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December 12, 2006

Indian Economy|Development Strategy

Is 9% Growth Rate Feasible?

By Nitin Desai


The Government has opted for a 9 per cent growth path for the Eleventh Plan.  The Approach Paper even speaks about reaching a 10 per cent level by the end of the Plan.  Some of this optimism rests on a projection of the high growth of recent years, though the Paper does identify the major policy changes required to get to this high growth path.  The moot question is whether these substantial changes can be effected.


Growth at the levels envisaged by Yojana Bhavan is not unprecedented.  It was experienced by several economies in East Asia and elsewhere.  Japan between 1950 and 1973, Korea and Taiwan between 1965 and 1990 and China since 1980 are some examples of high growth sustained over long periods.  Can we learn something from their history which can help us to judge the feasibility of what Yojana Bhavan proposes?


The sources of East Asian growth are generally attributed, at least in the early decades of high growth, to the increase in capital and labour inputs rather than in total factor productivity.  Rates of fixed investment 30 per cent and over drove a rapid accumulation of productive assets.  For instance in China this rate has been in the 30-40 per cent range since 1978.  Much of this investment went into infrastructure which was often developed ahead of demand.


The stance on foreign investment was more nuanced.  Japan and Korea followed a very restrictive policy while China and South-East Asia are more open. Foreign aid may have helped Korea and Taiwan when they were making their transition to outward oriented growth but not much after that.  However an openness to foreign technology induction and strong domestic capacities for technology adaptation has been common in all instances of high growth.   


There was also a large increase in the industrial labour force with substantial migration from rural to urban areas and an improvement in quality with education spending on education and training increasing sharply. 


In India the rate of fixed capital formation has accelerated in recent years to 25-26 per cent, a level comparable to what prevailed when the high growth phases started in East Asia.  The 9 per cent growth goal requires that we increase this rate by a couple of percentage points every year for 5 years or so.  This is a formidable task.  The Approach Paper sees this coming from a turn around in Government savings amounting to a little over 3 per cent of GDP. This is going to require a far tougher fiscal policy than what the UPA’s political partners will accept.  In fact the new Pay Commission may make this virtually impossible.


The Approach Paper projects an increase in the current account deficit from an average of 0.7 per cent of GDP surplus  in the Tenth Plan to a deficit of 2.8 per cent of GDP.  In absolute terms this would require net inflows of the order of $30 billion per year, which, given recent trends, may be possible. But portfolio flows that only add to reserves will not help.  The inflow must be linked more directly to real investment.  India, like Korea and Japan has an entrepreneurial class which is increasingly confident and able to compete on a global scale.  Will they welcome this foreign inflow? 


What about the labour input?  The Approach Paper talks about a shift of some 10 million rural workers but more from the perspective of ensuring a reasonable growth in rural per capita incomes.  The shift may have to be greater than that for a 9 per cent growth path.  A massive effort at training and technical education  will be required for these workers and for others.  Is the infrastructure for this good enough?


One way out would be to rely more on total factor productivity growth and unlike East Asia in its high growth phase, productivity growth is more evident in India.  With the growth in services and industrial restructuring the overall capital-output ratio has come down, labour productivity has gone up and corporate profits have boomed.  But will this continue with the increasing emphasis on infrastructure and employment generation?


A high growth model of development necessarily involves an outward orientation – high export growth to generate the opportunities for rapid industrialization and high imports for this purpose and to cover emerging imbalances in supply and demand.  India is already set on this path and the Plan goals are attainable provided we focus on fundamentals rather on me-too initiatives like the SEZs. 


There are other dimensions to the East Asian experience which we need to understand.  We tend to focus attention on what they did to promote industrialization and exports.  But they also put in a great effort at rural reconstruction- land reforms, agricultural development and rural infrastructure.  All of them protected their agriculture sector from the opening of the economy.  We have an agricultural sector that is in deep trouble with low growth rates and distress not just amongst marginal farmers and in traditional farming but amongst medium and large farmers in the modern sector.


The Approach Paper recognizes many of these problems and promises programmes and policies to raise the rate of savings, develop infrastructure rapidly, accelerate agricultural growth, strengthen skill building and technology development and so on.  But unlike East Asia, the objective of  high growth is tempered with a concern for equity and the Approach Paper makes all the right noises on employment, regional balance, disadvantaged groups, gender equity and social services.    


The greatest difference between India and East Asia is in the nature of the political regimes.  All of the East Asian tigers went through a political upheaval that changed old political equations before they started on a high growth path.  They had strong authoritarian governments or de facto one-party rule during the high growth period.  These were systems that could extract high savings from the economy, hold down labour unrest and where government and industry saw eye to eye.  In India the government has to be cross-eyed looking in one direction while moving in another.  Our political environment is more rambunctious and that is where the doubts  arise about the ambitions that Yojana Bhavan has placed before us.

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