Thursday, October 2, 2008

Is the Indian growth rate sustainable?

No! according to this piece which puts doubts on the sustainability of Indian economic growth rate, which the author argues is more cyclical in nature than is structural as has been assumed so far.

During the fiscal years 1980-81 to 1990-91, the average GDP growth rate was 5.38 per cent... In comparison, the average growth rate between 1990-91 and 2006-07 was 6.23 per cent, an increase of less than one percentage point.

On the other hand, reforms in China had galvanized the economy to such an extent that they had an inexplicably long run of double-digit real GDP growth rate. India has never achieved a double-digit growth rate.

The sectoral detail is even more alarming. Agricultural growth decelerated from an average of 3.39 per cent in the pre-reform period to 2.77 per cent. Even the industry didn't really do too well. The average growth rate was lower by nearly 0.57 per cent, as it decelerated from 6.72 per cent to 6.15 per cent.

…Let's take the agricultural sector.A sector that supports nearly 70 per cent of the country's population has seen a steady decline. A slide that even reforms failed to stem. India's agricultural productivity, in most cases, is one of the lowest in the world…So what have reforms delivered to the nearly 70 per cent of India's population? Nothing!

…The government's average annual development expenditure growth rate plummeted by more than 6 percentage points, falling from an average 15.97 per cent during 1980-81 to 1990-91 to an average of 9.75 per cent during the post-reforms period…When the focus is only on reducing the fiscal deficit, the brunt of fiscal correction is often borne by a reduction in capital expenditure. With the quality of fiscal correction remaining questionable, the growth potential of the Indian economy gets compromised.

…High growth, recorded during the last few years, seems to be more cyclical in nature than structural. Strong global growth, benign inflationary situation and ample liquidity sloshing around caused by a loose monetary policy, both globally and in India, led to this strong growth.

…The sustainability of growth would also depend on high savings rate. However, a closer look at the composition of India's savings rate does seem to suggest that the recent spurt in the rate has more to do with cyclical factor than real structural improvement.