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How fast should India grow?

By Suman Bery
February 14, 2006 17:27 IST
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At the time of the previous National Democratic government, when India was still shining, Prime Minister Vajpayee used to talk of India becoming a developed country by 2020.

The tone of the debate has shifted dramatically under the United Progressive Alliance, where all the attention seems to be on the glass being less than half empty, rather than more than half full.

Yet the economy itself takes little notice: like Ol' Man River, it just keeps rolling along. From time to time, the base year for measuring gross domestic product at constant prices gets updated to reflect the change in the underlying economic structure.

This has just been done and is the basis for the advance forecast of the Central Statistical Organisation that GDP growth for 2005-06 will exceed 8 per cent.

As many commentators have rightly observed, this is not necessarily a tribute to our native Indian genius: the whole world is enjoying a growth boom, particularly the large emerging markets. But it is nice to have just the same.

The deputy chairman of the Planning Commission, Montek Singh Ahluwalia, is reported to have said that India could now aim to grow at an annual rate of 10 per cent, although the formal growth target of the Eleventh Five-Year Plan is yet to be established.

Is such fast growth feasible? Is it desirable? The authority for answering these questions is Angus Maddison, who, in a seminal series of publications under the auspices of the OECD's Development Centre in Paris, has collated data on the income and growth of a large number of countries over the broad sweep of history, right up to 2001.

The important point about Maddison's numbers is that they measure income of all countries in each epoch in what are termed "1990 Geary-Khamis dollars" (henceforth G-K$). These are conceptually the same as what are now more commonly called purchasing power parity exchange rates.*

In calculating national output under this scheme, physical measures of output in all countries are valued at a common structure of prices (adjusted for quality). Thus, a haircut in India that cost Rs 45 would be valued at the $20 it would cost in the US, rather than the one $1 that would result with a US dollar: the rupee market exchange rate of Rs 45.

Let me first address the question of what it means to be a "developed country". I am not aware of any professional consensus on this issue; so, after studying the Maddison tables, I have arbitrarily established a figure of G-K$10,000.

I chose this level primarily on the basis of the experience of Western Europe and Japan after the Second World War. At the end of the War, neither entity would have been considered fully developed; today, they clearly are. Japan's per capita income in 1950 was around G-K$1920; by 1973 it had reached G-K$11,400. (In 2001 it had reached $20,700; in the same year US per capita income was G-K$27,000.)

By my reckoning, by 1973, Japan had become a developed country. In the case of Europe, a country like Italy, which had a per capita income of around GK$3,500 in 1950, had also attained a per capita income of $10,600 by 1973, somewhat less than Japan, but still, in my view firmly in the developed category.

Three questions then arise: when did the major developed economies reach the GK$10,000 threshold? Where is India today with respect to these countries, and some of its peers? And what is a realistic and reasonable time-frame for India to reach the same benchmark?

Some of these questions are answered in the table. Answering each of these questions in turn, the US broke through this benchmark in the early 1950s; Canada and Australia in 1964; and the UK and France around 1966. India's per capita income in 2001 is calculated by Maddison to be around G-K$1960, or approximately G-K$2000.

This was the per capita income of the US, the UK, and France as far back as 1860, of Italy in 1905, but of Japan, as we have seen already, as recently as 1950. Turning next to some of our Asian peers, India in 2001 was as poor as Korea in 1970, Thailand in 1975, and China in 1991.

Several findings flow from these numbers. First, modern economic development is entirely a post World War II phenomenon and is a great achievement of the liberal post-war economic order.

Second, the rise to developed status by most of the Atlantic economies was a relatively slow process despite relatively favourable demographic trends, taking almost a century.

Third, the circumstances of the post-war era do seem to have made it possible to accelerate the process quite considerably, although even here the experience of the East Asian countries, Japan in particular, but including South Korea and Taiwan, is unprecedented.

So, in principle, Vajpayee was not far off: it is now possible to telescope the process of development, which earlier took a century, into a quarter the time. [Note here that, for a poor country like India, growth when measured in PPP (or G-K dollars) will be higher than growth measured in the home currency. This "accelerator" effect diminishes over time, as the country approaches developed status.]

But it is also the case that the great bulk of the countries which are today rich, stable, pluralistic democracies became so by following a different, slower path. Which outcome is more likely? And which should we prefer?

The answer is that we should want efficient, not super-charged, growth. I say this for two reasons.

First, what economists call "extensive" growth, growth that is heavily dependent on high investment, involves a needless sacrifice of consumption, something that a poor society can ill-afford.

Few of the Atlantic societies sustained investment rates of the kind that first became commonplace in the Soviet Union and later in East Asia; instead their growth has been based on market-friendly policies that have led to steady gains in labour productivity.

China is currently something of a hybrid, in that it has a towering investment rate but also relatively rapid growth in productivity. India seems now to be moving to a similar situation.

Second, super-charged growth almost always requires rigging of the financial system, which means that the general tax-payer (who may often be a relatively poor consumer of highly taxed consumer goods) ends up subsidising poor investment choices.

But above all, we should have confidence in our own path. There are no precedents for mobilising a society of our scale to fast growth within a democratic framework. There will undoubtedly be hiccups and setbacks along the way.

But, as the last 60 years have shown, at heart we are a problem-solving society with a talent for negotiation, critical skills for sustaining the task at hand. We must always strive to do better. But by the standards of the countries we would most like to emulate, we are clearly on track.

*Estimates in this column are from Angus Maddison, "The World Economy: Historical Statistics". Development Centre Studies, OECD 2003 (Paris). The author is Director-General, National Council of Applied Economic Research, New Delhi. The views expressed here are personal.

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Suman Bery
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