'Ill-conceived, pre-mature’: SBI report lambasts Raghuram Rajan's 'Hindu rate of growth' prediction
The term Hindu rate of growth was coined by economist Raj Krishna in 1978, which denoted the economic growth of about 3.5-4.0 per cent in terms of GDP during 1947-1980.
- Mar 7, 2023,
- Updated Mar 7, 2023 3:58 PM IST
State Bank of India (SBI) in its Ecowrap report said the argument that India is “dangerously close” to the Hindu rate of growth is ill-conceived, biased and pre-mature at its best when weighing the numbers against the data on savings and investments.
SBI's comments have come in the wake of the views aired by former Reserve Bank of India (RBI) Governor Raghuram Rajan, who on Sunday had said that India is “dangerously close” to the Hindu rate of growth as the country sees limited investment in private sector, high-interest rates, and decreasing global growth.
The term Hindu rate of growth was coined by economist Raj Krishna in 1978, which denoted the economic growth of about 3.5-4.0 per cent in terms of GDP during 1947-1980.
"India's quarterly sequential Y-o-Y GDP growth has been in a declining trend in FY23. It has been argued in select quarters that India is going towards the Raj Krishna coined rate of Growth (3.5-4 per cent) that predominated the growth in the period of 1947-1980. We find the argument ill-conceived, biased and pre-mature at its best when weighing the numbers against the data on savings and investments," the Ecowrap report said without naming the former RBI governor.
Further, SBI Research said that institutional share of the Public and Private sectors in total Gross Capital Formation (GCF) has been nearly constant since FY12 at around 10 per cent and 34 per cent of GDP, respectively.
Gross capital formation 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, SBI said in its report.
"In fact, the trends in GCF to gross output ratio or the plough back of funds for the creation of fresh capacity shows that for public administration the ration attained a fresh peak in 2021-22 owing to the emphasis on capital expenditure in recent budgets," the report said.
The report further added that the household savings in India increased sharply during the pandemic period on account of sharp accretion in financial savings such as deposits.
"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."
SBI’s analysis showed that the 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.
"Such reducing ICOR in the current years reflects a relative increasing efficiency of capital. The talk on ICOR becomes relevant shows that the economy is on a sound footing. It is also now clear that potential growth of 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!" SBI Research's report added.
Raghuram Rajan recently said in an interview that the optimists will point to the upward revisions in past GDP numbers, but what he is more worried about is the sequential slowdown. “With the private sector unwilling to invest, the RBI still hiking rates, and global growth likely to slow later in the year, I am not sure where we find additional growth momentum," he had noted.
Also Read: Raghuram Rajan says India ‘dangerously close’ to Hindu rate of growth
State Bank of India (SBI) in its Ecowrap report said the argument that India is “dangerously close” to the Hindu rate of growth is ill-conceived, biased and pre-mature at its best when weighing the numbers against the data on savings and investments.
SBI's comments have come in the wake of the views aired by former Reserve Bank of India (RBI) Governor Raghuram Rajan, who on Sunday had said that India is “dangerously close” to the Hindu rate of growth as the country sees limited investment in private sector, high-interest rates, and decreasing global growth.
The term Hindu rate of growth was coined by economist Raj Krishna in 1978, which denoted the economic growth of about 3.5-4.0 per cent in terms of GDP during 1947-1980.
"India's quarterly sequential Y-o-Y GDP growth has been in a declining trend in FY23. It has been argued in select quarters that India is going towards the Raj Krishna coined rate of Growth (3.5-4 per cent) that predominated the growth in the period of 1947-1980. We find the argument ill-conceived, biased and pre-mature at its best when weighing the numbers against the data on savings and investments," the Ecowrap report said without naming the former RBI governor.
Further, SBI Research said that institutional share of the Public and Private sectors in total Gross Capital Formation (GCF) has been nearly constant since FY12 at around 10 per cent and 34 per cent of GDP, respectively.
Gross capital formation 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, SBI said in its report.
"In fact, the trends in GCF to gross output ratio or the plough back of funds for the creation of fresh capacity shows that for public administration the ration attained a fresh peak in 2021-22 owing to the emphasis on capital expenditure in recent budgets," the report said.
The report further added that the household savings in India increased sharply during the pandemic period on account of sharp accretion in financial savings such as deposits.
"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."
SBI’s analysis showed that the 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.
"Such reducing ICOR in the current years reflects a relative increasing efficiency of capital. The talk on ICOR becomes relevant shows that the economy is on a sound footing. It is also now clear that potential growth of 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!" SBI Research's report added.
Raghuram Rajan recently said in an interview that the optimists will point to the upward revisions in past GDP numbers, but what he is more worried about is the sequential slowdown. “With the private sector unwilling to invest, the RBI still hiking rates, and global growth likely to slow later in the year, I am not sure where we find additional growth momentum," he had noted.
Also Read: Raghuram Rajan says India ‘dangerously close’ to Hindu rate of growth