Optimism abounds in India following Narendra Modi’s unexpectedly strong election victory. It’s still early days, but the new government’s priorities and coherence are a breath of fresh air.
As India’s economy gets back on its feet, one question is whether the recovery will be shaped like a U, a V or a square root. In other words: Can growth rebound as quickly and strongly as it did after the global financial crisis?
Unfortunately, the answer is no: India’s recovery will be gradual and uneven, at least in the near term. Growth will accelerate sharply from fiscal 2016 onward.
It’s worth recalling the sting from the global financial crisis. Gross domestic product growth, as measured by production, plunged to 5.8% on-year in the final quarter of 2008, from 9.8% in the second quarter. Growth in expenditure GDP – a less reliable measure – dropped even more, to 1.5% on-year from 8.1%.
The main casualty was growth in gross fixed capital formation, which typically enhances an economy’s productive capacity. This fell from 13.9% in the second quarter to 2.1% in the fourth quarter – then declined by nearly 10% in early 2009.
Afterward, both capital formation and GDP recovered rapidly in a classic V-shaped pattern. Production GDP growth, which fell to 6.7% in fiscal 2009, averaged 8.8% a year in the next two fiscal years. Gross fixed capital formation averaged nearly 10% growth per year in fiscal 2010 and 2011, a swift recovery that hinted the economy was once again on an elevated trajectory — though policy paralysis later shortchanged it.