Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Fear of economic anorexia
BackBack

Fear of economic anorexia

Fear of economic anorexia

Premium

In a memorable exchange in the 2006 movie, The Devil Wears Prada, Anne Hathaway as the personal assistant of a tyrannical editor innocently asks a colleague in the fashion magazine she works for: “So none of the girls here eat anything?"

“Not since two became the new four and zero became the new two," is the deadpan reply she gets from Stanley Tucci, who plays the part of a fashion editor in the film, as he refers to the quest for the anorexic look in New York high society.

Does a similar case of creeping anorexia threaten the global economy— and the Indian one as well?

This is a question worth asking as there is growing confidence that the world economy will soon be out of the woods. That itself is a belief worth questioning. But equally important is the issue of where the recovery will take us: back to the growth levels we saw in the middle of this decade or somewhere much lower?

“I have trouble seeing how the US and China, the main engines of growth for the past two decades, can avoid settling on a notably lower average growth rate than they enjoyed before the crisis," wrote Harvard University economics professor Kenneth Rogoff in a recent syndicated column.

And last week the Reserve Bank of India released the findings of its latest survey of 17 professional forecasters. One significant result was that these economists have sharply cut their median forecast for Indian economic growth over the next 10 years, from 8.8% to 7.5%.

These steep reductions in the estimates of medium-term growth seem too pessimistic since most of us have our expectations anchored around the 9%-plus level that the Indian economy grew at between 2004 and 2008. But they seem less glum when you consider some of the more rigorous forecasts put out in recent years on what India’s sustainable growth rate really is.

In a September 2007 working paper for the International Monetary Fund, staff economist Hiroko Oura reported on four growth estimations put out in recent years. Dani Rodrick and Arvind Subramanian said in 2004 that India’s potential growth rate in the five years from 2007-08 was between 7.3% and 7.6%. Tushar Poddar and Eva Yi were the most optimistic, estimating a potential growth rate in that period of between 9.5% and 9.8%. Two other growth estimates—by the World Economic Outlook and by Barry Bosworth and Susan Collins—were between these two extremes.

But it is interesting to note that the median forecast of the economists surveyed by the central bank now says that the economy can sustain a growth rate that is close to the one made by Rodrick and Subramanian in 2004, before an unprecedented economic boom.

A lot of the current debate and advice to the new government is focused on short-term issues, especially ways to further prop up effective demand. But Manmohan Singh and his economics A-team will eventually have to grapple with the issue of long-term growth as well.

It would be risky to believe that the turnaround—when it comes—will necessarily take the medium-term growth rate back to around 9%.

The example of Brazil is instructive. This Latin American country was the original miracle economy, scorching the growth tables far before the likes of South Korea and Taiwan.

In the two decades after the end of World War II, Brazil’s average gross domestic product growth rate was around 7%. After a sharp slowdown between 1962 and 1967, growth once again soared. It averaged 11.1% a year between 1968 and 1973.

Brazil had a volatile time after the first oil price shock of 1973, with growth bobbing up and down through the 1970s. But its economy stagnated after 1980, and the country faced a fiscal crisis and social unrest.

India may not go the Brazil way. But the experience of that country shows that clear economic policies and reforms are needed to keep an economy on the growth track. In the case of Brazil, the inability to replace the import substitution that powered its growth between 1945 and 1965 with a more open economic system later was one reason for the collapse of economic growth. The other was fiscal profligacy.

That is why the new Manmohan Singh government that will take charge soon will need to push through tough reforms and move quickly to bring its finances back on track. Both are needed to ensure that the Indian economy keeps growing at a rate that offers productive jobs to the poor and thus helps them escape the poverty trap.

And fiscal balance is very important. India’s recent economic boom was powered by growing rates of domestic savings and investment. The savings rate soared because government finances improved. A fiscal crisis will pull down the national savings rate and hence the medium-term growth rate.

Let not seven be the new size 10.

Your comments are welcome at cafeeconomics@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 21 May 2009, 12:30 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App