India has done well on its debt to GDP ratio, which indicates that the country’s growth is not debt intensive…
01-Aug-2012 •Research Desk
It is fashionable to laugh at India's falling GDP growth rate. And depending on which group you support, you can take the credit or discredit for the fall. At a time when economists have been revising and re-revising their GDP growth forecasts downwards, what is being missed is that India's GDP growth is way ahead of the global GDP growth rate, according to data from the IMF's World Economic Outlook report. The graph below indicates how over bear as well as bull phases, we have fared better than the global average.
A lot is riding on India’s growth, because any spurt in the Indian GDP cushions the global economy. After the 2008 financial crisis, growth in India slowed more than the forecast due to a greater-than-expected effect of macroeconomic policy tightening and weaker underlying growth. India has responded to the fallout of the financial crisis with moderating domestic demand which is compounded with slowing external demand.
So, is India's GDP poor? A school of thought says one should focus on the debt to GDP ratio and not on the fiscal deficit ratio: A parameter on which India has done well. We have achieved GDP growth while lowering the debt ratios, with the debt intensity of GDP ratio being less for India at about 0.7, which is remarkable because it indicates that India's growth is not debt intensive. Compare the same for the UK which has a debt intensity of GDP ratio of 2, which means that the UK has to add two units of debt to generate one unit of GDP. Moreover, India's public finance is in good shape, and it will only get better once the RBI cuts interest rates as it will spark off growth, which will lead to higher tax collection which, in effect, will reduce the fiscal deficit.