Dispelling growth delusions
Trends in the ingredients of the ‘noughties' growth surge do not augur well for sustained 8 per cent plus growth in the near future
Whenever official estimates of GDP growth creep up over 7 per cent, as they did for 2017-18 Q3, voices (including of senior government spokespersons) proliferate claiming that 810 per cent hyper growth is around the corner. It’s time for a reality check. Before getting into the main issues, it is also important to reiterate that the new (since 2015) estimates of GDP growth (with base 2011-12) are non-comparable to the earlier (2004-05 base) estimates. For the only three common years, 2012-13, 2013-14 and 2014-15, the new series gives a GDP growth estimate that averages nearly 1.5 percentage points higher than the old series. Many analysts believe that the old series provided a truer reflection of underlying reality. I sympathise (see my “How fast is
India growing?”, Business Standard, April 9, 2015).
From a broader perspective, we have to recognise that in our 70-year post-Independence history there has been only one 8 year-long sub-period (2003-04 to 201011) when GDP growth averaged over 8 per cent. During the first five years, up to 2007-08, all macroindicators were very healthy (a “golden age”); then came the global financial crisis, which rationalised a massive pre-election fiscal blowout in 2008-09, which, in turn, kept growth unsustainably high for another couple of years, though accompanied by an unprecedented bout of a double-digit inflation and weakening external balances.
What were the factors which propelled India’s high growth in the “golden age”? Are they being replicated now? Here are my explanatory candidates for the “noughties” growth surge:
The exceptionally strong global economic expansion of 2002-07, which boosted growth across the world (including in India) through greater international trade, capital flows and technology transfers.
The cumulative, productivity-enhancing effects of wide-ranging economic reforms carried out under the Narasimha Rao and Vajpayee governments between 1991 and 2004.
A remarkably successful fiscal consolidation that reduced the combined fiscal deficit from 9.6 per cent of GDP in 2002-03 to 4.1 per cent in 2007-08, ensuring higher public savings, much greater loanable funds for private investment and lower real interest rates.
An unprecedented surge in the rate of gross domestic investment from around 25 per cent of GDP in 2002-03 to 35 per cent by 2005-06 and even higher in later years. Nearly all this increase was domestically financed by an equivalent surge in domestic savings, especially public savings and private corporate savings.
Sustained rapid growth in merchandise exports from about $50 billion in 200203 to $250 billion in 2010-11.
This was buttressed by a 25 per cent annual increase in India’s service exports (especially IT and IT-enabled) between 2001 and 2008. Coupled with the concurrent boom in domestic telephony and financial services, the modern service sector became a significant contributor to GDP growth during these years.
Are these kinds of factors at play today which might underpin realistic expectations of another bout of hyper growth? Some recovery from the shocks of demonetisation and GST implementation is clearly under way, but that is not enough to propel sustained 8 per cent plus growth. Let us consider each of the earlier growth ingredients in turn:
After anaemic global economic performance for a decade, 2017 saw surprisingly good, synchronised growth in major economies (US, European Union, China and Japan). The IMF expects this to continue in 2018 and 2019. But in recent weeks at least two major shadows have darkened that optimism. First, the international price of oil has rebounded from multi-year lows with surprising vigour and the outlook is not promising. Second, the prospects of a serious trade war between the US and major trading partners (notably China and Europe) have increased significantly.
On the domestic front, the decade of UPA government did not yield much economic reform. The last four years have shown a mixed record. Demonetisation was an avoidable economic shock. The GST was unquestionably a major reform effort, but with a lot of transitional problems, and it still suffers from significant weaknesses. The government has been working manfully to deal with the legacy twin balance sheet problems of banks and indebted companies through various initiatives, including the Insolvency and Bankruptcy Code and bank recapitalisation. But it’s all work in progress with a long way to go. The medium-term growth dividend of these reforms remains uncertain. And there has been no significant reform in the crucial factor markets of land and labour.
Modest fiscal consolidation has occurred at the central government level (now weakening pre-elections) but much of it has been offset by a deterioration in state finances, leaving the combined fiscal deficit hovering near 7 per cent of GDP. There has certainly been nothing comparable to the dramatic fiscal reduction achieved in the golden quinquennium, 2003-04 to 2007-08.
The rate of gross fixed investment has been in steady decline since 2011-12, with a minor uptick discernible in the past year. Again, the contrast with the “golden age” is stark.
Export performance has been particularly weak, with the dollar value of merchandise exports at $303 billion in 2017-18, below the level attained in 2011-12. As a share of GDP, merchandise exports have plummeted to 11.7 per cent, the lowest in 14 years. Software export growth has also been lacklustre in the face of new technological and market challenges.
Nor does the modern services sector look particularly dynamic, with the exception of civil aviation. Banks (especially, but not only, the public sector banks) are still beset by massive levels of stressed assets. The once dynamic mobile telephony sector has been buffeted by scams, court-ordered licence cancellations, regulatory uncertainty, and a form of predatory pricing by a new deep-pocketed competitor. Many firms have folded and the few that remain struggle to show profits.
To sum up, if the ingredients of the “noughties” growth surge were correctly identified above, the trends in those ingredients do not augur well for sustained 8 percent plus growth in the near future. Indeed, some of the indicators point to emerging macro imbalance problems, which might render even India’s current growth performance vulnerable in an uncertain world.