Growth projections are unrealistic

Written by fe Bureau | Updated: Feb 27 2011, 04:48am hrs
At a time of great uncertainty, the Economic Survey 2010-11 boldly asserts a return to pre-crisis growth levels in 2011-12 by projecting a growth rate of 9%(+/- 0.25). This is based on the recovery of savings and investment rates in 2009-10 from the depths they fell in the crisis year of 2008-09. The survey states that the economy still has excess capacity and the rising savings and investment rates will bring out a growth rate of about 9%. How realistic is this

In 2008-09, following the global crisis, both savings and investment rates of the country fell sharply: the savings rate from 36.9% of GDP in 2007-08 to 32.2% in 2008-09 and investment rate from 38.1% to 34.5%. In the next year, both savings and investment rates rose: the former to 33.7% and the latter to 36.5%. However, these rates did not recover to the pre-crisis levels in 2009-10 nor is there enough evidence so far that they are recovering to those levels in 2010-11. Particularly, the investment rate of the corporate sector which dipped sharply in the crisis year to 11.5% from 17.3% in 2007-08 remained just at 13.2% in 2009-10, way below the pre-crisis level.More importantly, the rise in investment rate in 2009-10 is accounted for by changes in stocks and valuables and not by the rise in fixed investment. On the other hand, the rate of fixed investment further declined to 30.8% in 2009-10 from 32% in 2008-09.

The Survey attributes the fall in savings and investment rates during 2008-09 to the deliberate decision by the government to encourage consumption as an antidote to the economic downturn. This policy-induced decline in Indias savings and investment rates stands in sharp contrast to the Chinese case where both savings and investment rates rose in 2008 and 2009. According to World Bank data, the savings rate of China went up from 52.4% in 2007 to 53.5% 2008 and 53.6% in 2009, and investment rate from 41.7% in 2007 to 44% in 2008 and a further 47.7% in 2009.

The potential growth rate of the Indian economy had risen in the mid-2000s. However, our estimates indicate that even when the actual growth rates rose to above 9% in the three-year period prior to the crisis, the potential growth had been just above 8.5 %. After the crisis, the potential growth rate declined to about 7.5%. Any growth above this rate will be inflationary and not sustainable for long. The growth of 8% in 2009-10 and the estimate of 8.6% in the current year are not sustainable given the fall in the potential growth rate of the economy. The Surveys assumption excess capacity in the economy appears quite strange for an overheating economy with high inflation.

(The writer is senior consultant at ICRIER, New Delhi. Views are personal.)