Half empty versus half full

Dr Shankar Acharya was closely associated with formulation of macro-economic policy in the ministry of finance in the 1980s and 1990s. Prior to that, he had made a significant contribution to research on fiscal policy issues, particularly on the estimation and sources of black money in India. In his present capacity as honorary professor at ICRIER, he is now a keen observer of the Indian economic scene, and through his writings, contributes to the ongoing debate on current policy issues. A book on macro-economic policy and growth in India by such a person is most welcome, and likely to be of wide public and academic interest.

The main focus of these essays is on a critical analysis of macro-economic and fiscal developments in the 1990s. Against the background of these developments, including India's unfinished reforms agenda, the book has two important essays about the country's future prospects. These are perhaps the most interesting parts of the book at the present juncture, when there is so much excitement"" and hype""about India's emergence as one of the fastest growing economies in the world.

So far as Shankar Acharya's analysis of the past is concerned, the essays in this volume are authoritative sources of reference for anyone interested in the evolution of India's recent economic policies. The presentation and analysis of data meet the highest academic and professional standards. There's not much to add on the author's views on the reasons for India's failure to improve on its growth performance in the post-1991 reform period (as compared with the 1980s). There may be differences of opinion here and there, but, by and large, what he says is correct and unquestionable.

Shankar Acharya's views about India's future prospects are of special interest, and also likely to be more controversial than his views about the past. His first essay on India's future prospects was written in mid-2002, and those views were updated in October 2004. This second essay takes into account the policies initiated by the present government in implementing the Common Minimum Programme. In the 2002 essay, Shankar's best estimate of the likely rate of growth during 2003-08 was an average of only 5 per cent, significantly lower than the growth recorded in the 1980s and 1990s, and far below the growth projection of 8 per cent in the Tenth Plan (which is also the latest official estimate of growth rate for the year 2005-06). In this essay, even this 5 per cent growth might not be realised, if there were a crisis or international turbulence.

In 2004, in the light of the relatively optimistic growth projections of other distinguished researchers and analysts (including the much talked about "BRIC"""i.e. Brazil, Russia India and China"" study by Goldman Sachs), Shankar Acharya decided to take another look at his earlier projections. Taking into account some positive factors, particularly the possibility of higher aggregate savings, he raised his growth projections slightly""to the range of 5.5-6 per cent for the next five years.

I do not know whether, in the light of last year's performance of 8+ per cent growth, Shankar would now revise his 2004 projection again. My guess is that he would probably do so""but by not more than another 0.5 per cent (to 6-6.5 per cent)!

There are several reasons for Shankar Acharya's pessimism about India's growth prospects. These include the government's high fiscal deficit, high public sector dis-savings, lack of financial sector reforms, infrastructure constraints, slow growth in agriculture, rigid labour laws, deterioration in government administration and political obstacles to reforms. I am sure that most analysts would agree that all these negative factors are still in existence. Then why this divide""between Shankar Acharya's pessimism and other analysts' optimism? Is the glass half-full or half-empty?

It is really for the reader to judge. Let me only say that Shankar Acharya is right in identifying several negatives on the Indian economic scene. Taken together, these perhaps reduce India's growth rate by, say 1.5-2 percentage points per year over its true potential. However, he is perhaps wrong in his vision of India's true potential if the rightly identified constraints could be partially or fully eliminated. Is that unconstrained potential for growth only 7.5 per cent per annum as implicitly assumed by him? Or, could it be even 9-10 per cent as in China because of India's emerging global comparative advantage in services, corporate resurgence, skilled manpower and so on?

I await Shankar's next article on this subject.

ESSAYS ON MACROECONOMIC POLICY AND GROWTH IN INDIA

Shankar Acharya
Oxford University Press
Price: Rs 550; Pages: 233