Can India keep it up? For the last three years, it has averaged GDP growth of 7 per cent, not far short of the 8 per cent achieved by East Asian miracle economies. But this year, the economy is decelerating. Jeremiahs say the recent fast growth was a temporary surge that cannot be sustained.
I share some apprehensions of the Jeremiahs, and acknowledge that growth has slowed this year. Yet I believe that, with luck and effort, we can indeed sustain a 7 per cent growth rate. After 1991,1 wrote repeatedly that our economic reforms were too muddled and half-baked to yield more than 5-6 per cent GDP growth. I have seen proved too pessimistic. I underestimated the ability of even \”half-baked reforms to increase efficiency, and am wary of repeating this error in the future.
Forget the current debate on whether the economy is slowing down this year. Look ahead and ask, have structural changes occurred in the Indian economy, which make a 7 per cent GDP growth look sustainable over the next decade?
The answer is a qualified yes. Consider the following.
- The savings rate has risen from 22.8 per cent of GDP in 1991 -92 to a record high of 25.6 per cent in 1995-96, and looks likely to rise to 28-30 per cent over the next decade. That will greatly increase the sums available for investment.
- The inflow of foreign investment (portfolio as well as direct) has risen from almost nothing in 1990-91 to $ 5.6 billion in 1996-97, and could touch $ 7 m this year. The potential is much greater-China alone attracted $ 42 billion last year.
- The share of agriculture in GDP has declined from 57 per cent at independence to 25.6 per cent in 1995-96 and will continue to fall. Agriculture is an inherently slow-growing sector since the amount of arable land is fixed. The share of faster-growing sectors (industry and services) has risen steadily, and this structural change will raise the overall growth rate even if sectoral growth rates do not improve.
- The share of exports in GDP has risen from 4.5 per cent in the mid-1980s to 10.5 per cent today. This constitutes a more competitive structure, and means companies facing domestic slack can more easily switch to foreign buyers.
- The efficiency of the economy has improved. This is why, with very little increase in our investment rate, we have increased our GDP growth rate from 5.5 per cent in the 1980s to 7 per cent in the last three years. Corporates across the land are now building world-class plants, focusing on core competence, cutting costs and restructuring for efficiency.
- Companies are making do with less inventories. The ratio of incremental inventories to incremental fixed investment has gone down from 8.9 per cent in 1990-91 to 6.6 percent in 1995-96. This enables massive sums to be switched from inventories to factory-building.
- While literacy continues to be very sub-standard, the literacy of male workers has risen close to 70 per cent. This represents a fundamentally more productive workforce than in the past.
None of these structural changes looks likely to be reversed, and most look likely to be reinforced in coming years. It seems the quantum of investment (domestic as well as foreign) will increase, and the efficiency of investment could also increase. This does not necessarily mean steady growth of 7 per cent every year (some years will be worse, some better). Yet these structural changes suggest that, if the creeping reforms of last two years continue, sustaining a 7 per cent GDP growth should be feasible even if our politicians commit the odd idiocy.
Pessimists will protest that I have failed to mention several negative factors. These certainly exist. Let us list some.
- India has been lucky to get two finance ministers like Man Mohan Singh and Chidambaram who understand the need for reforms and fiscal prudence. This run of luck could end, and we could get finance ministers like Ram Vilas Paswan who will quickly empty the treasury to cater to their favored lobbies.
- The Pay Commission award will worsen the near-bankruptcy of state governments, who will have less cash than ever for primary education, health and rural development. This will erode the fundamentals of rapid growth.
- Political instability will cause policy paralysis and lead to a series of massive give-aways-the enhanced Pay Commission award could be just a taste of things to come.
- Corrupt politicians will smuggle in new controls to replace the ones that have been abolished.
- The infrastructure bottleneck will worsen and strangle growth.
- Once these adverse factors begin affecting the economy, foreign confidence will evaporate, and we will witness an outward stampede of investors, which will drain our foreign exchange reserves and sink our stock markets.
We must acknowledge the validity of such fears. Indeed some of these negative factors have existed in some measure over the last six years. Yet, the country has experienced record growth. Arvind Virmani of the finance ministry has calculated that the share of infrastructural investment in total public investment actually rose from 23.5 per cent in the Seventh Plan (1986-91) to 25 per cent in the Eighth Plan (1992-SJ7), so we have salvaged something even in what has been generally seen as a disastrous sector.
Some observers say fragile coalition governments are incapable of purposive reform. Yet the Gowda and Gujral governments have given us creeping liberalisation, at a faster pace than the Rao government in its last two years. Information minister Jaipal Reddy declares that minority governments are better reformers than majority ones because they are anxious to perform in the limited time-span available to them. Most businessmen now say economic policy has been delinked from politics, so political instability affects them little.
I believe we have the potential for GDP growth of 10 per cent per year. That is why, despite many negative trends, I believe a 7 per cent growth is possible, provided creeping reforms continue. Downside risks, like Paswan becoming finance minister, are significant. Yet, they may produce no more than a bad year or two, which should be followed by better ones. I think it will take sustained mismanagement to lower our long- term growth rate below 6 per cent.
Cynics will say that, given our track record for 50 years, sustained mismanagement is precisely what we should expect. I am no longer so cynical.