IMF Says India Will Be Fastest Growing Economy in 2021, And That’s Good News, But…

The International Monetary Fund (IMF) in the World Economic Outlook update for January 2021, has forecast that the Indian economy will grow by 11.5% in 2021.

If this happens, it will be the fastest that the Indian economy has ever grown. It will also be the first time that the Indian economy will grow in double digits. (Actually, the country did grow by greater than 10% in 2010-11, but that was later revised by the Modi government, once a new set of gross domestic product (GDP) data was published).

The following chart plots the GDP growth over the years. The GDP is the measure of an economic size of a country.

Source: Centre for Monitoring Indian Economy.

It is interesting that the Indian GDP has grown by more than 9% only twice previously, and both these occasions were before the 1991 economic reforms. The economy grew by 9.15% in 1975-76 (post the first oil shock) and 9.63% in 1988-89. Post 1991, the country grew the fastest in 1999-00 when it had grown by 8.85% (after the American sanctions).

Also, among the selected economies for which IMF published data, India will be the fastest growing economy in the world in 2021. China comes in second at 8.1%.

Source: International Monetary Fund.

India growing by 11.5% in 2021 is indeed a big deal, there is no denying that. But there are a few factors that need to be kept in mind here.

First and foremost is the base effect. Before I go into highlighting the base effect in this context, let’s first understand what it means.

Let’s say the price of a stock in 2019 was Rs 100. In 2020, it falls by 50% to Rs 50. In 2021, it is expected to rise to Rs 75. This means a gain of Rs 25 or 50% per share. If we just look at prices of 2020 and 2021, the stock has done fantastically well and gained 50%.

But what we also need to keep in mind is the stock price in 2019, when it was at Rs 100. It then fell massively by 50% to Rs 50 and rose from there. Hence, the stock price rose from a much lower-base. And this lower base was responsible for a gain of 50%. Further, in 2021, the stock continued to be lower than its 2019 price. This is base effect at play.

One way to look at base effect is to look at the GDP growth/contraction forecast by IMF for 2020.

Source: International Monetary Fund.

As can be seen from the above chart, the IMF expects the Indian GDP to have contracted by 8% in 2020. Hence, in 2020, the Indian economy will be among the worst performing economies in the world. Given this, a 11.5% growth in 2021, will come on a massively contracted GDP in 2020. This is a point that needs to be kept in mind.

Also, all the countries which have done worse than India have a per capita income larger than that of India. In that sense they are economically much more developed than India is and their pain of contraction is much lesser than that of India, given that these countries already have access to the most basic economic necessities in life, which many Indians still don’t.

Let’s go into a little more detail on this point. While the IMF publishes real GDP growth data (which we have been discussing up until now), it doesn’t publish constant price GDP, which adjusts for inflation, in a common currency like the US dollar.

To get around this problem, let’s use the constant price GDP data published by the World Bank. On this we apply, the  GDP contraction/growth rates as forecast by the IMF. As per the World Bank, the Indian GDP in 2019 (in constant 2010 $) was $2.94 trillion. In 2020. A contraction of 8% in 2020 would mean a GDP of $2.70 trillion in 2020. A 11.5% rise on this would mean that the Indian GDP is expected to touch $3.01 trillion in 2021, which is around 2.4% better than the GDP in 2019.

Hence, in that sense, the slowing Indian economic growth for the last few years, followed by the covid contraction, has put the Indian economy back by two years. Of course, it can be argued that every country has gone through this. Indeed, that’s true, but that doesn’t make our pain any better.

Also, before saying stuff like India will grow faster than China in 2021, please keep in mind the fact that the Chinese GDP in 2019 was $11.54 trillion (World Bank data), which is much more than that of the India’s GDP.

In 2020, the Chinese economy was expected to grow by 2.3%. This means that the Chinese GDP in 2020 would have grown to $11.81 trillion. In 2021, the Chinese GDP is expected to grow by 8.1% to $12.76 trillion. This means an increase in GDP of $0.95 trillion in just one year. If we compare this increase with the expected Indian GDP of $3.01 trillion in 2021, what it means is that China will end up adding 31.6% of the India’s economy in just one year. Or to put it simply, China will add a third of India’s economy in just one year.

It also means that between 2019 and 2021, the Chinese economy is expected to grow by $1.22 trillion ($12.76 minus $11.54 trillion). During the same period, the Indian economy is expected to grow by $ 0.07 trillion ($3.01 trillion minus $2.94 trillion). Please keep these facts in mind before saying that in 2021 India will grow faster than China.

Between 2019 and 2021, the gap between India and China has grown even bigger and that is a fact that needs to be kept in mind. All numbers and figures need some context, otherwise they are useless and as good as propaganda, which I think will happen quite a lot during the course of the day today.

If you have already read the newspapers and the websites on this issue, you might have seen that almost all of them say that India will grow faster than China in 2021. But almost  no one bothers to mention the fact that China grew faster than India both in 2019 and 2020. Or the fact that China is growing on a significantly larger base (the most important point when we are talking percentages).

