The `new' Hindu rate of growth
C. P. Chandrasekhar Jayati Ghosh OFFICIAL statistics have begun to reflect the slowing of economic growth in India. The CSO has revised its optimistic advanced estimates of GDP growth during 2000-01, with the provisional figures now pointing to a 5.2 per cent rate of growth rate as compared with 6 per cent expected earlier. This 5.2 per cent compares with the 6.4 per cent rate of growth achieved in 1999-2000, pointing to a significant deceleration. There is no area of economic activity in which GDP growth has not decelerated. Agriculture continues to stagnate, manufacturing growth has fallen from 6.8 to 5.6 per cent, and the services sector, which was responsible for raising aggregate growth even when the commodity-producing sectors were languishing, has finally begun to experience a degree of slackness. This slowing of growth is significant because the government had all along held that, despite the fiscal compression resulting from its effort to contain the fiscal deficit in a period when the tax-GDP ratio was falling, the economy had been placed on a new, `higher' growth path after liberalisation. In its view, the stimulus to private ``animal spirits'' that liberalisation provided, had spurred private investment to an extent where it more than adequately compensated for the sharp deceleration in public capital formation during the 1990s. Clearly, the government itself is not convinced by this argument any more. In his effort at reversing the slowdown in growth, the Finance Minister, Mr Yashwant Sinha, has directed financial advisors in all ministries to step up capital expenditures. In addition, PSUs are to be tapped to obtain additional dividends and interest payments, so that the non-tax revenues of the government can be beefed-up and overall expenditures expanded. This becomes necessary because the government has already borrowed substantial sums in the very first month of this financial year, possibly to meet payments that were postponed at the end of the last financial year in order to keep the deficit during the last fiscal under control. If additional non-tax revenues are not garnered, expenditures could be squeezed to a degree where the deceleration in growth translates into a slump. If expenditure increases in general and capital expenditures in particular are being seen as the panacea for the slow down, there are two implicit judgments that the government has arrived at. First, that the current deceleration in growth is the result of slack demand in the economy. Second, that this has to be corrected with public expenditure, including capital expenditures, with the latter expected to spur private investment. This implies that the government too sees government investment as ``crowding in'' rather than ``crowding out'' or displacing private investment. These perceptions are in complete divergence with the views advanced by the advocates of reform who have held that there is a direct link between `reform' and growth inasmuch as the former spurs private investment, that public investment tends to ``crowd out'' private investment and should be curbed, and that sustaining growth requires sustained liberalisation. With trade having been almost wholly liberalised, with domestic regulation having been virtually wiped clean, with privatisation being pushed through even at rock-bottom prices for public assets and with the fiscal deficit being controlled to a far greater degree than earlier, there is a lot that the government has already done on the liberalisation front. If growth still tends to slacken, the problem must lie with the neo-liberal reform process itself, as Mr Sinha is implicitly accepting, though he would never admit the same. Liberalisation and growth In assessing this turn around in the pace of growth and change in perception regarding the determinants of growth, there is a larger question that is at issue. Does and did `reform' spur growth at all? Advocates of reform have often argued that, whatever else may be said about the effects of the reform process, it cannot be denied that it has helped India move up from the earlier ``Hindu rate of growth'' of 3-3.5 per cent to a new rate of more than 6 per cent per annum. If liberalisation is persisted with, they hold, India can move up to the 9 per cent rate of growth that the Prime Minister dreams of. What this argument conveniently ignores is the fact that the `transition' to the new rate of growth occurred well before the reforms of the 1990s. In fact, the 1980s was also a period when the rate of growth of GDP was close to 6 per cent. Chart 1 provide GDP growth rates for the 1970s, 1980s and 1990s as reflected by the two available series on national income, with base years 1993-94 and 1980-81 respectively. While figures in the series with 1993-94 as base extend up to 1999-00, those in the latter series end as of 1996-97. A point to be noted is that there is no sharp difference in the rates of growth yielded by the two series. The estimates yielded by the series with the more recent base year indicate that the rate of growth of GDP rose from around 3.5 per cent in the 1970s to 5.5 per cent in the 1980s and 6.5 per cent