Explainer: What is 'Hindu rate of growth' and why Raghuram Rajan's remarks may be 'premature'

NEW DELHI: India's gross domestic product (GDP) data for the third quarter (October-December 2022) received a word of caution from the former Reserve Bank of India (RBI) governor Raghuram Rajan.
In an interview with news agency PTI, Rajan 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.
India's GDP for Q3 slowed to 4.4% from 6.3% in the previous quarter.For Q1, Indian economy grew by 13.2%.
Rajan termed this sequential slowdown in growth as "worrying".
However, a report released by the State Bank of India (SBI) economists on Tuesday dismissed arguments that India is dangerously close to Hindu rate of growth saying such statements are "ill-conceived, biased and premature".
What is meant by Hindu growth rate
The term 'Hindu growth rate' was coined by late economist Raj Krishna in 1978 to describe the slow growth in the country.
It basically refers to the low pace of economic growth rates during 1950s to 1980s. During this period, the Indian economy averaged 3.5%.
A former lecturer at the Delhi School of Economics (DSE), Krishna noted that only if the rate of growth is persistently slow and accompanied by low per-capita GDP, then it will be known as Hindu rate of growth but it has to factor in population growth as well.
Before economic reforms of 1991, India's economic growth remained stagnant and low, while per capita income averaged around 1.3%. Krishna termed this low growth situation to be a result of socialist policies of state control and import substitution.
However, the economic situation changed when liberalisation, privatisation and globalisation (LPG) reforms came into effect in the year 1991, at a time when India faced balance of payment crisis.
Over the years, many economists have strongly opposed the idea of 'Hindu growth rate' and the term never had universal acceptance.
How India's GDP has been growing
The Indian economy plunged into its very first technical recession in FY21 due to the impact of Covid-19 pandemic and the related nationwide lockdowns. GDP shrunk by an unprecedented 23.8% in the first quarter of the financial year 2020-21. However, due to spurt in economic activities in the subsequent quarters, the GDP decline started to narrow.

However, if we look at the period before Covid-19 as well, India's growth curve shows a declining trend.
From 8.26% in FY17, GDP growth plunged to 3.74% in FY20. Shutdown of economic activities in FY21 in wake of Covid-19 only made matters worse.
As lockdowns started to ease and business activities resumed, India's GDP also started rising. In Q1 of FY22, growth jumped to 20.1% mainly on account of low base effect. By the fourth quarter of FY22, growth came down to 4.10%.

Similarly, the new financial year 2022-23 brought fresh economic challenges in the form of Russia-Ukraine war that impacted almost all major economies of the world, slowed the pace of growth, pushed inflation to record highs.
As a result, the central banks of all advanced economies spurred into action and opted for monetary policy tightening to curb the soaring inflation.
With persistently rising interest rates, India's economy grew by 4.4% in Q3 of FY23, as the Centre revised upwards GDP growth for previous year to 9.10% from 8.7% earlier.
What SBI report said on savings and investment
The report weighed recent GDP numbers against the available data on savings and investments for the past decade and highlighted some interesting points.
"Quarterly growth numbers are noisy and should be best avoided for any serious interpretation (on an average, India's GDP growth has witnessed Rs 2 lakh crore upward revision for the 3 year ended FY23)," the report said.

Gross capital formation (GCF) by the government touched a high of 11.8% in 2021-22, up from 10.7% in 2020-21.
"This also had a domino effect on private sector investment that jumped from 10 per cent to 10.8% over the same period," it said.
In fact, Ecowrap added that the trends in GCF to gross output ratio or the plough back of funds for creation of fresh capacity shows that for public administration the ratio attained fresh peak in 2021-22 owing to the emphasis on capital expenditure in recent budgets.
At the aggregate level, gross capital formation is supposed to have crossed 32% in 2022-23, the highest level since 2018-19.
According to the report, in 2021-22, gross savings have risen to 30% from 29% in 2020-21.

"The ratio is supposed to have crossed 31 per cent in 2022-23, the highest since 2018-19. The household savings increased sharply during the pandemic period on account of sharp accretion in financial savings such as deposits," said the report by SBI's Economic Research Department.
While household financial savings have since then moderated from 15.4% in 2020-21 to 11.1% in 2022-23, savings in physical assets have grown sharply to 11.8% in 2021-22 from 10.7% in 2020-21.

Incremental capital output ratio
The report further analysed Incremental Capital Output ratio (ICOR) -- which measures additional units of capital (investment) needed to produce additional units of output. It said that the ratio has been improving.
"ICOR which was 7.5 in FY 12 is now only 3.5 in FY22. Clearly, only half of capital is now needed for next unit of output," the report noted.
Such reducing ICOR in the current years reflects a relatively increasing efficiency of capital and shows that the economy is on a sound footing, the report said.
"From that point of view, future GDP growth rates even at 7% could still mean a decent number by any standards!," it added.