For three decades after independence, India so consistently averaged GDP growth of 3.5 per cent per year that it came to be called the Hindu rate. Then in the 1980s India graduated to the range 5-6 per cent, though unsustainably: the borrowing spree that financed this ended in tears in 1991. Economic reform followed, and growth exceeded 7 per cent for three years in the mid-1990s. But then came populist acceptance of the Pay Commission award, and GDP growth slid back to 5-6 per cent.
I have called this the neo-Hindu growth rate. Unlike in the 1980s, this rate now looks sustainable. It represents a stable equilibrium between India’s huge economic potential and the ravages of political populism. It represents a deep, unspoken political consensus. Jaswant Singh’s budget confirms this.
All political parties talk of the need to accelerate GDP growth to 7-8 per cent annually to eradicate poverty and catch up with China. But no party is interested in taking the tough measures needed for that. Only a party with high moral authority can impose tough measures in the absence of a crisis, and no Indian party has that. So parties compete in giveaways and subsidies. The equilibrium between the potential of the economy and the giveaways of politicians is 5-6 per cent growth, the neo-Hindu rate.
The political consensus underlying this can be summed up as follows. First, the government no longer has the money to scale the commanding heights of the economy, so we must liberalise and allow the private sector a greatly expanded role. Second, we must keep subsidising everything in sight, and invent new subsidies wherever possible. Third, we must do nothing to get rid of armies of surplus labour. Fourth, we are no longer in the old era of raising taxes every budget to finance ever-larger Plans, we are in a new era when we keep cutting taxes to win a few more votes.
Jaswant Singh’s budget is in harmony with this consensus. He has encouraged private investment in healthcare and tourism, and reformed the tax administration. At the same time central explicit subsidies will gallop up to Rs 48,000 crore. He is silent on downsising (while the Railway Minister wants to hire an additional 20,0000 persons while already having 500,000 surplus workers). Finally, the budget is replete with tax cuts and goodies for various section of society.
Once, we told the IMF we would cut our fiscal deficit to at least 4 per cent of GDP. Had Jaswant done that, he would have had Rs 45,000 crore less of money for giveaways. Politically impossible, he would say.
Some economists want a high fiscal deficit to finance public infrastructure. But everybody opposes a high revenue deficit, which implies borrowing for ordinary administrative expenses. The revenue deficit projected by Jaswant Singh is a whopping Rs 112,000 crore, or 4.1 per cent of GDP. This is overspending big time.
The consolidated fiscal deficit of the centre and states is now 10 per cent of GDP, the second highest in the world after Turkey. Now, Turkey survives by demanding a bribe of $30 billion for allowing the USA to station troops there for the Iraq war. India is in no position to demand similar bribes. So how does it sustain its huge overspending without going bust?
The answer lies in the flood of remittances coming from Indian overseas. These, along with software exports and other items are called invisibles, since they earn dollars without any visible export of goods. The net inflow of invisibles was $2-3 billion in the late 1980s. That rose steadily to $11 billion in 2000-01, $14 billion in 2001-02, and looks likes touching $20 billion in 2002-03. This enormous inflow is almost 4 per cent of GDP, roughly equal to the government’s revenue deficit. So, Jaswant Singh’s overspending is offset by the bonanza from abroad. The dis-saving of the government is offset by the huge savings from abroad. Hence even a deficit of this size is sustainable, and causes no distress, let alone crisis. Forex reserves are high, inflation and interest rates are modest.
And yet this equilibrium comes at a price. If the huge inflow from abroad was harnessed to productive investment instead of government overspending, our GDP growth could accelerate to 7 per cent annually. Eventually, we could match China’s 8 per cent growth rate.
But we are not Chinese. Instead we have an unspoken political consensus that keeps government overspending high enough to soak up foreign inflows, yet not so high as to cause a crisis. It is a stable equilibrium, yielding the neo-Hindu growth rate of 5-6 per cent. Neither war in Iraq or anything else looks like shifting it.
