9 upside down is 9

We now have GDP growth of 8.5 per cent in 2003-04, 7.5 per cent in 2004-05, 9.0 per cent in 2005-06 and 9.4 per cent in 2006-07. There are minor issues of compatibility across CSO8217;s advance, revised and quick estimates. But the serious question is the following. Is India on a growth trajectory of 6 per cent, the baseline for the 1990s? Or, since 2003-04, have we broken away from 6 per cent and are on a trajectory of 9 per cent? Has there been a structural change or is this growth cyclical? Will we look at 9 per cent upside down and pretend it is actually 6 per cent?

The sustainability question is partly linked to a savings/investment issue. Countries that grow at 9 per cent require a savings rate of 35 per cent. The last savings/investment figures at current prices are for 2005-06 and they show a savings rate of 32.4 per cent and an investment rate of 33.8 per cent. There are statistical questions of methodology in estimating both savings and investment, but those aren8217;t major. We have broken away from past trends. Note that when comparisons are made with East Asia, the overall savings figure can be misleading. Household savings rates in India are at par with and often higher than those in East Asia. The difference is made by public savings and private corporate savings and these have shot up now. If we can get public savings back to 1960 levels, the Indian savings rate will inch up to 40 per cent.

But even with a savings rate of 34 per cent and an investment rate of 36 per cent, we should next consider the efficiency of capital usage productivity, measured, say, by the incremental capital/output ratio ICOR. There are studies floating around suggesting that total factor productivity TFP growth in India hasn8217;t been high enough, say compared to China. However, these drag the time series back to the 1990s and if there has been a structural change around 2002, they suffer from the same extrapolation problem. They don8217;t factor in efficiency improvements due to IT use or competition or improved transport not just roads connectivity. Incidentally, what is India8217;s ICOR now? It is probably assumed the ICOR is around 4, in which case an investment rate of 36 per cent should get us growth of 9 per cent. But in December 2005, the National Development Council NDC talked of reducing the ICOR to 3.58. If that has happened, an investment rate of 36 per cent gets us growth of 10 per cent. In any event, TFP is measured after netting out labour and capital input contributions to growth. It is perfectly possible that at this stage of development, India8217;s growth is driven by labour higher work participation rates, lower dependency ratios and capital domestic and foreign savings and there is nothing wrong with that. The point to note is higher savings/investment rates converging towards East Asian trends. This should knock one element out of the non-sustainability argument.

Another element of non-sustainability concerns non-performance of industry, in particular, manufacturing. Barring 8216;community, social and personal services8217;, service sectors for which we have data are indeed growing at 10 per cent-plus, but the real story is in manufacturing. Manufacturing did 9.1 per cent in 2005-06 and 12.3 per cent in 2006-07, partly due to the export success story. Exports of goods more relevant than exports of goods and services grew by 23.88 per cent in dollar terms in 2006-07. The moot question is, how sensitive are exports to rupee appreciation? It is probably true that Indian exports are less sensitive to exchange rate changes than was the case earlier. Manufacturing accounts for a shade less than 80 per cent of industry. Imagine what kind of industry growth we would get if the other components mining and quarrying, electricity, gas and water supply, construction did better than the present 5 to 7 per cent; only construction is doing better than this? So another element of the non-sustainability argument should be knocked out, because of the manufacturing performance.

A 9 per cent trend doesn8217;t mean 9 per cent every year. Just as 6 per cent meant a band between 5.5 and 6.5 per cent, 9 per cent means a band between 8.5 per cent and 9.5 per cent. Back-of-the-envelope counter-factuals show what is possible. Efficient infrastructure will add 1.5 per cent to GDP growth,1 per cent because of power alone. An efficient public sector including services will add 1 per cent. Legal reforms in all its dimensions will add 1 per cent. Agriculture and allied activities not just agriculture can do 4 per cent, instead of the 2.7 per cent in 2006-07.

Per capita income growth was 8.4 per cent in 2006-07. We are missing out per capita income growth of almost 12 per cent, and arguments about growth not trickling down are easily countered by data from National Sample Survey. While most policy changes are at the state-level, the Centre has a catalytic role to play. Not only has this government missed out on the positive side of assorted reforms that could have driven absolute real GDP growth to 13 per cent and per capita growth to 12 per cent, it has embarked on the negative, by jacking up interest rates and constraining growth. This doesn8217;t show in 2006-07, but will show in the first quarter of 2007-08, bringing growth down to 8.5 per cent, the lower end of the band. With non-reforms preventing supply-side adjustments, higher inflation and more interest rate hikes say 0.5 per cent can8217;t be precluded. The only salvation is that the economy is probably less sensitive to interest rate hikes than it was in 1996-97.