in the 1990s. (The growth rate for the 1990s has also been computed separately with 1992-93 as the initial year, as is done by the advocates of liberalisation on the grounds that 1991-92 was a crisis year and should be ignored.) The continuous process of acceleration of growth rates through the 1980s and 1990s comes through in the case of figures from the series with base year 1980-81 as well, though the acceleration in growth in the 1990s (up to 1996) is sharper in this case _ a point we return to later. Thus the first point to be made is that the transition to a high rate of growth occurred during the 1980s, when liberalisation was limited and halting, and not from the 1990s, when the pace of liberalisation was substantially accelerated and was far more widespread. It could of course be argued that the salutary affect of liberalisation on growth comes through from the facts that the 1980s were also years of liberalisation and that the acceleration of the pace of liberalisation in the 1990s resulted in an acceleration of GDP growth as well. This view, however, does not stand up to scrutiny. In fact, if we break the three decades between 1970 and 2000 into five-year periods, we find that the rate of growth of GDP rose from around 3.5 per cent or less during the 1970s to 5 per cent during the early 1980s and more than 7 per cent during the late 1980s, before decelerating to around 6.5 per cent during the first half of the 1990s and less than 6 per cent during the late 1990s. The recent fall in growth rates discussed at the beginning of this essay is only a continuation of this decelerating trend. Thus, if the attempt is to focus on the acceleration in growth rates, it occurred before the 1991 liberalisation and has only been reversed since then. Over the last three decades, while the primary and secondary sectors registered a rise in the rate of growth between the 1970s and 1980s, that rate of growth has remained relatively constant in the 1990s when compared with the 1980s. It is only the tertiary sector that has seen a continuous rise in growth rates. However, when the rates of growth during the quinquennia beginning 1986-87 are examined, there is a sharp deceleration in rates of growth in the primary and secondary sectors, till 1999-2000. However, the tertiary sector, which experienced a fall in rates of growth between the second half of the 1980s and the first half of the 1990s, registered an increase in rates of GDP growth in the second half of the 1990s relative to the first, influenced no doubt by the expenditure entailed in the Pay Commission award. Thus, the 1990s liberalisation has not been accompanied by any new dynamism in the commodity-producing sectors of the economy. Finally, a look at the annual rates of change of GDP is revealing. While annual growth rates seem to have been much more volatile during the 1980s, there have been individual years of relatively high growth both at the beginning and the end of the 1980s. During the 1990s, however, annual rates of growth, which rose slowly but consistently from the trough of the 1991-92, up until 1996-97, have fallen since then and continue to do so currently. Thus the overall picture is one in which a transition to a higher `trend' rate in the 1980s has clearly lost steam during the 1990s, especially its latter half.The investment ratio The rate of Gross Domestic Capital Formation (or its ratio to GDP at market prices), which remained at around 20 per cent till 1987-88, set itself on a rising trend subsequently, and touched a peak of 27 per cent in 1995-96, before declining to 25 per cent and remaining at that level. Thus the acceleration in rate of growth during the latter half of the 1980s occurred essentially because the investment rate which stood at around 20 per cent at the beginning of the 1980s rose to around 25 per cent by the end of that decade. As compared to this we find that during the 1990s, barring three years around the middle of the decade of the 1990s, the investment rate ruled at or well below its end-1980s' level. Clearly there is a link between the investment rate and growth, as is to be expected, and the current slowdown is the result of slack investment demand in the economy. Not surprisingly, the capital goods sector is the worst affected by the recession being faced by industry. Thus what seems to matter for growth is the rate of investment in the economy, and the acceleration in growth starting from the 1980s was essentially the result of India's ability to sustain a higher rate of investment. After the agrarian and balance of payments crises of the mid-1960s, investment and economic growth in India was constrained by the twin dangers of inflation and balance of payments difficulties. Any effort to step up investment and growth either spilt over on to the external payments front in the form of a higher trade and current account deficit, or ran up against supply-side bottlenecks in the agricultural sector leading to inflation. The government walked the tight-rope between these two constraints, by cutting back on its expenditures, especially its capital expenditures. Real public sector capital formation that was growing at the