Economic Growth: Luck By Chance

As the government prepares to empty its filing cabinets and heads for the hot and dusty plains to solicit votes, it is visibly exuding optimism about the economy. According to its non-elected representatives, all the lead indicators seem to be showing some signs of a revival with the first glimmer of some incipient growth pushing through the enveloping gloom. Steel, cement, auto, fast moving consumer goods (such as soaps and detergents), food items, beverages, volume of goods moved by the railways, have all shown some improvement in January, after having shrunk in the previous two months.

With the government and other political parties having begun their courtship dance with the ballot box, this feat is sure to figure high on the Congress’ list of achievements. The economic slowdown in the past six months has certainly become a sore point with the Congress and threatens to blot its legitimate bragging rights of delivering an average growth rate of 9% year on year over the past four years. This year it may drop to 7%.

But before we start congratulating the government for its excellent economic management, let’s hit the pause button (a la P Chidambaram) for a moment. How much of the Indian economy’s resilience is owed to governmental intervention? Which parts of the successful India story can be credited to government strategy? Or, is there a strategy at all? Let’s find out.

• One of the economy’s mainstays for over a decade has been services. This contributes to over 50% of the country’s GDP and has been providing enormous growth impulse over the past few years. If you were to listen to the government representatives, it would seem as if they had foreseen the coming age of services and had designed this structure. The truth is somewhat different. There are many reasons behind the extraordinary growth of services. One of the reasons is the kind of elaborate rent-seeking structures erected by the government in the manufacturing sector. Any person wanting to set up a manufacturing facility in India still has to fill a large number of outstretched palms, making the operations costly from day one.

• Here’s another unique aspect of the economy for which politicians routinely take credit. One of the saving graces for the Indian economy during this episode of the downturn is the safety net expected to be provided by Indian consumers, even as the international economy winds down and eschews consumption of goods made in India. This has had a deleterious impact on Indian exports, leading many exporters to scale down their operations and restructure their businesses. Fortunately, for the planners and the administrators, the impact of the global slowdown is likely to be cushioned, to a large extent, by the gigantic Indian domestic market, which will continue consuming and providing the growth push to the economy. Again, it’s not as if some wise person in the government woke up one morning and presciently decreed that henceforth the country would focus only on the domestic markets. The government has always felt that exports should be the apposite strategy for economic growth, just like some of the other emerging countries. Guess what? Exporters also have to manufacture and that, as we said earlier, is quite an endurance test in India. Plus, the intricate structure built around promoting exports also worked as a huge deterrent. The government also did not quite see exports as an alternative, viable economic growth model till the Southeast Asian success story burst on to the scene. Hence, till then exports did not quite get the required push. So, no grand design here too.

• Savings, especially by households, is another strong point for the economy. But, there is a difference here. This strong economic foundation has developed for two reasons — partly by government design, and, partly because of deficiencies in services that governments elsewhere in the world provide to their citizens. The government in the 1960s and thereafter made a huge push to develop the banking branch network to funnel savings into the formal system. While that is good, the same savings were then used to finance the government’s various profligate expenses. The government harvested savings not to strengthen the economy but to finance its populist policies. Secondly, savings also grew in the economy because the Indian government has failed to provide any social safety nets for its citizens. Unlike in USA and various other European economies, where the government provides unemployment benefits as part of their social contract, Indians have to fend for themselves. In the current downturn, for example, many Indians – especially in the urban and semi-urban settlements — are wary of spending because of uncertainties surrounding their jobs. This has impacted consumption but, conversely, is bound to improve the savings rate.

The credit, therefore, should go to the Indian citizen who, despite the various hurdles and inconveniences, is using his ingenuity to improve his lot at all times. This collective strength has not been forged by some steely policy push, but has developed by default, almost in line with Charles Darwin’s theory of survival.

(Courtesy: The Economic Times)

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