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India: 8% growth is already here!

Last updated on: January 07, 2006 16:35 IST

It was three years ago that I wrote the article "Globalisation and the Chinese Bamboo". The rain-induced 8 per cent plus GDP growth of 2003-04 was not yet a reality, but I still predicted that "there is virtually nothing that the politicians, or bureaucrats, or industrialists, can do to prevent the 8 per cent target from being achieved by India in the near future".

This forecast was met with near universal derision, and some of my friends were even hasty with the bet that I would be way off the mark. Today, I am going to write about how 8 per cent GDP growth for India is no longer a "man bites dog" story. And how, despite the best efforts of the present populist government, there is little that they can do from this reality continuing.

As befits populism, the United Progressive Alliance government has gone all over the town (villages) proclaiming from tin rooftops that for India to grow above 8 per cent, agriculture must grow above 4 per cent.

And hence, we need the Employment Guarantee Programme to provide jobs in agriculture, reservation quotas by the dozen, more government control over pricing of crops, etc, i.e. more money for the state to squirrel away into the pockets of the politicians, their mandarins, and their supplicants.

How realistic is 4 per cent agricultural growth? Not very, since the long-run 55-year average is close to 2.8 per cent. Also, isn't development about facilitating the movement of individuals out of low productivity agriculture into higher productivity non-agricultural jobs, i.e. should not one be facilitating non-agricultural growth?

But there is not that much to contribute to the "white man's NGO burden" by policies which enhance growth in industry and services, not much gain in talking about modernisation of infrastructure, and even less gain in increasing the supply and quality of the already "rich" college-going population.

There is a great need for increasing competition in the supply of education, yet this government has stopped the minuscule, but high-quality, higher education provision in India by foreign universities.

Why? I don't know but it may have something to do with the fact that politicians are heavily involved in non-profit making education NGOs, which supply not-so-good-quality higher education!

The future role of India, an economy growing at a 10 per cent plus rate, requires an increasing participation of NGO entrepreneurs. (This description is much better than the vulgar term, private sector.)

But what does the present government do - advocate a cess for every burden that the political elite wants to become rich on. And it is right in believing that such schemes provide it with far more money than all the oil-for-food scams that the world can muster. And money that comes with a shabash from the white burdened left and other sundry intellectuals.

That 8 per cent GDP growth is here already is indicated by some simple maths. Industrial growth has averaged over 6 per cent over the last decade, and is on track to average over 8 per cent annually.

Why this mildest of accelerations? Because real corporate borrowing rates have declined by over 5 percentage points in the last four years. This phenomenon is the real story behind India's resurgent GDP growth, and the reality of 8 per cent.

But shockingly, none of our populist intellectuals/politicians cites this policy change as the real factor behind the acceleration in GDP growth.

A facilitating factor, and a hallmark of Indian policy since the reforms of 1991, is that the exchange rate has been kept at a competitive level by some astute FX management by the Reserve Bank of India.

What is the danger that either of these two policies will reverse course in the next few years? On interest rates, little. Because we are in a truly global capital market where long-term interest rates are determined by the supply of global capital.

The Asian economies, led by China, are keen to keep their undervalued exchange rates undervalued, and are happy to increase reserves. Asia is the global saver, and undervaluation means more savings and therefore a lower real cost of capital.

Given the recent appreciation of the rupee (over the last month or so, it has been the strongest currency in the world), there is some apprehension that this FX mechanism will derail the 8 per cent prospects.

As I have mentioned several times earlier, the RBI should send its able deputy governor, Dr Rakesh Mohan, to China for training in how to keep the exchange rate undervalued. Given recent trends in the rupee, such a trip should be of the highest priority.

Assuming India does learn the tricks from the Chinese masters, industrial growth should easily coast at 8 per cent plus levels. Growth in services has historically averaged about 2 per cent higher than industry, which means that services growth should be at least 9 per cent plus.

These two sectors, accounting for 80 per cent of GDP, should allow GDP growth to be above 7 per cent. And if agricultural growth matches its long-run average, Indian GDP growth will be 8 per cent.

These calculations suggest that there is a lot of populist hyperbole in the UPA government's claim that if Indians want GDP growth to be 8 per cent plus, then agriculture has to grow at 4 per cent. Given that agriculture's share in GDP is 20 per cent and falling, all that an extra 1 per cent agricultural growth would give us is an extra 0.2 per cent GDP growth! All that populist cess and nonsense for an extra 0.2 per cent GDP growth?!

Surjit S Bhalla