The nuts and bolts of reviving growth

The desired rate of growth of a country always attracts a lot of media interest. And with good reason. Sample some tickers: China is in a slump if its GDP grows less than 8 per cent; the US should grow above 3 per cent to be considered buoyant; India must get out of below 5 per cent growth rate and rise to above 8 per cent.

Globally, media and market participants have made growth rate a driver of investor sentiment and perhaps may also unduly influence government policy.

That said, it is now long forgotten that economic development is the foundation on which a country and its people prosper, and the result is growth .

Economic development is the result of sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area.

Such actions can involve multiple areas including the development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy and other initiatives.

Economic development differs from economic growth. Economic development is a policy endeavour which aims at economic and social wellbeing; economic growth is a phenomenon of productivity and rise in GDP.

Consequently, as economist Amartya Sen points out: “economic growth is one aspect of the process of economic development.”

To its credit, the present government has not targeted a growth rate; instead it has laboriously chalked out development vision and objectives which will form the foundation of economic development. To appreciate the impact of concerted development policy on human development and economic growth, there is perhaps no other better example than China.

The process of liberalisation and unleashing of the forces of development and entrepreneurship started in China in 1978.

Experts talk of the four phases of development in China, namely, Emancipation (1978-84), Reckoning (1985-89), Rebirth (1990s) and Overdrive (2000s).

A report by the US congressional Research Service called, ‘China’s Economic Rise: History, Trends, Challenges, and Implications for the United States’ traces the various steps taken and stages of development of China over the last three decades.

The report states that beginning 1979, China launched several economic reforms and continued the journey of implementation over the last three decades.

The report says economists generally attribute much of China’s rapid economic growth to two main factors: large-scale capital investment (financed by large domestic savings and foreign investment) and rapid productivity growth.

These factors appear to have gone together hand in hand. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for additional investment in the economy.

China’s trade and investment reforms and incentives led to a surge in FDI beginning in the early 1990s. Such flows have been a major source of China’s productivity gains and rapid economic and trade growth.

The extent of to which foreign enterprise and capital has contributed to China’s development is staggering:

There were reportedly 445,244 foreign-invested enterprises (FIEs) registered in China in 2010, employing 55.2 million people or 15.9 per cent of the urban workforce.

FIEs account for a significant share of China’s industrial output, increasing from 2.3 per cent in 1990 to a high of 35.9 per cent in 2003.

FIEs are responsible for a significant level of China’s foreign trade. In 2013, FIEs in China accounted for 47.3 per cent of China’s exports and 44.8 per cent of its imports.

FIEs in China dominate China’s high technology exports. From 2002 to 2010, the share of China’s high tech exports by FIEs rose from 79 per cent to 82 per cent.

According to the United Nations, annual FDI flows to China grew from $2 billion 1985 to an estimated $121 billion in 2013. The U.N. further estimates the stock of FDI in China through 2012 at $832.9 billion.

Unfortunately, India, where liberalisation began in 1991, seems to drift in its execution of ambitious development plans.

Perhaps, being a complex democracy it has given birth to regressive structures which tend to retard development and growth.

India seems to have reached a mature “Emancipation and Reckoning stage” and is now moving into “Rebirth stage”. India continues to depend substantially on Agriculture and Services as engines of growth and contributors to GDP.

Agriculture recorded a growth of 165.13 per cent in India as compared to 121.81 per cent in China between 2004 and 2011.

Services constitutes more than 51.15 per cent of our GDP, similar to any developed nation which enjoys state of the art infrastructure and whose per capita income is amongst the highest in the world. We are still a poor nation with poor infrastructure.

Economic reforms and trade and investment liberalisation helped transform China into a major trading power.

Chinese merchandise exports rose from $14 billion in 1979 to $2.2 trillion in 2013, while merchandise imports grew from $18 billion to $1.9 trillion.

China has emerged as the world’s largest manufacturer according to the United Nations.

It overtook Japan as the world’s second-largest manufacturer on a gross value-added basis in 2006 and the US in 2010.

In 2012, the value of China’s manufacturing on a gross value-added basis was 28.2 per cent higher than that in the US. Manufacturing plays a considerably more important role in the Chinese economy than it does for the US and Japan.

In 2011, China’s gross valued-added manufacturing was equal to 30.5 per cent of GDP, compared to 12.3 per cent for the US and 18.7 per cent for Japan.

Perhaps, if at all India needs to target a number, it is its merchandise trade deficit and low representation of manufacturing.

We need to move to an era of trade surplus for which we need to increase the level of manufacturing activity.

The constitution of India’s GDP, even after a period of substantial growth is largely represented by agriculture and services. Indian manufacturing as percentage of GDP is a low 13.72 per cent while in China it stands at 32.27 per cent.

Many market analysts and investors have forecasted India to be a $5 trillion dollar economy by 2020.

It is safe to summarise that this monumental target cannot be achieved without India achieving a merchandise trade surplus supported by a manufacturing base which represents more than 20 per cent of the GDP.

To make this possible, like China, India will have to invite foreign companies to invest and build multi-billion dollar export-oriented complexes.

The markets have found the Prime Minister’s vision exciting and laudable. Inflows into equity markets have revived.

If investments are productively implemented, the momentum created from the allocations will drive growth and sentiment.

If execution becomes a risk, all attention will move back to GDP growth rate rather than the factors which make high growth possible over a period.

The writer is executive director of Tata Investment Corporation. The views are personal

COMMENT NOW