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December 4, 1998


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Business Commentary/Bibek Debroy

India 2020

The finance minister continues to exude hope and the prime minister announces agendas at conferences, especially conferences of chambers of commerce. But not a single person in the government seems to have a vision about where the Indian economy should be in say the year 2020.

How is the Indian economy going to perform, say, in the next 20 years? What is the base on which we benchmark the projections? Consider two recent documents, the Human Development Report for 1998 and the World Development Report for 1998-99.

For 1995, HDR gives an Indian per capita gross national product figure of $ 340. For 1997, WDR gives a per capita GNP figure of $ 390. Let us accept $ 390 as the present benchmark. What kind of per capita GNP can one expect in 2005 or 2010?

The annual rate of population growth is around 1.7 per cent now and is expected to be 1.3 per cent during the period 1995 to 2015. This masks considerable inter-regional differences, which can be ignored for present purposes. Rather arbitrarily, one can presume population growth rates of 1.7 per cent for 1998 to 2000, 1.5 per cent for 2000 to 2005 and 1.3 per cent for 2005 to 2010.

What about GNP growth? Potentially, the Indian economy is capable of growing at 8 to 10 per cent, provided reforms are introduced. Although it is somewhat unfashionable to talk about other countries these days, other countries have demonstrated that such growth rates are possible.

Given the political configuration and the political economy of the reform process, substantial reforms seem unlikely. As a digression on 1998-99 GDP growth rates (there is not much difference between GDP and GNP growth rates), the Reserve Bank of India's Annual Report expects a GDP growth rate of 6.5 per cent. The Planning Commission Paper circulated at the Economic Editors Conference suggests a GDP growth rate of seven per cent, though this has been scaled down subsequently.

Such projections are unlikely and unrealistic. In 1998-99, growth rates are likely to be around five per cent, unless one goes dramatically wrong on what is likely to happen to the services sector.

However, once there is a revival, GDP (or GNP) growth rates ought to touch seven per cent. So without significant reforms, eight per cent plus may not be possible, but seven per cent is doable.

Without sophisticated econometric models, there are two ways to argue this out. First, gross domestic savings are 26.1 per cent of GDP (1996-97) and are probably around 28 per cent now.

With a current account deficit to GDP ratio of two per cent (unless one gets into a Balance of Payments crisis as in 1990-91 by throwing open the lid on borrowings), this implies an investment to GDP ratio of almost 30 per cent.

A capital/output ratio of four (the Planning Commission, in its two scenarios used for the 15-year Perspective Plan, uses incremental capital / output ratios of 3.9 and 4.2), suggests in a Harrod-Domar kind of formulation, GDP growth of 7.5 per cent.

Second, consider the sectoral composition of GDP, with agriculture and industry contributing roughly 25 per cent and the services sector contributing almost 50 per cent.

Provided reforms are introduced, agriculture is potentially capable of growing at five per cent, industry at eight per cent and the services sector at 8.5 per cent. If one adds that up, weighted according to sectoral contributions to GDP, one gets a GDP growth rate of 7.4 per cent.

To make comparisons easier, let us presume that calendar and fiscal years are identical. That is, the fiscal year 1998-99 is treated as equivalent to the calendar year 1998 and so on.

In view of what has been said, the following real GDP growth rates seem plausible. 1998: five per cent; 1999: six per cent; 2000 to 2005: seven per cent; and 2005 to 2010: 7.5 per cent.

Coupled with what was said about population growth, one gets the following kinds of figures for per capita GDP growth. 1998: 3.3 per cent; 1999: 4.3 per cent; 2000: 5.3 per cent; 2001 to 2005: 5.5 per cent; and 2006 to 2010; 6.2 per cent.

These assumptions give the following kind of figures. By 2010, the Indian per capita GDP ought to be almost $ 750, in constant US dollar. And by 2005, one is talking about a per capita GDP of around $ 550. Of course, the Indian economy is capable of potentially performing better. But that is beside the point.

Extrapolated further, by 2020, the per capita GDP ought to be close to $ 2,000. Stated differently, if this is possible, the worst forms of poverty should have disappeared by 2020.

Despite reservations expressed about trickle down in the context of the East Asian currency crisis, cross-country comparisons correlating growth with poverty reduction are fairly robust.

For 1993-94, the Expert Group Method shows the percentage of population below the poverty line to be 36 per cent. In 1987-88, the figure was 38.9 per cent. This is a drop of 0.58 per cent a year.

With the kind of growth rates we are talking about, it should be possible to achieve a poverty reduction of one percentage point a year. That is, by 2005, using the 36 per cent figure for 1993-94 as a benchmark, the percentage of population below the poverty line should be around 24 per cent in 2005 and around 19 per cent in 2010.

By 2020, the figure could well be around 15 per cent. Of course, such extrapolations can be questioned.

Liberalisation does not automatically enhance market access opportunities for disadvantaged groups, not without investments in primary education and rural health, the sort of message that emanated from the East Asian miracle and the kind of thing Amartya Sen has been harping on.

However, cross-country experiences do suggest that such a sharp drop in poverty ratios is possible within a couple of generations.

Drops from around 30 per cent to around 15 to 20 per cent have been achieved by both China and Indonesia (pre-currency crisis).

The poverty issue is coupled with the employment elasticity of growth. Provided the employment elasticity of growth is high, it should be possible to create an incremental ten million or more jobs a year, given the growth rates that are possible.

It is difficult to estimate the present backlog of unemployment, since some of it is not open, but disguised. A figure like 25 million will probably be fairly close to the mark. With ten million and more jobs a year, it should be possible to eliminate the backlog of unemployment by 2010, since the number of jobs created will be more than the number of new entrants to the labour force.

Of course, this employment cannot be in the organised sector, but will be in the unorganised and rural sectors. It cannot be in the organised sector because the organised sector is characterised by rigid labour markets and, therefore, an artificially high capital intensity of production.

Elimination of poverty, more employment and high growth. These are desirable objectives. But given the myopia that characterises the government, is anyone doing anything to ensure these?

Bibek Debroy

Superpower by 2020/Mukesh Ambani

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