Of ‘growth stories’, slowdowns, and ‘miracles’

What precisely should one make of India’s recent growth, and of the prospect that it may be stalling?
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First Published: Mon, Sep 03 2012. 12 41 PM IST
By its own longer-term standards, India still hasn’t done badly enough in 2012 to merit a demotion—but that’s because its own standards are so low. Photo: Hemant Mishra/Mint
By its own longer-term standards, India still hasn’t done badly enough in 2012 to merit a demotion—but that’s because its own standards are so low. Photo: Hemant Mishra/Mint
Updated: Mon, Sep 03 2012. 09 17 PM IST
Indians—certainly those who read Mint—have probably been thinking (or been listening to others thinking) about economic growth a lot over the past few months. As the economy slows, the talk has gone from being whether India would eventually begin to grow faster than China to whether the “Indian growth story” (whatever that might be) is over, or whether it is just “taking a break” (a la Doordarshan of old) and will soon bounce back to near double-digit levels.
If anyone accuses the growthwallahs of being overly fixated on their favourite topic, they can always come back with a much-quoted comment by Nobel laureate Bob Lucas, who once wrote (or perhaps said), “Once you start thinking about growth, it is hard to think about anything else”. Lucas was onto something. Given the difference that a sustained period of rapid growth—however riddled with structural imbalances and worsening inequality, as such periods often are—makes to the standard of living of large numbers of people, it is easy to understand why no other economic indicator has quite the fascination of measures of economic growth. Rapid growth does not solve all of a developing economy’s problems—indeed, it may exacerbate some. But it is hard to imagine any of those other problems being tackled without reasonably fast growth in output.
photoSo what precisely should one make of India’s recent economic growth, and of the prospect that it may be stalling? Was the fast growth of the recent few years an aberration (as many now seem to be implicitly assuming when they speak of a return to the Hindu rate of growth)? Or is the current slowdown a blip? What does this all mean in a longer-term perspective, as well as in relation to the experiences of other countries? And if the slowdown is in fact not a blip, what ought policymakers to do about it? As with most things of this nature, the answer to most of these questions is “it all depends”. Still, history provides some (moderately) useful points of comparison.
Sports minister Ajay Maken’s recent formulation when discussing India’s “best-ever” (but still dismal) medal haul at London 2012—words to the effect of “compared to our own past, we have done a lot better, but compared to others, we have a long way to go”—prove remarkably useful as an organizing principle in discussing economic growth. From the point of view of India’s own past performance, even 5.5% gross domestic product (GDP) growth is actually not that bad. If one looks at the International Monetary Fund (IMF) data on the GDP growth at constant prices for calendar years and restricts oneself to the 20 years before 2001, this rate would fall squarely in the middle of the range. There were 10 years between 1980 and 2001 when the Indian economy grew at a rate in excess of 5.5% and 10 years when growth was slower than this rate. Of course, the comparison with the period since 2001 is much less favourable: of the 10 years, 2002-2011 inclusive, GDP growth as per IMF figures has fallen below 6% only in 2002. If India grows at less than 6.2% this year, as it almost certainly will, then 2012 would have had the slowest growth in a decade. Given that the decade in question includes the years of the global recession and the oil-price shock that preceded it, this must count as pretty awful relative to the recent past.
But what of the “growth story”? How fast does a country have to grow, and for how long, to be canonized as an “economic miracle”? The Spence Commission, which set out to identify the developing countries that it classed as post-war growth miracles, set a benchmark (admittedly an arbitrary one) of a period when annual growth rates averaged 7% or more for a significant number of years. The Commission found 13 post-war “success stories” that fulfilled this criterion, and most of them saw average growth of over 7% for several decades at a stretch up to 2005, when they stopped counting: China for 45 years, Taiwan and South Korea for 41; Japan for 33; Indonesia for 31; Thailand for 37; Malaysia for 30; Botswana for 45 years, etc. India has simply not come anywhere close to this sort of sustained growth, which is precisely why talk of miracles and the like seem a bit premature.
Of course, comparing growth across countries in entirely different eras, when the head (or tail) winds from the global economy (not to mention the overall rate of technological progress, etc.) would naturally have been quite different, is a somewhat funny thing to do, although the Spence Commission does help make it clear just how rare these “miracles” have been. So I decided to devise a simplified version of this metric for the years since 1980, when comparable IMF data is easily available, and find that the longest period when the average of annual growth rates was above 7% is the period 1995-2011, when growth averaged a shade over 7%. In contrast, China has averaged annual growth of 7% for the entire period of 1980-2011; Botswana likewise; Malaysia between 1980 and 1997 (i.e. for 18 years), and Thailand for 17 years, (i.e. from 1980 until the Asian crisis). India’s 16 years is not looking that terrible—until one realizes that most of the countries mentioned earlier were at the tail end of an already long period of rapid growth.
In that sense, India was either never quite on the spur of a period of unusually rapid, sustained growth—or it could well continue to be on that path despite a break in 2012 and possibly 2013. By its own longer-term standards, it still hasn’t done badly enough in 2012 to merit a demotion—but that’s because its own standards are so low.
Most importantly, though, the Spence Commission’s eventual conclusions made clear that for all that economists are aware of just how important sustained long-term growth is, they have surprisingly little to say about it that is not banal. Michael Spence and his colleagues concluded that countries that did well “fully exploited the world economy, maintained macroeconomic stability, mustered high rates of saving and investment, let markets allocate resources, and had committed, credible, and capable governments”.
The banality of this conclusion is breathtaking. In addition, it is immediately apparent that it must be easy to draw up a list of countries that met all these criteria but nevertheless never grew in the way these countries did—and it is debatable whether South Korea, China, Indonesia or Malaysia even met these rather vague criteria during their “miracle years”.
So India’s government has a number of defences it could use: the best growth India has ever had was under the present government and its predecessor; India’s “miracle” might be intact even if this year’s growth is awful; and there’s not much the government can do to change things since it’s not clear that what the government does matters. Of course, it doesn’t seem to be making much of a case for itself (or for the Indian economy) at all—which is a shame, given how important all this is.
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First Published: Mon, Sep 03 2012. 12 41 PM IST
More Topics: Ourviews | Economy | GDP | Growth | Inflation |