A V Rajwade: New growth with an old mindset?

WORLD MONEY

Without new thinking on governance, or on issues like monetary policy, the target looks impossible.

The new year has witnessed a number of articles in the media about the sustainability of the 9 per cent growth rate. Most commentators seem to be quite optimistic that there are not too many threats to it. Incidentally, there are only two countries in economic history which have achieved 8-9 per cent per annum growth consistently over a quarter century "" China and Botswana.Over the same period, Korea and Malaysia registered growth rates of 6.5-7 per cent per annum and India 5 per cent. Obviously, sustaining an 8 per cent growth rate is not easy.

The process of economic reforms seems to have come to a halt since the coming into power of the UPA government, thanks to its dependence on the Left. One of the first, major pronouncements of our Prime Minister on coming to office was that he would give priority to administrative reforms. However, nothing has happened on this issue since, and it seems to be a dead subject although, to my mind, more purposeful, efficient and honest governance is a sine qua non of sustained, fast economic growth. Surely there are not too many political sensitivities about the issue? And, in many ways, Manmohan Singh is the first Prime Minister with a vast experience in the administration, and therefore in a unique position to implement administrative reforms. Then why the reticence? One hopes that the Sixth Pay Commission's recommendations would be considered along with the need for administrative reforms and reducing unproductive, indeed often counterproductive, civil servants, if only by attrition.

There are a few other major problems which could curtail growth:

a) Monetary policy: While we await the Governor's statement due at the end of the month with some trepidity, it is obvious by now that the central bank is uncomfortable with the rate of credit growth, and seems to be bent upon bringing it down. This would surely impact the GDP growth rate, albeit with a lag. It is worth recalling that GDP growth rate of 7.1 per cent per annum (1993 - 97) came down to 5.2 per cent over the next six years, at least partly, some would say significantly, because of the monetary policy in 1995-96. (Note that each 1 per cent of lower GDP growth translates into, say, Rs 40,000 crore of lost output and a few million jobs, that too permanently.) Will history repeat itself? To be sure, at least currently, the interest rates and monetary stringency is nowhere near the experience of a decade back. But, sustaining growth at 8 per cent may require credit growth at 30 per cent to continue, and the monetary aggregates to come nearer Asian averages. There are few signs of overheating as the mid year review placed before the Parliament argued. (Incidentally, the last two measures taken by the central bank, in October and December respectively, fail Mervyn King's test of sound monetary policy: he has argued that interest rates should be so predictable as to make policy making "boring".)

b) Given that the objective of GDP growth needs to be the creation of jobs for the tens of millions of unskilled and less educated youth coming in the job market, one qualitative aspect of monetary policy is also worrying. This is the obvious emphasis and exhortation to "rebalance lending portfolios", that is, reducing the exposure to real estate. Whatever the concerns of the monetary authorities, the fact is that not only are millions of houses needed, but construction has one of the highest employment potential.

c) By my estimate, the exchange rate is currently overvalued in REER terms by about 6 per cent. The deficit on current account in the current year could be around $18 billion (it has crossed $13 billion in the first half, but Q4 is generally positive). While the deficit is easily financeable, this should not blind us to the deflationary impact and lost growth and jobs from an overvalued exchange rate. While not too much of a concern at the moment, if worries about money supply and sterilisation continue to dominate the central bank's thinking, then there is a potential risk to the sustainability of the growth rate, through an overvalued exchange rate. Incidentally, is the exchange rate one of the factors why the export growth is coming through technology or capital intensive services and manufacturers and not in labour intensive segments? We need the latter for job creation, but labour intensive manufacturing remains sluggish.

d) At some point, infrastructure would start affecting growth, but this could still be a few years down the line. Remember, China had one of Asia's poorest infrastructure as recently as the early 1990s when it already was a fast growing economy for the previous 15 years.

Tailpiece: Commenting on the incidents in Nandigram, Buddhadeb Bhattacharya admitted that "it was a big blunder and the principal cause of the mayhem that followed." The candour is refreshing.