The Indian economy: The long view
Is the India story secure? Far from it. The best example to learn from is Brazil
The global investment banks have been busy cutting their forecasts on the pace at which the Indian economy will grow in the current fiscal. It now seems very likely economic growth will be even more sluggish than it was in the previous year, and the most bearish forecasts suggest that we are headed for the worst year since the reforms of 1991.
This column had even earlier pointed out that the ongoing slowdown has been accompanied by high inflation and an unsustainable current account deficit, an indication that the current problems are at least partly structural. The slowdown in the first years of the current century was more typical of a cyclical downturn, because India then had very low inflation and a current account surplus. The situation now is much more complicated.
Even as there is a growing consensus that no rapid recovery is in sight, there are rumblings that India is headed for a prolonged period of low growth. And some even fear that are already in a new normal. Several econometric studies have used either techniques to smoothen time series data or built production functions to show that the growth rate that India can now sustain without setting off an inflationary scare is at least two percentage points lower than what it was five years ago.
Economic output had stagnated in the last 50 years of colonial rule. The growth in the first decade after India became a republic was spectacular in comparison. Economic growth averaged 4.09% between fiscal years 1952 and 1965. There was a boom in industrial production. But India could not build on this momentum for various reasons, particularly the rigid controls that choked the economy.
Then there was a prolonged downturn. Economic growth averaged just 2.8% over the next 15 years, or just a little above the rate of population growth. Average incomes hardly grew. No wonder this was also a period of great social unrest. It is true that the global economy was also in trouble during much of this period, but the rapid progress by some Asian economies shows that many of the wounds were self-inflicted.
Most economists now identify the early 1980s as the period when there was another structural break in the India growth story. Look at the chart once again: it shows that growth rates began to climb after around 1980. The Indian economy has grown at an average 6.27% in the subsequent 32 years, over several economic cycles as well as the macroeconomic crisis of 1991. So even while it is likely that India is not set to revert to the high trajectory of 2004-08, it is not clear if it is about to sink to the growth levels seen in the Indira Gandhi years.
India has significantly higher savings and investment rates than it had through most of the past three decades, despite the recent fall in these rates thanks to the deterioration in public finances and corporate balance sheets. India is also an open economy with a large domestic market. And it has a large entrepreneurial class as well as a growing labour force.
The management of the Indian economy over the past five years has been terrible, leading to an economy cursed with low growth, high inflation, a fiscal mess and a record current account deficit. But some of the structural factors that have sustained growth for more than three decades since 1980 are still in place.
Does this mean that the India story is secure? Far from it. The best example to learn from is Brazil. It was the star of the development crowd in the 1950s and 1960s, before it began to take high growth for granted. Governments there committed themselves to social spending schemes that could not be supported by tax revenue. The country went on a global borrowing spree. Its industries became uncompetitive. The result: two lost decades of economic stagnation after 1980.
The Brazilian example is a sobering one, and India is not immune from such risks. Countries with a track record of sustained growth over several decades can suddenly lose the plot. There is a difference between a country that grows rapidly for five years and one that can sustain fast growth for 30 years—think India and China.
Even as the way India has been able to grow over the past 30 years offers hope there are also the stark examples of countries such as Brazil that made a spectacular mess. For one, my guess is that both the infectious hubris of the boom years as well as the utter despondency of the current times is overdone. The truth lies somewhere in between.
Niranjan Rajadhyaksha is executive editor of Mint. Your comments are welcome at cafeeconomics@livemint.com. To read Niranjan Rajadhyaksha’s previous columns, go to www.livemint.com/cafeeconomics-
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