X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
10% the New Normal for India's Secular Growth? - Outside View by S.S. TARAPORE
 
 
10% the New Normal for India's Secular Growth?

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.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

Equitymaster requests your view! Post a comment on "10% the New Normal for India's Secular Growth?". Click here!

  
 

More Views on News

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

Why Shopping Online This Festive Season Makes Better Sense (Outside View)

Aug 24, 2017

Online shopping if done sensibly can help you save money and carries many other advantages.

Mr Trump Has Been Broken (Vivek Kaul's Diary)

Aug 24, 2017

Kelly, Mattis, McMaster, Cohn, and Mnuchin are in charge. But these Pentagon bureaucrats and Wall Street hustlers may be worse than a loose-cannon president.

Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

Aug 23, 2017

Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

Deep State First (Vivek Kaul's Diary)

Aug 23, 2017

Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

More Views on News

Most Popular

This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

Aug 17, 2017

A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

Aug 21, 2017

Most Indians who cannot find jobs, look at becoming self-employed.

It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

Aug 16, 2017

The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

5 Steps To Become Financially Independent(Outside View)

Aug 16, 2017

Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

Aug 22, 2017

Post demonetisation, a cut in bank savings deposits rates was in the offing.

More
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Aug 24, 2017 12:49 PM

MARKET STATS