At the risk of repetition, you won’t see any such analysis appearing in the mainstream media. So, kindly continue supporting my work. Even small amounts make a huge difference.

India growing faster than China is like saying Bihar’s growth quicker than Gujarat

chinaVivek Kaul

The ministry of statistics and programme implementation released the GDP growth forecast for the current financial year a few days back. It expects the Indian economy to grow by 7.4% during the course of the year.
This is significantly higher than the GDP growth of 5.5% forecast by the RBI. The ministry has moved on to a new method of calculating the GDP, which has led to this massive jump. In fact, in late January, the GDP growth for the last financial year (2013-2014) was revised to 6.9% using this new method. The GDP growth as per the old method had been at 5%.
Explaining this jump in growth, a
Crisil Research note points out: “The Central Statistical Office’s explanation for the upward revision in GDP for previous fiscal is premised on improved efficiency. For instance, the manufacturing sector is generating more value-added from the same level of input. This has led to faster growth in manufacturing GDP which is a measure of the value added.”
The jury though is still out on the possible explanation for this jump in economic growth. The high frequency data doesn’t explain this jump. Car sales remain muted. Tax collections have seen slow growth. Corporate profitability isn’t anything to write about. The number of stalled projects continues to remain huge. Exports are on a decline.
Also, it is worth remembering that the numbers highlighted above are real numbers, unlike the GDP which is a theoretical construct.
Nevertheless, the 7.4% GDP growth number has got the media going. Several news reports have compared India to China and said that India is now growing faster than or as fast as China. Here is a
PTI news report which says: “Indian economy will grow by 7.4 per cent this fiscal, outpacing China to become the world’s fastest growing economy, after a revision in the method of calculations.”
Another news report in the Wall Street Journal says: “India expects its economy to grow at 7.4% in the current fiscal year, a growth rate that rivals China’s, reflecting a strengthening recovery but also a recent radical revision in the way the country calculates its gross domestic product.”
It also needs to be pointed out here that for the period October to December 2014, the Indian economy grew by 7.5% as per the new method of calculating GDP. During the same period the Chinese economy grew by 7.3%, in comparison to the same period in 2013.
While technically there is nothing wrong with saying India is growing faster or as fast as China, we also need to keep in mind what base are we talking about. India’s GDP last year was $1.87 trillion. On this base it is expected to grow by 7.4%. China’s GDP last year was almost five times larger at $9.24 trillion. So China has a significant larger GDP than that of India. Even if the Chinese GDP grows by 1.5% it would be adding as much to economic output as India would at 7.4%.
Given this, comparing Indian growth with Chinese growth just doesn’t make any sense. Further, if we look at the GDP growth data provided by World Bank since 1980, it throws up interesting results. Only four times between 1980 and 2013, has the Indian GDP growth been faster than that of China.
Two of those years were 1989 and 1990 when China was probably facing the after effects of the failed Tienanmen Square revolution. In 1981, China grew by 5.2% and India by 6%. The only other year when the Indian growth was faster than that of China was 1999, when the Indian economy grew by 8.8% and the Chinese economy grew by 7.8%. This was when the dotcom bubble was at its peak.
In fact, in 17 years during the period under consideration the Chinese economy has seen double digit growth rates. On the other hand the Indian economy has grown by greater than 10% only once since 1980. This was in 2010 when it grew by 10.3%. The Chinese managed to beat us even then by growing by 10.4%.
Over the years, the Chinese economy has been growing faster than that of India on a much higher base. This has increased the gap between the GDP of the two countries.
In short, saying that the Indian economy is growing faster than China is like saying that Bihar is growing faster than India or to be more specific faster than Gujarat. The gross state domestic product for Gujarat in 2012-13(the latest data that is available and at 2004-05 constant prices) was at Rs 4,27,219 crore. It had grown at a rate of 7.96% in comparison to 2011-12.
Now compare this to Bihar, where the gross state domestic product had grown by 10.73% in 2012-13, which was higher than the GDP growth rate of Gujarat. In fact, between 2006-07 and 2012-13, the economic growth rate of Bihar was higher than that of Gujarat, on five out of the total seven occasions.
But the question is on what base? In 2012-2013, the gross state domestic product of Bihar stood at Rs 1,58,971 crore. As mentioned earlier the gross state domestic product of Gujarat was at Rs 4,27,219 crore or nearly 2.7 times. It is important to further point out that Gujarat has a population of 6.27 crore people and the population of Bihar is 9.9 crore. Hence, Bihar has been sharing a significantly lower GDP with a larger number of people.
So, the point here is that Bihar (like India) is growing on a lower base. Hence, saying that it is growing faster than Gujarat, which is 2.7 times bigger in economic terms and has a smaller population, doesn’t make much sense.
The same logic holds when we compare the Indian GDP growth to that of China. Like Bihar’s economy has a long way to catch up to that of Gujarat, the same stands true of India’s economy when compared to that of China.

The column originally appeared on on Feb 12, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)