The five-day economy

The economy will grow by 7 per cent; rural incomes will increase; 14 million new jobs will be created this year. I am not quoting from anoth...

The economy will grow by 7 per cent; rural incomes will increase; 14 million new jobs will be created this year. I am not quoting from another vision document by an Indian political party. This is the Chinese prime minister speaking at the National People’s Congress in March. In all probability, the Chinese will attain these targets. We went ballistic over our 10.4 per cent growth in Q3. In that same quarter, the Chinese economy grew by 9.9 per cent. Indeed, 2003-04 will end with a bang for us. The recent Quarterly Statement issued by Finance Ministry speaks of GDP growth of 8.1 per cent in 2003-04. Others inch closer to 9 per cent. But by the time a new government is in place, we will be in 2004-05. And one will have to implement what has been promised in vision documents. Without the benefit of a low base, as in 2002-03, forget the promised 10 per cent. Getting 7 per cent won’t be easy.

Mess around with some simple numbers. Roughly 25 per cent of GDP comes from agriculture, 25 per cent from manufacturing, 50 per cent from services. What kind of spectacular growth do we expect from manufacturing and services? If you are really optimistic, perhaps 8 per cent for the first and 9 per cent for the second. Taken together, that gives you 6.5 per cent. As a trend, as opposed to spectacular growth to compensate for spectacular declines the previous year, agriculture and allied activities have never grown by more than 2.5 cent. That gives you 0.625 per cent more and you have overall GDP growth of 7.125 per cent. Not 8 per cent or 10 per cent. Eventually, perhaps agriculture’s share in GDP will decline and 70 per cent of the population will cease to work in the rural sector. But until that happens, without agriculture growing at a trend rate of at least 4 per cent, you don’t get trend GDP growths of 8 per cent plus. And one shouldn’t forget that the secondary and tertiary sectors also depend on primary sector performance. Nor do you create 10 million jobs a year.

The pink papers typically pick rigid labour markets as the culprit for low employment growth. By rigid labour markets they mean the Industrial Disputes Act. Certainly, Chapter V-B of the IDA needs to change. However, the organised sector accounts for 8 per cent of the workforce, and even in the organised sector there are other elements to labour market rigidities than just the IDA. In any case, if the issue is reduced employment growth and reduced employment elasticity of GDP growth between 1993-94 and 1999-2000 (the two periods for which we have large National Sample Survey data), that has precious little to do with Chapter V-B of the IDA. It has everything to do with the deteriorating state of agriculture and the rural sector and the changing composition of unorganised sector employment. A pending agenda for agro sector reforms is easily drawn up, pending as very little on the agenda has actually been implemented. But whatever be one’s priorities and whatever role one ascribes to private sector involvement in this rural reform agenda, there is no getting away from public sector investments. Once the incoming government begins to implement promises made in manifestoes or vision documents, we will merely confirm what’s been known throughout the 1990s.

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There are no resources to increase public sector investments. Mess around with numbers in a slightly different way. Our incremental capital/output ratio is around 4 now. Indeed, there are ways to decrease it and the Tenth Plan’s target of 8 per cent GDP growth was critically based on a dip in the capital/output ratio. But think of the reforms required to increase efficiency of capital usage. If these haven’t been implemented so far, why should they suddenly get implemented after another round of elections? We are therefore stuck with that capital/output ratio of around 4. For 8 per cent GDP growth, we then need an investment to GDP ratio of 32 per cent, and for 10 per cent GDP growth (which has also been promised) we need an investment rate of 36 per cent. Foreign savings cannot be expected to contribute more than 2 per cent of GDP. Hence, we still need domestic savings of 30 per cent or 34 per cent, as shares of GDP. Where are these going to come from? 18 to 20 per cent may come from the household sector and will be promptly pre-empted (at least the financial component) by the government. What about the rest? The intention, as Arun Shourie often reminds us, is not to be negative. But targets need to be set with some degree of realism — although, almost tautologically, targets are meant to be so high as to never be actually attained. If a potential is actually reached, it ceases to be a potential. Even if this point is accepted, why talk about 10 per cent when we know that this is a pie in the sky? Let’s instead set a reasonable target of 7 per cent and celebrate if we touch 6.5 per cent, without the benefit of a low base in the preceding year.

After the election, the test of reforms will be in the new budget. Forget high-flying reform pronouncements. A budget is fundamentally about the Centre’s revenue and expenditure. A large chunk is committed expenditure. Can’t be changed in the short run. But in a slightly longer term sense, how about implementing recommendations of the Expenditure Reforms Commission? Beyond food and fertilizer subsidies, everyone seems to have forgotten about these recommendations. On direct and indirect taxes, how about implementing the recommendations of the two Kelkar Task Forces in their entirety? Today, the tax/GDP ratio is around 15 per cent, if we include state and local body taxes also. This needs to go up to around 18 per cent.

A developed economy suggests certain minimum standards of health, education and rule of law, not to speak of elimination of hunger and poverty. The trickle-down effects of growth don’t automatically ensure this and the state has a supplementary role in financing, if not in provisioning. But for this to happen, we need increased state revenue and greater efficiency and transparency in public expenditure. Had the incoming finance minister been able to ensure either or both of these, the hype about India becoming a developed economy in 2020 would have been believable. But regardless of the political composition of the new government, that’s not going to happen. The FM will have few degrees of freedom. The 2003-04 track record, in Q3 or for the entire year, was a bit like a one-day match. With the CSO (Central Statistical Organisation) at work, that’s a game of glorious uncertainty. A test match is different. But the Chinese don’t play cricket, do they?