Prime Minister Manmohan Singh has done well to set his goals high. He said in his first speech in the new Lok Sabha on Monday that the Indian economy could continue to grow rapidly despite problems in the rest of the world.
But the way he has made the statement reveals an old flaw: the tendency to sound like a professor rather than the first national leader in at least 30 years to get a chance to rule for 10 years in a row.
“I don’t promise you we won’t be affected by the international conditions, but we will be able to achieve a growth rate of 8-9%, even when the world grows at a lower rate,” the Prime Minister said.
Illustration: Jayachandran / Mint
We would have preferred a more forceful approach: India has to grow at close to 9% if it has to abolish poverty in a generation, and this is what we need to do as a nation to ensure that the economy keeps expanding at a rapid pace.
A more important question is: Can it be done?
The Prime Minister hit the nail on the head when he brought the national savings rate into the picture. The long-term rate of economic growth depends on how much of current income is saved and invested.
India’s savings rate is currently around 35% of gross domestic product (GDP). That is at least 10 percentage points higher than what it was at the beginning of the decade. A large part of the growth acceleration in the middle of this decade can be traced to the huge rise in savings rate a few years earlier.
The spurt in savings rate was because of two factors: a drop in government deficits and an improvement in corporate balance sheets; lower public sector dissaving and higher corporate saving, in other words.
It is quite likely that both these components of national savings have moved into reverse gear. The marked deterioration in public finances in recent months and the problems in company balance sheets are likely to bring the national savings rate down a notch or two in the coming years. That will act as a barrier to 9% growth over the long term.
Thus, the big policy decision that Manmohan Singh has to make in the coming months is: higher spending or higher saving? The fear of economic collapse ensured that the government spent like mad to support economic activity through a growing fiscal deficit. As the economy stabilizes, the need to move back to fiscal sanity and higher savings becomes more urgent.
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