1.103 In the last 2 years, real GDP growth
has averaged about 7.5 percent. But this has been achieved against the context of weak investment, export volume and credit growth. This wedge between steady growth and its underlying (relatively weak) drivers raises a
question and also poses a puzzle. To shed
light on this a cross-country comparison was undertaken to investigate whether in the last 25 years there have been similar experiences in other emerging market countries (that is, of successive two-year periods where Indian levels of growth were achieved with such a
combination of factors, i.e. Indian levels of real investment, export volume, and credit growth witnessed in 2015-16 and 2016-17). The focus is on the last 25 years because of data availability.

1.104 First, Indian performance on real

investment (gross fixed capital formation), export volume and credit during the last two years (2015-16 and 2016-17) is identified. These were 4.5 percent (real) growth in investment, 2 percent growth in export volumes, and decline in credit-to-GDP ratio of 2 percentage points (all averages over the
two years). A sample of 23 other comparable countries is then considered to infer how many times this combination of investment, export volume, and credit has led to growth of at least 7 percent.

1.105 Since there are three criteria, there
are seven possibilities: three cases where any one of the criteria are met, three cases where any two combinations are met, and one case where all the three criteria are met. That never in the last 25 years has there been another case of 7 percent growth with investment, exports and credit corresponding to the current Indian combination. In fact, there have also been no cases when two of the three criteria have been met. Only in a very few cases, has 7 percent been consistent
with only one of the three criteria having
been met.

1.106 The next question is whether the
Indian combination of investment, export volume, and credit is consistent with a weaker growth performance of 5 percent. Again the answer is never. In fact, 5 percent real GDP growth has been consistent with two of the three criteria having been met only four percent of the time.

1.107 Therefore, the Indian experience of the last two years has been exceptional. Another way of seeing this is to note that the average investment and export volume growth in the 7 per cent sample is 13.8 and 12 percent respectively, well above India’s. From a strictly accounting perspective, there is no difficulty in explaining Indian exceptionalism. By
definition, consumption and, to a lesser extent, Government investment have powered the economy. But the purpose of the cross-country comparison is to move from accounting to plausible economic explanations.

1.108 One lesson is the following. While
the current configuration is certainly
unprecedented in cross-country experience, sustaining current growth trajectory will require action on more normal drivers of growth such as investment and exports and cleaning up of balance sheets to facilitate credit growth.

Source: Indian Economic Survey Vol. II

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