Surjit S Bhalla: India joins China at 10% growth

IT DOESN'T MATTER

The newspapers are abuzz with speculation. Will Indian growth at the 8 per cent levels be able to sustain itself? The answer is a cautious "maybe". Similar scepticism is displayed by the Ratan Tata-headed committee as it gingerly outlines a gradual increase in investments. We should move towards a 35 per cent investment rate over the next five years, it advises. But the stark evidence of three years and counting 8 per cent plus growth have even the gradualist stumped or emboldened""the Planning Commission has now set a target of 9 per cent growth for the next Plan.

However, there are a lot of rear-view economists and intellectuals who say this just cannot happen. Just look at our poverty and food consumption levels, they say. All this India Shining growth is humbug; JNU intellectuals and their supporters glibly talk of how this growth is only relevant for a tiny minority of the other India. The real India is poor and not growing. Dream 8 per cent targets are a capitalist plot to divert the people's anger away from hunger""the poor, and everybody, is eating too little because calorie intake in India today is lower than at any time in history, and even lower than the Bengal famine of 1943. (Not my figures, others'.)

Joining forces are the protagonists of jobless growth. Such growth cannot happen because unemployment is zooming in India, zooming so much that you need programmes which promise dole to the politicians and employment to the already employed poor. The job security situation is so bad that BPO workers need to be unionised, to prevent their exploitation by rapacious capitalists.

The pathetically uninformed Communist types don't realise that the drive towards unionisation is actually a capitalist plot. The BPO workers don't believe in sticking around; they job-hop such that the transaction costs of hiring a new worker are enormous. What better way to solve the problem, from the employer's perspective, than to have the workers unionised and therefore committed to staying at a particular firm for more than a few months.

Short-run growth rates can be explained well by knowledge of the rate of investment. Unfortunately, figures on investment growth (and levels) are only known with a 2-year plus lag in India. For example, the last available "official" investment figure for India, 30.1 per cent of GDP, is for 2004-05. This ratio is a full 3 percentage points above the previous highest recorded level, 27.6 per cent (observed in 1995-96). Current information on several "pointers" to total investment spending are, however, available on a current basis, e.g. growth in non-food credit, bank credit to industry, capital spending by major companies, etc.

Regardless of which indicator one looks at, there has been explosive and sustained growth for the last three years. Non-food credit growth, which had averaged only 15 per cent during 1991-2002, jumped to 22 per cent growth in 2003-04 and 33 per cent growth in 2005-06. But as we all know (or so I am told), these days non-food credit contains much more of credit towards speculation of all sorts""housing, stock markets, cricket matches, etc. So non-food credit growth is only an indicator of speculation and reflection of the "other" India, to which only a trivial minority belongs. But investment is a third of GDP and the tiny minority cannot really do all these expenditures ...

Another proxy for investment spending growth is the growth in lending by banks to industry. This (mostly) cuts out the speculation allegation, but regardless, this proxy also shows a doubling to 25 per cent per annum growth in 2005-06 from the 13 per cent levels earlier. Capital expenditure by major companies (177 firms) is yet another pointer. Such expenditures languished in nowhere land for most of the last fifteen years""until they perked up, jumped, and catapulted to an average growth rate of 66 per cent per annum in 2005-06.

What does this mean for that all-important determinant of growth""the investment-GDP ratio? Throughout the 1990s and till 2002-03, this ratio moved in a narrow range ""23 per cent to 27 per cent. Then, as the numbers above show, this ratio got wings, and increased to 30 per cent in 2004-05. A rough rule of thumb is that each 1 per cent extra share in the investment-GDP ratio leads to an extra growth rate of 0.15 per cent per annum; so the extra 5 percentage points in the investment-GDP ratio means an "automatic" increase in GDP growth of 0.75 per cent per annum.

But the reality is even more (pleasantly) shocking than even the dreams of our planners and industrialists. Projections based on an econometric analysis of investment spending, non-food credit, bank credit to industry, real interest rates, etc. give a minimum estimate of investment spending as a share of GDP of 41 per cent in 2006-07. If true, this level is not East Asian but Chinese. Between 1991 and 2002, the investment ratio averaged 36.5 per cent in China; in 2006-07 it is close to 42 per cent*. China's annual growth rate all these years""around 10 per cent per annum! Now we know where our PM and the Planning Commission get their (realistic) projections of growth for India.

*For details and comparison with China, see Bhalla, Surjit S, Second Among Equals: The Middle Class Kingdoms of India and China , forthcoming, Institute for International Economics, Washington, DC, 2007

ssbhalla@gmail.com