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Will India sustain its growth rate?

Published by The Straits Times, Singapore on 2004-04-25

NEW DELHI--It was one of those tony Delhi dinners where the purveyors and observers of power gather, a small gathering organized around a couple of political and economic stars. The lighting was seductively low, the sitar music soothing, the food first-class, and the conversation lively.

'So, professor,' said Miki Daulet-Singh, a top business executive to the well-known economist, 'what's it going to be this year--a return to the "Hindu Rate of Growth"?' The reference was to the annual growth rate of around 3.5 percent that characterized the Indian economy for long years after the predominantly Hindu country achieved independence from the British in 1947. The lethargic growth rate was attributed to socialist policies that discouraged private investment and promoted state activism in economic development. It only accelerated after those policies were abandoned in favor of economic liberalization.

'No,' said the economist, Dr. Arvind Virmani, 'more likely the "Bharatiya Rate of Growth." That's to say, around 6.1 percent annually.'

To a visitor who's been in India for the last several weeks, the exchange neatly captured the essence of an ongoing debate--and its subtext of anxieties--concerning the pace of economic growth in this country of 1.1 billion mostly poor people. The concern over economic growth--although always present in a nation where nearly 50 percent of the population earns less than the equivalent of US$1 a day--appears to be mounting in the light of new uncertainties over the composition of India's next government.

That government is still widely expected to be formed by the 22-party ruling coalition known as the National Democratic Alliance. Its main element, the Bharatiya Janata Party (BJP), has freed the economy from many bureaucratic constraints such as rigid licensing requirements for industry, opened the door to more foreign investment, and spurred exports so that India's foreign-exchange holdings are now at a record US$110 billion, the sixth highest in the world.

But the BJP may have to backpedal on some of its economic liberalization, which is invariably portrayed by its socialist rivals--including the powerful Congress Party of Sonia Gandhi--as an instrument of Western ideology unsuitable for eradicating mass poverty in India. While it would be absurd to suggest that unnamed foreign powers influence the administration of Prime Minister Atal Behari Vajpayee, the argument resonates surprisingly well in many rural areas where the government's economic liberalization programs haven't created jobs or improved the standard of living.

That the BJP's economic performance hasn't quite dazzled India's masses was evident this week. Exit polls in key constituencies indicated that the NDA may fall short of the 272 seats it would need to hold a majority in the current election for 543 seats in the Lok Sabha, the lower house of the national parliament. If these indications are borne out when the election results are formally announced on 13 May, Mr Vajpayee may well have to seek partnerships with small parties in order to be able to form a government.

Forming a government under such circumstances would inevitably mean making compromises on economic liberalization, the anchor theme of the BJP's re-election manifesto. Economists such as Dr Virmani, the director and chief executive of the influential Indian Council for Research on International Economic Relations (ICRIER) in New Delhi, that the BJP and earlier administrations have long temporized on economic liberalization anyway.

"The credibility of economic reforms is always an issue to be examined," the Harvard-educated Dr Virmani said. There are too many competing interests weighing on the sustaining of economic liberalization, he added. This would make it harder for the government--any government--to forthrightly hew to a clear-cut commitment to free enterprise and a market economy. There are also those who aver that India's economic has already "taken off," and therefore there's no need for further liberalization. More reforms, in this view, would overheat the economy and generate intolerable inflation (currently at a manageable 3 to 4 percent).

That is why economists such as Dr Virmani are increasingly skeptical that India's growth rate will reach the 8 to 10 percent that's being bruited about in many quarters, both domestically and overseas. The economy has averaged about 6.1 percent annual growth since the early 1990s, when a predecessor government of Mr Vajpayee--a Congress administration led by Prime Minister P. V. Narasimha Rao--began instituting economic reforms. Indeed, Dr Virmani himself was a member of the national Planning Commission in 1999 when the current forecast of an annual growth rate of 7.3 percent was made for India (and 7.5 percent for neighboring China, India's great economic rival). And in June 2001, India's 10th Five-Year Plan formally set that growth rate as an annual target; economic cheerleaders were even urging the government to push the figure to 8 percent in order to enlarge the country gross domestic product (GDP) beyond the current US$550 billion.

'There are some people who talk of a growth rate of 12 percent per annum, which is nonsense,' Dr Virmani said, with some disbelief in his tone. "You can always keep pushing the target higher and higher. Why stop? Then it becomes illogical. You really cannot stretch your judgment beyond a certain point. Politically-motivated targets are one thing, realistically achievable targets are another."

Besides the political constraints on an incipient Vajpayee government, what would come in the way of accelerating India's growth rate? Dr Virmani says that economic reforms in the agriculture--the largest sector of the economy--manufacturing and mining still haven't been completed in order to make these sectors more dynamic.

'There's also been a slow but poisonous deterioration in governance,' he said. 'The consequent impact on the delivery of public goods is troubling.' Dr Virmani said that corruption at the local level has frequently meant that government funds designated for 'public good' were diverted into other areas. Deteriorating governance has also meant an unraveling of law and order in many areas of India, such as Bihar and Uttar Pradesh states, he said, with local police often working in tandem with lawless elements.

'Public goods' are defined as roads, communications and municipal services--among others--that the government is typically obliged to sustain. The quality of public goods determines the health of a country's infrastructure, and here India is generally found lacking by international standards.

Dr Virmani contends that it isn't enough for a government to simply keep spending more on providing social services. It's the widening of the availability of public goods, coupled with better public accountability of those public goods, that will generate faster economic growth.

'It's safe to assume that we will have no trouble maintaining a 6.1 percent annual rate of growth,' Dr Virmani said. 'Anything more than that? It's not realistic at the moment.'

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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