Shankar Acharya analyses the factors that make it difficult for India to revert to the high growth rate of previous years
India’s eight per cent plus economic growth surge between 2003-04 and 2010-11 has set up expectations that it is only a matter of time before the country reverts to such an elevated growth path.
This is unlikely to happen, in any sustained fashion, for several reasons.
First, scholars have pointed out that in the 60 years between 1950 and 2010 only three countries in the world achieved sustained growth at above 7.5 per cent a year for three decades or more: South Korea, Taiwan and China.
In fact, no other country achieved even two decades of such sustained, super-fast growth, though quite a few experienced short bursts of rapid expansion, which then petered out.
Second, the major industrialised players in the global economy seem to have entered a period of “secular stagnation”, or at least slower economic expansion, ever since the global financial crisis and the associated 'Great Recession' of 2007-09.
This certainly seems to be true of Europe, Japan and perhaps even the United States.
Now, in recent years, China’s turbo-charged growth has slowed dramatically from double digit rates to six per cent or so and an early recovery looks highly unlikely.
Together these four economies account for nearly two-thirds of the world economy at market exchange rates.
Little wonder that world trade volume growth has also collapsed to one-three per cent annual rates, compared to the five-seven per cent norm in pre-GFC times. So, the global economic environment for individual countries is now much less supportive than in previous decades.
Above all, the prospects for strong, sustained economic reforms do not appear to be promising in India.
After the bursts of economic reforms during the 1990s and early 2000s (notably during the P V Narasimha Rao and Atal Bihari Vajpayee governments), the reform locomotive has clearly lost steam.
Very little reform happened during the decade of United Progressive Alliance government up to 2014.
While the first two years of the Narendra Modi-led government have seen some improvement in economic policies, the prospects for sustained, strong economic reforms remain dubious.
Let me illustrate by listing 10 daunting challenges that remain inadequately addressed:
1 Fast expansion of labour-intensive manufactured exports was a key growth-driver in the East Asian star performers.
Despite the abundance of cheap, unskilled labour, India’s record remains woefully modest because of many reasons, including, notably, the thicket of anti-employment labour laws, poor basic education, creaky infrastructure and logistic chains and other impediments to doing business.
2 More broadly, future economic growth will be constrained by India’s long history of weak policies and programmes to build human capital, especially through primary education and public (and primary) health care.
The 500-million-strong labour force and the unfolding “demographic dividend” (at about 10 million a year) is a somewhat dubious asset when its average schooling is under five years (with little learning according to successive surveys by Pratham), stunting of children under five is about 40 per cent and sanitation indicators are amongst the worst in the world.
How will India prosper in an increasingly “knowledge”-based world economy?
3 Development continues to be hobbled by fragmented, opaque and corruption-prone land markets, as well as the UPA legacy of the largely unworkable 2013 Land Acquisition Act, which the Modi government tried to amend, unsuccessfully.
4 With some exceptions, India’s infrastructure is notoriously inadequate and shoddy.
This is especially true of the electric power sector and urban infrastructure services.
Pervasive shortcomings in power transmission, distribution and pricing have repeatedly bankrupted the system and entailed bail-outs.
Nor does the 2015 Ujwal Discom Assurance Yojana promise a truly new dawn for the electricity sector.
5 Agricultural growth and development continues to be impeded by mismanagement of water resources; for example, the universal under-pricing of water and electricity (for “agriculture”) have dangerously depleted reservoirs and acquifiers and worsened the prevalence of water-stress in large parts of the country.
Climate change, continuation of high urea subsidies and distorted incentives in favour of water-hungry crops compound the growing problems.
6 The public-sector dominated banking system is in pretty deep distress, with government-owned banks reporting stressed loans at over 15 per cent of total.
While the central bank and the present government have successfully moved to bring out the depth and breadth of the banks’ balance sheet problems, a cogent policy roadmap for their resolution is yet to be articulated. Meanwhile, net new lending has slowed and constrained the growth of productive sectors.
7 Urbanisation in India is proceeding in a higgledy-piggledy manner, with little attention to efficient land-use planning, municipal finances, service provision and environmental sustainability.
In the next 15 years the urban population will grow by nearly 200 million.
With business as usual, the economic gains from agglomeration could be severely eroded.
Reform of urban institutions, finances and governance lie at the heart of the urbanisation challenge.
Not much is happening.
8 At the macroeconomic level, high levels of fiscal deficit (Centre and states combined) have plagued macroeconomic management and performance for over three decades.
Despite modest recent consolidation, the combined deficit still exceeds six per cent of GDP, keeping interest rates high and reflecting significant vulnerability to macro shocks.
Furthermore, with inflation abating, the government debt to GDP ratio of about 65 percent is rising. The key structural weaknesses of Indian public finance, a narrow revenue base and a predilection for populist expenditure, still challenge fiscal management.
9 After peaking at nearly five per cent of GDP in 2012-13, the current account deficit in the balance of payments has stayed in the one-two per cent range for the last three years, feeding complacency.
As I pointed out elsewhere (“BoP: Beware complacency”, Business Standard, October 8, 2015), the entire adjustment has come from the import side, with the decline in oil and other commodity prices playing a leading role.
The exports-to-GDP ratio has actually fallen.
Unless India’s competiveness improves significantly, our vulnerability to oil price increases, remittance declines and capital flow volatility could rise uncomfortably fast.
10 Finally, for more rapid economic and social development, major administrative reforms are long overdue.
Against this background, recapturing sustained growth of eight per cent plus seems a forlorn hope. We may have to settle for six per cent or so.
Shankar Acharya is honorary professor at ICRIER and former Chief Economic Adviser to the Government of India. Views are personal
Image: People look at a large screen displaying India's benchmark share index, on the facade of the Bombay Stock Exchange building in Mumbai. Photograph: Arko Datta/Reuters