INDIA'S GDP VS.

CITIZENS

The economy of India  is characterised as a  developing market economy. It is the world's  fifth-
largest  economy by  nominal GDP and the third-largest by Purchasing Power Parity(PPP).
According to IMF, on a  per capita income basis, India  ranked 142nd by GDP(nominal)
and 119th by GDP(PPP) in 2018. From  independence in 1947 until 1991, successive
governments promoted  protectionist  economic policies with extensive state intervention and
regulation. The end of the cold war and an acute balance of payment crisis in 1991 led to the
adoption of a broad program of economic liberalisation. Since the start of the 21st century,
annual average GDP growth has been 6% to 7% and from 2014 to 2018, India was the
world's fastest growing economy; surpassing China. Historically, India was the largest economy
in the world for most of the two millenia  from the 1st until 19th century.

The Indian economy grew at 4.5 percent in the second quarter of the current fiscal year as
compared to the same quarter of the previous year. This makes it the Sixth Successive quarter
when the country’s gross domestic product (GDP) has shrunk. If the trend continues for one
more quarter, it would make for the longest spell in over two decades since quarterly GDP data is
available for India. There is a high likelihood of such a scenario fructifying.

To understand the GDP numbers better, it is crucial to understand the components of the
measure. GDP is a sum of four values: government expenditure, consumption, investment and
net exports. If the first component of GDP is removed, the value would denote the non-
government part of the economy. In the second quarter of the current fiscal, this grew at 3.05 per
cent – exactly 150 basis points lower than the overall GDP growth.

The poor performance of the non-government part of the GDP is taking place because
investment in the economy has stalled, consumption is muted, and exports are barely growing.
Investment growth fell to 1 per cent in the last quarter, which has been the trend for over a year.
Low investment has been primarily led by weak consumer demand. Even though consumption
has slightly picked up in the last quarter, sales of all consumer products from cars to toothpastes
has fallen. The latest export numbers also show a degrowth by 1.1 per cent in October.

Since all components of the non-government part of the GDP are performing poorly, the only
driver of overall GDP that remains is government expenditure. In the last quarter alone, the
government expenditure grew by a whopping 15.64 per cent. And this has consistently been the
case for India over the last few years. In 2017-18 and 2018-19, the government expenditure has
grown by about 15 per cent and 9.25 per cent respectively. This is what makes the Indian growth
numbers – even in their low state – unsustainable if status quo is maintained.

There are limits to the extent to which government stimulus can drive the Indian economy. First,
government expenditure accounts for just above 10 per cent of India’s GDP. Second, in an
economy that has stagnated, tax collections start to taper off. This is already showing up in the
data. In the first seven months of the current fiscal year, the government has collected merely Rs
10.52 trillion and is likely to fall well short of its target of Rs 24.61 trillion that it has set for the
entire year. The dividend from the RBI of Rs 1.76 trillion and its earnings through disinvestment
can help bridge the gap to a certain extent. But sooner or later, the government will have to move
beyond stimulating growth through spending and address the fundamental causes of the
slowdown.

While some of the cause for the downturn can be attributed to the global economy, the burden of
internal factors is quite overwhelming. What needs to be understood is that the current growth
slowdown is not cyclical in nature. The growth in India has been historically consumption-led as
evidenced in its consistent double-digit imports against weak exports. In fact, currently almost 60
per cent of India’s GDP is determined by consumption. But this primary component of the
economy has dropped from double digits in the second quarter of last fiscal to 3.1 per cent and
5.1 per cent in the first two quarters of the current fiscal respectively. Such worrying trends had
not even occurred as a result of the 2008 crisis.

Thus, the numbers show that the slowdown must have structural reasons. In such a situation, a
revival cannot be expected using the usual Keynesian tinkering through higher government
expenditure. The twin balanced sheet problem of over-leveraged companied and bad-loan-
burdened banks is only one sign of the structural issues ailing the Indian economy. There are
even deeper concerns that need to be addressed. First, India needs to avoid drawing lessons from
the Western economies, which grew amidst a different global scenario under very different
conditions. Successful Asian economies hold much vital lessons for it. Most successful
economies in the East like China, Japan, and South Korea first reformed their agriculture sectors
by not aiming for scale but for efficiency through competition among small farms. India needs to
adopt a similar approach. Agriculture should be the first sector to be reformed.

Second, in a similar approach adopted by the East, India needs to focus on strengthening its
human capital through higher investment in health and education. This would go a long way in
building the country’s manufacturing strength as well, just like China did in 1980s. It does not
help India’s long-run growth if it keeps losing out on low-skill manufacturing to countries like
Bangladesh and Vietnam. There are evident structure concerns with the Indian economy that
make India unattractive to global manufacturers. Beyond skill, there are issues of regulation and
infrastructure that impede investment in the sector as well.

If such issues are still left unaddressed, the elongated slowdown can quickly convert into a
premature "middle-income trap" where economies like Brazil, Thailand and Malaysia currently
find themselves. It would be premature because India is still far behind the income levels that
those countries have managed to achieve during their high-growth years. The next few years
would decide India’s place in the world for decades to come.

Indian citizens to the growth of their country’s GDP remains rather low. Other impediments
include the country’s poor power and transport infrastructure, high levels of inflation, low levels
of national savings, and closed economy. Moreover, productivity levels in the country are
relatively low and the country has a rather weak human capital.

This paper explores the possible reasons why the contribution of the Indian citizens to the
country’s GDP is low despite the actuality that the country has the second biggest population
globally.