agriculture and industry TFP growth is unlikely to be more than 1 percent. However the aggregate TFP is strong because of services growth, thanks to domestic factors, retail trade, etc. I do not see much friction in the export of services. I do not see any risk to TFP because of global issues,” Mishra told CNBC TV18 in an interview.
India is likely to see higher growth against earlier estimates of 6.5 percent as the economy is doing well due to the increase in private capital expenditure, which is not a surprise, he said.
“It’s time to upgrade the trend growth because private capex has kicked in. This growth is not a surprise. The economy is doing very well. Also, the 7 percent GDP growth estimate is on the back of fiscal tightening, and the government is likely to stick to its fiscal consolidation roadmap. It is also on the back of interest rates being jacked up and tight liquidity conditions. And it is despite exports slowing very sharply. Policymakers need to worry about trade barriers,” he said.
If the fiscal deficit is rising, it supports GDP growth, and if it’s shrinking, it's a drag on GDP growth. US GDP growth is supported by a doubling of the fiscal deficit. But in India, fiscal deficit is a headwind for GDP, he said. “Indian growth is despite the fiscal consolidation. It hurts GDP growth as of now,” he added.
Mishra feels it is important for India to continue to gradually pace its fiscal deficit and not go for a drastic consolidation.
“The pace (of reduction) of the fiscal deficit is important. It’s important to reduce the fiscal deficit by 50-70 basis points (bps), not 100 bps, and rein it down in a gradual fashion. If debt-to-GDP is reduced too fast, things could go wrong,” he said.
India is still behind its pre-pandemic growth estimate roadmap and more work needs to be done on the labour and capital expenditure front to achieve it, Mishra added.
During 2011-12, a GDP growth rate of 8 percent was seen as the trend growth, which shrank to 6.5-7 percent from 2015 onwards, and during Covid, economists thought it would go lower. The growth slowdown before Covid was due to a slowdown in capital formation, Mishra explained.
Trend growth is the long-term increase in GDP caused by an increase in a country's productive capacity.
“We are still 1.3 years behind the pre-pandemic growth path. There is spare capacity that needs to be filled on the labour and capex side. Artificial intelligence (AI) is seen as a growth booster because it will improve productivity. AI will be supportive of higher growth,” he emphasised.
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