Don't Grow So Fast

The official discourse on India’s recent economic performance now considersdouble-digit targets of 10 per cent GDP growth in two-three years time as "eminentlyfeasible". Towards this end, finance minister P Chidambaram has urged domesticindustrialists to tell him what stands between them and investments for pushingup manufacturing growth to 12 per cent. These are certainly desirable as onlywith faster growth is there a better chance for addressing the problem ofpoverty in the country. But the big question is whether such double-digit ratesof growth are "eminently feasible"?

If GDP growth indeed accelerates to double-digit levels, but the process isaccompanied by a dangerous widening of disparities between richer regions andpoorer ones and income inequalities, is it then sustainable? In this context,some eminent economists in the not-so-distant past have urged caution regardingeven the 8 per cent target adopted in the 10th Plan (2002-2007). Despite the 7.5per cent to 8 per cent growth achieved during the last three years, theprospects for hitting the plan target are remote and a 7 per cent average isconsidered likely. Nevertheless, the bar has been raised to 10 per cent.

A bit of digression is in order. Considering the passion with which thedouble-digit growth imperatives are now being espoused, it is worth noting thatIndia’s emerging economy rival Brazil seeks a more sustainable 4-5 per centgrowth rather than double-digit rates. In an interview, President Luiz InacioLula da Silva told The Economist that Brazil was in no hurry to make theeconomy take off: "I don’t want to grow by 10 per cent or 15 per cent a year— that’s not what I am looking for. I want a lasting growth cycle averaging4 per cent or 5 per cent so that Brazil can make up for lost time..."

China is also considered an exemplar for rapid GDP growth -- in fact, itachieved double-digit rates between 1991-2001 -- but there are indications thatits government now prefers to lower growth to more sustainable levels of 8 percent this year from the torrid 9.9 per cent experienced in 2005. The intentionis to cool down its overheating economy and focus on addressing the growingurban-rural divide that has accompanied its progress. China also seeks a moreequitable distribution of the fruits of its economic success according toPremier Wen Jiabao in his recent address to the National People’s Congress.

What has been India’s track record on growth? Interestingly, there has beenonly a single year since 1951-52 that India ever experienced double-digitgrowth. That was in 1988-89 when real gross domestic product (GDP) rose by 10.5per cent. Conjunctural factors again explain this phenomenon. There was arebound in agriculture after a disastrous year in 1987-88: Real GDP originatingin agriculture, forestry, fishing etc grew by 15.4 per cent after negativegrowth of 1 per cent. In the five times that it has crossed 8 per cent growth,agricultural rebounds account for four such instances, barring 2005-06.

With such conjunctural factors, what basis indeed is there for aiming for aperfect 10? Much, of course, is being made of the 7.5 per cent to 8 per centgrowth between 2003-04 and 2005-06. The latest Economic Survey adds that the "oddsare loaded heavily in favour of a continuation of the growth momentum observedin the last three years." A similar although slightly lower growth rate wasalso witnessed during 1994-95 to 1996-97 but this had a lot to do with thetransient boost of the Fifth Pay Commission award. Does the promise of a SixthPay Commission make 10 per cent GDP growth feasible?

Suppose India does hit double-digit growth in two-three years time asexpected, the big question that worries economists is the sustainability of thisprocess. Worrisome indeed is the prospect of such explosive growth beingaccompanied by widening inter-regional disparities of income. These grounds forconcern are not without basis as the income gap between the richest and pooreststates in the country has widened significantly since the reforms era of the1990s. Worsening rural-urban disparities and regional imbalances are importantreasons why the Chinese government has chosen a less ambitious GDP growth targetthis year.

India must heed these lessons and not be carried away by the hype that it hasalready arrived on the global scene as a superpower. In any case, becoming aneconomic superpower has nothing to do with 10 per cent growth. The predictionsof Goldman Sachs that India would become a world power in 2050 hardly arepredicated on double-digit rates of growth but more on so-called Hindu rates of5 to 5.5 per cent GDP growth. Such rates are eminently sustainable as well asthey have been experienced for long periods of time and can also ensure thatregional imbalances don’t get out of hand.

The moral of the story is that raising the bar to become an economicsuperpower in the 21st century is perhaps a better idea whose time has comerather than an ambitious growth target per se. For all the official talkregarding its feasibility, the point is that there is no particular virtue ormachismo associated with double-digit growth. There are also serious doubtsabout whether such a trajectory is feasible or sustainable in an India-typeeconomy considering the large inter-regional divergences that have taken placewith reform. Pushing for 12 per cent rates of manufacturing growth may be goodfor boosting the post budget morale of India Inc but not necessarily so for theIndian economy.

N Chandra Mohan is a Delhi-based analyst of economic and business affairs.