Opinion Worse than Hindu rate of growth

How does it feel/ To get the macro so wrong?/ To be a slow growth economy/ With no direction home/ Like a rolling stone

(with apologies to Bob Dylan,“Like a

Rolling Stone”)

There is a new talk in India town. When some people suggest that growth in India has crashed,the apologists say “What’s the problem? India is still growing at 6.5 per cent,the second highest in the world.” And when some people point to the abnormally high inflation above 7 per cent for the last five years,the refrain is equally shocking. For a long time,especially in the pre-globalisation years of the 1960s and 1970s (PG),India had the same inflation rate as now,but growth was considerably lower; so low,that it was immortalised in that evocative description by Raj Krishna — India’s GDP growth,at 3.5 per cent,was the Hindu rate of growth. So,6.5 per cent ain’t that bad and congratulations to the Sonia Gandhi-led government for doubling the growth rate and maintaining inflation at “historical” levels.

There are so many problems with such glib assertions that one does not know where to begin. Average GDP growth in the 1960s and 1970s was near exact 3.5 per cent: 4 per cent per annum (ppa) in the 1960s and 2.9 ppa in the 1970s. The investment rate that delivered this growth was a meagre 16 per cent of GDP. In contrast,GDP growth in 2011-12 was 6.5 per cent,and the investment share 34 per cent. If one steps a bit further into the first quarter in 2012 (January-March),GDP growth had slipped to only 5.3 per cent. This is not the quarterly growth annualised,but the growth over the previous 12 months. The world economy was buoyant in the first quarter,perhaps the most buoyant for some time to come! So,before the international problems with Europe,and before the slowdown in world growth circa 2012,

India grew at only 5.3 per cent. At 6.5 per cent,our rank was not second,but 22nd. At 5.3,our rank falls to 35 among 83 non-oil developing economies with a population above 1 million. Countries with a higher growth rate include Ghana,China,Sri Lanka,Bangladesh,Chile,etc.

What is worse is that India has a similarly bad rank for inflation. Using the GDP deflator as a measure,our rank is 54 out of 83; for CPI ,the rank is worse. At a rank of 65,we have the 18th worst inflation performance in the large inflation prone sample of developing countries.

So how bad has been our recent growth experience? The above comparative experience suggests that it has been awful; an “absolute” comparison with the Hindu rate of growth suggests we are operating below that level. Here is a simple method. Each 1 percentage point of investment adds approximately 0.13 percentage points to GDP growth. The difference in average investment shares is close to 20 percentage points,which yields an approximate difference of 2.6 percentage points in GDP growth. Which means that if one was growing at 3.5 per cent earlier,one should be growing at 6.1 per cent today,just because of the increase in investment levels. GDP growth of 6-6.5 per cent is not the new Hindu rate of growth — it is the Hindu rate of growth.

There is also the important calculation of the effects of education,openness and the cost of capital. In the pre-globalisation period,the average educational attainment of an Indian worker was around 1.7 years; in 2010,it was more than triple that level at 5.4 years. The export plus import share is now close to 60 per cent,more than three times the level earlier. As expected,this has effects on productivity of labour and capital and therefore the aggregate growth rate. In the PG period,productivity growth averaged close to 0 per cent in India; over the last decade,productivity growth has averaged more than 2.5 per cent per year. In other words,our potential GDP growth (labour,capital and productivity) today is closer to 8.5 per cent (6.1 per cent plus 2.5 per cent). If we grow at 6.5 per cent,we are 2 per cent below potential; at 5.3,we are more than 3 per cent below potential. This implies that our 5 per cent GDP growth today is 0 per cent GDP growth of the PG period when our policymakers were young and potential GDP growth was 3.5 per cent. That’s how bad it is.

And what is this Sonia Gandhi-led government doing about the precarious situation they have placed the once-strong economy in? They are drifting,and doing so with an appalling lack of leadership. Just recently,there was hope for renewal,as Manmohan Singh assumed the post of finance minister. Surely the government would do the minimum necessary to put the economy right. Surely the government would reduce subsidies on diesel and LPG,a subsidy that only accrues to the middle class and the rich. Yet,this simple decision,which all of the technocrats within the government have said is absolutely necessary to begin to get the economy right,cannot be made. Why? Presumably because Gandhi feels that this move will cost her party votes,or some equivalent reason thereof. There is no point reasoning with our great political leaders — they don’t want to confuse their policies with facts until after they have lost every election.

There was (is) also hope that there will be greater coordination in our monetary and fiscal policies. The last four years have been a waste,indeed counter-productive,in this regard. The rolling stone-esque populist regime has queered the pitch for inflation control. By providing for extra-large procurement prices for the kulaks this government so loves,the possibility for inflation reduction,and therefore reduced interest rates,has been severely compromised. If now the Centre does not provide at least a fig leaf to RBI Governor D. Subbarao,his credibility as an inflation fighter (and in reducing super high interest rates) will be in question. And the economy will continue with its sub-par,sub-optimal,pathetic performance.

India needs to get out of its straitjacket of “zero” growth. It awaits the PM and the RBI governor to begin to set the path right. Here’s hoping they do.

The writer is chairman of Oxus Investments,an emerging market advisory firm