MacroScan - On the "New" Hindu Rate of Growth

Official statistics have begun to reflect the slowing of economic growth in India. The CSO has revised its optimistic advanced estimates of GDP growth during 2000-01, with the provisional figures now pointing to a 5.2 per cent rate of growth rate as compared with 6.0 per cent expected earlier. This 5.2 per cent compares with the 6.4 per cent rate of growth achieved in 1999-2000, pointing to a significant deceleration. There is no area of economic activity in which GDP growth has not decelerated. Agriculture continues to stagnate, manufacturing growth has fallen from 6.8 to 5.6 per cent, and the services sector, which was responsible for raising aggregate growth even when the commodity-producing sectors were languishing, has finally begun to experience a degree of slackness.

This slowing of growth is significant because the government had all along held that, despite the fiscal compression resulting from its effort to contain the fiscal deficit in a period when the tax-GDP ratio was falling, the economy had been placed on a new, "higher" growth path after liberalisation. In its view, the stimulus to private "animal spirits" that liberalisation provided, had spurred private investment to an extent where it more than adequately compensated for the sharp deceleration in public capital formation during the 1990s.

Clearly, the government itself is not convinced by this argument any more. In his effort at reversing the slowdown in growth, the Finance Minister Mr. Yashwant Sinha has directed financial advisors in all ministries to step up capital expenditures. In addition, PSUs are to be tapped to obtain additional dividends and interest payments, so that the non-tax revenues of the government can be beefed-up and overall expenditures expanded. This becomes necessary because the government has already borrowed substantial sums in the very first month of this financial year, possibly to meet payments that were postponed at the end of the last financial year in order to keep the deficit during the last fiscal under control. If additional non-tax revenues are not garnered, expenditures could be squeezed to a degree where the deceleration in growth translates into a slump.

If expenditure increases in general and capital expenditures in particular are being seen as the panacea for the slow down, there are two implicit judgements that the government has arrived at. First, that the current deceleration in growth is the result of slack demand in the economy. Second, that this has to be corrected with public expenditure, including capital expenditures, with the latter expected to spur private investment. This implies that the government too sees government investment as "crowding in" rather than "crowding out" or displacing private investment.

These perceptions are in complete divergence with the views advanced by the advocates of reform who have held that there is a direct link between "reform" and growth inasmuch as the former spurs private investment, that public investment tends to "crowd out" private investment and should be curbed, and that sustaining growth requires sustained liberalisation. With trade having been almost wholly liberalised, with domestic regulation having been virtually wiped clean, with privatisation being pushed through even at rock-bottom prices for public assets and with the fiscal deficit being controlled to a far greater degree than earlier, there is a lot that the government has already done on the liberalisation front. If growth still tends to slacken, the problem must lie with the neo-liberal reform process itself, as Mr. Sinha is implicitly accepting, though he would never admit the same.

Liberalisation and Growth
In assessing this turn around in the pace of growth and change in perception regarding the determinants of growth, there is a larger question that is at issue. Does and did "reform" spur growth at all? Advocates of reform have often argued that, whatever else may be said about the effects of the reform process, it cannot be denied that it has helped India move up from the earlier "Hindu rate of growth" of 3-3.5 per cent to a new rate of more than 6 per cent per annum. If liberalisation is persisted with, they hold, India can move up to the 9 per cent rate of growth that the Prime Minister dreams of.

What this argument conveniently ignores is the fact that the "transition" to the new rate of growth occurred well before the reforms of the 1990s. In fact the 1980s were also a period when the rate of growth of GDP was close to 6 per cent. Charts 1 and 2 provide GDP growth rates for the 1970s, 1980s and 1990s as reflected by the two available series on national income, with base years 1993-94 and 1980-81 respectively. While figures in the series with base 1993-94 as base extend up to 1999-00, those in the latter series end as of 1996-97. A point to be noted is that there is no sharp difference in the rates of growth yielded by the two series.
Chart 1 >> Chart 2 >>

The estimates yielded by the series with the more recent base year indicate that the rate of growth of GDP rose from around 3.5 per cent in the 1970s to 5.5 per cent in the 1980s and 6.5 per cent in the 1990s. (The growth rate for the 1990s has also been computed separately with 1992-93 as the initial year, as is done by the advocates of liberalisation on the grounds that 1991-92 was a crisis year and should be ignored.) The continuous process of acceleration of growth rates through the 1980s and 1990s comes through in the case of figures from the series with base year 1980-81 as well, though the acceleration in growth in the 1990s (up to 1996) is sharper in this case - a point we return to later.

Thus the first point to be made is that the transition to a high rate of growth occurred during the 1980s, when liberalisation was limited and halting, and not from the 1990s, when the pace of liberalisation was substantially accelerated and was far more widespread. It could of course be argued that the salutary affect of liberalisation on growth comes through from the facts that the 1980s were also years of liberalisation and that that the acceleration of the pace of liberalisation in the 1990s resulted in an acceleration of GDP growth as well.

This view, however, does not stand up to scrutiny. In fact, if we break the three decades between 1970 and 2000 into five-year periods (Chart 3), we find that the rate of growth of GDP rose from around 3.5 per cent or less during the 1970s to 5 per cent during the early 1980s and more than 7 per cent during the late 1980s, before decelerating to around 6.5 per cent during the first half of the 1990s and less than 6 per cent during the late 1990s. The recent fall in growth rates discussed at the beginning of this essay is only a continuation of this decelerating trend. Thus if the attempt is to focus on the acceleration in growth rates, it occurred before the 1991 liberalisation and has only been reversed since then.
Chart 3 >>