10% the New Normal for India's Secular Growth?

May 4, 2015

The growth rate in India averaged a little less than 9.5 per cent for the three years ended March 2008. It is recognised that to meet the aspirations of the youth for jobs, a 10 per cent per annum secular growth is necessary. There are concerns about certain preconditions in terms of avoiding an upsurge in inflation, increasing gross domestic savings to match up to investment requirements, ensuring equitable distribution in income and spreading the growth impulses more evenly through the economy.

More importantly, in the international debate on the burden sharing of the locomotive of growth, it is necessary to highlight relative standards of living in India and China.

India-China Per Capita Incomes

To ensure equitable burden sharing in the global economy it is useful to see the long-term per capita income levels in the two countries which would emerge based on certain assumptions. Let us assume that India keeps growing at 10 per cent per annum and China grows at 6 per cent per annum. Notwithstanding that these assumptions are questionable, particularly in the long run, as China's growth rate is unlikely to be lower than that of India, these assumptions are made on the large differences in the India-China per capita incomes.

Item  India  India
Per capita Income
In 2013 (US$)	1,500	6,800
Long-term Growth Rate	10%	6%
Per capita after 10 years	3,885	12,172
Per capita after 20 years	10,080	21,828
Per capita after 30 years	26,160	39,032

What these illustrative calculations show is that even if India grows substantially faster than China for 30 years - which is virtually impossible - China's per capita income will be almost 50 per cent higher than that of India. Thus, global burden sharing should be based on relative per capita incomes rather than growth rates.

Preconditions for Attaining a 10% Growth Rate

To attain a long-term 10 per cent growth rate in India a major perquisite would be an increase in the gross domestic savings to GDP ratio from 30 per cent to 38 per cent. Since the marginal propensity to save is higher in the upper income groups than the lower income groups, a corollary is that higher growth rates are invariably associated with a redistribution of income in favour of the upper income groups. This goes against the grain of distributive justice and hence great care has to be taken that the distribution of income is not tilted away from the lower income groups.

The natural factor endowments in India are excess supply of labour and shortage of capital but policies invariably violate the natural factor proportions. Reflecting this is the perennial pressure on the authorities to lower interest rates. The system has to put a premium on labour intensive techniques rather than capital intensive techniques.

For a sustained 10 per cent growth rate it would be necessary to attract more foreign capital into the country. Here, it is necessary to tilt the scales in favour of foreign direct investment rather than portfolio investment and external debt inflows.

The fashions of the time are to do away with controls on External Commercial Borrowing but there are serious hazards in such a policy. It is sometimes argued that if there are defaults by Indian parties on External Commercial Borrowing, the lender takes a judgement to lend and the consequences of an erroneous judgement would need to be borne by the lender. But things are not so simple. If there is an External Commercial Borrowing default by an India borrower there would be severe adverse repercussions on direct and portfolio inflows into the country. Thus, a hasty acceptance of the Sahoo Committee Report to free up the maturity of external commercial borrowing would be a serious error of policy.

Aspirations and Sound Policies

While it is legitimate to aspire for a long-term growth rate of 10 per cent, it is incumbent on policymakers to ensure that salutary regulations are not done away with merely to appease overactive advocates of rapid reforms.

Note: This article was first published in The Freepress Journal on May 04, 2015. Syndicated.