The Hindu : Shine or sham?

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Sunday, Feb 08, 2004

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Shine or sham?

The economy is now doing well but it is too early to claim that India has climbed on to a high growth path, writes C. Rammanohar Reddy.

The nation can take pride in the performance of the economy. The challenge is to sustain it.

YET ANOTHER arrow will be added to the quiver of the National Development Alliance tomorrow when the Central Statistical Organisation presents its estimate of how fast the Indian economy has been growing in the fiscal year 2003-04. It is more than likely that the CSO, the state agency entrusted with presenting statistics on growth, will place the GDP growth rate at 7.5 per cent or more.

This would be sufficient for the NDA to claim that this is one more piece of irrefutable evidence about "India shining". The real picture is, however, far more difficult to discern. Yes, it is true that a growth rate of 7.5 per cent plus will place India in the league of the fastest growing economies in the world. But it is also true that the acceleration of 2003-04 is related to the good monsoon of last year and cannot therefore be seen as a harbinger of a permanent change in India's economic fortunes. Yes, it is true that it is not just farm production but all three sectors — agriculture, industry and services — that have been doing well this year. But it is equally true that it is the first time since 1996-97 that growth has crossed 7 per cent. The Congress can rightly claim that it initiated and oversaw a longer period of 7 per cent plus growth (1994-1997) that had nothing to do with a good monsoon following a drought. Yes, it is true that a number of new sectors like outsourcing, auto-ancillaries and tourism are now thriving and the greater self-confidence among a new class of entrepreneurs marks a sea change from the past. But it is just as true that there are many important sectors (notably agriculture, the capital goods industry and small-scale manufacturing) and many populous areas (notably Uttar Pradesh, Madhya Pradesh, Orissa, Bihar and the north-eastern States) that have not experienced any dramatic improvement in economic conditions. Under-employment, malnutrition and economic stagnancy are the defining features of these States.

The many points of view about how India is doing reflect a larger underlying complexity: the economy is now doing well but it is far, far too early to claim that India has climbed on to a high growth path. And it is pure hyperbole to project, as Merrill Lynch has done, that in a matter of two decades India will join the ranks of the developed nations.

The beaming faces in the India shining campaign — all unusually fair-complexioned in a country of predominantly dark-skinned people — do not tell you one thing. For the Indian economy to truly shine, the Central and State Governments, companies, farmers and small-scale entrepreneurs all have to invest much more. Of that there is little sign. One cannot keep pointing to the highway project as evidence of a pick up in investment. Indeed, Union Finance Minister Jaswant Singh, of all people, said on Friday that the `feel good' phenomenon had not been translated into higher investment. This is a fact. Despite the boom in the stock market, the string of new equity issues, industry and agriculture on the rebound there is no visible sign of any major growth in capital outlays. Investment and productivity drive economic growth. There are certain limits to how far productivity can drive growth in a developing economy like India. (Yes, whatever the Bharatiya Janata Party and the pink press may say, India is still a developing and largely poor country.) A quantum rise in capital expenditure is essential for economic acceleration. But investment has been sluggish since the mid-1990s with only arms acquisition showing any spurt in capital spending.

Until the investment scene changes, the saner and more circumspect observer would only say that the economic performance in 2003-04 is still only one swallow. One will have to wait for more signs of an economic transformation and a longer spell of rapid growth before concluding that decades of under-performance have come to an end. And that will not happen before the Lok Sabha elections.

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