The Hindu : Make-believe growth

Online edition of India's National Newspaper
Tuesday, Dec 31, 2002

Opinion

Opinion - News Analysis

Make-believe growth

By Prem Shankar Jha

Last week the National Development Council gave its seal of approval to the Tenth Plan and thereby bound not just of the Central Government but also the States to the achievement of the targets it has set. One can only wonder how the assembled leaders did this. For the truth is that these targets belong in the realm of fantasy. What is worse, the Vajpayee Government is perfectly well aware of this. Its purpose in putting them forward and going through the entire rigmarole of getting them approved by the NDC is not to accelerate economic growth, but to persuade ordinary people, who know very little economics, that this Government, that is, the BJP, can deliver them both Hindutva and economic growth.

The targets have been set somewhere in the stratosphere in the full knowledge that by the time it becomes apparent to the people that they will not be met; that there is little acceleration of growth and absolutely no new jobs for the youth who pour out of schools and college every year, the 2004 elections will be behind us. In the annals of India's democracy there have been few more brazen attempts to deceive a gullible and unsuspecting public.

Let us look at the Tenth Plan's primary target — to achieve an 8 per cent rate of growth in the next five years. In the past ten years (1992-2002) the GDP has grown at an average rate of 6 per cent per annum. The rate of investment (domestic saving plus foreign investment) has averaged 25 per cent of the GDP per annum. Thus the investment required to obtain a one per cent growth of GDP (also called the incremental capital to output ratio or ICOR) has been 4.17 per cent of GDP. The growth rate can jump to 8 per cent only if one of two things happens: either the gross investment rate goes up to 33.5 per cent of GDP, or the ICOR falls to 3. Is either even remotely likely?

The answer is an unambiguous `No'. Let us take the rate of investment first. Most of this is accounted for by domestic saving (22-23 per cent of GDP), with foreign investment adding only between 1 and 2 per cent. Assuming no significant increase in foreign investment, domestic saving will have to rise to 32 per cent of GDP for the investment target to be met. This is not theoretically impossible. The saving of the private sector in India is as high as 33 per cent. But of this fully 10 per cent or more is borrowed by the Central and State governments every year to spend on their own consumption. It is this that has brought the investment rate for the economy as a whole down to 22-23 per cent.

To take it back up to 32 per cent, the Central and State governments will have to cut their expenditure by about 10 per cent of GDP, that is, about Rs. 220,000 crores and channel it back into investment, whether public or private. This too is not beyond the realms of theoretical possibility. The explicit subsidies of the Central and State governments on food, petroleum products, fertilizers, power, transport, irrigation and education add up to around Rs.180,000 crores. So all that the Central and State governments have to do to achieve an 8 per cent rate of growth is eliminate all subsidies and run a tight financial ship.

The Government is already committed to doing this. So where is the problem? The answer is that in a political system where there are coalition governments at the Centre and elections in several States every year, each of which turns into a referendum on the performance of the Government in New Delhi, it is impossible for any Central governmental coalition to muster up the political courage to do away with subsidies. That is why neither the Congress, nor the United Front, nor the NDA has made any headway in reducing subsidies. The Tenth Plan implicitly acknowledges this for nowhere does it make the achievement of the 8 per cent growth target conditional upon a drastic cut in subsidies and the achievement of balanced Central and State budgets.

If the savings to GDP ratio cannot be increased can the ICOR be brought down. In theory, again, a higher rate of growth can by itself lower the ICOR. When capacity utilisation increases in existing enterprises because their order books are full, the added output gets reflected in the ICOR without any fresh investment being needed. This is why in the boom years of 1994 to 1997 the ICOR fell to 3.6. But this figure carries within it not one but two messages.

First, even an acceleration to 7.5 per cent growth in 1994-97 did not bring the ICOR down to 3. Second, to bring down the ICOR one needs to get the acceleration of growth first, and that means that one has to raise the investment rate in the economy first. That can only be done by lowering the Central and State governments' fiscal deficit and moving towards a balanced budget. There are thus absolutely no soft options before the country.

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