SBI report calls Raghuram Rajan's remarks on Hindu rate of growth 'Ill-conceived, biased'

A research report by the State Bank of India (SBI) on Tuesday dismissed arguments of ex-RBI governor Raghuram Rajan that India is dangerously close to the Hindu rate of growth saying such statements are "ill-conceived, biased and premature" in the wake of the recent GDP numbers and the available data on savings and investments.

"Interpretations of GDP growth based on noisy quarterly numbers is a game of smoke and mirror," said the SBI report 'Ecowrap'. The report comes within days of former Reserve Bank Governor Raghuram Rajan saying that India is "dangerously close" to the Hindu rate of growth in view of subdued private sector investment, high interest rates and slowing global growth.

Rajan said that sequential slowdown in the quarterly growth, as revealed by the latest estimate of national income released by the National Statistical Office (NSO) last month, was worrying. Hindu rate of growth is a term describing low Indian economic growth rates from the 1950s to the 1980s, which averaged 3.5 per cent. The term was coined by Raj Krishna, an Indian economist, in 1978 to describe the slow growth

"India's quarterly Y-o-Y GDP growth has been in a declining trend in FY23 sequentially, prompting arguments that India's growth is reminiscent of a pre - 1980 Raj Krishna coined growth rate," the report said.

Apart from the fact that, quarterly growth numbers are "noisy and should be best avoided for any serious interpretation (on an average, India's GDP growth has witnessed Rs 2 lakh crores upward revision for the 3 year ended FY23), "we find such argument ill-conceived, biased and premature at its best when weighing the recent GDP numbers against the available data on savings and investments."

The investment and savings data for the past decade reveals interesting points, said the report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

Gross capital formation (GCF) by the government touched a high of 11.8 per cent in 2021-22, up from 10.7 per cent in 2020-21.

"This also had a domino effect on private sector investment that jumped from 10 per cent to 10.8 per cent over the same period," it said.

In fact, Ecowrap added that the trends in GCF to gross output ratio or the plough back of funds for creation of fresh capacity shows that for public administration the ratio attained fresh peak in 2021-22 owing to the emphasis on capital expenditure in recent budgets.

At the aggregate level, gross capital formation is supposed to have crossed 32 per cent in 2022-23, the highest level since 2018-19. According to the report, in 2021-22, gross savings have risen to 30 per cent from 29 per cent in 2020-21.

"The ratio is supposed to have crossed 31 per cent in 2022-23, the highest since 2018-19. The household savings increased sharply during the pandemic period on account of sharp accretion in financial savings such as deposits," said the report by SBI's Economic Research Department.

While household financial savings have since then moderated from 15.4 per cent in 2020-21 to 11.1 per cent in 2022-23, savings in physical assets have grown sharply to 11.8 per cent in 2021-22 from 10.7 per cent in 2020-21.

"Prima facie, a careful analysis shows that Incremental Capital Output ratio (ICOR), which measures additional units of capital (investment) needed to produce additional units of output, has been improving.

"ICOR which was 7.5 in FY12 is now only 3.5 in FY 22. Clearly, only half of capital is now needed for the next unit of output," it said. Such reducing ICOR in the current years reflects a relative increasing efficiency of capital. The talk on ICOR becomes relevant and shows that the economy is on a sound footing, it added.

The report further said it is also now clear that potential growth of the Indian economy (a global phenomenon) is now lower than earlier. "From that point of view, future GDP growth rates even at 7 per cent could still mean a decent number by any standards!," it said.

The Gross Domestic Product (GDP) in the third quarter (October-December) of the current fiscal slowed to 4.4 per cent from 6.3 per cent in the second quarter (July-September) and 13.2 per cent in the first quarter (April-June). The growth in the third quarter of the previous financial year was 5.2 per cent.

(With inputs from PTI)

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