Capital Efficiency Hits New High
The efficiency level of capital in the economy has achieved a new high in 1996-97 as per the just-released estimates on national accounts, suggesting that the economy can aim for high growth with minimal increase in investments in future.
This is a marked shift from the past problem of high investment and low growth, first identified by US-based economist Paul Krug-man, which has dogged both East Asian economies and the erstwhile Soviet economy.
Improved productivity levels mean the country doesnt have to go for a big step-up in investment. It can achieve 7-8 per cent growth with the same level of investment, said a senior economist in government.
Endorsing this view, Dr Isher Judge Ahluwalia, economist with the Centre for Policy Research, said, Clearly, the growth has come from improved efficiency. And this could be in the form of improvement in technology and improving by doing. It could also imply a reallocation of resources towards more productive capital.
The national accounts data released on February 6 also reveal that 1996-97 has turned out to be a benchmark year, with the economy notching up several new highs in the form of growth in gross domestic product (7.5 per cent), savings (26.1 per cent) and investment (27.4 per cent).
It is heartening that the data showed record rates of saving and investment in the Indian economy. This certainly belies the doubts and fears expressed by some that economic reforms would lead to high consumption and low savings and investments, said Shankar Acharya, chief economic advisor, finance ministry.
While several measures are available to analyse productivity levels in the economy, the most widely accepted one is the movement in the incremental capital output ratio (ICOR) the proportion of real investment to change in estimated real gross domestic product at market prices.
The Icor, which averaged 4 between 1992-93 and 1995-96, has now dropped to 3.6 in 1996-97. Any fall in Icor indicates that productivity of capital has improved and that the economy can produce the same level of output with lesser capital.
Isher Ahluwalia, who pioneered the debate on improved efficiency and higher growth in the Indian economy in the 1980s, believes that the fall in Icor and the record increase in savings levels are significant. While the former establishes improved efficiency of capital in the economy, the latter means that fears of consumerism taking root in the wake of economic reforms are unfounded.
The Indian economy experienced a rise in Icor during the first three decades of the planning period from a little less than four to a little more than six.
This is attributed to changes in the composition of output, additional investment requirements in agriculture as well as in infrastructure, and inadequate synchronisation in the implementation of inter-linked projects. Subsequently, it declined in the 1980s before rising sharply again during the crisis years of the early 1990s.