INDIA BUSINESS WORLD – FEBRUARY 2007
The Month that was ...

INDIA’S PRICELESS GROWTH STORY

INDIA needs low, East Asian levels of taxes so said finance minister P Chidambaram in 1997. Ten years later, the Economic Survey declares that India has moved into the East Asian growth trajectory: high growth rates with low inflation. The focus of government policy will be to rein in inflation without dampening growth, essentially through growth that removes supply constraints in the agriculture, infrastructure and social sectors.

The Survey also holds out organised retail and tourism as the two areas of economic activity that need special attention. While retail has the potential to link the distressed farm sector to booming industry and services, tourism can help generate a large number of low-skilled jobs. Wherever the Survey casts its eye, India is shining. The economy is growing at 9.2%. Employment growth has accelerated to 2.5% a year, faster than not only the 1.6% registered during 1993-2000 but also the 2.1% over the decade up to 2002-03. Fiscal deficit is under control, FDI is surging (27.4% growth in 2005-06, followed by 98.4% growth in the first half of 2006-07), the capital markets are shovelling large dollops of money from the rising share of financial savings in overall household savings and the nature of India's growth is shifting from consumption-led to investment-led (the share of investment in the total value of goods and services produced touched 33.8% in 2005-06 the investment rate was just 24% in 2000-01). Exports are booming. Imports are growing even faster, feeding domestic growth and investment, yet the current account deficit is still moderate. Forex reserves have climbed to a level where they can cover 11 months' imports. The Survey, however, remains silent on the costs imposed on the economy by this pile of foreign exchange, save its role in augmenting money supply.

Fiscal deficit is well under control (the combined deficit for the Centre and states is inching towards 6% of GDP from 9.9% in 2001-02). As a result, the government corners less of bank credit, reducing the strain on interest rates produced by the ongoing surge in lending to industry (31.6%) and housing (38%) this year. Yet, money supply growth at 21% is five percentage points higher than the nominal growth rate of GDP. This is potentially inflationary. But don't worry, the central bank is on the job, impounding cash through hikes in the cash reserve ratio and raising interest rates on short-term loans to banks.

Political parties, including Congress, are crying hoarse over inflation, now at 6.7%. But the Survey sees inflation as a manageable problem. And not without reason. Inflation is mostly supply-induced. Global prices of metals and oil have gone up sharply (particularly in dollar-denominated indices). Wheat output has been depressed, both in India and around the world, leading to two years of steady increase in prices. Of course, the government has taken steps cut import duties and clamped down on futures trading to curb prices. But the real solution to supply-constrained price rise is to augment supply, and that, the Survey points out, itself generates growth. This goes for infrastructure too. There is paucity of power plants, roads, ports and rail linkage. But things are improving on all these fronts. Even the losses of state electricity boards are projected to move down (although SEB losses have gone up nearly Rs 5,000 crore this fiscal). The Survey happily cites the setting up of a $5-billion fund for investing in infrastructure but glosses over the sad fact that investment in power, irrigation, roads, etc has been constrained not so much by paucity of funds as by populist policies that make infrastructure projects commercially unviable.

The Survey does spot one blight on all this gloss: unemployment has risen marginally from 2.8% in 1999-2000 to 3.1% in 2004-05 and organised sector jobs have stagnated. While right-sizing of the public sector partly explains the latter phenomenon, the Survey is not apologetic about the efforts to make the government less a provider of direct employment and more an efficient provider of essential services. Rather, inflexible labour practices and rise in the efficiency of capital use are to blame for stagnant organised sector jobs. Plus, the Survey suggests that the recent surge in industrial growth (before the current run that began in 2003-04, industrial production has never grown more than 7% a year for four years on the trot since 1951-52) is yet to register its effects fully in official data.

There is a positive spin on the rise in unemployment, despite accelerated job creation overall. This has to do with demographic change: rise in the share of working-age people. When more people work and fewer people depend on them, total output goes up, naturally. Moreover, when the dependency ratio falls, savings rise in the economy, feeding stepped-up investment. This phenomenon, of a rise in the share of working-age population and resultant rise in savings and growth, is called the demographic dividend. India is poised to reap the demographic dividend.

All this leads the Survey to identify two issues and three priorities. The issues pertain to managing the paradigm shift from moderate growth to high growth: keeping inflation low even as growth soars and ensuring that there should be broad-based participation in growth.

Three priorities flow from these two issues: keeping growth high, "bolstering the twin pillars of growth, namely, fiscal prudence and high investment", and effective state action in education, health and social security.

The Survey is confident on all counts, although it has very little to offer on how to improve education and health care, subjects primarily dealt with by state governments. The Survey holds out the promise that the government would foster growth momentum even while taming inflation.