Plan panel member Sen says the older models of predicting the state of the economy once we had a period of high growth has been junked, while we are predicting higher growth, higher investment and lower inflation than is actually the case under the current model. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)
Plan panel member Sen says the older models of predicting the state of the economy once we had a period of high growth has been junked, while we are predicting higher growth, higher investment and lower inflation than is actually the case under the current model. Photo: Pradeep Gaur/Mint

(Pradeep Gaur/Mint)

Rethink economic policy model, says Abhijit Sen

The high-growth years 2003-08 as a phase of ‘exuberance’, says Plan panel member

New Delhi: Indian policymakers should assume 6% to be the “normal" pace of economic growth, Planning Commission member Abhijit Sen said on Wednesday, describing the high-growth years between 2003 and 2008 as a phase of “exuberance".

Sen’s remarks come against the backdrop of declining growth that has worried policymakers, economists, companies and consumers in Asia’s third largest economy. Growth fell to 5.3% in the quarter ended 30 September, pulled down by weak manufacturing and agricultural growth, from 5.5% in the previous quarter and 6.5% in the year ended 31 March.

“We have junked the older models of predicting the state of the economy once we had a period of high growth, but we are predicting higher growth, higher investment and lower inflation than is actually the case under the current model," Sen said at the Bharat Ram Memorial Seminar on ‘Animal Spirits, Policy Formulation and Economic Stability’.

Six percent is the normal pace for India to grow at, the Cambridge-educated economist said at the event organized by the Federation of Indian Chambers of Commerce and Industry and the Shri Ram Centre for Industrial Relations and Human Resources.

India’s economy grew at an average pace of 5.4% in the five years prior to 2003-04; it reached 8.9% between 2003-04 and 2007-08, before falling to 7.5% in the past four years.

An International Labour Organization report released last week showed that while real wages in India fell 1%, labour productivity had improved 7.6% between 2008 and 2011, reducing the purchasing power of wage earners.

High inflation has, meanwhile, reduced the room for the Reserve Bank of India to lower borrowing costs; the high cost of money has curbed investment by companies and hurt the ability of borrowers to repay loans.

India should identify the engine that’s keeping the economy growing at 5-6% and strengthen it, rather than decry the lower growth and talking down the markets, said Onno Ruhl, the World Bank country director and another panellist at the seminar.

Since September, the government has announced policy measures to stimulate economic growth by opening the doors to foreign investment in multi-brand retail and liberalizing norms for investment in aviation, insurance and pension funds. It has raised the price of diesel and capped the supply of cooking gas to households to lower the fiscal deficit.

Still, economists expect growth in the current fiscal to be only around 5.5%, although the government is hoping it is closer to 6%.

Alleged wrongdoing in the allocation of public resources such as telecom spectrum and coal mines—highlighted by reports submitted by the Comptroller and Auditor General of India (CAG)—has dogged the economy and dominated political discourse in the country in recent months. “Is the CAG a disequilibriator?" Sen said, asking why fairness was not being talked about as much as corruption.

Yale University economist Robert Shiller said economic policy must be formulated after considering which economic indicators relate to sudden and big events and which to sustained trends. Shiller said animal spirits are the “fundamental uncertainties" in economies that cannot be calculated and tackled, citing the US sub-prime crisis that ballooned into a global financial crisis as an example. Shiller is co-author of Animal Sprits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.

Remya Nair contributed to this story.

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