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A new twist to the growth debate

N. Ravi

It is ironic that the economy should have entered a new, higher growth phase when reforms in the conventional sense appear to be in the pause mode. Can the economy coast along with a reform-less growth?

GOVERNMENTS BASKING in the glory of high growth rates, so commonplace in the last few years, is a relatively new phenomenon. In the earlier years when the growth rate was not much to speak of, it hardly formed the centrepiece of the economic survey or the budget speech of the Finance Minister. After the reforms of 1991, Finance Ministers started pointing to the relatively higher growth rates of around 5 per cent as proof that the new policies were working, and this trend reached its height with the "India shining" campaign of the Bharatiya Janata Party-led NDA regime. The United Progressive Alliance Government has also sought to make the growth rate its showpiece and Prime Minister Manmohan Singh sought to emphasise growth as the objective when he described the latest budget as "outstanding and growth oriented". Finance Minister P. Chidambaram has attributed the heartening performance of the economy to "the political message conveyed by the National Common Minimum Programme; the perceptive leadership of the Prime Minister, Dr. Manmohan Singh; the policy changes made by the Government; and the palpable confidence of the Indian people that their future is in safe hands."

With the economy registering a 7.5 per cent growth in 2004-05 and set to grow at 8.1 per cent in the current year, the Government could assert confidently in the pre-budget Economic Survey that it had moved on to a new growth path of 7 to 8 per cent from the earlier trend of 5 to 6 per cent. It is ironic that this racheting up to a higher growth trajectory should have come at a time when reforms in the conventional sense seem to have reached a plateau, lending a new twist to the Indian growth debate. What precisely fuelled this break into a higher growth path? Is it possible to sustain the growth momentum with reforms on pause?

For certainly, the latest budget speech in comparison with its predecessor is singularly silent on high profile reforms that have been on the Government's wish list. For instance, disinvestment in public sector companies that after the last budget had become a matter of dispute between the UPA Government and the Left has been put aside. Again, financial sector reforms and particularly the issue of allowing foreign pension funds as also the question of labour law reforms meant to promote employment in organised industry are on the backburner. Fiscal consolidation has been achieved largely because of buoyant revenues while the task of reducing the leakages and administrative costs of subsidies remains unattended. A Planning Commission study quoted in the Economic Survey estimates that for one rupee of benefit conferred through the public distribution system, the government spends Rs.3.68 and raises the question whether direct income transfers would not be less expensive and more effective.

In a sense, the issues raised now recall the earlier debate on the break from what was termed "the Hindu rate of growth" of a disappointing 3 to 3.5 per cent on to a 5 to 6 per cent growth trajectory. This break was commonly associated with the reforms of the post-1991 period but as Dani Rodrik and Arvind Subramaniam (following upon earlier studies) emphasise, it came a full decade before those reforms. It was in the early 1980s that the Indian economy entered the 5 per cent phase, a finding that prompted the search for the factors that fuelled the break. In this period, reforms were minimal and much less systematic and deliberate than the post-1991 reforms, yet in terms of accelerating the growth rate, the period of the early 1980s was more significant.

Rodrik and Subramaniam argue persuasively that none of the conventional explanations for this break into a higher growth path in 1980 are convincing. The hypotheses of a favourable external environment, liberalisation of trade, internal liberalisation, fiscal stimulus, green revolution and public investment turn out to be wholly inadequate to explain the shift. They themselves seek to explain it in terms of the change in the attitude of the Indira Gandhi Government from socialist to "pro-business" (rather than pro-competition), and this indeed to them was the defining moment rather than the reforms of 1991.

"Animal spirits"

"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities," wrote John Maynard Keynes in 1936. Invoking a similar explanation, they contend that when the government's attitude turned friendly, it triggered the animal spirits in Indian industry which had been built up earlier but was under restraints. Already in 1980, India had economic and political institutions that were suited to a far higher income level: one estimate suggests that the per capita income was just a fourth of what the strength of the economic institutions indicated and when one looked at political institutions, it was just 15 per cent of the potential.

The experience of the 1980s offers interesting possibilities and perhaps valuable lessons as well in relation to the current reform-less, high growth phase. Perhaps industry could be convinced of the commitment of the UPA Government to reforms and to maintaining an industry-friendly policy environment. Its sticking to fiscal consolidation targets even as it has taken on the massive national rural employment guarantee scheme may well have served to strengthen the confidence. And any political uncertainty resulting from the high profile disagreements between the government and the Left on such issues as disinvestment and liberalising the rules for foreign direct investment may not be regarded as of much long term consequence. For, even considering the scenario of the collapse of the UPA Government, the emergence of a third front would seem a remote possibility, and the alternative could only be an even more industry-friendly BJP-led coalition or a strengthened Congress-led coalition.

The more critical question that arises is whether the buoyant mood of industry alone can sustain the momentum. The country has undoubted strengths in the type and quality of economic and political institutions it has built up over the years and in terms of institutional support, the potential income level is far higher than the current level. If in an earlier period the failure to rein in the high population growth rate was seen as a major handicap, the country now enjoys the demographic advantage of a large and young work force and a lower dependency ratio than most other countries with ageing work forces, which should boost savings. The education scene may be uneven, with a large number of institutions of indifferent quality but institutions of excellence and high standards of achievement are sufficiently large in number to make a substantial difference in the areas of manufacture and services, and particularly in high technology.

Infrastructure critical

If the economy is now coasting along at a historically unprecedented 8 per cent growth rate, are further reforms at all necessary in the short run? Reforms in such areas as labour regulations may improve efficiency and bring about an increase in employment, though at some cost in terms of social protection and rights of workers. They do not seem to figure high in the list of what industry itself seems to want — according to a survey of Indian enterprises published in the latest World Development Report of the World Bank, only 16.7 per cent regarded labour regulations as a major constraint on their operations. On the other hand, infrastructure is an area where massive investments would brook no delay: already, infrastructure constraints are telling on the performance of industry and services. The World Bank survey found 69.2 per cent of the enterprises reporting power outages, resulting in a loss of production amounting to11.6 per cent of their sales. The area of subsidies also calls for attention not so much to effect savings in expenditure — fiscal consolidation is on target in any case — as to make them more effective and confer the full advantage to the beneficiaries.

0Whatever the factors at work, the move to the current, unprecedented growth phase is undoubtedly cause for celebration. In terms of sheer size, the Indian economy is projected to become the fourth largest after the United States, China and Japan by 2020. There is no room for euphoria though, considering that India's per capita income stood at $2880 (in purchasing power parity terms) in 2003, in contrast to the world average of $8180 and in terms of ranking, it stood 146 in the list of 200-odd countries. The celebration is also tempered by the realisation that 25 per cent or more of the population live in abject poverty. The results of the 61st round of the National Sample Survey to be published this year would show what exactly has been the impact of the growth of the last two decades on poverty. Even as economists are searching for explanations for the current phase of high growth, the great Indian poverty debate would have begun.

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