Shankar Acharya: Eight percent growth for ever?

A PIECE OF MY MIND

A couple of months ago, Oxford University Press brought out a collection of my recent papers on macroeconomic policy and growth in India. In one of the papers, originally published in October 2004, I foresaw India's economic growth in the medium term (say, five years plus) at about 6 percent, that is, at pretty much the average rate experienced in the last quarter century. A couple of reviewers of the book (and some other interlocutors) have justifiably asked if I still adhere to this somewhat bearish prospect, given the 8 percent growth performance of the Indian economy in the last three years (2003/4-2005/6). I owe them an answer.

To begin with, let me admit straightaway that I did not expect such strong growth in the last two years (2003/4 was a more predictable, agriculture-led rebound from the drought-affected slump of the previous year). So, as far as the short term is concerned, I was simply wrong. The only caveat I would enter is my continued discomfort with the sustained high growth of the Services sector (accounting for over 55 percent of GDP) estimated by the CSO. As the table shows, the growth of services has averaged 8.5 percent after 1996/7, compared to 4.5 percent in the thirty years 1951/2-1980/1, 6.7 percent in the Eighties and 7.6 percent in the post-reform growth surge of 1992-7. In contrast, industrial growth has averaged hardly 6 percent after 1996/7, markedly slower than services and (as I have pointed out on other occasions), quite unusually so given India's growth history and that of other developing countries. Unusual doesn't make the CSO's estimates incorrect. It just raises doubts (shared by others, such as Prithwis De in Business Standard, May 16, 2005), especially when one takes account of the much more indirect methods of estimating services value added deployed by the CSO in comparison with the methods used for agriculture and industry. I can't help recalling the pithy remark of a former head of the CSO's national income division on the methods he had to rely on: "If you come into my kitchen, you will never eat my food!"

Putting such nagging doubts to one side, I must freely admit that I had not anticipated either the strength of the global economy or the (linked) longevity of the industrial upswing in India since 2003. There clearly is a boom in industrial investment and output. The key issue is, will it be sustained? More generally, is 8 percent economic growth now our inalienable right for the next five years, say, 2006-11? The pronouncements by government ministers would certainly suggest so. Indeed, rather like the "India Shining" days of spring 2004, 10 percent growth ambitions are also wafting in Delhi's dusty, dry air once again, despite the water-less, power-less hardships of the capital's citizens (leaving aside the favoured denizens of Lutyens' inner city).

In assessing the realism of such aspirations, let's take a moment to review recent history. A glance at the table suggests some caution. After the post-reform growth spurt of 1992-7, averaging an all-time high of 6.7 percent for five consecutive years, growth in the remaining four years of the Nineties slowed to 5.5 percent. In the next five years (2001-6) thanks to the unexpected (at least by me) boom of 2004-6, average growth has climbed back up to the 6.7 percent record of 1992-7. Because of the underlying momentum of economic activity (not to mention estimation methods!), this record is likely to be surpassed if we take the five years, 2002-7. But only marginally; we would still be in the neighbourhood of 7 percent "only". So, two points merit emphasis. First, we have experienced growth deceleration in our recent past and cannot assume immunity from such experience in future. Second, despite the 8 percent spurt of 2003/4-2005/6, we have yet to surpass the five-year growth record set in 1992-7.

Past performance is certainly relevant. But my real doubts about sustaining 8 percent economic growth for the next five years has much more to do with the continuing infirmities of economic policy. In giving a short list of these I will inevitably sound like a broken record (itself a meaningless simile for the digital generation!). First, despite the prolonged and tortuous efforts of successive governments, real progress in relieving the infrastructure bottlenecks of power, roads, water, sanitation and airports remains painfully slow. Second, in spite of some moderation of fiscal deficits in recent years, real interest rates are creeping up, weakening one of the key props of the current investment boom. And future fiscal deficits remain hostage to unchecked expenditure populism and revenue laxity of the kind exemplified by the Special Economic Zones scheme, which could shrink substantially the future tax base. Third, serious under-utilization of our abundant manpower resource seems likely to persist, given the political fondness for dysfunctional labour laws. Indeed, the renewed affection for reservations in jobs is likely to hugely distort labour markets further, to the detriment of productivity, livelihoods and social cohesion. Fourth, after almost a decade of slow growth in agriculture, we seem no nearer to viable solutions. Amongst other things, our policy makers do not seem to understand that the solution to massive underemployment and low labour productivity in agriculture may lie outside the sector: through promoting rapid growth of labour-using manufacturing (shades of labour laws again). Fifth, the government still conducts and controls far too much of economic activity in the country, despite the mounting evidence of the costs this imposes. More broadly, continuing slippage in standards of governance all round is exacting a significant (perhaps rising?) economic toll. Sixth, the government's response to the global challenge of rising energy prices remains woefully inadequate. And I haven't even mentioned the spectres of AIDS, bird flu, global recession or protectionism and other sundry threats which could spin out of control and threaten economic buoyancy.

Against this background I would not bet on 8 percent growth for the next five years. Even after taking due account of the demonstrated dynamism and resilience of India's remarkably resourceful people, a growth rate in the range of 6 to 7 percent seems more likely. If you want to play the game of betting on a particular figure, I suggest an average growth of 6.5 percent for 2006-11. Five years hence, if I am still writing this column (not asking for commitments, Mr. Ninan!), I promise to revisit the factual record. In the meantime, I can't resist requoting George Eliot: "Among all forms of mistake, prophecy is the most gratuitous"!

The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. The views are personal