Downside factors in Indian growth story

We have been witnessing a lot of literature, media releases, and blogging on Indian economy. They are generally divided into 2 camps- optimistic/hopeful and pessimistic/cautious.

I just came across this paper that falls into pessimistic/cautious category. It is by Shankar Acharya (SA) and is a highly referred paper so one needs to look into it. It is written in 2004 but is still pretty relevant.He lists all the factors that have been cited by the first camp and criticizes them one by one:

1.  Demographic Dividend (Labour): Most analysis just look at broad India numbers and suggest that India would gain from the huge working population and falling dependency ratio.But Acharya does a state-wise analysis and finds states that have the highest fertility rate are laggards (Bimaru States – Bihar, MP, Rajasthan and UP)  and those with lowest fertility are leaders. So is the demographic dividend happening?And when one looks at fertility rates and per capita incomes the disparity grows further as population has grown higher in Bimaru states.

2.  Demographic Dividend (Capital): The conventional thinking is, as people in working age (15-64) group grow so would the savings and the investment or capital in the country. This would mean more capital would be deployed leading to higher GDP growth.The hypothesis is that as the demographic trend cited has begun almost 15 years ago, we should be seeing some effects by now. But Gross Domestic Savings has increased by just 20.4% ( average of 1985-90) to 24.2% in 2002-03  largely because of negative savings of Public Sector.

Before I go on, this point needs to be revisited and revised by  Acharya. As per latest CSO estimates, India’s savings and investment rate has improved quite a bit. The average gross savings and investment rate as a % of GDP (at market prices, as he also takes the same) between 2003-06 is 31% for each.  (And if you look at the respective data as a % of GDP at Factor Cost then it is 34% for each. He criticises a Rodrik paper which says India’s savings rate could increase  to 39%. Well if you look at estimates based on Factor cost, we are getting nearer to the Rodrik guesstimate.)

3. Productivity Growth: SA rightly says that to calculate productivity growth via a metric called Total Factor Productivity Growth is difficult because if output growth is high, TFPG would be high and vice-versa.

4. Others: SA then comments on the well-known problems-  falling standards of  institutions in India (particularly the Indian bureaucracy), the deplorable infrastructure, the slowing down of reform process, agriculture, fiscal stress and increasing inter-regional disparities.

In the whole paper he criticises two pieces, one a paper by Rodrik and Subramanian (RS) and a speech by Kelkar. I have already pointed out above one criticism needs to be re-looked.  

SA also criticises the Planning Commission for assuming 7% plus growth rates in Bimaru States during 10th plan where as they grew by only 4% during 9th plan (1997-02). On checking the growth rates for these states for 10th plan period,                   
                   Net State Domestic Product (2002-05)
Bihar –        9%
MP-             5 %
Rajasthan – 6% 
UP-             4.6%
So, we do witness high growth rates in Bimaru States. But these growth rates need to be taken with a pinch of salt, as the variation (measured by standard deviation) in growth is pretty high. All Bihar, MP and Raj have high variation of almost 15. Only UP has a low variation of just 0.85.  So, a bit of a mixed evidence really.

Overall, a good analysis and helps us know more factors we need to be cautious about while analysing India’s growth story. But then he needs to revisit some facts and revise the paper.  

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One Response to “Downside factors in Indian growth story”

  1. Assorted Links « Mostly Economics Says:

    […] who always provides caution on India growth story.  I had written about one of his papers here. In BS today, he points to more evidence, this time on health indicators in India. Pretty […]

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