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Economy: A stitch in time saves nine! - Views on News from Equitymaster
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  • Jun 28, 2004

    Economy: A stitch in time saves nine!

    A famous analogy relates economic growth with the game of cricket. It states that economic, or GDP growth is like chasing a target score in a cricket match. When you are chasing a target, be it the cricket score for 50 overs or GDP growth for 5 years, the performance in every year will affect the target in the remaining period. If you perform poorly in the early part of the innings, the pressure is relatively higher in the later part. Something similar happens with the Indian GDP growth, as targeted in the five-year plans.

    The tenth five-year plan (FY02-FY07) for the Indian economy has envisaged an annual GDP growth rate of 8%. If we take this into account and assume that the size of the Indian economy was US$ 100 bn at the beginning of 2002, consistent 8% growth rate per year will get us to a GDP of around US$ 147 bn a the end of 2007, or 47% growth over a period of 5 years.

    E-CMIE estimates; FY06 & FY07 growth rates are estimates to achieve the 8% p.a. plan targeted growth.

    Now, if one were to take into account the 4.0% and 8.7% growth achieved in FY03 and FY04 respectively, the total growth has been around 13%. Also, if we take into consideration the 6.3% growth rate projected by CMIE for FY05, the total rate comes to 20%. This leaves us with another 27% growth to be achieved in the next two years (FY06 and FY07). This means a CAGR of almost 11% over these two years, which seems an uphill task. Though possible, a lot of factors have to go right to achieve this target.

    However, even if we wish to achieve this high level of growth over the next two years, the Indian economy needs significant acceleration. More simply, we need to move faster on the path to reforms. And this will require combining the pro-business policies with the pro-market policies. The former is meant to favour the incumbents (existing players) by providing a level-playing field. This can be done through a host of measures, the more important including easing restrictions on capacity expansion of the existing players (for instance, the fertiliser industry), removing price controls and providing a strong infrastructure support. On the other hand, the latter involves liberalisation of trade and services, free movement of labour and capital, promoting foreign investment and competitive practices.

    The Indian governments of the past, especially those that held offices post the 1991 liberalisation, have also failed to focus on fundamental issues like education, healthcare and poverty. In fact, though we are one of the fastest growing economies in the world, the per-capita GDP trend fails to inspire confidence. If we are to move to the new growth trajectory, these fundamental issues have to be addressed seriously. Ultimately, they are the pillars that would enable us to achieve our objective of sustainable long-term growth. Policies that are aimed to please one section of the economy will never work in our favor.

    "In regard to the importance of agriculture in a broader socio-economic sense, all the three basic objectives of economic development of the country, namely, output growth, price stability and poverty alleviation are best served by the growth of the agricultural sector. It may sound ironic that agriculture is one sector where there is convergence of all the three main objectives of economic policy in India but we seem to have relegated the sector to the background in the process of economic reforms..." - Dr. Y. V. Reddy, Governor, RBI.



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