The Meaning Of Being Fifth

Of all major economies India's has been the least fiscally boosted and so most resilient now

- Krishnamurthy Subramanian

In the 75th year of our Independence, we have overtaken our colonial masters to become the fifth largest economy in the world. As the V shaped recovery after Covid contributed to this important milestone, now is a good point to analyse the path of the Indian economy. For this purpose, examine growth over a three-year period from 2019 to 2022 for the April-June quarter.

Among all major economies, India’s growth at 3.83% in the three-year period is highest followed by US 3.78%, Canada 2.58%, UK 1.06%, France 0.68%, Italy 0.21%, Germany 0.11% and Japan -1.27%. However, India’s growth rate being the highest over the three-year period reveals only a partial positive picture.

Fiscal boost’s impact: To understand the complete picture, recognise that countries across the world expanded fiscal spending enormously following Covid. So, the adjoining figure correlates GDP growth over a three-year period with the increase in inflation over the last one year when compared to the historical average of inflation in the country from 1960 to 2021.

We must use inflation over the last year as the impact of the huge fiscal expansion has manifested on inflation over the last year. Ignoring the outliers, India and Germany for now, we see a tight relationship between three-year growth and increase in inflation. This relationship manifests the fact that fiscal expansion prevented a more precipitous decline in GDP growth in these countries, on the one hand, and fuelled unprecedented inflation, on the other.