Glitz and grime

With India’s GDP growth accelerating to 9.1 per cent per annum during the first half of 2006-07 —highest since reforms began in 1991 — the country clearly is one of the world’s fastest growing economies, second only to China. Finance minister P Chidambaram naturally is elated by this development but desisted from predicting the economy’s performance for the year as a whole: “There are no limits to my expectations. Just savour this moment”, he said. The official discourse goes even further in considering double-digit rates of growth as ‘eminently feasible’ in 2-3 years time.

With these half-yearly tidings, it is unlikely that India would register an overall growth less than 8.5 per cent in 2006-07. This would indeed be the fourth straight year in which its growth averaged 8 per cent — a noteworthy achievement considering the fact that such growth rates earlier were associated with rebounds from a disastrous agricultural performance in the previous year. The grounds for being bullish on India’s growth are that this association has been broken of late: The pace of expansion during 2005-06 and 2006-07 reflect a more broad-based pattern of growth.

The big question is whether India’s rapid growth is sustainable? Chidambaram thinks it is, as he believes the economy will grow by more than 8 per cent in the next few years. However, for all his optimism, the point is that there is no particular virtue or machismo associated with high growth rates. To be sure, they are desirable as only with faster growth is there a better chance for addressing the problem of poverty in the country. They are desirable as they also result in revenue buoyancy to enable the finance minister to meet his social spending priorities and deficit reduction targets.

But for how long can India’s sizzling growth story continue if the economy faces the risk of overheating and rising inflation, as has been recently argued in The Economist? Prima facie, the grounds for concern surely are the elevated asset prices with stock market indices going through the roof. The real estate market, too, is red hot, exhibiting all the hallmarks of a speculative bubble. Rising incomes and cheap retail loans are helping the urban middle class to splurge. Booming consumer demand is driving India’s growth story.

To meet this surging demand, a survey of the National Council for Applied Economics Research shows that domestic firms are working close to or above their optimum levels of capacity utilisation. Many companies are experiencing shortages of skilled workers and managers. Not surprisingly, India reported the highest average salary hikes of 13.8 per cent this year in a wider Asia-Pacific context. All of this is being reflected in rising inflation — with the headline rate touching 5.45 per cent of late, the highest in 18 months. Consumer inflation has already hit 7 per cent.

While all of this is true, none of these facts have escaped the attention of the vigilant Reserve Bank of India, which in its latest annual policy review has signaled that money will not come cheap. If it does takes a call that the economy is indeed pushing against the limits of its productive capacity — which is what overheating is all about — it is bound to raise interest rates in early 2007, if not earlier, to cool down the retail loan-induced surge in consumer demand and real estate bubble. But overall growth need not get impacted so long as investment demand remains high.

Beyond overheating, the question mark over the sustainability of India’s growth really is when it is accompanied by a dangerous widening of disparities between richer states and poorer ones and income inequalities. Considering the passion with which the double-digit growth imperatives are being espoused in India, it is worth noting that China achieved double-digit rates between 1991-2001 but there are indications that its government prefers to lower growth to 8 per cent to address the growing urban-rural divide and regional disparities that has accompanied its progress.

It worrisome indeed that the prospect of rapid growth will be accompanied by richer states like, Maharashtra getting even more prosperous by attracting FDI while Bihar and UP would lag behind. These grounds for worry are not without basis as the income gap between the richest and poorest states in the country has widened significantly since 1991. The upshot is that there is no virtue in double-digit growth. Even a lower growth rate will do if the gains are better distributed and regional imbalances don’t get out of hand.

The writer is a commentator on economic affairs.