Column: India’s growth – Possible futures

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January 20, 2016 12:23 AM

Growth at 7-8% might not stave off social unrest that could be associated with a failure to create enough jobs

Earlier this month, I spoke on the topic of this column’s title at the annual meeting of the Association of Indian Economic and Financial Studies in San Francisco. Despite debates about the possible limitations of aggregate economic growth as a policy objective, the growth rate remains the first-order indicator of material progress. In late December, Kaushik Basu, World Bank chief economist, got headlines in India when he reiterated forecasts of growth of 7-7.5% for India in 2016. But the real issue is what growth rate India can sustain over a period of at least 5-10 years.

Nine years ago, India was growing at over 9%, and I had given a similar talk at the Brookings Institution in Washington, DC, discussing whether India could maintain that pace. All the studies I looked at then, both those based on detailed statistical analysis and others relying on more informal expert judgment, suggested that 7-8% might be a sustainable medium-term growth rate for India. Subsequently, of course, global economic conditions worsened, and the fallout has been reflected in slower growth, but the future can always be different.

Last year, I edited a special issue of India Review which included papers by several prominent economists, again assessing India’s future growth prospects. Interestingly, the predictions remained close to 8% growth, but with some significant qualifications. The fact that the global economic environment may be less favourable going forward, in the long term and not just as a result of the recent Great Recession, means that India is going to have to work harder to achieve even 7-8% growth, let alone getting to double digits, as some had hoped for a few years ago. Even this would mean more significant economic policy reforms than had been achieved in recent years.

The pure economic drivers of growth remain the same, of course: investment in public infrastructure, private equipment and machinery, and human capital, along with innovation and adaptation to improve the efficiency of resource use and what economists call “total factor productivity.” In my talk, I suggested that improvements in organisational efficiency, in both the private and public sectors, are a vital and possibly underestimated factor for future Indian growth. And lurking underneath all of these economic and managerial drivers of growth are two fundamental political dangers.

One political danger surfaced in the UPA II government, and contributed greatly to India’s growth slowdown. The uncertainty about when the leadership of the Congress party would change officially undermined the then-prime minister, in my view, and contributed heavily to the chaos in the second rung of government, with various individuals acting as if the ostensible political leadership did not matter. Subsequently, the succession issue has been settled, but it has not led to responsible leadership, but rather to opposition through tantrums.

A second political danger comes from the identity politics of organisations that surround the current ruling coalition, encompassing individuals within the government as well. A situation where classes of citizens are made to feel unsafe or unwelcome in their own country is a recipe for economic disaster as well as being undesirable in its own right.

In a sense, these are the two biggest downside risks in India’s possible scenarios for future growth.

When I finished my talk, and noted that it seemed that the technical consensus (assuming that political disasters are avoided) is for 7-8% growth in the medium term, two prominent economists in the audience made significant observations. One suggested that a recovery of investment rates to match the boom years could support 9% growth, more optimistic than what I had described as the technical consensus. But then a second leading economist made another cogent observation: he suggested that 9% growth is not only feasible, but that it is necessary. Growth at 7-8% might well not stave off social unrest that could be associated with a failure to create enough decent jobs for India’s so-called demographic dividend.

The implication of this line of reasoning is that India has to grow faster than 8%, otherwise it might end up growing much slower—there may not be any middle ground where the nation can muddle along, at a neo-Hindu rate of growth. In my view, this puts the political dangers that I see in India into even starker relief. Political leadership that is based either on personal petulance or on cultural grievance cannot provide India with the basis for accelerating its growth rate to the 9-10% range that may be required for sustainability. One can list dozens of examples across all the continents, of failures in political leadership that have led to severe social unrest and profound economic stagnation. The success stories are far fewer. It seems, therefore, that India may be truly at a crossroads in terms of its economic future, and underlying that, what its political leadership chooses to do. Much will ride on those choices.

The author is professor of economics, University of California, Santa Cruz

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