The 10% growth target for India has had a magical allure. It is hard to say if anyone first held it out publicly as something to strive for realistically, but I do remember Vijay Kelkar as being an early believer. The current Prime Minister has also mentioned this target several times. Yet that double-digit growth rate has remained stubbornly out of reach as a short-term forecast of actual growth. Indeed, it seems that when the Indian economy nears 10% growth, inflation rears its ugly head, and fears of overheating spread. A few years ago, estimates of India?s medium-term potential growth rate tended to be in the 8-9% range. This may be about to change.
The latest OECD economic survey of India, its second ever, and coming four years after its first, offers this optimistic prospect, ?the annual potential growth rate of the economy could rise to 10% in the next five years, and that this pace could be maintained for the remainder of the decade.? What assumptions underlie this conclusion? There are a number, including the rate at which households increase their savings rates, greater government saving through fiscal consolidation, channelling of these savings to increased investment, and continued growth of total factor productivity (roughly, a measure of the gains from innovation rather than input accumulation) of 1.9% per year?its recent trend.
Much of this forecast is driven by India?s favourable demographics over the next two decades. The young people entering the labour force may provide a boost to India?s growth potential. Of course, these young people will be expecting the fruits of growth, perhaps much more than their predecessors of a generation ago. The OECD projection also assumes that the contribution of labour to growth will increase substantially, due to rising education levels and shifts of workers out of agriculture. This assumption reminds us of two huge challenges faced by India. One is the need to expand its education system, both in access and quality. The other is to create jobs for those who acquire more education.
The government is not capable of doing either of these on its own, because it lacks the needed financial resources and incentive mechanisms, but it can certainly improve the environment for private sector provision of education and creation of jobs. It is starting from a poor base. According to the OECD survey, ?Human capital in India is still low relative to a number of North-East Asian economies when incomes there were similar to those in India in 2010.? The comparison with South-East Asia is somewhat more encouraging, but it remains to be seen if the government can truly liberate the education sector. On the jobs front, the survey blames ?intrusive product and labour market regulations? for holding back growth, and notes the lack of sufficient competition in industry, as well as India?s continued poor ranking among countries according to the World Bank?s Ease of Doing Business Index.
As one would expect, the survey also touches on infrastructure, land acquisition, inefficient subsidies, tax reform and financial sector reform. An unsurprising thread that runs through several of these areas, as well as education provision and the business environment, is the need to improve governance. What is important to understand is that improving governance goes well beyond the current focus on reducing corruption. While corruption is abhorrent, it may not be the worst obstacle to India?s development. Bad or poorly designed laws honestly applied can, in some ways, do more harm than corruption.
Despite the long list of reforms on the table, it is likely that not all of them are needed to achieve 10% growth for a few years. This is because of India?s favourable demographic trends. But this is no reason for complacency. India?s per capita income is only a third of China?s. And China has not yet guaranteed that it will avoid getting stuck in a middle income trap, as has happened to some developing countries. Even 20 years of 10% growth will not get India to where South Korea is now. So perhaps we should stop thinking of the lowest double-digit number as an achievement to be prized. Instead, it could be transformed into a new baseline for Indian growth. If this seems far-fetched, recall that such growth rates were once considered miraculous for any country. And for India, getting beyond 6% growth was once remarkable.
In earlier columns, I have emphasised the importance of dealing with problems like malnutrition, of making growth inclusive, and of the intrinsic benefits of development. In debates about the role of growth targets in economic policymaking, I acknowledged, like some other economists, that these and other factors matter. But I also noted, like a different set of economists, that high economic growth is not to be dismissed lightly. Actually, 10% is not bad.
The author is professor of economics, University of California, Santa Cruz