Friday, July 26, 2013

India's growth story has lessons to learn

India’s growth story has lessons to learn:

The most vocal protagonist of India’s growth and the architect of planning in India during the current UPA regime Monteksingh Ahuluwalia conceded that the expected growth would not reach for the current fiscal. Quickly following, at ASSOCHAM the Prime Minister Manmohan Singh conceded that all is not well with the economy and India’s current growth is a serious concern.
The Reserve Bank of India, country’s central bank has been consistently downplaying the growth story due to uncertainties in the farm and manufacturing sector and the adverse influence of the overall global slowdown. But is that all? IMF and World Bank also downsized their growth expectation to 3.5 from 3.7 percent. Should China’s slowing growth be a concern for us akin to a boy getting 10 percent comparing with another getting only 2 percent and feel satisfied?
Reminded of J.S. Mill (1806-73): “It must always have been seen, more or less distinctly, by political economists that the increase in wealth is not boundless: that at the end of what they term the progressive state lays the stationary state.”
Inflation continues to be a major worry with the country’s topmost economic advisor Dr Rangarajan warning of the likely stagflation. Domestic savings are not growing at sustainable rate any longer and this is a serious cause for worry. Banks’ short term deposits are on the increase but the medium and long term deposits are on decline whereas the demand for long term credit is increasing with housing, real estate, infrastructure denting the AML of Banks. Decline in savings rate is loss of fundamentals of the economy. We should do all that is necessary to let it grow to no less than 28-30 percent and this can be done in two ways: incentivize savings through fiscal policy and protect the deposit rates against rising prices.
Post-liberalisation trended towards a sustainable growth in the services sector while the country has to look for investors from developed countries for growth in infrastructure not supported by right policies. Now after averaging to 8.5 percent growth in the five years 2004-09, the next five years have been witnessing year after year the slowing down.
Even to stay where we are in growth trajectory, we need multiple times of investments in school buildings (most public school buildings in villages and towns are in dilapidated state: some with collapsing roofs; some with no basic amenities like safe drinking water and wash rooms for children; no play grounds; no teaching aids etc.); primary health clinics; safe drinking water; drainage and sewerage systems; sanitation; highways – both central and state; repairs to rail tracks and replacement of train compartments at galloping speed to catch up with the new trains and emerging demands on rail traffic; goods transport coaches; airport maintenance etc., most of which are with the governments, State and Centre. The resources have to be found either through public borrowing or increase in taxes. If it has to borrow, it will be of long term nature as all such assets have no prospect of returning either the principal or interest. Its capacity to indulge in fiscal deficit is peaking. The virtuous moves of right to employment, right to education and food security have their loopholes in the systems that were created to result in their effectiveness.
The country’s natural resources are declining in productivity: rivers are silting more at the nose-end where they join the sea; minerals like coal to generate the thermal energy are inferior although the stocks are assured till 2050 but these are environmentally hostile; the country has very little natural gas, fossil fuels and has to depend on such of these depleting resources of the West and Middle East; soils are also depleting in energy with regeneration requiring huge organic resources; nuclear and solar energy are proving to be highly expensive. Agriculture production though has potential still left in the virgin soils of Bihar and eastern UP on the Ganges plains, frequent flooding of rivers and mismanagement of rivers does not leave enough hope for sustainable growth here. Forest wealth is also degenerating. Animal and bird population to maintain ecological balance in the biosphere suffers from disease and malnutrition due to wanton neglect in most cases and in others due to the ravages of nature like floods, cyclones, tsunamis and earthquakes. Claims just keep growing while resources keep depleting – and real prices of energy and commodities have begun looking to north with little prospect of looking south. It would appear as though we are peaking limits of growth if we would like to measure growth only by the GDP figures.
Gross Domestic Product is something we need to look at: Is this the right measure? GDP defined as the market value of all goods and services produced in one year by the labour and property in a geographic space – the country. It is therefore more space related than ownership related. If the number went up economists consider that all was well whereas the decline meant that something was going wrong somewhere. GDP does not distinguish between waste, luxury and satisfaction at fundamental levels and there is no accounting for the costs and benefits. It builds inequalities and the glaring examples: the more the rich accumulate riches the GDP increases and takes for granted that this would lead to the poor reducing in numbers; the companies may invest and grow but the employment may go down with every unit of increase in production and the market index rises with no guarantee that employees would have their share equal to their contribution. There is no guarantee that there would be happiness around with growth measured by GDP increases. It was a tiny neighbor Bhutan that first thought of Gross National Happiness has to be measured and now the UN Human Development Index is taking this into account but the nations like ours still find it difficult to move to such measure.
Let me hasten to mention here that we are not alone in this journey of stagnation. Several developed countries with US no exception sail in the same boat. This means that the capability of developed nations to come to the aid of India or other developing nations in the midst of their own problems would be on the wane. This is not to say that we have no options but to draw consolation. I would not like to sound pessimistic but would like to caution on the realities to move to sustainable development that depends inherently on our culture both social and economic.
Technology and innovation have shown the way, no doubt but have also been pointing to certain destructive dimensions that needed to be guarded against. High salaries at the start of the careers before the earners could know the value of the rupee led to squandering the resources through lavish living, pubs and clubs. If the technological advantage should continue there should be stable structures and adequate and timely incentives as substitutes for resource degeneration could result in regeneration and welfare all round. Growth sans happiness leaves the economy in the hands of touts and terrorists that every citizen has a responsibility to prevent.

If demographic dividend that we are likely to have till at least 2025 should give the advantage, we should invest more in education and health sectors and this would in turn help people think of rationalizing and practicing austerity led growth. We have to learn the lessons of growth, even if they are the hard way.