The idea that growth in domestically driven emerging markets like India could decouple from those in the West had got somewhat discredited when the global economy, in general, went for a tailspin after the Wall Street crisis in 2008-end. It was argued that the decoupling theory did not hold much water because fast growing emerging economies were inextricably linked to the developed ones through trade and capital flows. While there is an element of truth in this assertion, an equally strong case can be made out that certain domestic factors will help India decouple from a continued slowdown in the OECD bloc.
It may be instructive to look closely at some of the domestic dynamics at play which may largely neutralise the impact of lower export growth caused by the non-recovery of GDP growth in the US and EU to their earlier mean levels achieved in the boom years.
What are these local factors that can relatively insulate India?s growth rate in the next five years or so? The real surprises could come from some of the domestic drivers of the economy that are not linked to international trade?what we describe as non-tradables. A simple example will illustrate this point. A recent study in Economic and Political Weekly shows that Bihar registered an average GDP growth of 11% for five years starting 2003-04 largely on the back of massive road construction projects. Similarly, many other relatively backward states showed average GDP growth of 9% and above in these years possibly because they have just begun to implement projects relating to roads and other infrastructure sectors where there is massive pent up demand.
Now Bihar?s road construction-driven GDP growth has no real link with international trade or the recovery of the OECD economies. Similarly, there is a massive scaling up of power generation going on to meet the target of 70,000 mw of power during the 11th Plan ending in 2012. Even if we achieve 60,000 mw, it will mean massive investments in the medium term. Again, this has to do with pent up demand caused by past GDP growth, and has no link whatsoever with how the US or EU economies behave in the next few years.
What is interesting to note is that India?s investment in infrastructure had substantially lagged the overall industrial investment during the boom years of 2003 to 2008. According to one estimate, private corporate investment grew by nearly 10% of GDP during this period whereas investment in critical infrastructure to support such growth grew barely by 2% of GDP.
So the India growth story going forward will be supported by the pent up demand for such infrastructure, which is a non-tradable and therefore might counter some of the negatives caused by a continued slowdown in international trade.
The other interesting facet of this infrastructure driven growth story is that it is happening on a relatively low base. Therefore, one tends to get a fairly high growth rate, especially in some of the backward states.
Therefore, a few hundred kilometres of road and some two or three 1,000-mw projects in these states tend to create a big spike in the GDP growth rate. This is purely a growth opportunity created by the massive historical deficit. It is this historical deficit that has the potential to keep India?s GDP growth racing at 9% for at least the next 10 years. However, one need not become ecstatic about such high growth rates from the kind of low base it is happening! It is this large and continuing deficit in infrastructure that is responsible for the currently high growth rates?of 39% in December and 50% in January?in the capital goods production. As pointed out by Mahesh Vyas of CMIE in the columns of FE last week, the growth in capital goods production is quite high even on a seasonally adjusted basis. Data produced by Mahesh also bears out India?s robust investment growth story based on infrastructure growth. Between November and January of 2009-10, the production of broad gauge rail wagons has recorded over 500% growth! Again this could be a case of production lagging way behind demand caused in the boom phase. Also, an estimated 21,300 mw of power is coming on stream in 2010-11. The Power Finance Corporation is in the process of releasing massive funds to drive such power projects.
CMIE data also shows that projects worth Rs 4 lakh crore will get commissioned by the end of 2009-10, and this is 36% higher than what one saw in the previous year. It is also becoming clear that India?s investment led growth has not suffered following the current global economic downcycle. One recalls when the business cycle was down in the late-1990s Indian industry withdrew into a shell for a long time following the Asian financial crises. The critical difference this time is that businesses have retained their confidence in India?s domestic consumption story. The Keynesian ?animal spirits? are really alive this time round. That seems to be the key motivator.
mk.venu@expressindia.com