Long-term questions

There is suddenly a flurry of forecasts about India's economic growth in the new year. Most forecasts predict a second year of high growth.

Typical of the upbeat mood about India is the forecast by the Asian Development Bank (ADB), which has analysed 41 economies in the Asia-Pacific region as part of its annual Asian Development Outlook and predicted nothing less than 7.4 per cent growth for India in 2004 "" second only to China.

Some others have forecast 6.5 per cent growth, which now seems positively modest. It is useful therefore to bear in mind that India has seen successive years of high growth only once, during the boom times of the mid-1990s, when the system was clearly overheating.

While it is correct to argue, as the ADB does, that India is on an accelerating growth curve, it is difficult to believe that the current year will see exceptional growth once again, on the back of the 8 per cent and more achieved last year. The truth is that the "India shining" story isn't that good as yet.

More interesting than the short-term forecast is the fact that the ADB's exercise, unlike most other forecasts done by government, quasi-government and independent institutions, is qualified. Read carefully, ADB's economic outlook on India is mixed.

While it is bullish on the output performance of the economy, it has expressed serious concern on the slow growth in employment. It has also expressed its apprehensions about the reversible nature of the foreign exchange inflows and the increasing inter-regional disparities.

The short-term output forecast has been given a fresh dimension by placing it in the context of long run business cycles. ADB's analysis of the growth patterns over the past 50 years indicates that the Indian economy may be poised at the beginning of a new business cycle.

The analysis emphasises the well-known long-term trend of accelerating growth, from 3.5 per cent up to the 1970s to 5.4 per cent in the 1980s and further to 5.9 per cent in the 1990s.

ADB sees this acceleration being sustained because of its understanding of the sources of growth. The analysis shows that the largest contribution to GDP growth during 1960-2002 has come from capital stock.

The growth in total factor productivity has been the second important source of growth since 1979, and its contribution has been rising. It is this that is now expected to become the dominant source of growth. This along with the increasing contribution of services to GDP will make the growth pattern less volatile and more stable.

Even so, ADB believes that this is unlikely to be the start of a virtuous cycle. It does not expect major improvement in employment growth or poverty reduction, even in the medium term though per capita income will be rising (the World Bank announced a different conclusion last week).

ADB argues that any decline in the poverty ratio will depend on employment growth, especially in the agriculture sector. And on current trends the poverty-reducing impact of agricultural growth is going to be weak because of low employment growth in the sector.