Column: Where does growth go from here

Written by Bibek Debroy | Updated: Jan 30 2010, 03:15am hrs
The World Bank has just released Global Economic Prospects (GEP) 2010. Indian real GDP growth is expected to be 7.6% in 2010 (calendar year) and 8% in 2011. (A different table says 7.5% for the fiscal 2010.) Barring China, these numbers are higher than most developing countries. There is one sentence in the GEP that is bound to be quoted. Growth in the East Asia and Pacific region (particularly in China) as well as in South Asia (particularly India) has been resilient, buoyed by a massive fiscal stimulus package in China and by Indias skilful macroeconomic management. Most people wont dispute the numbers.

While question marks can be raised about what contributed to 7.9% in Q2 of 2009-10, we had 7.3% in the first six months of the current fiscal so 7.5% in full year is eminently feasible. Indeed, 2009-10 may show growth closer to 8% and 2010-11 closer to 8.5%. But what does the bank mean by Indias skilful macroeconomic management Is it a reference to monetary stimulus and the speed with which it was introduced Elsewhere in the document, there is the statement, Substantial fiscal stimulus measures were introduced in India (including pre-election spending) and yet another statement, Countries that entered the crisis with stronger fundamentals, such as Bangladesh, Bhutan, and India, weathered the crisis better.

One cant say these statements are lucid. If stronger fundamentals mean stronger base-line growth, the statement is true. But if one means stronger fiscal fundamentals, the statement is hardly true. GEP also has some poverty projections. Consider the $1.25 a day poverty line first. Using this, the poverty ratio is estimated at 41.6% in 2005, 23.6% in 2015 and 20.3% in 2020. Absolute numbers are 456 million in 2005, 295 million in 2015 and 268 million in 2020. With a $2.00 a day poverty line, poverty ratio is estimated at 75.6% in 2005, 58.3% in 2015 and 51.9% in 2020. Absolute numbers then are 828 million in 2005, 728 million in 2015 and 686 million in 2020. There are two reasons why drops may actually be faster. First, income (or expenditure) distributions are log normal, they arent symmetric. Consequently, when the thick part of the distribution passes above poverty lines, sharp drops are possible. However, bank projections incorporate this distribution angle. All such projections are based on growth. But if PPP dollar is the numraire, PPP exchange rates are pertinent and with Indias growth, rupee appreciation is inevitable. Poverty projections dont factor this in.

IMFs World Economic Outlook (WEO) update is also recent and projects Indian growth of 7.7% in 2010 and 7.8% in 2011. This isnt remarkably different from the World Banks. Whats interesting in the assorted projections is that since the 7.9% number of Q2 came in, most projections have been revised upwards by around 1.5%. This is also true of internal projections within India. No one expected 7.9%.

Therefore, in its last report dated October 2009, the PMs Economic Advisory Council projected 6.5% in 2009-10, with a range between 6.25% and 6.75%. Consensus for 2009-10 is around 7.5% now, well above upper limit projected by PMs Council. However, consensus is still elusive beyond 2009-10. For instance, for 2010-11 and 2011-12, external forecasts rarely exceed 8%. But Montek Singh Ahluwalia has spoken of 7.3% in 2009-10, 8% in 2010-11 and 9% in 2011-12. The CEA has spoken of growth between 7.5% and 7.8% in 2009-10, 9% from the last two quarters of 2010-11 and India overtaking Chinese growth in 4 years. At the Pravasi Bharatiya Divas, the PM was more guarded, speaking of 9-10% in a couple of years. Lets leave aside overtaking China. Thats not going to happen in a hurry.

Beyond 2009-10, there is dissonance between the conservative 8% and the governments 9%. There are two reasons for this. First, global markets and exports still dont show recovery and 9% is contingent on that. (8.2% month-on-month dollar growth in November 2009 is on a low base and April-November is still negative.) Second, there will be an exit from stimulus measures, with some negative impact on growth.

Substantial fiscal exit wont likely happen in February 2010 and may have to wait for the 2011-12 budget. However, with the inflation spectre, some monetary tightening is inevitable. RBIs quarterly policy review is due today. At the moment, all that may happen is a 0.5% (or thereabouts) hike in CRR. This wont affect growth. But food price inflation wont go away; endemic reasons remain, reinforced by some manufacturing inflation. That monetary tightening wont help fight food price inflation is neither here nor there. Irrespective of that argument, policy rates are certain to be hiked a few months down the line. Thus, with a 1 or 1.5% hike in interest rates, it is safer to bet on a trend of 8% rather than 9%.

The author is a noted economist