Is double digit growth wishful thinking or an achievable target?

Country's economic growth at nine per cent requires our exports to rise by around 20 per cent, says NSC chairman Pronab Sen

Earlier, the erstwhile Planning Commission had originally set a target of a double-digit economic growth for the concluding year of the 11th Five-Year Plan (2011-12), but the actual growth turned out to be 6.7 per cent, just a shade better than recorded during the global financial crisis period of 2008-09.

The double-digit economic growth is again being targeted, officially, this time around. Only the government seems to be gung-ho over such a possibility in the near future.

Finance Minister Arun Jaitley and NITI Aayog Vice-Chairman Arvind Panagariya are again, talking of double-digit growth at a time when, even the changed methodology of calculating gross domestic product (GDP) had yielded 7.3 per cent economic growth rate for 2014-15. For the current financial year, only the government has projected the growth rate to be 8.1-8.5 per cent; other agencies have pegged it in the range of 7.5-7.8 per cent. In fact, the International Monetary Fund (IMF) has projected the country’s economic growth rate at just 7.8 per cent even in 2020-21.

When asked, why he is so hopeful of up to 10 per cent growth for a sustained period of 15 years, Panagariya told Business Standard there are at least four reasons behind his optimism.

“One, ending the paralysis over the 10-year period under the United Progressive Alliance (UPA), Prime Minister Narendra Modi has breathed new life into economic reforms,” he said.

The second reason, he said, is the savings rate remaining 30 per cent which can potentially go beyond 35 per cent, a level reached in 2007-08.

Panagariya said the third fact is, that the country was still at a relatively low level of per capita income, which means it has a lot of room as it moves towards the global technology frontier.

“And finally, we are a young and entrepreneurial nation,” the renowned pro-growth economist added.

India has recorded an economic growth in double digits only once since 1951-52 — 10.2 per cent in 1988-89.

 

The National Statistical Commission (NSC) Chairman Pronab Sen said the work that the Planning Commission was doing in the 11th Plan and later in the 12th Plan showed that the country’s economy could grow between seven and eight per cent, even without real dynamism in the global economy.

However, in order for the economy to grow beyond eight per cent, it requires a robust global economy.

Elaborating, he said even if the capital-output ratio of the economy improves to 4 or 4.2 from the current 4.6, the investment rate required for 10 per cent growth rate would be humongous at 40-42 per cent. The investment rate had stood at 31 per cent in 2013-14.

Since production from 40-42 per cent investment rate cannot be consumed by the domestic economy, it requires sound global economy.

Country's economic growth at nine per cent requires our exports to rise by around 20 per cent, Sen said. For growth to be 10 per cent, these need to rise by 24-25 per cent. 

This may seem a daydreaming to some at the current juncture when the merchandise exports contracted for six months in a row in May. Besides, the Federation of Indian Export Organisations (FIEO) sounded an alarm bell, saying that there could be lay-offs in export-oriented units. 

According to the recent World Trade Organization (WTO) estimates, the world exports in volume terms increased by 0.4 per cent in the first quarter of this year, down from the 2.1 per cent growth registered in the previous quarter.

Sen also said that savings rates need to rise much beyond 35 per cent to narrow down current account deficit (CAD) to enable the economy grow 10 per cent.

Since, ten per cent growth requires investment rate up to 42 per cent, 35 per cent saving rate would leave CAD at seven per cent, a difficult task for any economy to bear. 

A government adviser said double digit growth does not look as difficult since the economy grew 8.16 per cent on an average between 2003-04 to 2011-12 (after which GDP methodology changed). 

When posed this query to former Prime Minister's Economic Advisory Council chairman C Rangarajan, he said the government should first eye the growth rate achieved in three years, prior to 2008-09, when the ripple effects of the global financial crisis hit India's economy. 

The economy grew over nine per cent in each of those three years. In fact, the average rate stood close to 9.5 per cent. 

Rangarajan said it is possible to achieve those growth rates.

Once we achieved that kind of growth rate, we can target higher at the double digit growth rate, he said.