An investment-lite growth model?


Cast your eyes on the accompanying chart. It’s well known now that the International Monetary Fund (IMF) has forecast 6.7% growth in India’s gross domestic product (GDP) this year, which will improve to 7.4% next year and further to 7.8% the year after next. That the slowdown in growth is temporary is indeed good news.

But consider IMF projections of savings and investment in the economy. Even in 2019, when GDP growth is projected at 7.8%, investment as a percentage of GDP is expected to be 29.7%, while savings are predicted to be 28.1%. Now consider 2011, when GDP growth was 6.6%— investment in that year was 39.6% of GDP, while savings were 35.4% of GDP. In 2019, with a much lower proportion of savings and investments, how do we have higher GDP growth? Is growth really expected to be investment-lite? Indeed, the investment-GDP ratio in 2019, according to IMF’s prognosis, will be lower than in 2017.

Are higher exports the reason for higher growth? Not really, because as the chart shows, the volume of export of goods and services increased by 11.4% in 2011 and is forecast to increase by just 7.9% in 2019. The pace of export volume growth is expected to pick up only modestly in 2018 and 2019.

The answer then must be that, according to IMF’s numbers, we’ll have higher growth next year and the year after that, but this growth will not be based on a big rise in either investment or exports. It will, presumably, be based almost entirely on very strong consumption growth.

But won’t higher consumption growth without growth in investment lead to higher inflation? Well, IMF predicts average inflation of 4.9% next year and 4.8% the year after. It doesn’t seem to believe that the Reserve Bank of India’s 4% inflation target is going to hold.