Indian Economy: Forecasting the 'High' Growth Rate

Everybody talks about India achieving high rate of growth. The 11^th Five Year Plan has targeted to achieve a ‘high’ 9% ‘inclusive’ average rate of growth of GDP for the next five year beginning '07 - 08. The issues here are:

• Why 9 % is called high?
• Can 9% be achieved in a sustainable manner in the long term?
• What are the major impediments and how they can be managed?
• Based on the strengths gained during the recent years, what is the likely growth rate of the economy

• The targeted 9% is desirable and high - largely because at this rate our per capita GDP can be doubled in 10 years, a feat performed by China twice over.
• Our trend rate of growth has been 4.7% (carg) during the last 55 years. During the six year period beginning 2001 the rate of growth was 6.5 %. But during the last three years a record high growth rate of 8.3% has been achieved. This created a sense of optimism.
• However, the prospect of growth for the current year and the next has already been reduced. This is largely due to high inflation. The RBI’s tight money policy cure may aggravate the disease itself.

There are several critical problems of the Indian economy, which are well known. In this Note, I would like to specifically focus on one critical problem area i.e. agriculture. I shall, also provide my carefully construed long term GDP forecast.

The share of agriculture in our GDP has been steadily coming down, reaching 21.7% in '05 -06.

The average rate of growth during the six years from 2001 has been a meagre 2.5%.

One major issue is widely oscillating growth rates. Illustratively, the yoy growth rates of agriculture GDP from '00 – 01 to '06 -07 are:

-0.6, 6.5, - 8.1, 10.9, - 0.2, 6.3.

The wild oscillations will have to be reduced. But this is going to be stupendous task.

Agriculture remains a major problem area despite our so called development planning initiatives. Problems like credit delivery, infrastructure including transportation and storage, farmers not getting return due to intricate involvement of layers of middlemen, state level regulations etc. known and we have been living with this problem for so many decades! Even the frequent suicides committed by the farmers have become statistics.

What is not usually discussed is the number and area of operational holdings of our farm land. According to the latest available official data (1991), the total number of holdings and area in 1990 -91 were 10.3 mn and 165.6 mn hectares, respectively.

The percentage distribution of the number of holdings for marginal (below one hectare) and small (one to two hectares) farmers is as high as 78% and that of large (10 hectares and above) size holdings is only 1.6 %. The percentage distribution of area of holdings is 32% and 17.4%, respectively.

As seen from above, the distribution is highly skewed. There are too many small and marginal farmers with too small size of holdings. Just saying that we need to do land reform would be paying a lip service. Simply speaking, in this regard status quo seems to be our destiny.

Our plan documents read like essays. They are expressions of good intent no doubt, but they do not have any managerial approach / implementable mechanism.

The market friendly reforms introduced in the country since '91 – 92 have bypassed the agriculture sector. According to 2001 Census, 67% of India’s population and 54% of workers depend on agriculture for their livelihood, one way or the other. They do live a subsistence/pre industrialization stage of living.

How to bring these people in the employment and income stream? If this sector can grow at a sustainable rate of 4% per year, perhaps only then we can talk about the sustainable 9% rate of growth of GDP. Too tall a task indeed!

Agriculture, being a State subject under the Indian Constitution, needs a managerial approach at the States level. Illustratively, a five tier sector specific corporate planning approach should be prepared:

² Cereals and pulses including oil seeds

² Cash crops like sugar, cotton and jute

² Plantation crops like tea, coffee, rubber, spices

² Fruits and vegetables including tobacco and

² Poultry, dairy and fishery etc

Each of these sectors (which can be divided/ sub - divided variously) is unique in terms of harvesting cycle, cropping pattern, needs for irrigation and fertilizer, etc. Their distribution across the country, the culture and systems of land ownership etc. vary from State to State. Therefore, it will be necessary to work out a sector – and state – specific managerial approach. The state planning boards together with leading B - Schools/ agri universities in the State can take up this assignment.

In China universities and institutions of higher/technical learning are vigoursly involved in doing such economic projects. Why can’t we have some learnings from them?

Unless these critical problems of agriculture are resolved, we can forget the sustainable 9% rate of growth.

At the same time, to my humble understanding the Indian economy has achieved the feasible potential to grow at the rate of 7.5% per year. In doing this projection I have considered, inter alia, the following encouraging factors together with my analytical:

² ICOR has improved at 3.6 by the end of '06 - 07.

² Domestic savings as % of GDP significantly improved to 32.4% ('05 - 06),

² Investment as % of GDP also increased to 33.8% ('05 – 06) and

² Net inflow of foreign capital as % of GDP improved to 1.5% ('05 – 06)

Improvements on all these fronts have been possible because of the introduction of the liberal market oriented macro policy compact. There are number of other factors both, qualitative and quantitative, like gains in labour, capital as well as total factor productivities, disciplined rigours of corporate restructuring in the face of increasing competition and the dynamics of globalization etc.

Thus, this neo - Hindu 7.5% rate of growth of GDP should double our per capita income in about 15 years.

For a vast, very complex and historically rooted democratic country like ours, the 7.5% neo-Hindu growth rate should serve us alright, at least for the time being.

An elephant after all cannot fly like an albatross; it should walk fast in robust strides.