Getting India Back to the Growth Turnpike: What Will It Take?

Abstract

India’s real GDP growth has slipped substantially since the onset of the North Atlantic financial crisis (NAFC). There are questions as to whether growth can be revived back to the high growth phase of 2003–2008 in an environment of macroeconomic and financial stability. This article argues that returning India to a high growth turnpike is quite feasible but it will need much more focused attention to the revival of manufacturing and to accelerate investment in transport and infrastructure. The immediate priority is to achieve the kind of fiscal quality and low inflation level that was exhibited during 2003–2008, with focused attention to increasing efficiency and compliance in tax revenue collection Higher tax revenues can facilitate increases in public investment for the delivery of public goods and services, which then crowd in private investment. However, the task ahead will be more difficult now in view of the protracted slow-down in global economic growth and in global trade.

Acknowledgements

Comments from Nirvikar Singh and an anonymous referee on an earlier draft are gratefully acknowledged; the usual disclaimer applies. The views expressed in the article are those of the authors and not necessarily those of the institutions to which they belong.

Notes

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3. Christine Lagarde, “The Challenge Facing the Global Economy: New Momentum to Overcome a New Mediocre,” Speech at Georgetown University, School of Foreign Service, http://www.imf.org (accessed October 2, 2014).

4. Lawrence Summers, “Why Stagnation might Prove to be the New Normal?” Financial Times, December 15, 2013, http://www.ft.com/intl/cms/s/2/87cb15ea-5d1a-11e3-a558-00144feabdc0.html#axzz3PyCn7DZJ.

5. International Monetary Fund, India: Staff Report for the 2013 Article IV Consultation (Washington, DC: International Monetary Fund, 2014); R. Nagaraj, “India’s Dream Run, 2003–08: Understanding the Boom and Its Aftermath,” Economic & Political Weekly 48, no. 20 (2013): 39–51.

6. Lant Pritchett and Lawrence Summers, “Asiphoria Meets Regression to the Mean,” in Prospects for Asia and the Global Economy, Asia Policy Conference, eds. Reuven Glick and Mark Spiegel (San Francisco: Federal Reserve Bank of San Francisco, 2014), 33–91.

7. Rakesh Mohan, “The Growth Record of the Indian Economy: A Story of Sustained Savings and Investment,” in Growth with Financial Stability, ed. Rakesh Mohan (New Delhi: Oxford University Press, 2011), 3–42.

8. The periodization in this paper follows and extends Mohan, “The Growth Record” and is based on significant policy changes (early 1950s, early 1980s, and early 1990s), or significant differences in growth rates (1997–2003, 2003–08, 2008–12; the NAFC and domestic stimulus impact) and the period since then.

9. Arvind Panagariya, India: The Emerging Giant (New Delhi: Oxford University Press, 2008).

10. Rakesh Mohan and Muneesh Kapur, “Managing the Impossible Trinity: Volatile Capital Flows and Indian Monetary Policy,” in Growth with Financial Stability, ed. Rakesh Mohan (New Delhi: Oxford University Press, 2011), 271–344.

11. Rakesh Mohan, “Development of Banking and Financial Markets in India: Fostering Growth While Containing Risk,” in Growth with Financial Stability, ed. Rakesh Mohan (New Delhi: Oxford University Press, 2011), 101–52.

12. Muneesh Kapur and Rakesh Mohan, “India’s Recent Macroeconomic Performance: An Assessment and Way Forward,” Working Paper WP/14/68, International Monetary Fund (Washington, DC: International Monetary Fund, 2014).

13. Some caution is, however, needed in analyzing the industrial performance during 2012–14 based on the available data on index of industrial production (IIP), given that IIP data indicate much lower growth than indicated by the Annual Survey of Industries (ASI) for the comparable period. For example, during 2008–12, the IIP indicated an annual average industrial growth of 4.7 percent, while the ASI data (net valued added adjusted for inflation) indicated an annual growth of 9.1 percent. ASI data for the period 2012–13 onwards are not yet available.

14. Government of India, Economic Survey 2012–13 (New Delhi: Author, February 2013).

15. National Transport Development Policy Committee (NTDPC), India Transport Report: Moving India to 2032 (Chairman: Rakesh Mohan) (New Delhi: Routledge, 2014).

16. The NTDPC was chaired by one of us, Rakesh Mohan, and the simulation projections were carried out under his supervision.

17. For example, according to a recent study—“Estimates of Productivity Growth for Indian Economy,” India KLEMS Project at ICRIER in collaboration with Reserve Bank of India (2014)—the trend rate of growth in total factor productivity (TFP) of the overall economy increased from 1.1 percent per annum during the 1980s and 1990s to 2.3 percent during the 2000s (2000–01 to 2008–09), led by manufacturing and services sectors. Overall, the contribution of TFP growth to real GDP growth increased from 21 percent during the 1980s and 1990s to 30 percent during the 2000s. For the next two decades, we can expect the TFP growth to be at least of the same order as was recorded during the 2000s. If infrastructural shortages are addressed satisfactorily, then TFP growth can easily exceed the one estimated for the 2000s, which can provide an upside boost to growth prospects.

18. These infrastructure numbers are based on estimates for gross domestic capital formation (GDCF) according to National Accounts Statistics (NAS) and are typically lower than those usually made for infrastructure by the Planning Commission. For example, expenditures made for buying land in the process of making infrastructure investments are not included in GDCF as these are regarded as transfer payments in the GDP context. This and other factors could lead to an underestimation of infrastructure estimates in NAS classification and hence this paper by 1–1.5 percent of GDP (NTDPC, India Transport Report).

19. See Kapur and Mohan, “India’s Recent Macroeconomic Performance.”

20. Surjit S. Bhalla, “What You Sow Is Not What You Reap,” Indian Express, October 19, 2013, http://archive.indianexpress.com/news/what-you-sow-is-not-what-you-reap/1184525/.

21. See Kapur and Mohan, “India’s Recent Macroeconomic Performance.”

22. Dani Rodrik, “The Past, Present, and Future of Economic Growth,” Working Paper 1, Global Citizen Foundation, June 2013; Dani Rodrik, “An African Growth Miracle?,” Richard Sabot Lecture (2014); Marcel Timmer, Gaaitzen de Vries, and Klaas de Vries, “Patterns of Structural Change in Developing Countries,” GGDC Research Memorandum 149 (University of Groningen, Groningen Growth and Development Centre, July 2014).

23. Committee on the Global Financial System (CGFS), Capital Flows and Emerging Market Economies (Chairman: Rakesh Mohan), CGFS Publication No. 33 (Basel: Bank for International Settlements, 2009); Obstfeld, Maurice, “International Finance and Growth in Developing Countries: What Have We Learned?,” IMF Staff Papers 56, no. 1 (2009): 63–111.

24. Ila Patnaik, Sarat Malik, Radhika Pandey, and Prateek, “Foreign Investment in the Indian Government Bond Market,” DRG Study No. 1 (Mumbai: Securities and Exchange Board of India, 2013).

25. Rakesh Mohan, Michael Debabrata Patra, and Muneesh Kapur, “Currency Internationalization and Reforms in the Architecture of the International Monetary System: Managing the Impossible Trinity,” Working Paper WP/13/224 (Washington, DC: International Monetary Fund, 2013).

26. Rakesh Mohan and Muneesh Kapur, “Monetary Policy Coordination and the Role of Central Banks,” Working Paper WP/14/70 (Washington, DC: International Monetary Fund, 2014); Raghuram Rajan, “Competitive Monetary Easing: Is It Yesterday Once More?” Reserve Bank of India Bulletin 48, no. 5 (May 2014): 1–12.