Our obsession with 8 percent GDP growth is silly

Like most economic policymakers in India, Planning Commission Deputy Chairman Montek Singh Ahluwalia has over the past three years been wildly off the mark with his projections in respect of both GDP growth and inflation rate. With all the persuasiveness of a faith healer, Ahluwalia has been claiming - even in the face of glaring evidence that the economy was in the grip of stagflation - that a recovery was just around the corner and India would soon be in a higher orbit of growth and a lower orbit of inflation.

Of course, with every such public pronouncement, the economy only ended up slowing down even further, while inflation remains untamed.

A lesser man than Ahluwalia may have been inhibited by such a record of getting it wrong from making any further economic projections. But not for him such self-imposed restraints.

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[caption id=“attachment_651894” align=“alignleft” width=“380”] Today, 8 percent GDP growth has become the “new normal” in terms of over-the-top projections. Reuters[/caption]

Returning overnight from a G-20 Sherpas Meeting in Moscow - another of those big-spend junkets that earned him a bit of bad press last year - Ahluwalia stopped over at the Blavatnik School of Government at Oxford University to give a talk on ‘India’s Challenges Ahead’.

At that event, Ahluwalia was back with his earnest attempt to “talk up the economy”. India, he said, had all the requirements to return to a GDP growth rate of 8 percent in the coming years, even though it may take longer than had been earlier expected.

“India has averaged 7.5 percent growth in the last 10 years,” Ahluwalia said. “It should have done that for 15 years but it is possible to bring it back to the average performance of the last decade. The target for 2013-14 is 6.5-7 per cent and then accelerate further.”

That overly optimistic outlook was shared also by Prime Minister Manmohan Singh, who told Parliament on Wednesday that the slowdown in the Indian economy would not last long and that it would return to a growth rate of 7-8 percent in the next two years.

Today, 8 percent GDP growth has become the “new normal” in terms of over-the-top projections, unlike in the past when our policymakers breathlessly held out the prospect of double-digit growth, merely because China had done it for so long. That new-found obsession, even with 8 percent, is silly, particularly in the light of China’s own experience on that count.

In China’s case, until not long ago, economic policymakers were similarly obsessed with maintaining a GDP growth rate of at least 8 percent. The world economy, upon which China was dependent to push out its cheap exports, may have been crumbling, but leaders at the central and provincial levels would be be excessively preoccupied with “bao ba” (“protecting 8”).

There are several unlikely explanations to account for why Chinese policymakers had eight on their mind. The most outlandish one, which nevertheless enjoyed some legitimacy was that Chinese policymakers were targeting 8 per cent growth because in the Chinese numerological belief system, the number ‘8’ (ba) is considered auspicious, in large part because it sounds like the Chinese word for ‘wealth’ (fa). The superstitious association runs deep, and automobile licence plates and telephone numbers with a preponderance of the ’lucky 8’ in them command astronomical valuations in China. Even Communist Party leaders are evidently in thrall of it: the inaugural ceremony for the Beijing Olympics in 2008, for instance, was timed precisely for 8 minutes past 8 pm on August 8, 2008 (8/8/08).

One other, more likely account for the obsession with ‘8’ draws on a historical event. In 1982, the then Supreme Leader Deng Xiaoping determined - somewhat whimsically - that he wanted to see China’s GDP quadruple by 2000. He reportedly asked the then Communist Party general secretary Hu Yaobang how that economic “Great Leap Forward” could be achieved, to which Hu said that it could be done if the economy grew at 8% a year. (Which just goes to show that Hu Yaobang was well-versed in the Power of Compounding and, in particular, the Rule of 72!)That number perhaps remains burnished in Chinese officials’ minds as an unwavering target.

In any case, the obsession with ‘protecting 8’ cost China dearly because in their effort to maintain it at all costs, Chinese policymakers spawned structural distortions in the economy, which are only now being worked off.

Indian policymakers would do well to learn from the Chinese lesson on the folly of pushing for 8 percent growth without the structural reforms that can absorb such a pace.

In any case, in India’s case, precisely where such optimism about 8 percent growth springs from is hard to fathom, considering that the mood among economy watchers and industry is far from upbeat. The most charitable reading of the Indian economy, such as by Moody’s Analytics economist Glenn Levine, is that the economy has likely bottomed out. But even he doesn’t reckon that the recovery, when it does kick in, will be sharp.

Levine reasons that for India, in the absence of structural reforms, any GDP growth of above 7 percent will stoke inflation and will result in a more painful future adjustment - just as the headlong pursuit of double-digit growth some years ago caused the economy to overheat and contributed to the current problems of inflation and the current account deficit.

Other commentators have a rather more downbeat outlook on the Indian economy. This commentary, for instance, reasons that “unless our governments … in the states or at the Centre… start dealing with realities, our glory days are over for years together.”

For instance, it adds, “unless radical action is taken to increase food production and distribution, the curse of inflation will stunt growth, and hamstring our ability to improve infrastructure. In all this, the centrality of infrastructure as enabler and multiplier cannot be overemphasised.”

It is far more likely that even if the Indian economy has bottomed out, as analysts reckon, it will be scraping the bottom of the barrel for a lot longer - in the absence of supply-side initiatives and game-changing structural reforms for which the UPA government hasn’t had much of an appetite.

Talking of 8 percent growth potential, as Ahluwalia does, without the government doing the spadework to facilitate that, is just so much wishful thinking. It’s arguably a good thing that Ahluwalia will again be proved wrong with his projection.