Monday, January 7, 2013

Sustain India Growth At potential for Two decades

The Economic Times of December 28, 2012, headlined that, "India can and should plan for double digit growth," stating that, " Only incoherent, populist politics and poor governance deriving from it hold down the growth rate."  The financial express of January 7, 2013 reported the PM as saying that "The only way forward for this country is to register a growth rate of 9-10%.” Every time the Indian Economy starts to recover, the talk of double digit growth is not far behind.  This detracts from and misleads politicians and government from the real challenge: Restoring the Indian economy to its growth potential of about 8.25% GDP growth and maintaining it there for at leas two decades till India becomes an upper middle income economy.
 The 12th Plan, recently approved by the NDC, targets a growth rate of 8% for the twelfth plan period 2012-13 to 2016-17.  This was a reduction from the 8.2% average proposed earlier in the year and a sharp downward revision from the 9.5% proposed in the Approach paper to the 12th plan.  With a likely growth rate of 5.5% in 2012-13 and an optimistic 6.5% in 2013-14 this would require and average growth of over 9% in the last three years of the plan.  Despite this, experts have criticized the Planning Commission for not targeting double-digit growth.  In an article, Claude Smadja a prominent observer of global growth concluded that , “..with some effective reformist actions.. India will bring the ‘Hindu growth rate’ to what should be 9 or 10 per cent a year.”

To my mind the most disturbing point in all this is not that the Planning Commission’s forecast of a year ago turned out to be so wrong - It is in the elite company of the Finance Ministry, EAC, World Bank, IMF and numerous international and domestic private forecasters.  The more important point is that too many influential people in India and abroad seem to believe that attaining an average growth rate of 9-10% over ten years is as easy as ticking of policy suggestions on a power point presentation.  The history of economic growth conclusively demonstrates the falsity of this assumption.  Having had the good fortune to study growth, one was in a position to oppose the adoption of unreasonably high growth targets (above 8.5%) in both the 10th and 11th plans and to delicately warn in 2008-9 (Economic Survey) that the key issue for India was not how to raise economic growth from the existing 8-8.5% to 9-10% (on which analysts, businessmen, government and media seemed to be virtually unanimous), but how to sustain 8 to 8.5% over the next two decades to become an upper middle income country.[i]
There have been scores of countries that have grown at very fast rates of GDP growth of over 8.5%% (GDP) for a few years but only a limited number that have sustained this average for a decade.  I call these “shooting stars” and ‘sprinters’ respectively. For the entire set of countries the correlation between average decadal growth rate in the 1990s and the 2000s is negative, having come down from a mildly positive 0.13 in earlier decades.  This means that in general growing fast in one decade does not guarantee a country equal success in the next decade.  Worst in the last two decades it has paradoxically proved to be a handicap. 
The transformation of an economy from low income to upper middle income takes many decades. Sustained fast growth is neither constitutional nor a human right or entitlement, that can be taken for granted once it has been bestowed or attained.  Just because India has grown at a per capita GDP growth of 6.1 per cent in the decade 2001 to 2011 and is one of eight countries to grow at 6% or higher during this period does not guarantee that it will continue to grow at this rate.  Like other fast growing economies, India has to constantly work at meeting the new challenges that arise from both outside and inside the country, in the form of disruptions and shocks, such as the global financial crisis and the oil price shocks.  Existing polices and institutions have to be constantly reevaluated as the trade-offs constantly change with faster growth and the faster the growth the greater the change.  Thus a nationalized coal industry that may have been able to cope with the growth rate of demand in the eighties is totally inadequate to the challenges of the fast growth of the 2000s: de-nationalization is now a greater imperative.   Some of these challenges are paradoxically the negative effect of faster growth.  To take a trivial example, in many parts of India, fast growth in real estate has depleted the standard, known sources of sand for construction.  Another more critical example is the depletion of underground aquifers and the pollution of surface and underground water sources.  Unless the policy and regulatory structures adapt and evolve to ensure that either new sources of these natural resource are found or there is enough incentive for innovation in developing substitutes, further growth will be hampered.  
 Institutional adaptation and reform also becomes essential as a country moves from the low income category to lower middle income category as we have in the last few years.  As institutions (administration, police, courts, legal system, social rules and norms) are slow to adapt and change, the faster the growth the greater the gap between the type of institutions that are needed and those that exist.  If un-addressed these can give rise to social discontent and conflict that can paralyze decision making and bring growth to a grinding halt.   Thus our institutions dealing with rural land, its conversion into urban land, the classification of land use and the development of urban public goods, are now quite inadequate to the needs of growth and in urgent need of reform.
                There have been less than a score of countries in history, which have grown for over a decade at an average per capita GDP growth rate of 7.1 per cent or more. The significance of this cut off (7.1%)  is that per capita income doubles in a decade and would become eightfold in three decades. There have also been about a dozen countries in history that have sustained a per capita growth of 6 to 7% for a decade.  India was in 2011 a member of this second category, but is in danger of falling out of it this year.  Talk of double-digit GDP growth (8,5% per capita) distracts from the challenge of maintaining per capita growth at 6% plus and the even more challenging one of bringing it back to the potential rate of  7% (about 8.25% GDP) and sustaining it at that level for the next two decades.

[i] For analysis and papers see  website

A version of this article appeared under the banner, " The Double Digit Fallacy," on the Op-ed page of  the Indian Express of Monday 8th January, 2013, at

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