Former RBI governor: India's 8.5% growth rate has some 'fluff' in it

This is an economy which by headline numbers is growing at eight and a half, 8 to 8 1/2 percent. You’ve been attracting a lot of press. Indian yes, yes, you always do. But also a fair bit of criticism for I guess, doubting those numbers. You think it’s more realistic and more likely to be 6 to 6 1/2 percent. Why? Why so pessimistic? Well, I it’s not so much pessimism as saying these are even 6/6 and 1/2 is a pretty good number. The, you know, 8 1/2 has a little bit of fluff in it, partly because of the low GDP deflator we used to deflate the nominal GDP numbers. Nominal GDP is about 9. If you deflate it by, you know, 1% deflator, you get 8% growth. But 1% is not the inflation that India is experiencing. So there’s one problem, that problem. There’s another problem, which is a lot of the GDP numbers are first taken off large firm growth. And actually large firm growth has benefited because small firm growth has really been much more tepid in India. Large firms are capturing market share from the small firms. And so when we eventually readjust the GDP numbers with the fact that small firms haven’t grown that much, my guess is we’ll come closer to the six 6, 1/2 it’s good to have. Be realistic about your GDP numbers because that forms the basis of policy. If you think you’re growing fantastically, why change policy at all? Fair enough Professor. You know a lot of the growth in India we’re seeing is foreign direct investment. It’s also this tilt much more towards manufacturing out the sole making India campaign as well as of course very heavy infrastructure spending. The good news is that the money is there, financing is there, a credit cycle is going, is ongoing again. But it took quite a while for India to dig itself out from under the last time they went very heavy on infrastructure spending and we had a lot of loans go wrong, which killed that cycle for for almost a decade. Are you confident that India or rather policy makers have learned their lessons from the last time around? Well, much of the infrastructure spend right now is by the state, not by the private sector. And so that’s a difference This time around the the financing of the private sector was what led to some of the bad loans that happened. But you know it is something to be weary about because yes, India needs a lot more infrastructure, but it doesn’t need a metro in every city and we have to be careful about that. But I I think the bigger question right now is precisely the private sector. Why isn’t the private sector investing more in India? And if we are to maintain strong rates of growth, which I, you know we absolutely need to, to create jobs for the many people joining the labor force, Of course private sector investment has to pick up strongly. And and that’s the puzzle with all the euphoria about Indian growth. Why aren’t private Indian firms investing at A at A at a larger rate than they have been? Of course everybody says they’re going to invest, but the facts on the ground is they haven’t invested enough so far.