Biased: SBI debunks Raghuram Rajan's 'Hindu rate of growth' prediction

The argument that 'dangerously close'' to the Hindu rate of growth is 'ill-conceived, biased and pre-mature' when weighed against the respective data on savings and investments, said SBI Research in its Ecowrap report.

Hindu rate of growth is a term describing low Indian economic growth rates from the 1950s to the 1980s, which averaged around 4 per cent. The term was coined by Raj Krishna, an Indian economist, in 1978 to describe the slow growth.

According to the SBI's latest Ecowrap report,''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 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.''

Earlier, sounding a note of caution, former Reserve Bank Governor Raghuram Rajan has said 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 further 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.

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.

However, the Ecowrap underlined argued 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.n''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.

Furthermore, it argued that 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,'' The Ecowrap also noted.

An analysis by SBI Research prima facie showed that the Incremental Capital Output Ratio (ICOR), which measures the additional units of capital investment needed to produce an additional unit of output, has been improving. ICOR which was 7.5 in FY12 is now only 3.5 in FY22, which essentially means only half of the 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.