compound rate of 13 per cent during the first decade-and-a-half of planned development, grew at less than 5 per cent in the subsequent 15 years. Growth was the casualty. The recovery which began in the 1980s reflected a breakthrough, inasmuch as the government was able to sustain a high rate of growth of spending in general and investment-spending in particular, without triggering inflation or setting off a collapse in foreign exchange reserves. The principal explanation for this breakthrough was a change in India's (and other developing countries') ability to access foreign exchange from the international system in the form of debt, direct investment, and portfolio flows. This change was a result in a range of developments in the world of international finance in the wake of the oil shocks of the 1970s, which not only rendered the world financial system awash with liquidity, but also forced it to find new destinations to recycle its surpluses. The resulting access to foreign exchange not only helped India sustain a higher current account deficit, but also allowed it to import commodities in short supply to dampen inflationary trends. Not surprisingly, in the 1980s, the rate of investment in India was raised in part by large deficit-financed spending by the government, which not only propped up public capital expenditures but also spurred private investment. This, however, did not result in inflation or balance of payments difficulties because of the access to international liquidity provided by changes in the world of international finance, which allowed the government
to borrow abroad to finance its expenditures and to import the commodities needed to meet domestic demand and dampen price increases. Thus the transition to a `higher' rate of growth was not the result of changes within the country, but changes in the world economy, that permitted a strategy that raised growth at the expense of increased external vulnerability as the 1991 balance of payments crisis forcefully demonstrated. To an extent a similar process operated during the early and mid-1990s. Despite the government's claim of having substantially reduced the fiscal deficit, it is known that after making adjustments for changes in definition and upward revisions of GDP figures, the deficit has ruled high over much of the decade. This helped sustain the growth gains registered during the 1990s, despite the crisis in 1991. It is only in recent years that the deficit has been reduced, with the hope that private investment would help spur growth. In practice the reduction in expenditures that deficit control during the late 1990s entailed has adversely affected investment and growth. The reduction in the deficit has been all the more damaging from the point of view of the dampening of the fiscal stimulus, because of the fall in the tax-GDP ratio. That fall was because of the sharp liberalisation-induced reduction in Customs duty collections, in the wake of substantial cuts in import tariff rates. It was also due to the massive reduction in direct and indirect tax revenues as a result of tax concessions provided to the private sector, as part of an effort to spur private investment. With private investment and growth slipping now, revenue collections have dipped even further, as evident from the figures for 2000-2001 and the first month of fiscal 2001-2002. It is in response to this evidence that the government is attempting to shore up expenditures in general and capital expenditures in particular. But even here, the pressure to prove to international financial capital that the
deficit is being reined in, is forcing the government to rely on current revenues and surpluses grabbed from PSUs to achieve its goal. It is unlikely that this would have much effect, since there is a limit to such `expansionism'. What the government needs to do is to give up its obsession with the fiscal deficit and use the opportunity offered by the large food stocks and foreign exchange reserves available with it, to launch a massive food-for-work programme geared to building rural infrastructure, as well as undertake larger infrastructural investments that would improve utilisation in the demand-starved public sector. This would raise demand and output, increase employment and have salutary effects on poverty and productivity. Though success is guaranteed if such an effort is initiated soon, it is unlikely that the government would opt for this strategy. To do so would be to disturb the tenuous equilibrium it has built vis-a-vis foreign finance capital, the IMF and the World Bank, as well as to openly declare that `reform' has failed to deliver because it is inherently flawed. That would prove the correctness of those who have held that reform of a different kind, involving a significant, though redefined, role for the state combined with structural changes that redress the deep inequities characteristic of ``market-driven'' development `strategies' in the current international conjuncture, is the need of the hour. India's elite, which the present state represents, is as yet unwilling to back that position even implicitly.
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