India's $2 trillion economy means we have to reform faster
India will be a $2 trillion economy. This is not just a milestone, but a signal to our leaders. Raising $2 trillion to $4 trillion over this decade calls for more reforms, not less.
Amidst all the gloom over an economic slowdown, untamed inflation and fears of a policy paralysis, we have lost sight of an interesting national milestone: India will become a two-trillion-dollar economy this year.
Yes, US $2 trillion. Or maybe just a few shekels short of it.
These figures come from the PM's Economic Advisory Council (PMEAC) led by C Rangarajan. The Council, despite putting out a lower growth projection of 8.2 percent for 2011-12, expects gross domestic product (GDP) at market prices to reach $1,994 billion. Not exactly $2 trillion, but with the dollar set to decline against the rupee, who knows, we could well hit the number.
At this economic size, the average Indian would be earning $1,632 annually. And this despite our population growing by another 12 million from the recent Census figure of 1,21 billion. A per capita income of $1,632 translates to over $6,500 per year for each household of four.
Are these mere numbers?
Not really. Two trillion dollars is just a number till we understand that we have doubled our GDP under the UPA between 2004-05 and now. It means that if we keep growing at this rate, we will double the economy again by 2018-19 or 2019-20 to $4 trillion.
If we take care of the distribution of income - which we seem to be through entitlement schemes like NREGA and the Food Security Act - we are on the threshold of abolishing grinding poverty in this decade.
Per capita incomes would have shot up to well over $3,000 per annum - or $12,000 per household. A family earning over $1000 a month cannot be poor by any standard. Unless inflation has got completely out of hand by then.
Two trillion dollars this year also explains many things we are bewildered about - and why the UPA is looking clueless about inflation, or corruption or what reforms to pursue.
When your income doubles, your challenges change. When there is so much money sloshing about in the economy, corruption will escalate - unless we deal with it systemically. This is why we are so apoplectic about Raja's spectrum scam. We didn't realise that the scale of corruption has grown in proportion to the economy and its new opportunities.
Humans understand an arithmetic scale of growth, but not a geometric one. This is why we still benchmark our scams with what we remember from the past. A Bofors scam of Rs 60-and-odd crore looked big in the mid-1980s. Today, we are staggered by the spectrum scandal when we should not be.
Between them, Raja and all the scamsters could not have made more than a few thousand crores, even though the Comptroller and Auditor General put the notional loss to the exchequer at $1,76,000 crore. The size of the 2G scam relates to exponential growth, not arithmetic growth. This does not reduce the gravity of Raja's crookery, but it is good to see it in perspective.
The second thing that a doubling of the economy tells us is that our institutions simply cannot cope. Over the last one year, we have seen regular carping about judicial overreach, we have fretted about why an Anna Hazare and civil society are wandering into parliament's turf, and we have worked ourselves into a fit about the National Advisory Council's unelected mandate.
Two trillion dollars is the reason. The UPA inherited an economy just nudging $1 trillion. Two trillion dollars heading for $4 trillion over the next seven-to-nine years is a completely different ballgame. It needs different institutions, newer laws, newer approached to problems - which we are not seeing. Which is why civil society needs to muscle in. Why the courts are stepping in when the executive fails to do its duty.
Two trillion dollars is why red signals are being hoisted on the future India growth story. What we did in 1991-92 is not enough to see us on our way to a $4 trillion economy. The message that is coming through is simple: if we do not opt for big-ticket reforms now, the growth story that we have taken for granted - and which we are hoping will continue - is going to taper off.
The latest to sound the alarm is C Rangarajan, Chairman of the PM's Economic Advisory Council (EAC). In a recent interview to The Economic Times, he said that business sentiment is low, and its impact will be felt in the coming two years. "A weak business sentiment now could...depress growth next year or the year after that, if it persists..."
Last Monday, Rangarajan's EAC put out its review of the economic outlook and said with finality that things were not going right: "High rates of inflation, excessive government debt, political instability and the global situation have eroded business confidence, impacting asset creation adversely. It is important to push through the reform agenda...", it said, and issued other dire warnings.
The only way to reverse this is through reform - both of the economy and its institutions. As Rangarajan sees it, the key areas of reforms are agriculture (where productivity needs to be raised), power (where the state electricity boards need to be made viable, or compensated for their subsidies), and oil price deregulation (to avoid sudden, steep increases that give a shock to the system), apart from infrastructure.
Above all, Rangarajan wants a "clear policy on land for urbanisation and industrialisation," which has been a minefield in the tribal and farm belts - as the protests against Posco, Sterlite, and Tatas (at Singur) have shown.
The key point that all liberalisers have realised is the two-way linkage between growth and reforms. The big bang reforms of 1991-93 laid the foundations of fast growth. But fast growth needs even faster reforms, as Ajay Shah and Ila Patnaik point out.
Writing in his blog, Ajay Shah, professor in the National Institute of Public Finance and Policy, says: "For a country to work out in the long run, it has to constantly nurture the foundations of liberal democracy and the market economy, and repeatedly reinvent itself."
"At 7 percent growth in India, we are getting a doubling of GDP every decade. This requires a reinvention of the economy and the political system every decade. But India presents a stark contrast with what's required: we have grossly failed on modifying laws, government agencies, policy frameworks and world views at a rapid pace."
Ila Patnaik, writing in The Indian Express, says we need to reform existing institutions to make them transparent and more accountable. Instead, "short-cuts to better governance are being sought by turning to the Supreme Court or through interventions like the Lokpal Bill."
The arrival of a $2 trillion economy is the final wake up call for a reform of not only the economy, but all institutions.
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