The Telegraph
Since 1st March, 1999
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- There is a tendency to play down India's trend growth rate

At current prices, the latest national accounts figures we have, courtesy Central Statistical Organization, are for Q1 (April-June) of 2005-06. These show nominal gross domestic product growth of 12.8 per cent over the same period in 2004-05 and real growth of 8.1 per cent. What will real GDP growth in 2005-06 be' Most forecasters project growth between 7 and 7.5 per cent, although actual growth may be closer to 8 per cent. There is a reluctance to accept that India's trend growth rates may have inched up to something like 8 per cent. From a trend of 3.5 per cent, we jacked growth up to a trend of around 5.5 per cent till the end of the Eighties and then jacked it up again to a trend of around 6.5 per cent in the Nineties. The mindset continues to be that trend of 6.5 per cent, although the trend is probably more like 8 per cent now. Indeed, it should go up further. With a savings rate of 30 per cent and an investment rate of 32 per cent, why should growth not be closer to 9 per cent' There are probably two reasons why people refuse to accept this higher trend of 8 per cent.

First, the United Progressive Alliance government seems embarrassed at this high growth, as it is with the sensitive index's 'irrational exuberance'. It is too reminiscent of National Democratic Alliance's India Shining campaign. Had employment figures looked up, as they probably will when the National Sample Survey's large sample data for 2004-05 are available in early 2006, matters would have been different. The UPA is willing to paint the town red over equity, not over growth.

Second, people are legitimately sceptical about the present government's track record on reforms. However, many of the reforms we have in mind are state government subjects and we should not get obsessed with the Centre's inability to introduce reforms. For 2004-05, the CSO estimated nominal GDP (at factor cost) to be Rs 28,30,465 crore. If there is 8 per cent real growth in 2005-06, and 13 per cent nominal growth, nominal GDP in 2005-06 will be Rs 31,98,425 crore. At an exchange rate of Rs 45.5 to $1, this means GDP of $702.95 billion. With a population of 1.08 billion, this means per capita GDP of $651. There are differences between per capita GDP and per capita national income, since net factor income from abroad is included in the latter. But, in the Indian case, differences between per capita GDP and per capita national income are minor. In addition, there is a difference between national income using official exchange rates for conversion and figures using purchasing power parity exchange rates for conversion. The argument for the latter is that purchasing power of currencies varies and Rs 45.5 can purchase much more in India than $1 can purchase in the United States of America. This is because not everything can be freely traded. Otherwise, global prices would have been the same as domestic prices, although even for goods that should be tradable, there are restrictions on free trade. Classic examples of non-tradables are in many services.

In relative terms, PPP conversions thus blow up incomes in developing countries and proportionately reduce incomes in developed countries. World Bank figures typically use official exchange rates for conversion, while the International Monetary Fund uses PPP exchange rates. For 2004, the World Bank gives us a nominal GDP of $692 billion (gross national income is marginally lower) and a per capita income of $620. For 2003, the Human Development Report 2003 gives us a PPP GDP of $3,078 billion and a per capita PPP GDP of $2892.

There is often talk about India becoming the fourth largest economy in the world, after the US, China and Japan. This is true, but only in PPP terms. The US is at a PPP GDP level of $10923, China at $6446 and Japan at $3568. Given relative rates of growth in India and Japan, in the next few years, India will be the third largest economy in the world. But only in PPP terms. If one uses official exchange rates, we will have to wait till 2030 or thereabouts to become the third largest economy in the world. But let's forget PPP and stick to official exchange rates, what the World Bank calls the Atlas method.

At a talk delivered in the US not very long ago, the finance minister mentioned a GDP figure of $800 billion and a per capita income of $730. Contrast that with the GDP figure of $703 billion and per capita income of $651. What has changed' What has changed is the exchange rate, because rupee national income figures have to be converted to dollar figures and the rupee/dollar exchange rate comes in. For example, had the exchange rate been Rs 43.5 to $1 instead of Rs 45.5 to $1, GDP of Rs 31,98,425 crores would have translated into national income of $735.27 billion and the per capita income would have been 681. The finance minister overestimated both the GDP and the per capita income figures. We will get the kinds of figures he mentioned in 2006-07, not in 2005-06.

However, we do need to recognize the exchange rate effect. For instance, the Goldman Sachs BRIC (Brazil, Russia, India, China) report is often cited, meaning the first BRIC report. (There have been two subsequent ones that have not attracted the kind of attention the first one did.) India's real growth projected in the BRIC report is actually lower than 6 per cent. And around one-third of the spectacular increase in income and per capita income, especially spectacular after 2020, comes through rupee appreciation vis-'-vis the dollar. Unlike many other forecasts, Goldman Sachs also brings in the demographic dividend, flagged recently by Vijay Kelkar in his Gadgil Memorial Lecture delivered in Pune. Consider it in the following way. What does the Indian per capita income of $651 mean' Per capita income is nothing but the country's average level of productivity. If the per capita income in the US is higher, that simply means that the average American is more productive than the average Indian. Of course, this is not quite physical productivity, because there is a price tag attached to labour. But more accurately, per capita income is not the average productivity of all Indians. It is the average productivity of all working Indians, say those who are in the working age-groups of 15 to 59. This is 58 per cent of the population today. Even that statement is a trifle inaccurate. Not everyone who is in the working age-groups of 15 to 59 is part of the workforce today. The workforce today is 400 million, 37 per cent of the population.

The demographic dividend has two components. First, the dependency ratio is declining, because birth rates have dropped and because a large number of babies were born 20 or 25 years ago and are now entering the labour force. In the next 10 years, the percentage of population in the working age-groups of 15 to 59 will increase from 58 per cent to around 63 per cent. Second, within those working age-groups of 15 to 59, work participation rates will increase. If the GDP of $703 billion is distributed among the workforce of 400 million, the per capita income of this working population is $1758, not 651.

The country's per capita income increases whenever the per capita income of an additional worker is more than the average. There are several areas where the average Indian wage is higher than that per capita income of $651, but is lower than average wages in developed countries. Stated simply, that is what India's labour cost advantage is all about. Admittedly, there are issues about literacy, skills, morbidity and mortality. If these indicators improve, exploitation of the demographic dividend becomes even more palpable. But even if these indicators do not improve dramatically, in the next 10 to 15 years, there is a cycle of additional labour inputs. For instance, the dependency ratio will decline by about 5 percentage points. If these entrants into the labour force earn that per capita income of $1758, that factor alone, everything else remaining constant, will jack up India's per capita income (in today's dollars) from 651 to 684. Barring exceptions like Goldman Sachs or Vijay Kelkar, this is not built into projections. Most projections are obsessed with capital inputs and increases in investment rates. And that is precisely the reason why they are unnecessarily pessimistic. As a trend, we should get 9 per cent.

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