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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 >> Click
to Enlarge
Chart
2 >> Click
to Enlarge
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 >> Click
to Enlarge |
