India’s Gross Domestic Product (GDP) of an average annual growth rate in the last 4-5 years has been an ‘incredibly high’ 15%-plus, in dollar terms, according to Arvind Panagariya, professor of Indian political Economy and economics at Columbia University . Panagariya reckons that India’s Economy would equal the size of the US Economy in two decades by growing from the present $1.2 trillion level to $18 trillion .
“India has witnessed an 8-9% growth on an average in the last 4-5 years. But the rupee has also appreciated by 6-7% on an annual basis during the same time. Therefore, if the growth is calculated in real dollar terms, then the growth of the Indian Economy would be 15% and this is an incredibly high number,” Panagariya said in the Capital on Friday. “India’s economic growth will be sustained and would even jump to 10-11% if reforms are continued in earnest,” he said.
To sustain such growth levels, Panagariya emphasised the need for reform of labour laws and the power sector to make a perceptible dent in reducing the number of people dependent on agriculture and moving them on to non-agricultural, industrial activities.
“The slow transformation of the Economy to date is attributed to the slow growth of industry, especially manufacturing. The share of manufacturing in the total output of India has remained stagnant at 17% since 1990-91,” he said. This can be attributed to the slow growth of the unskilled labour intensive sectors like apparel, footwear and toys, in which India has a comparative advantage, he said. On the other hand, China was able to pull a large number of people out of agriculture into these non-agriculture and employment intensive industrial sectors.
Columbia University’s resident Indian expert in his latest book ‘ India :The Emerging Giant’, calls for a slew of sweeping reforms to unshackle the country’s potential. Consider a sampling of his key ideas—increase foreign direct investment cap in insurance, privatise banks in a phased manner, repealthe Essential CommoditiesAct, end government monopoly over agricultural produce marketing, allow lateral entry of specialists in the civil service, replace the Indian Telegraph Act, end fertiliser, electricity and water subsidies and implement the new bankruptcy law at the earliest. Though compelling, the measures will take some doing in the prevailing political climate.
However, he is cautious about full capital account convertibility as the potential costs in case of a financial flow crisis are... large. Two areas in which progress remains elusive to date, he says, are rural roads and urban infrastructure, including urban transportation. On Laloo Prasad Yadav’s performance in railways, he notes that progress is unlikely to be sustained unless a significant portion of railway operations are subject to commercial pressures.
In the context of the ongoing slowdown in the United States , Panagariya said his view of India was optimistic, as the country’s savings rate has risen from 29.7% of GDP in 2003-04 to 32.4% in 2005-06. Also gross investment during the same period rose from 28% to 33.8% of the GDP. Pointing out that India 's private corporate savings also rose from 4.7% of GDP to 8.1% over the same period, he said he was confident that in the near future it would increase to the Chinese levels of 29% in 2005. “Given the stability of the rupee in terms of the dollar, the progress achieved in dollar terms so far will be largely preserved rather than reversed by a massive depreciation,” he says.
Panagriya’s rosy growth calculation of the GDP in current dollar terms at the market exchange rate is obtained by dividing the GDP at current consumer goods prices in rupees by the exchange rate, as his book explains. GDP in current rupees has grown at extremely high rates and the value of rupee against the dollar has increased by 9.3% during the three years since 2002-03.
India ’s GDP rose from $506 billion in 2002-03 to $806 billion in 2005-06, representing a 59% growth. “The annual growth rate of GDP in current dollars during 2003-06 turns out to be a whopping 16.8%. Allowing for 3% inflation in the US , this works out to a 13.8% annual growth in real US dollars,” he points out. If the growth rate could be sustained, the GDP in India would exceed the 2005 US GDP of $11.5 trillion in just 21 years.
The biggest challenge for India is to grow agriculture at 4-5%as its contribution to GDP was a mere 20% while 60-65% of the country's population was depended on it. There was urgent need to speed up reforms in agriculture as the long-term solution lay in bringing down the absolute number of labour force in agriculture.However, he pointed to poverty seeing a tangible decline in the last two decades compared to the first three and a half decades after independence.