India’s growth story in the post liberalisation era

Another one on macroeconomics! As I was reading through the IMF Financial Policy Programme[FPP] manual as part of the Fundamentals to Macroeconomics elective, I wondered how a graphical representation of India’s growth story in the post-liberalisation era would have looked like. So I set out to look for and plot the relationship between the Nominal GDP figures from 1991-2015, which measures GDP at current prices, the GDP deflator, which measures price levels with 2004 as the base year[deflator=100 for the year 2004] and the real GDP figures, which is growth at constant prices[2004 prices in our case].

This graph below represents the nominal growth of the Indian economy in the last 25 years. As we see, there has been a steady growth and a rather sharp one post 2003. But does it translate to real growth? Let’s try to figure that out. Real growth can be calculated by dividing the nominal value over the deflator. The second graph shows the rise of the GDP deflator over 25 years.

The below graph superimposes the nominal growth over the real growth. This is tellingly revealing, if you look at the growth in the nominal GDP between 2013-2015, it has increased by about $425 billion while the real GDP has increased by just about $81 billion. Compared to the previous few years(2011-13) that saw a dip in the real GDP growth, reining in the CPI by adopting hawkish monetary policies starting September 2013 has, to some extent, contributed to the slow rise in real GDP. On the other hand, the years 2006-07 & 2008-10 recorded a prolific, almost parallel, growth in the nominal as well as the real GDP. Wonder why? These were the halcyon years just before the 2008 subprime mortgage financial crisis in the US. The Indian government was already on a spending spree via welfare schemes such as the MNREGA and huge farm loan waivers that led to high growth rates, but little did they know[actually they knew it very well] that winter was coming. However, the expansionary fiscal stance adopted by the government at that time served the country well than a conservative fiscal stance would have.

In response to the mortgage crisis, between 2008-10, the government unleashed economic stimulus packages on 7th December 2008, 2nd January 2009 and 24th February 2009. Other actions included an overall central excise duty cut of 4 percent, ramping up additional planned expenditure of about Rs.200 billion, further state government borrowings for planned expenditure amounting to around Rs. 300 billion, interest subsidies for export finance to support certain export oriented industries, a further 2 percent reduction of central excise duties and service tax for export industries (that is a total 6 percent central excise reduction). The impact of these measures is estimated to be around 1.8 percent of GDP in 2008-09. If the increase in public expenditure across the budgets of 2007-08 and 2008-09 is taken together it amounted to about 3 percent of GDP (Kumar and Soumya, 2010). This increased public spending in turn catapulted the economy to staggering growth rates of about 8.5% in 2009.

The years 2007-08, no prizes for guessing, even saw a fall in the nominal GDP largely owing the 2008 financial crisis, which is clearly visible in the steep decline in growth rates during that period. The years 2010-13, also, saw a fall in the real GDP growth. This could be largely attributed to the persistently high inflation at the time owing to increased public spending, or rather the delay in rolling back the 2008 stimulus packages. CPI hovered close to and a little over 10% during that time.

The below graph is plotted by running the real GDP values through the natural logarithmic function(ln or log to the base e) or log transformation of economic variables as it is called. This is all the more convenient because the slope of the logarithmic function of a variable is equal to the growth rate of the original variable. In GDP terms, the slope of the logarithmic function of the real GDP data points is equal to the growth rate of the real GDP. The slope is essentially the first difference in the log of the real GDP, which is plotted in the graph below. The almost vertical fall in the 2007-08 period are plain as daylight in this plot. The steady growth in real GDP post 2013 is also clearly visible in this graph.

The mean of the first differences, which gives us the average real growth rate of India over the last 25 years stands at 2.36%. Just to ensure I didn’t commit any calculation errors with the first differences method, I computed the Computed Annual Growth Rate(CAGR) of the real GDP data and it yielded a perfect 2.36%.

P.S : I take full responsibility for any analytical anomalies or transgressions. Data points were plotted in MS Excel. Subsequent calculations for natural logarithm and first differences were also performed in MS Excel.

Sources:

Fiscal policy in India: Trends and Trajectory, Supriyo De.

GDP figures : http://statisticstimes.com/economy/gdp-growth-of-india.php

Deflator figures : http://www.economywatch.com/economic-statistics/India/GDP_Deflator/