To sustain rate, push reforms, core sector

Indian Express, 29 September 2006

With GDP growth of 8.9 per cent in the first quarter of 2006-07, the Indian economy continues to do well.

While manufacturing and services kept their momentum of growth, the high growth in agriculture at 3.4 per cent helped attain the nearly 9 per cent growth. While the news is great, the first question that most people ask is whether the country will be able to sustain this rate of growth. The rapid upswing witnessed in recent years has been a combination of a higher trend and the high of a business cycle. In the last few years, the economy has seen an increase in the trend growth rate to about 6.25 per cent. This trend has had a cycle around it so that the growth rate moved in a band of around -2 and +2 percentage points.

In other words, the rate has ranged from 4.5 to 8.5 per cent. The GDP growth rate of 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.

This is a consequence not of the government setting a target and investing and producing more. It is, in fact, the result of the taking away the restrictions that the government had put on private enterprise for nearly 30 years, from the '60s to the early '90s. By slapping various restrictions, licences and controls, the government had constrained individual initiative and prevented higher growth. Now that it is trying to create a supportive environment with better infrastructure and facilities for private initiative, every individual who does better for himself does better for the country, too.

Indeed, this is India's main strength in contrast to China's, where there is an attempt to develop private enterprise. This is not to say that the we can take high growth rate for granted. There will be a need to focus on two things. One is to remove the remaining restrictions on movement of goods and on factors of production — labour, capital and land — so that they can move freely across uses and be available for use in the most efficient and productive way. This will mean bringing changes in land use policies, exit policies, labour laws and the financial sector.

The second is improving infrastructure. The first can be attained by the stroke of a pen, though it needs political consensus which may take a little time to come about. It is building infrastructure that will take time and resources. But as and when it gets done, and sooner or later it will, the world can bet on India for even faster growth than it has seen this quarter.

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