The International Monetary Fund, in its July update of the World Economic Outlook, has lowered India’s economic growth forecast for 2012 to 6.1 per cent. This is the latest in a series of affirmations that India is indeed slowing down. The forecast for 2013 has also been lowered to 6.5 per cent. Earlier, the World Bank, international credit rating agencies and various domestic agencies — both official and private — had indicated that India’s slowdown would continue.

Yet, the Government has betrayed a sense of complacency by claiming that we are still one of the fastest growing economies. Is the current slowdown, notwithstanding a growth rate of above 6 per cent, a matter of serious concern, or are some of our apprehensions overstated?

GROWTH HISTORIES

We can derive some insights in this regard from the observations of noted Harvard economist, Prof. Robert J. Barro, on the growth experience around the world during 1960-2000. First, he observed that the OECD countries were rich in 2000 because they were already well-off in 1960 and grew during 1960-2000.

Second, East Asian countries moved up from low levels of per capita income in 1960 to much higher levels in 2000, by growing at high rates. Thirdly, sub-Saharan African countries are poor, because they have grown at low or negative rates since 1960.

The Indian experience shows that India’s per capita income (NNP at factor cost at 2004-05 prices) approximately doubled from Rs 7,114 in 1950-51 to Rs 14,157 in 1991-92. In other words, it took 40 years to achieve this milestone, when Indian GDP grew at an average annual rate of 4 per cent.

On the other hand, during the post-reform period, it just took 13 years to double India’s per capita income from Rs 18,934 in 1998-99 to Rs 38,005 in 2011-12 (figures are 2004-05 prices). During this period, GDP grew at an average rate of 7.2 per cent.

The fastest growth period of 2003-04 to 2010-11 (average rate of GDP growth was 8.5 per cent) witnessed per capita income increasing by two-third in a matter of 7 years (in constant prices). Calculations show that had GDP grown by around 6.5 per cent per annum during the above fastest growth period, the per capita income in 2010-11 would have been around Rs 31,200 which is lower by Rs 4,800 as compared with actual figure of Rs 35,993. This underscores the need to put the economy back on 8-9 per cent growth rate at the earliest.

INVESTMENT TRENDS

We need not distract ourselves by comparing its performance with the rest of the world. There is no room for complacency; as Prof Barro’s analysis points out, countries such as Argentina, Israel, South Africa and Venezuela lost their top 25 position between 1960 and 2000 due to slow growth rates.

Policymakers attribute much of the current slowdown in India to the European crisis. This can be verified by estimating the relative contribution of various components of aggregate demand.

Much of the stability to recent growth is provided by domestic components, such as private final consumption expenditure (PFCE).

The contribution of net exports (NEXP) to Indian GDP growth was generally within the 20 per cent limit, except for 2008-09, when it pulled down GDP growth to 6.7 per cent.

Economic slowdown is largely a manifestation of domestic investment (gross domestic capital formation - GDCF) and government final consumption expenditure (GFCE) in recent years (see graph).

There has been some deterioration in private consumption and external demand. In terms of policy options, there is little scope to play with GFCE. Policy initiatives should, therefore, focus on private expenditure, mainly investment.

The dynamics of domestic savings, which determines investment capacity, need to be ascertained.

It is particularly important to examine the role of high inflation in recent years in discouraging savings — diverting financial savings to idle hoards, such as in gold and real estate.

(The author is Reader, Department of Economics, Pondicherry University.)

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