Economic Growth: Differences in Priorities

By Priya Prasad

At the 6th Sage-MSE Endowment Lecture on “India’s Growth in Global Perspective,” President of Chintan Live and Former Executive Director to the International Monetary Fund, Arvind Virmani highlights the role of economic growth in India being a key contributor to the global economy. However, as Pankaj Mishra points out in his review Which India Matters in the New York Review of Books, this growth occurs at a disproportionate rate, creating a deepening economic and social divide between the “haves” and a large segment of “have nots,” mostly from the agricultural sector. Mishra mentions that these are “all the ingredients necessary for a Latin American–style oligarchy.”

Following the United States (US), India was one of the key players that helped sustain global demand in the aftermath of the 2008 financial crisis, while Germany, China, Russia and Saudi Arabia withdrew demand. Virmani says that the reforms of the 1990s are responsible for this high growth rate. He cites that a paper, Berg et al (2007), showed that the ‘90s reforms—decontrol, import liberalisation, market exchange rate, phased liberalisation of the capital account, development and regulation and caution of the current account—were key to accelerating growth not only in India but also globally. “So it’s a vindication of what was done in the 90s. It happens everywhere. It was not something that we had discovered,” says Virmani. Ten years ago, the picture was different, the US was the largest contributor. Now, the Chinese have taken over, with the US relegated to third place, while the Euro zone has a negative contribution to growth. The outcome of these reforms in India can be seen in the rate of growth which has risen exponentially from 3.9 per cent in the 1980s to 8 per cent to 8.5 per cent in the 2000s.

According to Sen, growth rate, as Mishra highlights in his review, is a very “daft” measure of economic progress. Growth reforms in India, while increasing gross domestic product (GDP), have not done much to alleviate poverty. Mishra cites the example of Brazil, which although had grown by only one per cent between 1993 and 2005 as compared to five per cent for India, the rate of poverty in the Latin American nation was brought down drastically.

Another indicator of India’s performance at the global level is fast growing countries, which refers to a country with an average per capita growth rate of seven per cent for more than a decade. An additional criteria for a country to be fast growing is that the rate must keep rising. “If you fall by 50 per cent and then suddenly grow very fast, that’s not a very great achievement,” Virmani adds. Before the 1950s, no country had achieved that level of growth. It was only after that time period that 19 countries managed to meet the seven per cent benchmark. Relaxing the benchmark to six per cent, only 15 countries met the criteria, among which India was the fifth fastest, growing at 6.2 per cent. China was the fastest growing at 9.9 per cent, followed by Belarus at 7.6 per cent and Bhutan at 6.3 per cent.

Virmani also mentioned that the growth differential between India and China had been converging since the 90s. “The rates of growth of China and India will cross over in the middle of this decade, around the middle. It’s impossible to predict very precisely,” he says. However, this differential would have been lesser still if not for the disaster of the last two–three years.

While the good news puts India on the global economic map, internal economic challenges impede its growth. Virmani says that the growth potential has fallen due to the slow pace of policy regulators and institutional reform. “The issue is maintaining and sustaining growth, that is the lesson I was trying to convey. It is not a question of raising the growth rate,” he adds. He also mentions the government is spending more despite a widening current account deficit, which he blames on “institutional inertia.”

He emphasises that the policy changes needed for growth are different for those needed to sustain it. He further espouses the idea of pragmatism to achieve growth, as opposed to ideological orientation, which stagnates an economy. “The East Asian countries are the most important exponents of that. That’s why so many countries in Asia sustained it; they were completely pragmatic, no ideologies whatever,” Virmani emphasises.

In its early modernising days, postwar Japan was, like India and China, a dual economy—agriculture and a large rural population on one hand and industry on the other. In his review, Mishra talks about how Japan’s economic growth focused on educating the population, particularly the rural, agrarian population, ensuring that they transition smoothly into the “modern sectors of the economy.” Although they took a pragmatic approach, as Virmani states, what helped was a welfarist growth orientation, focusing on poverty alleviation, reforming health and education, developing a skilled labour force.

While Virmani’s view of economic growth is market driven which celebrates India as a contributor to the global economy, the welfare approach of Amartya Sen and Jean Dreze provides a sharp contrast to the existing inequalities and poverty that are still prevalent regardless of the seven per cent (4.8 percent for Q2 FY14) growth rate.

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Which India Matters?