Economy needs hope, not hype

This is a time of much self-congratulation on the economy, a time when India’s strengths are being recognised globally. It is likely that 2003-04 will see inflation-adjusted GDP growth of around 7 per cent.
This should not be derided. It should also not be forgotten that 2002-03 saw an abysmal 4.3 per cent growth and hence this year’s spurt is, in part, a statistical spurt.
Further, the compound annual average growth rate of real GDP for the last five years works out just 5.3-5.4 per cent from around 7.5 per cent during 1993-94—1996-97, the only time when the country has seen 7 per cent plus growth for three years in a row.
The achievement of the last five years is even lower than the growth rate of around 5.6 per cent registered in the 1980s. The quality of growth in the recent past is also somewhat suspect.
Normally, because of the speed with which data is made available, GDP growth is measured in terms of supply, that is, in terms of growth in value-added in agriculture, industry and services.
But GDP growth is also estimated in terms of demand, that is, in terms of consumption, investment and foreign trade. Since there is a two-year lag in data availability, this measure of GDP is used only retrospectively to evaluate how the economy has performed.
The Centre for Economic Research of Crisil has just carried out such an evaluation.
The main conclusion of this study is that in the past five years, government consumption has been the key trigger to economic growth.
Increased wages for government employees has boosted demand for consumption goods, particularly consumer durables, even as it has spelt fiscal doom for states.
The numbers tell their own story. Private final consumption expenditure (PFCE) that accounts for slightly less than two-thirds of GDP slowed down in growth in the last five years, while government final consumption expenditure almost doubled its growth rate. How far will PFCE continue to be the engine of growth is debatable.
There is an even more distressing dimension. The growth in gross domestic capital formation, which accounts for less than a quarter of GDP, has come crashing down from 10.6 per cent in the mid-1990s to just 5.3 per cent in the last five years.
This is not surprising given bankruptcy in public finances. As the Crisil analysis says, slowdown in investment activity contributed significantly to overall growth slowdown. The most dramatic difference between China and India lies here.
As long as the huge differential in gross domestic capital formation (that is, investment basically) persists, India will always lag behind. In China, investment rates have been around two-fifths of GDP.
The one silver lining in the slowdown phase since 1997-98 has been export growth. Whether this momentum will continue in the face of steady appreciation of the rupee remains to be seen. Textile exports will face new challenges with the abolition of all import quotas in the US and Europe.
There have been substantial achievements in the past five years that have to be acknowledged. Reforms have continued, although intent has been stronger than actual implementation.
Interest rates have declined significantly, although this has had an adverse impact on bank depositors. Telecom connectivity has expanded and the highway development programme is an important milestone.
Privatisation, however halting, is on the agenda. IT is adding to India’s global muscle even though its domestic productivity-enhancing contributions remain marginal.
Many companies, both listed and unlisted, are flourishing. But India’s fundamental malaisea fiscal system both at the centre and in states that promotes neither growth nor equity remains.
All in all, while there is much to be self-confident about, some sobriety and renewed focus on basics would not be misplaced.