PM Narendra Modi’s 10% growth target far-fetched

Double-digit gross domestic product (GDP) growth advocated by Prime Minister Narendra Modi on a sustained basis could be far-fetched given the current state of the Indian as well as global economy. Only a miracle can help the economy grow in double-digit.

China is perhaps the only economy that has grown in double-digit for two-three decades on a sustained basis on the back of structural reforms and massive skilling of over billion people besides quality health and education in the decades preceding its high growth.

Though India had grown over 10% in market prices and a little over 9% at factor cost for four consecutive years from 2004-08, it could not sustain it due to poor infrastructure and lack of skill development leading to overheating of the economy. Subsequently, the 2008 global crisis pulled down the economy further from which India is yet to get back to a high growth path. This is despite the fact that the new method of GDP calculation of GDP has inflated India’s growth by 1.5-2%.

Analysts defer on whether double-digit growth is sustainable or not. But many say that no country barring China has had high growth for a long period continuously. Japan, South Korea or miracle countries of South East Asia too have not achieved double-digit growth for over decades. They achieved at best 8-9%. “One Swallow does not make a summer,” former RBI governor Y V Reddy and 14th finance commission chairman, once said on China’s high growth. He, however, added India can at best achieve a sustainable growth of 8%, which is good enough to become a developed country in a decade or so.

Endorsing this viewpoint, Crisil chief economist D K Joshi said on Monday his rating agency has forecast that 10% growth is not possible for India given the current global economic scenario. “Our forecasts do not support double-digit growth,” he said, adding it can happen in an odd year but certainly not on a sustained basis. On a continuous basis, Joshi said India can grow at 7.5-8% because of the structural reforms carried out by the Modi government.

When India grew at over 9% during UPA regime, global growth was around 5%. Global growth is now around 3% and is expected to slow down after a year or two. So, double-digit growth can at best be a pipe-dream.

India’s former chief statistician, TCA Anant, however, said double-digit growth is in the realms of a possibility and if China has done it, India too could do it. But what needs to be done is a matter of debate and Niti Aayog is already working on it. “I am an optimist and India can achieve it.”

After an overdose of fiscal and monetary stimulus after 2008 crisis, India achieved near 8% growth when Pranab Mukherjee was finance minister in the UPA government. Buoyed by this good growth, Mukherjee suggested at a full planning commission meeting chaired by Prime Minister Manmohan Singh that the growth target should be 9% for the 12th five-year plan and not 8%. The meeting was convened to approve approach paper for the 12th five-year plan. It was the prime minister’s Economic Advisory Council chairman C Rangarajan, who struck down Mukherjee’s proposal and said even 8% will be a tough ask considering the global and Indian economic situation. Now looking back, the 12th plan could not even achieve an average 8% growth set by it.

The current economic dynamics can at best support an economic growth of 7.5%. To achieve 8% GDP growth, India’s exports will have to grow at 12% annually and to achieve 9% GDP growth, the exports will have to grow at 20% and that’s what happened during 2004-08 when GDP growth was over 9%, former National Statistics Commission chairman and top economist Pronab Sen told DNA Money.

If India were to grow at 10%, it would have to pursue export-led growth like China. Nearly 40% of China’s GDP came from exports against India’s mere 20%. China virtually funded its exports to Africa thereby resulting in Chinese banks suffering huge non-performing assets. The recapitalisation of Chinese banks was done by its huge foreign exchange reserves of $3.5 trillion built out of its current account surplus.

India’s $420 billion foreign exchange reserves are built through borrowing as it runs huge current account deficits. So the foreign exchange reserves cannot be used to recapitalize the banks as it is not government money. In this scenario, India cannot adopt Chinese model to fund its exports. Also to achieve 20% export growth by itself, big-ticket export reforms will have to be carried out, particularly in infrastructure, which can happen in medium term only.

Former finance minister and Congress leader, P Chidambaram is right in saying “the tyres of three of the four wheels on which the economy rides are punctured. Firstly, exports, secondly private investment and gross fixed capital formation. The only tyre that is ok is the public expenditure. The exports were in negative territory not long ago, private investment is not picking up due to excess capacity and capital formation has come down to 28.5% from a high of 37% during 2004-08.”

With most of the cylinders of growth engines not firing fully, it is really over ambitious for PM Narendra Modi to fix such stiff target of double-digit growth for the Indian economy.