Despite policy paralysis, India's growth is still among the highest for emerging economies
Panic has struck the vast majority of commentators on the Indian economy in the wake of the recent decline in the growth rate. In turn, they have spawned a number of myths that pose additional threats to future growth by creating self-fulfilling negative expectations. If the India growth story is to sustain, these myths must be exposed for what they are and balance restored to the policy discourse.
The first myth is that growth has collapsed. It is expressed variously in the press. Some commentators say that gross domestic product (GDP) has collapsed; others say growth has collapsed; and still others say that India growth story is over. Then there are cynics who assert that the 'I' in acronym BRIC is about to drop out or that it now stands for Indonesia.
But let us do some fact-checking. Rather than collapse, GDP has continued to grow in every single quarter, not just every year. Even the rate of growth of GDP has not seen a dramatic decline.
In the last fiscal year, which ended on March 31, 2012, GDP grew 6.5%. While below the 8.5% average of the preceding eight years, this is still well above what we have achieved during any other period on a sustained basis and among the highest growth rates in the world now.
To those who think that the 'I' in BRIC is about to drop out, let me first remind them that India supplies the only vowel in the latter. But more seriously, commentators making such claims need to check the record of the other countries in the quartet.
Brazil has grown faster than 6.5% a year only once in the last 20 years and its average growth rate since 1996 has been less than 1%. Russia has done better than Brazil since 1999 but its growth rate was -7.8% (yes, negative 7.8%) in 2009, 4% in 2010 and 4.2% in 2011. So, if the acronym is going to shrink, IC is a far better candidate than BRC!
As for those who think that Indonesia should replace India to provide 'I' so as to preserve the elegance of the acronym, let me point out that in doing so, they would be dropping a country whose minimum annual growth rate has been 6.5% since 2003-04 in favour of one whose maximum annual growth rate has been 6.5% since 1997.
The second myth is that India's investment rate has collapsed. If you believe that growth has collapsed, inference of the collapse of the investment rate is the natural next step: how could growth have collapsed with the collapse of investment?
But even the recent Standard & Poor report, which revels in predicting India's fall out of Bric, tells you that the gross investment has been a healthy 35% of GDP in 2011-12. This is well within the range of 27-39% since 2003-04, the year in which growth shifted to the 8-9% range.
The third myth is that reforms are stalled. In a literal sense, this is not a myth since the reforms are indeed stalled.
What is strange, however, is the sudden discovery of this fact by India observers who evidently assumed that since growth was progressing well all these years, progress on reforms must be on track as well.
The reality, however, is that liberalising reforms have been in hibernation ever since the United Progressive Alliance (UPA) assumed office in May 2004.
If anything, in the immediate past, reforms have seen a small forward movement. UPA has restored the petroleum price deregulation, which it had abandoned soon after coming to power in 2004.
Though the government rolled back the opening of multi-brand retail to FDI, it did lift the cap on FDI in single-brand retail with happy results: the world's largest furniture retailer has just announced the plans to invest nearly $2 billion.
There is much that is wrong with the entire approach to economic policy of UPA, as I have written, starting as early as July 2004. But this is not enough to diminish my confidence in the India story just yet for reasons that I have stated in many of my writings in the past several years, which have now found their way into the writings and speeches of many, including top government officials.
To recapitulate the reasons, first, gross investment as a proportion of GDP has remained well above 30% in the last seven years; temporary falls in the growth rate have not dented this key determinant of long-term growth.
Second, the mega reforms done under Prime Minister Narasimha Rao, whose 91st birthday we celebrate tomorrow, as also under Prime Minister Atal Bihari Vajpayee, remain intact.
Policy paralysis has not meant policy reversal. And finally, Indian entrepreneurs remain as cutting edge as ever. Delivery of nearly 4% growth even with their hands and legs tied at the height of the license raj bears eloquent testimony to their entrepreneurial talent.
Does this mean that nothing stands in the way of India becoming the third-largest economy in the world in 15 years? Alas, this is by no means guaranteed.
In addition to the threats posed by possible economic crises abroad, we must also live with our politicians who show no dearth of talent to suppress growth impulses to promote narrow personal interests. So, we need some bit of good luck too.
This article is originally published in the Economic Times dated 27th June, 2012, written by Arvind Panagariya who is a Professor at Columbia University.