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Need that extra 1%

If we grow by the 6% per annum seen over 1991-2021, it won’t be enough to become a developed country. But, an extra 1% could give us wings

Need that extra 1%
A percentage ‘extra’ growth assumption may be interpreted as rather naive by some pundits. Can we do time travel or reverse history, they might ask (IE)

By CKG Nair

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India is aspiring to be a developed economy by the year 2047—the hundredth year of our independence. This involves a multi-variate trajectory of high aspirations. Economically, per capita GDP at $12,000, high standard of living, and related attributes are all part of this re-imagined India. If GDP/per capita goals can be realised, many other attributes may follow in a default mode.

However, is it feasible to achieve this target? What does the past trajectory of economic growth tell us? Along with these simple, standard questions we explore another hypothetical question: What would India’s GDP have been if our economic growth rates had been just 1% more than the actuals since 1951-52?

A percentage ‘extra’ growth assumption may be interpreted as rather naive by some pundits. Can we do time travel or reverse history, they might ask. However, it is a well-known and generally accepted fact that the Indian economy operated under several policy-governance-implementation constraints for several decades. These constraints included a dirigist model, factor-use inefficiency, time- and cost-overruns, spreading limited available resources thin and, in general, a lack of serious, professional approach to execution and implementation, among others.

The authors have used the official GDP numbers for the period 1951-52 to 2021-22, available at bit.ly/3DUHjIa. The impact/outcome of an additional percentage growth is estimated using these actual, realised real growth rates. Further, the same logic and methodology has been extended to the period 2022-2047, assuming a normal real growth of 6%, and with that extra 1% growth, at 7 %. A summary capsule of the data and estimates are given in the accompanying graphic. Had the Indian economy had grown 1% more than the actual real GDP (using the 2011-12 series) growth during 1951-2021, our real GDP would have been almost double (1.96 times, at Rs 289.12 trillion instead of Rs 147.36 trillion) by 2021-22. That would have made us the 3rd largest economy in the world [instead of the 5th now] and much closer to the GDP of the US and China. Our per capital income would have also nearly doubled during the period.

Further, this period is divided into 1951-52 to 1990-91 and 1991-92 to 2021-22. During the first period, the economy grew by an average rate of 4.18% (a little over the ‘Hindu rate of growth’ of about 3.5%, as lamented by Raj Krishna in the early 1980s). During the second period, it grew by an average of 5.91%. Calculations also have shown that only 17% of the total GDP growth was achieved in the first period of 40 years, while 83% of the growth was achieved in the 30-year period that followed.

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Higher degrees of inefficiency in the first period is clear from the fact that during the second period, the economy grew by an average additional 1.73% every year. Differing growth rates at different sub-periods during the second period also indicate some, though reduced, continuing inefficiencies in the system. Otherwise, growth rates of 8- 9% in certain years could not have been drastically curtailed to 3-4% in some other years (excluding the Covid period), in the absence of massive shocks as explanation. Therefore, a simple assumption that India could have achieved an ‘extra’ 1% real growth is not unrealistic. In the second period, while inefficiencies had declined, the 1% as a numerator—with a higher denominator—would still hold good.

Now that India has been growing at an average annual growth rate of 5.91% during 1991-2021, going forward, taking a benchmark rate of 6% is generally considered feasible. So, if we grow by about 6% per annum, India’s real GDP in 2046-47 would be Rs 632.42 trillion which will be 4.29 times the size of the 2021 GDP. This is insufficient to put India into the orbit of developed economy group. A 7% real growth will multiply the GDP by 5.43 times to Rs 799.76 trillion in the next 25 years. [Again, look at the importance of that 1% extra growth]. Our growth aspirations can be truly achieved if we can elevate our real growth rate to 7%, capturing that 1% ‘extra’ growth. We are not able to capture the lost growth of the past, but we can certainly use this knowledge to minimise mistakes in the run upto 2047. It is paramount to capture that marginal growth should be the economic policy-governance mantra.

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This analysis also cautions against fixing India’s targets in other countries’ currencies. If the value of INR had been stable at around 4 (INR-$ exchange rate in 1947) in 2021-22, India’s GDP would be $37 trillion in real terms (Rs 147.36 trillion divided by 4) and $70 trillion (Rs 280 trillion divided by 4) in nominal terms, as against $3 trillion! However, exchange rate declined from 4 per dollar to an average of 75 during 2021-22—of late, it stands close to 83. Further, recent rapid appreciation of US dollar against INR, even when INR is appreciating against all other major currencies, there is a need to avoiding fixing our GDP targets in dollar terms. India suffers from the original sin of being unable to borrow abroad in its currency, though limited ability has been gained recently. Let us not put that Achilles’ heel directly into our growth goals. Let us grow the fastest, removing all inefficiencies and capturing that ‘extra 1%’, but with all targets measured in INR. Whenever conversion into foreign currencies is needed, we can simply apply the then prevailing exchange rates. Otherwise, exchange rate changes—beyond our control—will continue to make our targets seem elusive.

Co-authored with Latha Chari, professor, and Pradiptarathi Panda, assistant professor, National Institute of Securities Markets

The writer is Director, National Institute of Securities Markets

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First published on: 04-11-2022 at 04:15 IST