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Wheels within wheels

Predictions about India?s GDP growth will vary according to the pundit one is talking to, writes Pramit Pal Chaudhuri.

india Updated: Feb 01, 2007 03:55 IST

If you line up all the economists from end to end they will not come to a conclusion, say the wags. Predictions on India’s GDP growth for the coming year are impressively varied. The bulk of them  seems to hold out for 7.5 per cent or less. India is overheating, they say; time for some cooling down. At the other end are a small group of dissenters who say India is past the tipping point; that it will touch the magic 10 per cent. And then there are a number of mainly domestic fortune-tellers who have split the difference and plumped for 8-8.5 per cent growth.

These predictions are not based on jiggery-pokery. There are tangible assumptions underlying the conclusions of these schools of thinking. The School of Low Growth argues India’s economy is clearly running too fast while carrying too much flab. The government, for example, is spending too much. For once, the states have trimmed their budgets but the story in New Delhi remains one of red ink. The IMF says general government debt remains about 80 per cent of GDP. The low growthers note that the average Indian has joined his leaders in debt-driven expenditure. This school says the results are clear: the inflation rate is politically and economically unsustainable. For example, it is over 7 per cent for factory workers and 8 per cent for their country cousins. There won’t be any white knights galloping to the rescue: the Indian stock market is the second-most expensive in Asia.

Inevitably, the Reserve Bank of India will have to slam the brakes. Interest rates will go up, consumers will become unconfident and government finances — which have no buffer against high interest rates or slowing growth — will get pilloried. The Manmohan Express will slow down. Those enrolled in this school of thought include the IMF, the World Bank and HSBC. They all forecast growth of 7.5 per cent or less.

The School of High Growth believes there is more sugar and spice in the Indian economy than meets the statistician’s eye. They largely ignore concerns of too much supply chasing too few things. In any case, they say, it is global interest rates, not the domestic ones, that crimp consumption, cripple government. For them the real story is the coming Indian investment boom.

Like Japan in the 1960s and China in the 1980s, India is on the verge of seeing a huge construction boom in the form of new roads, ports, new everything. Economist Surjit Bhalla caused a flutter last year by arguing that India’s investment rate has increased much faster than government figures — which have a two-year lag — indicate. Looking at a host of tertiary and related data he believes the investment rate has touched 40 per cent of GDP.

Most pooh-pooh this conclusion. After all, it was only 30 per cent in 2005. But at least one financial institution, Credit Suisse, has planted its flag next to Bhalla’s. Its December forecast predicted 10 per cent growth for India in 2007. Its analyst, Dong Tao, wrote, “Our most significant growth upgrade for 2007 is in India, from 8.5 per cent to 10 per cent... lifted by strong domestic consumption and public investment.” In other words, Indians will not be holstering their credit cards and their enthusiasm will be topped off by a wave of cement-pouring across the country. Given that most analysts now believe India grew 9 per cent in 2006, if nothing goes wrong, getting an additional one point should not be hard.

Finally, there’s the School of Medium Growth. Crudely put, they take the negative of the first school and the positive of the second, blend and dilute, and come up with a cocktail. They posit an Indian economy that will grow by 8 per cent, roughly the average rate for the past four years. This school argues inflation is the elephant in the room that cannot be ignored. The RBI has been coming up with wheezes to curb inflation without scaring consumers. Rules regarding real estate loans in India are now tighter than Basel norms, the international standard. This is having some effect, but an interest rate hike of some small size seems inevitable by the end of January.

Combined with a slump in global oil prices and reduced tariffs for food items, it could just be possible for the RBI to tame the fires of inflation without giving the economy the sniffles. However, many medium growth advocates also see an investment boom, but one that still has some time to go before it begins to pick up speed. At best, it will begin to trickle into the growth figures in the latter half of 2007.

This is the other pachyderm working its way into the economy. Advisors at the PMO say there is about Rs 350 billion in committed funds for infrastructure in the coming five years. If momentum picks up, then even private investors like Citigroup and Blackstone have indicated they will set up infrastructure funds of their own and pour in tens of billions as well.

An economy is like a centipede on acid. Some legs march in the wrong direction, some in the right one. But if there are more right-moving legs, they can negate the wrong ’uns and move the economy in their direction. If a government can get more reforms through, it can get more legs on to the growth path. While the Manmohan Singh government has shied away from hard reforms, it has put in place lots of below-the-radar administrative measures. If it can put in place more and implement some of the reforms it has carried out, then the economy will be all that more buffered against any possible bad news in 2007. The Electricity Act allowing private investment has been on the books since 2003. It’s about time to make it a reality. The laws for giving India genuine markets for corporate debt and government securities are ready. The list goes on.

If 2007 is a year of proactive reform and not one of political sloth, India could break the 10 per cent barrier — and interest rates could go hang. The good thing about reforms is that, unlike temporary measures like throwing around government money, they keep giving returns until the cows come home. Go for reforms — and all these schools of economic thinking will be swept away by the College of Sustained High Growth.

Email Pramit Pal Chaudhuri: pramitpc@yahoo.com