Is Hinduism putting on new economic clothes? For the first three decades after independence, India’s GDP grew at an average rate of 3.5 per cent annually, which was dubbed as the Hindu rate of growth. Creeping liberalisation helped accelerate the rate in the 1980s, and half-baked liberalisation in the 1990s provided an extra fillip. But now growth seems stuck in a groove again, in a new equilibrium of around 6.25 per cent annually. May be we should call it the neo-Hindu rate of growth.
Politicians talk of raising the growth rate to 9 per cent. But the World Bank and IMF caution that India is living unsustainably beyond its means, and will come a cropper unless it slashes its fiscal deficit. Politicians pay lip-service to fiscal prudence but continue living merrily beyond their means.
What then is the likely outcome? Many things are going right, many things are going wrong. Neither trend looks strong enough to change the overall picture for better or worse. Indeed, many things will have to go right simultaneously or go wrong simultaneously to change the trend. That is why the neo-Hindu rate of 6.25 per cent is looking so well settled.
GDP growth from 1981 to 1991-92 averaged 5.4 per cent annually. Since 1992, growth has fluctuated up and down, averaging 6.25 per cent. In the first three years of the current five-year Plan, it has averaged 6.25 per cent. Every year people express hopes of crossing 7 per cent or fears of falling below 5 per cent, yet the country continues in its neo-Hindu groove. This reflects a balance between various positive and negative trends. The positive trends include higher productivity and efficiency induced by greater competition. Half-baked though the reforms are, they have released new entrepreneurial energies, notably in information technology services. Old inefficient business houses are giving way to dynamic new ones.
Foreign investment has brought in a package of capital, technology and managerial expertise. For the first time since the 1950s, India has no shortage of either food or foreign exchange. The capital markets are much improved in credibility and volume. Decentralised, participatory rural development has started in several states. Even literacy is growing at the fastest rate ever, according to recent data.
Alas, the list of negative trends is pretty long too. Subsidies remain as high as in the pre-reform era at over 14 per cent of GDP, equal to the entire tax revenue of the country. If all your tax revenue goes on subsidies, you have to borrow even to pay salaries or interest on past loans, and that is unsustainable. Some states today cannot honour even bank loans or provident fund dues. Few are taking stern steps to curb spending or increase revenue.
Corruption and sloth looking more widespread than ever. The criminalisation of politics proceeds apace. Infrastructure remains woefully inadequate. Moves to reform the power sector have stalled. Sectional interests like trade unions, the farm lobby and small-scale lobby continue to resist reforms to protect their little jagirs. The negative list alarms more than the positive list cheers. What use are software exports and new TV channels if governance collapses, if the state cannot pay its bills or deliver essential services? Many other countries have imploded financially with far smaller fiscal deficits.
Yet, remarkably, India shows no sign of collapse. Unsustainable overspending by governments typically has three adverse effects. First, it can suck in excessive imports and empty a country’s forex reserves. Second, overspending financed by printing currency can cause hyper inflation. Third, overspending financed by domestic borrowing can send interest rates through the roof, ruining most businesses.
In India the fiscal deficit today is as high as it was in 1991, 10 to 11 per cent of GDP. The Centre has cut its deficit but the states have increased theirs. Yet inflation and interest rates are lower today than they have been for most of the past decade. Forex reserves have soared to record heights.
Why? For many reasons. Indians save a lot, and so can offset a lot ofgovernment overspending. Remittances from Indians abroad total $ 12 billion a year, a whopping 3 per cent of GDP. Foreign direct and portfolio investment provide another 1.0 to 1.5 per cent of GDP. This large inflow offsets the usual strain that a fiscal deficit places on the balance of payments, prices and interest rates. The software export boom promises to bring in large flows of foreign exchange in coming years. So, international confidence in India remains high, higher indeed than in many South-East countries that were once hailed as miraculous.
Now, pessimists fear that this foreign confidence may evaporate if we suffer some external shock. Remember that East Asia’s large forex reserves vanished quickly in 1997 because of a crisis of confidence. If confidence in India goes, remittances from overseas Indians and foreign capital inflows may slump. You could get a panic which drains our reserves. Yet the fact is that India withstood the Asian financial crisis of 1997-98 and the oil shock of 2000 rather well. It did so despite a high fiscal deficit, half-baked liberalisation, lousy infrastructure, uncompetitive manufacturing, poor governance and a host of other negatives. The positives in the economy offset the negatives.
The irony is that the same mix of positives and negatives which prevents conomic deceleration also prevents the economic acceleration which Vajpayee and Yashwant Sinha desire. The positives and negatives have created a newequilibrium from which it is difficult to move. No single reform can lift us, no single blunder can down us. Only if several things go wrong or go right simultaneously does a change in the neo-Hindu rate seem likely.
Indeed, the very fact that fiscal deficits have not caused excessive distress means that there is less pressure on politicians to reduce them. Overspending is delicious if you can get away with it. It prevents India from getting richer, but it also helps the politician build patronage networks. So, the neo-Hindu rate of growth is, ultimately, an equilibrium between the imperatives of fiscal prudence and the desire of politicians to overspend.