The Telegraph
Since 1st March, 1999
Email This Page
- The growth rate is not a panacea for India’s economic woes

If anything ushered in the year 2004 on an ecstatic note for India, apart from the 705 runs Ganguly’s team scored in far- away Australia, it was the announcement of a lofty 6-8 per cent rate of growth of its real gross domestic product in 2003-04. The country, we were told, was emerging out of a drought. Now that agriculture was back on track, what could prevent us from riding high and mighty on the growth wagon once again' Even the omniscient World Bank officials corroborated the claim. Indeed, the year 2004 commenced for us with a magnificent, growth-filled hope.

Yet, a few weeks ago, Abhirup Sarkar pointed out an inconvenient pattern in India’s high-growth story in these columns: that it is more often than not linked to agriculture. There is no point dwelling on the details of his analysis, except to note that in the history of economic development, agriculture-driven growth constitutes the earliest stages of economic uplift. Thus, Sarkar’s observation that agriculture doggedly remains the backbone of India’s growth performance was not a flattering commentary on India’s economy.

Sarkar though may well have been a spoilsport, an embittered cynic, vowed to spend his time in mournful gloom. Let us therefore join the revelry, basking in the glory of the phenomenal 8 per cent growth rate and inquire where it lands us by daybreak. How long will it take us to shed the stigma of a developing economy and find a berth in the luxury saloon reserved for the chosen few'

We have now a fifty-year-long time series on some of our important macroeconomic characteristics. It records our GDP figures, calculated at 1993-94 prices, as well as our population figures for the period spanning 1950-51 through 2000-2001. The fact that calculations are made at 1993-94 prices means that changes in the value of output brought about by fluctuations in prices alone are eliminated. Consequently, the GDP fluctuations in the available set represent solely variations in real goods and services. In other words, the figures qualify in economic jargon as real GDP data. But real GDP by itself is of little consequence. What matters more is real per capita GDP — that is, real GDP deflated by population.

The numbers so obtained present a clear upward trend, and a simple calculation shows that the rate of growth was around 2.1 per cent for these 50 long years — a far cry, of course, from a heady 8 per cent dream. Nevertheless, let us compare the 2.1 per cent figure with the long-run growth rates of two of the most developed countries in the world, the United States of America and Japan. Curiously enough, over the 120-year period 1870-1990, the US economy grew at the rate of 1.75 per cent, somewhat lower than India’s 50-year growth performance. Japan’s growth rate, on the other hand, for the 100-year period 1890-1990 was higher at 2.95 per cent. Where, however, do these countries stand today relative to India' In 2001 (at prices prevailing in that year), the US per capita GDP was $ 35,277, while that of Japan was $ 32,26. India’s per capita GDP during the same year was, by comparison, a trifling $ 462.00!

The American and Japanese examples demonstrate that steady growth over a long period leads to dramatically high values of per capita GDP, even if the rate of growth is as small as 2 per cent. Yet, in the case of India, the result of a 50-year growth experience at a rate higher than the US figure, produced a ridiculously low per capita value. Would matters be altered substantially then if India persisted, like the US, with its 2.1 per cent growth rate for 120 years' Once again, the arithmetic reveals that India’s real per capita GDP would be around Rs 48,533 in the year 2070 if we continued to grow at the long-term rate of 2.1 per cent. To discover its dollar equivalent it is necessary to convert the figure to US dollars using the exchange rate prevailing in 1993-94. India’s per capita GDP after 120 years of sustained growth at 2.1 per cent turns out, following that calculation, to be a frivolous sum of $ 1,547. Thus, even after 120 years, we should be hopelessly behind the American or the Japanese economies.

Clearly then, India needs to grow at a much higher rate to look respectable. Some believe that we ought to emulate the celebrated “south-east Asian miracle”. During the thirty-year period 1960-1990, economies such as Singapore, Hong Kong and South Korea grew at phenomenally high rates, often touching figures as impressive as 10 per cent. The result was that Singapore’s per capita GDP in 2001 (at prices prevailing in 2001) was $ 20,733, Hong Kong’s was $ 24,074, South Korea’s $ 8,917.

If they grew at such high rates for 30 years, so can we. With a willing suspension of disbelief, let us hypothesize then that we shall succeed in this growth experiment. Where would our per capita GDP alight as a consequence' We may simply use the Indian per capita GDP of $ 467 at 2001 prices and compute what it would turn into in 30 years, if indeed 8 per cent were to be realized. The figure, alas, is roughly $ 5,115, which is way below the lowest of the per capita GDPs quoted above — the one prevailing in South Korea, and that too 30 years ago.

Obviously then, the growth rate is not a panacea for our economic woes. Nor the number of years for which we have grown. What matters crucially is the real per capita GDP prevailing in the year we started to grow. And where we started depends in turn on two numbers, the undeflated real GDP and the population size. In the year 2001-2002, the Indian population had already crossed 1 billion, while the population of Singapore was 4.1 million, after growing at an average rate of 2.2 per cent for the previous 25 years. Interestingly enough, India’s population growth rate during the same period was also around 2 per cent, but whereas the population of Singapore was 2.3 million in 1975, India’s stood at 620 million. Even a large value of real GDP would contract to an inconsequential sum when distributed over 620 million heads.

Thus, a rise in real GDP is important, but so is the rate of growth of population. Liberalization, open economies, research and development are possibly marvellous solutions to the growth dilemma, but none of these will make a dent on our welfare unless the rate of growth of population is simultaneously kept under control or even reduced. China has succeeded on both fronts. It had a population of 1, 285 million in 2001, but a per capita GDP that was nearly twice as large as India’s. During 1975-2001, China managed to lower the rate of growth of its population to 1.3 per cent, but India’s population grew at 2 per cent. A small reduction in that growth rate over the next 30 years will take us a long way in improving the per capita GDP, especially so since the initial size was itself enormous.

The mandarins of North Block are yet to show us a way to rein in the population. Till that solution is discovered, a high growth rate of real GDP alone will not constitute happy tidings. Besides, let us not delude ourselves into believing that it would be an easy task to maintain a steady growth rate, either high or small, in a world that is increasingly opening up. The other have-nots will also be tossing their hats in the ring.

Email This Page