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My Millennium Wish: Double-digit Growth

Arvind Panagariya

            My millennium wish is for India to achieve a double-digit growth in the forthcoming decade.  Having decisively freed itself from the trap of the ‘Hindu rate of growth’¾a term coined by my teacher and brilliant economist late Raj Krishna to refer to the country’s abysmally low growth rate during the 1960s and 1970s¾ the country should now join ranks with the East Asian tigers, which now include China.

            On the surface, the desirability of double-digit growth rate, as opposed to its feasibility, seems obvious.  Yet, the case for it is not uncontested.  In India where concerns with poverty reign supreme and many continue to see a conflict between growth and poverty reduction, even the desirability of high growth rates is under constant attack.

            Sceptics argue that a development strategy that focuses on growth counts on prosperity “trickling down” to the poor and is predestined to fail the latter.  It will only make the rich richer, leaving the poor where they are.  This, in my judgement, is a spurious argument.  Those advocating high growth rate as the cornerstone of the development strategy rarely view it as an end in itself.  Instead, they consider high growth rate as an essential means to all-round development including poverty reduction.

Thus, as economist Jagdish Bhagwati tells us, right from the 1950s, growth in India was seen as an instrument that would actively "pull up" the poor into gainful employment rather than a passive "trickle-down" strategy.  Land reforms, spending on education and public health, extensive community development schemes and the promotion of progressive social agendas through appropriate legislation constituted an integral part of our development plans. The failure of our development strategy was not that too much growth crowded out the objective of poverty alleviation but, instead, too little growth resulted in too few resources to combat poverty.

The power that high growth lends us in combating poverty can be judged from a rather simple example.  Thus, suppose our gross domestic product (GDP) in 1980 was $10,000 crores.  The Hindu rate of growth of 3.5% will raise this GDP to $19,898 crores by the year 2000.  If the growth rate were 6%, instead, the GDP would grow to $32,071 crores or 61.18% higher!  Not only is this larger GDP likely to support a higher level of employment, it will also give the government more tax revenue with which to build schools and hospitals and provide the poor food at subsidized prices.

Not surprisingly, as economist T. N. Srinivasan reminds us, a significant declining trend in poverty in India coincided precisely with a significant rise in the GDP growth rate.  Thus, during 1950-80, when India grew at an average rate of 3.5 per cent, the proportion of population living below a modest poverty line fluctuated around 50 per cent with no trend.  In 1980, there was a fundamental break in the growth rate, with the GDP rising at 5.8 percent during 1980-90 and at 6.1 per cent during 1990-98.  Correspondingly, poverty also exhibited a declining trend during 1980-98.

While the wisdom of double-digit growth as the focal point of development strategy is, thus, defensible, how feasible is this goal?  For starters, even at the risk of being repetitive, it is useful to recall that such growth rates have not been uncommon in Asia during the last 50 years.  Therefore, at least in principle, double-digit growth rates are feasible.  If China can do it, why can’t we?  In terms of our own experience, I recall being greeted with scepticism when I predicted growth rates of 6 to 7 percent in a 1994 article entitled “India: A New Tiger on the Block?” In the face of growth rates of 4 percent in 1992-93 and 3.8% in 1993-94, the scepticism was not altogether unjustified.  Nevertheless, as the reforms of early 1990s began to impact efficiency, in the subsequent three years, Indian economy grew at rates exceeding 7%!

But there are more concrete reasons to believe why we can realistically think of pushing the growth rate further to double-digit levels.  Despite the reforms that have taken place, our output and income remain well below the level feasible along the economy’s true efficiency frontier.  In turn, the scope for high growth through increased efficiency is still quite substantial.  Given the relatively liberal investment regime, our dynamic entrepreneurs are in a better position than ever before to contribute to growth.  With East Asian economies recovering rapidly¾South Korea’s growth rate for 1999 is estimated to exceed 10% ¾the external environment can also be expected to be more favourable.  

Given that our economy is also more open now to external trade and investment, prospects for growth through technological upgrading are also better than ever.  Indian Diaspora¾some of them now among the movers and shakers in the U.S. corporate world¾are in a position to bring not merely much needed capital but also up to date technology, management skills and valuable links to the world market.  While this is already happening in some sectors, most notably information technology, the scope for it is virtually unlimited.  In the years to come, the Indian Diaspora could play the same role in India’s development that the Taiwanese and Hong Kong entrepreneurs have played in China.

Of course, none of this will be possible without continued reforms that open the economy to further competition.  Fortunately, even here we can be optimistic.  Having recently passed several important bills, the government now appears set to implement what I have called the ‘second-generation reforms’ (Economic Times, September 19, 1998).  The determination shown by Prime Minister Vajpayee and Finance Minister Sinha in carrying out the reform of diesel oil price and insurance sector even in the face of widespread strikes places them firmly in control of future reforms.  The road will be much rougher as reforms move into difficult areas such as banking.  Nevertheless, the double-digit growth appears well within the grasp of the country.

Economic Times, January 12, 2000