A lot of debate during the five years of the previous government was around a 7% growth, give or take a few basis points. It seemed then that India had achieved 7% as a default option, though doubts were raised about the estimates by Aravind Subramaniam. He had failed to find the inputs associated with growth at a sufficiently high level to justify the growth estimate. The jury is out.
Even so, the ambition of doubling GDP size from $2.5 trillion to $5 trillion in seven years has been adopted. Yet, the course of the economy during the last two quarters, for which we have estimates, belie the hope that India can chart a steady growth path to $5 trillion, unless drastic action is taken. So far, there seems to be no urgency on the government's part to correct the temporary fall in growth rates. The Budget took the view that no short-run stimulus was needed. It kept the level of personal taxation high and raised various indirect tax rates.
The way to understand this lack of urgency is political. Politically, one can view the BJP under Modi’s leadership as a coalition of two powerful forces. The ideological core of the BJP cares nothing about economics. It wants to build a Hindu Rashtra and along that path, they have marked goals such as Ram Mandir, Gau Raksha, Hinduisation of the education curriculum, putting Hindi above English as national language, etc. This ideological package has been there since the 1980s and got the BJP 182 seats at most.
Narendra Modi brought a growth and technological modernity narrative from Gujarat to the BJP. He has a global vision, is environment friendly and willing to cast the BJP net wider to include Dalits, women and other deprived groups. It was this strategy that won the extra 100 seats in 2014, which gave BJP a single party majority.
During 2014-19, the ideological section was kept back. No temple, no cultural change, but growth was the focus. After re-election, it seems economics has taken a back seat and politics is in command. So, educational legislation entrenching the role of Hindi has been a priority. Article 370, the oldest commitment from the Jan Sangh days, has been dealt with. No doubt Ram Mandir will follow soon as the Supreme Court is hearing the case at breakneck speed.
Could it be that the compulsions on Modi 2.0 are cultural rather than economic? Or is it the case that India does not have the foundations for a sustained high—7/8%—growth rate? Once the talk was of demographic dividend. Now, the prime minister, speaking from the Red Fort, expresses concern about population growth. Are the constant weaknesses of Indian economy resistant to reform?
The numbers available over the last 70 years are revealing. The first thirty years, 950-1980, GDP growth numbers average 3.5%. The next 23 years, 1989-2003, give us 5.5% as a rough average. In the 21st century, the Indian economy achieves 8.7% in 2003-08, 7.7% in 2008-12 and 6.9% in 2012-18. Thus, there is a low growth equilibrium of 4-5% for the first fifty years and of 7-8% for the last twenty years.
These last twenty years have coincided with globalisation and India had prepared itself to benefit from it, thanks to Rao-Singh reforms. But, the global economy has slowed down. India benefited more from service sector growth, thanks to cyber business, than industrial growth. From 1997 onwards, the growth rate of services has exceeded that in industrial output in all years. Agriculture has continued to be the slowest growing sector through the seventy years.
Thus, the economy remains predominantly a service economy. While there has been industrial growth, it has not been the driver of the economy. The reasons are well known in terms of labour market strangulation by misguided legislation in the socialist decades as well as high cost of land. Credit, too, has been high-cost since bank nationalisation created an inefficient and corrupt banking sector. The alternative non-banking financial sector has just imploded. The difficulty for the creditor to collect debts has just recently been a subject of reform, but even that reform seems to have stalled.
The global economy is slowing down. We may even be entering a recession. So, India slowing down may be expected. The real worry, however, is that the ideological section of the BJP not only rates growth as a low priority but may actually be hostile to it. India is a rare polity in having no political party that is openly pro-business. The normal Right-Left division is along religion/culture lines and not state versus market lines. The higher taxation at the top income brackets (consisting of only 5000 super rich), the continuing tax terrorism indicates an anti-business culture. The economic ideologues in the BJP, such as the Swadeshi Jagaran Manch, do not like FDI. The Hind Mazdoor Sabha would not support any labour market reform which was business friendly. Their priority is agriculture not industry.
Back to Hindu rate of growth?
Author is prominent economist and labour peer. Views are personal