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 Economic Freedom
India's Growth Fantasy
The Wall Street Journal, United States Monday, July 5, 2010

Swaminathan S Anklesaria Aiyar
It is expected by the Prime Minister Manmohan Singh that India will soon achieve a growth rate of 10 percentage. The future, however is not that promising as of the global recession and domestic policies.The global trade outlook is gloomy, and the rate of inflation in India is high, writes Swaminathan Aiyar in The Wall Street Journal.

Prime Minister Manmohan Singh says he want India to hit an annual GDP growth rate of 10% soon. Since the country averaged 8.5% from 2003-08, he thinks this is definitely achievable.

Think again. Given a sluggish global economy and lack of domestic reform, India may not average much more than 8% growth in the next five years. True, the country has many advantages—cheap skills, catch-up possibilities and good demographics (the working-age share of the population is rising). But against these must be weighed disadvantages such as high inflation, rising corruption and deplorable public services.

... ...

Exports, including service exports, have risen to over 20% of GDP from 7.2% in 1990. Computer software and business services exports grew at 40% per year in the 2004-08 boom, while merchandise exports grew at 20% to 30% per year, sometimes twice as fast as nominal GDP. Hence export growth pulled up GDP growth. This will not happen to the same extent, if at all, in coming years, since the global trade outlook is sombre.


Government economists overestimate the extent to which India can accelerate if export growth slows. One major reason for their optimism is that India's savings rate shot up to about 35% in recent years from 23% in the 1990s. Supplementing these savings with modest capital flows from abroad, India can invest 40% of GDP per year. Assuming a capital-output ratio of four to one—which was achieved in the boom period—40% investment will translate into 10% output growth.

This calculation is neat, plausible and wrong. Higher investment does not guarantee higher output. The Soviet Union collapsed when output refused to grow with higher investment.

Indian reforms to improve productivity could be new sources of growth. But the government is focused on welfare spending, such as subsidized food and rural employment schemes, rather than economic or administrative reforms. India stands a pathetic 133rd out of 183 countries in ease of doing business, according to the World Bank's "Doing Business 2010." It comes 169th in ease of starting a business, 175th in giving construction permits and 182nd in enforcement of contracts. Legal delays are horrendous: It took 25 years to complete the supposedly top-priority case against Union Carbide officials for the Bhopal gas disaster of 1984.

Transparency International ranks India a lowly 84th in its Corruption Perception Index. The quality of public services, especially education and health, is terrible: India ranks 134th in the UNDP Human Development Index.

Privatization remains a dirty word. The government refuses to reform labor laws that make it impossible to sack workers.

... ... ...

After a recession, the world economy typically recovers sharply, and then grows at a more sedate pace. So, India's 8% to 8.5% growth this year may reflect the sharp recovery phase, followed by a more sedate pace. Mr. Singh's target of 10% growth would be feasible if he went for economic and administrative reforms in a big way. That remains a big if.

This article was published in the The Wall Street Journal on Monday, July 5, 2010. Please read the original article here.
Author : Mr Aiyar is consulting editor of Economic Times and writes the Swaminomics column in Times of India
Tags- Find more articles on - growth rate | India | inflation | Manmohan singh | recession

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