Why is India the fastest growing economy despite four droughts?
India’s agricultural sector is heavily dependent on rainfall, even after 68 years of independence. Agriculture accounts for nearly 17% of the country’s economy and supports 40% of its population. As such, every time there is a drought, it deals a telling blow on India’s GDP growth.
It is a matter of great surprise then that despite four droughts in six years, India became the world’s fastest growing major economy in 2015. The country’s GDP growth rate has increased steadily from 5.1% in FY12 to an expected 7.5% in the current fiscal, estimates the World Bank. So, what has gone right for India this year? Here are a few things:
Easing energy and commodity prices: Oil is the largest component of India’s imports. Every time global crude prices fall, it is party time for the Indian economy. Crude collapsing to below $35 a barrel from the usual $100 a barrel, last year, was naturally a big event for the economy. It saved the government billions of dollars on crude imports, and sharply reduced India’s current account deficit.
It also eliminated the need for the government to subsidize fuel, and helped somewhat, in bridging the fiscal divide. The collapse of crude, although more severe, is in line with the reversal of the global commodities super-cycle. Since India is a net importer of many other commodities, like food grains, and gold; the end of the super-cycle has also saved the country forex on its other commodity imports. The government could channelize its savings into growth-generating projects, which put the economy on a long-term growth trajectory.
The grip on inflation: Two years of high inflation had crippled the Indian economy. It compelled the RBI to raise interest rates to reduce the free flow of money in the economy. High-interest rates made it difficult for people and companies to borrow. In the absence of consumption and investment, economic growth came to a complete standstill. The fall in crude prices (crude accounts for 7% of India’s CPI inflation index), and the efforts of the government and RBI; finally brought inflation down in 2015, and created a conducive environment for cutting interest rates.
Simultaneously, the government increased public investment, to help kick start the private-sector investment cycle. The efforts of the government and the RBI succeeded in boosting consumption and private sector investment; which helped India become the fastest growing major economy in 2015. According to the World Bank, capex increased by 1/3rd in the first six months of 2015, over the previous year, and capital goods imports also went up sharply.
Immunity to the world economy: India follows a domestic consumption-oriented economic model, and has limited dependence on the export market. Such a model gives a country relative immunity against adverse developments in the external economy. An ‘inward-looking’ economic model has served India well at a time when the world economy seems to be sitting on multiple bombs. The Eurozone, which is among India’s biggest export destinations, is probably in an extended economic slowdown.
There are serious fears about the health of the Chinese economy. The US has just come out of a recession, and its recovery is expected to be gradual. Weakness in the other BRICs (Brazil, Russia, and China), and geo-political developments in the Middle-east; are matters of great stress too. These factors led to negative export growth in FY14-15, after an impressive FY13-14. Although the World Bank expects the weakness in exports to continue in 2016, India’s economy should stay largely insulated from it. The only significant impact that global developments could have on our economy is a fall in foreign investments. A rate cut by the US Federal Reserve has alleviated these fears.