Demand creation must for driving growth
INDIA DOES not have savings constraint. It is more weighed down by the constraint of investment productivity. To be precise, its growth ambition is bogged down by the constraint of marginal efficiency of investment, says Parthasarathi Shome, IMF-Singapore Regional Training Institute.
In an informal interaction with The Hindu during his recent visit to Chennai, Mr. Shome expressed surprise at the very high savings rate 22-23 per cent in India, ranked among the poor countries in the world. Given the fact that an average Indian earned an income of just Rs. 3,000-4,000 a month, Mr. Shome reckoned that these savings could have come only from those who earned `non-subsistence income.' The high saving rate meant a high capital-output ratio. This meant that capital employed produced very little. That further meant the productivity of capital was very low.
What was required to get the industry and services moving? In his view demand creation was the sine qua non for driving the growth. Further, he felt that the efficiency of capital should be beefed up by lowering the capital-output ratio. "We don't probably have a savings constraint. But what we do have is a constraint on investment productivity ... of the marginal efficiency of investment,'' Mr. Shome pointed out.
Even compared to people in Latin America and African countries, Indian saving was very high, he said. "We save much more. Probably we have to go on more holidays. I really don't know,' he said. Dwelling on demand generation say in tourism industry Mr. Shome felt that the demand came not just from people coming from abroad. It did not even come from the huge population, which was constrained by the per capita income. But it had to come from actual demand. Mr. Shome regretted that a study done by him of the sectoral lending by banks revealed no pattern of any kind. "If we are to get to the eight per cent real rate of growth, we have to take many more facilitating actions on the ground,'' he said. Steps on the demand generation, infrastructure investment and the like fronts would require necessary institutional frameworks and reduced regulations. "I don't see these happening," he bemoaned.
Mr. Shome, who was in Chennai recently on a private visit, was genuinely concerned about the fiscal deficit number. In his opinion, fiscal deficit would have an inter-generation impact. According to him, the rate of interest at which the deficit was serviced should be much lower than the rate of growth. That was not happening, he felt. Thanks to the ability of the authorities to manipulate the interest rate, they could effectively hide this inter-generation impact. He also saw the lack of development on the infrastructure front impacting fiscal deficit number. "In India, we are sort of substituting the private sector by artificially pushing down the interest rate for government borrowings,'' he said. This, in effect, crowded out the private sector vis-à-vis cheap funds. Still India could avoid implosion in the economy, thanks to `the management of financial indicators'. In this context, he pointed to the revision of GDP number sometime in the first-half of 90s when the Ministry of Finance failed to correct the whole series but selectively gone for alterations.
Mr. Shome felt that the Government should work out its strategy in a rational way before contemplating retiring the loans borrowed from IMF and World Bank. Nevertheless, he said the reported move by New Delhi to retire IMF loans in the wake of the ballooning foreign exchange reserves was not `irrational'.
K. T. Jagannathan
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