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Great Indian growth trick

In this lucid and witty collection of essays, a former chief economic advisor joins the dots and finds some glaring holes, writes Prem Shankar Jha.

books Updated: Sep 21, 2009 10:55 IST

<b2>Economics has often been described as a dismal science. But Shankar Acharya’s slim volume on India’s economy is the exception that proves the rule. Acharya’s book is a compilation of articles that appeared in the Business Standard when the global economic crisis was still gathering steam. Its first seven essays are devoted to explaining the origins of the crisis and assessing the government’s response. In one of these (written in November 2008), he points out that India had already had its fiscal stimulus in the form of farm loan waivers, civil servants salary and pension increases and export subsidies. So there was little scope left for a further increase.

But clearly, Finance Minister Pranab Mukherjee didn’t heed Acharya’s caution. So today, we have a record budget deficit and record government borrowing to finance it. Not surprisingly, we also have the highest real rates of interest in the world, an investment drought and an economy that is about to slam into the buffers of stagflation.

As a former chief economic adviser to the government, Acharya examines the management of the Indian economy, especially in the first five years of the UPA government, with authority. But he does this with a humour that makes it impossible for his targets to take offence.

His assessment of the UPA government’s performance is fairly scathing. “What would you do if you were a reform-oriented finance minister in an unwieldy coalition government…?” he writes. “The short and truthful answer is, ‘not much’. The somewhat longer answer is… first you describe, in numbing detail, your budget allocations for education and health and other social sectors, while eliding over the fact that the cutting edge of these programmes are the responsibility of the state governments. You spend the next 20 minutes… talking about agriculture… Then you announce the expansion of the dubious National Rural Employment Guarantee Scheme to 130 new districts, thus making a virtue of the internal battle you lost to contain the expansion of this misconceived and expensive gravy train.”

One of the essays in the book deserves special attention. How reliable are India’s official estimates of economic growth? Most economists believe that China’s growth estimates are somewhat inflated. But could this be true of India as well? The doubts, he points out, all centre round the measurement of growth in the services sector. Till 1995-6, this closely paralleled and was almost identical to the rate of growth of industry. But from 1996-7, it took off on its own trajectory, averaging 8.5 per cent growth a year till 2005-6, against industry’s 6 per cent. Not one of the seven fastest growing countries in the world between 1965 and 1999 showed a similar divergence. Also, almost no country has experienced such a high growth of productivity in the traditional services sector — transport, trade, tourism and entertainment.

Acharya reconstructs the estimate by assuming that services grew 1 per cent faster than industry from 1996 onwards and concludes that the real rate of growth between 1996 and 2005 was not 6.2 but 5.3 per cent. Using the same yardstick, the growth rate from 2003 till 2008 was not 8.8 but 7.9-8.0 per cent.

Acharya is aware of the many caveats that can be entered against his adjustments, so he calls his correction only an exercise. But there is one peculiar piece of overestimation: the need for whose correction was admitted in the 2000-2001 Economic Survey. This is the habit of counting increases in civil servants’ salaries as real increases in the GDP. The Fifth Pay Commission added 0.7 per cent to the GDP in 1997-98 and 1998-99, and possibly another 0.4 per cent in 1999-2000. What is more relevant, the Sixth Pay Commission has added a full 1 per cent to the GDP estimate for 2008-09.

Take this away and the growth rate falls to 5.7 per cent for the year and a paltry 3.8 per cent for its second half. There is little cause for complacency. But try telling the government that.

Prem Shankar Jha is the author of India: A Political Economy of Stagnation