The economists are at it again, doing what they are good at - i.e. building castles in the air.
The Prime Minister's Economic Advisory Council (EAC) headed by Dr C Rangarajan released its review of the economy in 2012/13 on Tuesday. One of the things that the Council points out in this report is, "If we (i.e. India) grow at 8 to 9 percent per annum, we will graduate to the level of a middle income country by 2025. It is once again a faster rate of growth which will enable us to meet many of our important socio-economic objectives."
While 8-9 percent economic growth is a noble thought, what is the chance of it happening given the current state of affairs in the country? The answer is that the situation doesn't look very good.
The PMEAC expects an economic growth of 6.4 percent in 2013-2014, which itself is a leap from last year's estimated 5 percent..
Sustained long term economic growth is very rare. As Ruchir Sharma points out in Breakout Nations - In Pursuit of the Next Economic Miracles: "Very few nations achieve long-term rapid growth. My own research shows that over the course of any given decade since 1950, only one-third of emerging markets have been able to grow at an annual rate of 5 percent or more. Less than one-fourth have kept that pace up for two decades, and one tenth for three decades. Just six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hongkong) have maintained the rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades."
India and China, which have been among the fastest growing countries over the last 10 years, are totally new to this class. "During the 1950s and the 1960s the biggest emerging markets - China and India - were struggling to grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth, but those strings came to a halt with the outbreak of war...In the 1960s, the Philippines, Sri Lanka, and Burma were billed as the next East Asian tigers, only to see their growth falter badly," writes Sharma.
The point is that economic growth cannot be taken for granted. There is a lot that can go wrong and it does. In the Indian context that is already turning out to be true. As the PMEAC report points out: "In August 2012, the PMEAC had projected a likely growth rate for the economy of 6.7 percent...At the end of the fiscal year...the actual growth rate at around 5 percent is much lower than what was projected."
Different countries have followed different formulas for sustained economic growth at different points of time. But one thing that has almost always killed economic growth is the premature construction of a welfare state, which the Congress-led United Progressive Alliance (UPA) government has at the top of its agenda.
As Sharma writes, "It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period. Inspired by the popularity of the employment guarantees, the government now plans to spend the same amount extending food subsidies to the poor. If the government continues down this path, India may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country's economic boom."
Countries that now run big welfare states have done so after many years of high economic growth. As Gurucharan Das points out in India Grows at Night, "India's leaders did not modernise or expand the capability of its institutions. They forgot that western democracies had taken more than hundred years of economic growth and capacity building to achieve the welfare state."
While extending subsidies to the poor is a noble idea, the thing is it does not work over a period of time. A recent discussion paper put out by the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, seems to suggest the same. The paper finds that real farm wages (i.e. growth in wages adjusted for inflation) grew by 3.7 percent per year in the 1990s. This growth fell to 2.1 percent per year in 2000s. "The result (of the analysis) points to the fact that a 'pull strategy' is more desirable than a 'push strategy', meaning growth-oriented investments are likely to be a better bet for raising rural wages and lowering poverty than the welfare-oriented MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme)," the paper pointed out.
The paper also suggests that "investments would have raised growth rates in these sectors, and 'pulled' real farm wages through a natural process of development, whereby wages increase broadly in line with rising labour productivity." So it is very clear that the government's much touted rural employment guarantee scheme is not really working. The incomes of farmers would have grown much faster had the government simply stayed away.
The other thing all these subsidies (which include oil subsidies, the biggest chunk) have done is push up government borrowing. "The total public-debt to GDP ratio is now 70 percent - among the highest for any major developing country," writes Sharma. "The development of this habit - deficit spending in good times as well as bad - was a major contributor to the current debt problems in the United States and Western Europe, and India can ill afford it." This is something that the politicians who run India seem to have totally forgotten about.
Increased government borrowing has also led to high interest rates. This has a huge impact on consumption as well as business expansion and in turn pulls down economic growth. The investment by Indian businesses has fallen from 17 percent of GDP in 2008 to 13 percent in 2012.
The media has recently been reporting about Finance Minister P Chidambaram travelling to different parts of the world soliciting investors to put money in India. And this is happening at a time when more and more Indian companies are setting up businesses abroad. "At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 percent, they are looking abroad. Overseas operations of Indian companies now account for more than 10 percent of overall corporate profitability, compared with 2 percent just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad," writes Sharma.
This makes one wonder that if Indian companies are not ready to invest in India, why would foreigners want to do the same? It need not be said that doing business in India has become more and more difficult over the years.
Gurucharan Das in India Grows at Night recounts the experience of a businessman friend of his, Navin Parikh. "'Not a week goes by,' Navin said, 'without an inspector from some department or the other coming for his hafta vasooli, "weekly bribe". Labour, excise, fire, police, octroi, sales tax, boilers and more - we have to keep them all happy. Otherwise, they make life hell. More than 10 percent of my costs are in 'managing the system'."
Given this it is not surprising that more and more Indian businesses are happy going abroad rather than investing in India. And if this continues to happen India's economic growth will continue to flounder.
The Economic Survey 2012-13 points out that agriculture accounts for 58 percent of employment in the country. But this 58 percent produces only 16 percent of the country's GDP. So it is basically a no-brainer to suggest that India needs more industries and businesses, so that people can move out of agriculture. And that cannot happen without the government getting its act right. While a spate of economic reforms, from land to labour, are the need of the hour, but there is something which is more important than even that.
The government of India needs to limit its ambitions. As Sunil Khilnani writes in The idea of India, "The state was enlarged, its ambitions inflated, and it was transformed from a distant alien object into one that aspired to infiltrate the everyday life of Indians, proclaiming itself responsible for everything they could desire."
This anomaly needs to be corrected. The idea of a mai-baap sarkar needs to go. Unless that happens, continuous 8-9 percent economic growth will continue to remain an idea in the heads of economists and politicians.
Vivek Kaul is a writer. He tweets @kaul_vivek
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Updated Date: Dec 20, 2014 18:09:00 IST