To sustain rate, pushreforms, core sector


Indian Express, 30 September 2005


With GDP growth of 8.9 percent in the first quarter of 2006-07 the Indian economy continued to do well. While manufacturing and services continued their momentum of growth, the high growth in agriculture at 3.4 percent helped to attain the nearly 9 percent growth. As the world looks towards India as one of the fastest growing economies in the world, the fate of India is important not only for the domestic economy or foreigners investing in India but also for the world economy.

The first question that most people ask is whether the Indian economy will be able to sustain growth. The successful growth witnessed in the Indian economy in recent years has been a combination of a higher trend and the high of a business cycle. In the last few years the Indian economy has witnessed an increase in the trend growth rate to about 6.25 percent. This trend has had a cycle around it so that the growth rate moves in a band of around +2 and -2 percent around this trend. In other words, the growth rate has ranged from 4.5 to 8.5 percent. The GDP growth rate witnessed this quarter is an improvement on this.

When the economy is at the high of a business cycle, it is natural to be concerned about a downturn. But while the cycle can turn down due to a number of factors both domestic and international, there is reason to be optimistic about the higher trend growth path of the economy. This growth path is a consequence not of the government setting a target and investing and producing more. Not at all. It is the consequence of the taking away the restrictions that the Indian government had put on private enterprise for nearly thirty years, from the sixties to the early nineties. The government by putting various restrictions, licences and controls, had constrained individual initiative and prevented higher growth. Now, when instead of restricting growth, it is trying to give a supporting environment, with better infrastructure and facilities to private initiative, then where ever possible, every individual who tries to do better for himself does better for the country.

Indeed, this is India's main strength in contrast to China, where there is an attemp to develop private enterprise. The job of the Indian government is different and easier. It primarily had to take the restrictions away and set up a facilitating environment for markets to function.

This is not to say the we can take it for granted that the growth will continue. There will be a need to focus on two things. One is to remove the remaining restrictions on movement of goods and factors of production -- labour, capital and land so that they can move freely across uses and be available for being used in the most efficient and productive way. This will mean changes in land use policies, exit policies, labour laws and financial sector development. The second will be improvements in infrastructure. While the first is easy to do by the stroke of a pen, it needs political consensus, which may take a little time. The improvement in infrastructure will take time and resources. But as and when these get done, and undoubtedly sooner or later they will, the world can bet on India for even faster growth than what we have seen this quarter.


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