Growth illusions

Old habits die hard. As in the 2005-08 period, we seem back to speaking of the economies of India and China as if they were in the same league. The International Monetary Fund has joined the World Bank and the OECD in predicting that India’s growth rate will overtake China’s in two or three years. The IMF has said that India is likely to grow at 6.5 per cent in 2016-17, against China’s 6.3 per cent. The OECD and Goldman Sachs have lent their voices to this chorus. The Centre’s commitment to reforms has triggered such forecasts and an affirmation of this in Davos may lead to a revival of investor interest. Yet, the optimism needs to be tempered with the acceptance that industry has been in decline for four straight years, and is growing at 2 per cent this year. If the growth rates of the two countries are converging, it is because China is deliberately cooling down after more than two decades of frenetic growth and not because India’s about to hit the high growth trajectory all of a sudden. After achieving a growth rate of 9 per cent in the 2003-09 period, when the ‘elephant’ and the ‘dragon’ were alluded to in the same breath, India has slumped to 5-6 per cent levels. However, China maintained a compound annual growth rate of over 10 per cent between 1990 and 2013. Therefore, for such comparisons to make any sense, India should run up a growth rate of 8-9 per cent over the next decade.

India cannot aspire to reach China’s levels, given its present savings rate of about 30 per cent of GDP against China’s 51 per cent. That India’s savings rate has fallen over the last four years or so, after touching about 35 per cent, shows that one of the first pre-requisites for sustainable growth is somewhat lacking. The Centre’s efforts to boost growth by improving supply-side efficiencies can at best reduce the incremental capital ratio to about 4 (from over 5 now). But with the current savings rate, that gives us a growth rate of just 7.5 per cent. India can bring savings back on track by boosting employment and controlling inflation. Foreign direct investment can be raised from the current levels of 1.5 per cent of GDP by creating the necessary policy environment, thereby bridging the savings-investment gap. With China’s labour costs rapidly rising, India must leverage its competitive advantage in labour as a key aspect of its manufacturing impetus.

China’s success also lies in its superior social indicators, which have lifted its labour productivity. India’s literacy level at 74 per cent is way below China’s 95 per cent, with the education system unable to teach even the three Rs. Our infant mortality rate of 43 per thousand live births is thrice that of China. China’s growth has been attended by an improvement in human capital. The Centre’s new advisors should consider a ‘growth plus’ approach and not reduce development to a mere numbers game.

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