OECD medium-term outlook points to lower growth for India

When will we get back to the 9% plus growth rates notched up a few years back? The government believes we’ll be able to do it soon. Planning Commission deputy chairman Montek Singh Ahluwalia believes India’s potential growth rate is around 8-9%. Others peg it lower, but believe that, given economic reforms and the right policies, we’ll be able to get back to a high rate of growth.

The OECD has become gloomier about the country’s growth prospects. It’s also interesting that the growth prediction is being toned down at a time when its projections for global growth are more or less the same as they were last November. Global GDP growth is now estimated by the OECD at 3.4% this year and 4.2% in the next. Last November, the projections were 3.4% for this year and 4.3% the next. That suggests the OECD believes the reason for slower growth in India is due to its own policy bungling rather than the global turmoil.

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It isn’t just India whose growth prospects have been scaled down. The outlook for Europe, of course, has been revised downwards, but that’s hardly a surprise. China’s GDP growth projections too have been pared. In contrast, the US economy is expected to manage a growth rate of 2.4% this year, up from last November’s forecast of 2%. These projections are far from being sacrosanct and will very likely change as the year goes on, but what’s interesting is what they imply. There seem to be several underlying assumptions. The most important one seems to be that the current crisis in Europe will fade away, just as it did last year or the year before that. The attitude is we have seen it all before: the problem in Greece comes to a boil, contagion affects the region’s bond markets, risk aversion rises across the world, Europe’s political leaders cobble together a leaky rescue package, the European central bank loosens its purse strings, the temperature comes down and the markets soar on a surge of relief. The crisis is defused for the moment, although it continues to simmer. The second assumption is that the US recovery is sustainable, which means that the so-called “fiscal cliff”—spending cuts and tax hikes due next January in the US—does not happen and the politicians there find ways and means to extend the fiscal stimulus. To be fair, the OECD has warned that these cutbacks could derail the recovery. And the third assumption, a big one, is that the Chinese economy recovers from its slowdown next year.

But while the OECD is optimistic about an early recovery in the short term, consider what it has to say about the medium-term prospects for the world economy. It forecasts that potential world GDP growth will increase from 2.7% during 2001-07 to 3.4% between 2012 and 2017. However, here’s the bad news—the OECD says India’s potential growth, which averaged 7.4% per annum during 2001-07, will be lower at 7.2% during 2012-17 and will fall further to 6.5% per year between 2018 and 2030. China’s slowdown will be even more drastic, as the table shows. The rationale is simple—as rapidly growing countries like China and India catch up with the advanced economies in technology and productivity, their growth rates slow. The OECD projections imply that the rates of growth of 9% plus that India had for a few years may not be possible in future.

But then, China had a long period in which it managed to notch up double-digit rates of growth. Why then won’t India be able to achieve the same high growth rates during the process of catching up? The assumption seems to be that the old paradigm of leveraged consumption growth in the advanced countries leading to high rates of growth in exports from the developing countries may no longer be as powerful a force as it used to be.

Moreover, many of the assumptions being made by the OECD are extremely optimistic. Experience has shown that any accord in Europe will be a mere band-aid, which will in no way solve the underlying problem. Indeed, things are now taking a dangerous turn in Europe with the revival of ultra-nationalist groups.

Chinese growth too is likely to stay subdued as its economy makes the difficult transition from relying on government investment for growth to banking on domestic consumption. Consider the historical example of Japan, another economy that relied on investment to drive growth.

And although there are some indications that bank credit is once again flowing to households in the US and the deleveraging process is almost over, it’s very unlikely that leverage will go back to earlier levels. All these trends point to a long period of lower growth for the world economy. The heady growth of 2004-07 may be relegated to the realms of nostalgia.

Manas Chakravarty looks at trends and issues in the financial markets. Comment at capitalaccount@livemint.com

Graphics by Yogesh Kumar/Mint

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