Is India’s growth story over? Not quite. History shows there have been ups and downs in the past too

The Reserve Bank of India has downgraded its forecast for growth in the current fiscal year to 5%. But going by the gloom that pervades our analysts and commentators, one would be tempted to think that the forecast is missing a minus sign in front of it. At such a time, a look at the post-reform economic history of India provides a good reality check.

Since 1991, when systematic economic reforms were launched, the economy has oscillated between periods of high and low growth with the latter lasting two to three years. Each time it enters a low-growth phase, sceptics and pessimists of different shades come to the fore, predicting the end of the India growth story. Each time, the economy proves them wrong.

Thus, alongside reforms, India had managed to register an average annual growth rate of 6.4% from 1992-93 to 1999-2000. This was the first time the country grew at a rate exceeding 6% for a continuous eight-year period. Even the 1997-98 East Asian currency crisis could halt the economy during this period for only a year. It quickly bounced back to grow 7.5% on average in the following two years.

Though there was no discontinuity in policy in the new millennium, average annual growth plummeted to 4.1% during 2000-01 to 2002-03. An avalanche of gloomy pronouncements followed not just in the media but academia as well. While economist Bradford DeLong wrote sceptically of India’s reforms, Dani Rodrik and Arvind Subramanian upped the ante by arguing that the post-1991 reforms had delivered nothing. The economy had grown no faster in the 1990s than in the 1980s, they claimed.

But the celebrations of reform critics did not last long. Sustained policy reform by Prime Ministers Narasimha Rao and Atal Bihari Vajpayee yielded handsome returns. During the last year of Vajpayee government, the economy grew 7.9%. In the following years it accelerated, growing at the average annual rate of 8.2% for a continuous nine-year period from 2003-04 to 2011-12. Even the massive global financial crisis could jolt the economy only for a year with growth returning to 8.5% on average during 2009-10 to 2011-12.

This robust performance of the economy silenced the critics at least temporarily. Even a critic of post-1991 reforms such as Subramanian retreated. Contrasting India’s growth convergence with the opposite experience of many Latin American countries, he admitted in a 2007 article, “In the Indian case, the triggers [for convergence] were clearly the policy reforms which have created a basic confidence in the private sector that the policy environment will be supportive rather than hostile.”

Unfortunately, multiple policy mistakes by the United Progressive Alliance (UPA) during its second term culminated in a slowdown once again. The average growth rate fell a tad below the 6% mark during the second half of the term. At its worst during this downturn, growth rate dipped to a low 4.3% in January-March 2013 quarter.

The fall once again saw pessimists surface. In a 2012 report, Standard & Poor’s rhetorically asked, ‘Will India Be the First BRIC Fallen Angel?’ Echoing the sentiment, in its August 23, 2013 story titled ‘India in Trouble: The Reckoning’, the Economist declared, “It is widely agreed the country is in its worst economic bind since 1991.”

But the Indian economy disappointed pessimists yet again. With some key UPA mistakes corrected and investor confidence restored, the economy returned to the healthy pace of 7.5% on average during 2014-15 to 2018-19. Many had predicted that demonetisation of high-denomination currency notes, announced on November 8, 2016, would bring the economy down on its feet. But it continued its advance, growing robustly at 8.2% in 2016-17.

Consistent with the past pattern slowdown has returned yet again, however. Growth rate during the last four quarters for which we have GDP estimates has averaged 5.5%. In the latest of these quarters, July-September 2019, it has been lower still at 4.5%.

Unsurprisingly, pessimists are back in the saddle. Some say that India has now gone into a recession. Others capitalise on the prevailing gloom to fantastically claim that the economy grew no more than 3-5% prior to the current slowdown. Still others feel nostalgic about UPA years stating that scams and paralysis notwithstanding, “we were hovering around 8%” under it. The memory of 4.3% growth during January-March 2013 quarter under UPA has all but faded.

This history should give us some pause as we assess the prospects of Indian economy in the medium to long run. There is no denying that the economy is going through a rough patch. But let us not forget that we have been here before. There is absolutely no reason for the panic that seems to grip many in the commentariat.

At the heart of the current slowdown is the process of cleaning up non-performing assets. It has considerably weakened the balance sheets of corporates as well as banks. As the cleanup process progresses and measures are taken to strengthen bank balance sheets, growth is bound to pick up. In the meantime, the government should remain focused on its long-term reform agenda.