India entering of a 20-year high-growth cycle – Economic Survey

The Economic Survey of India, the basis on which the country’s economic policies are formulated, sounds an optimistic beat for India’s growth during the next twenty years, even as short term risks remain. It forecasts 9% plus growth for the next two years and another ‘step up’ after that for the next 20.

The most positive take-away from the Survey has to be its prediction that India will return to its pre-downturn economic growth rate of 9%-plus from the coming year onwards. After growing at 9% plus since 2005-06, growth had dipped abruptly to 6.8% in 2008-09 due to the global economic turmoil. Due to the gradual recovery, the expected growth for the current year is 8.6%.

The Economic Survey points out that India has two strong decades of economic growth ahead of it, with yearly growth of 9% and above.

“There are two reasons for this expectation,” the Survey, prepared by the Finance Ministry, points out. The two reasons are the rising savings rate and the high level of investments going into the infrastructure sector.

“Given the momentum in the savings and investment rates and also the fact that India’s demographic dividend is yet to peak and there is evidence that the savings rate for the working- age population of India is disproportionately high, the ratio of investment to incremental capital output ratio is expected to rise in the next half to one decade. Further, the fraction of investment that is going towards building up infrastructure has been rising,” it explained.

“The next two decades should see the Indian economy growing faster than it has done any time in the past and also faster than the growth in the next two years,” it went on.

The Survey pointed out the country’s savings and investment rates, which had dipped slightly to 32% during the recession, bounced back last year to 33.7% and is likely to increase further, going by current trend.

The survey also identified near term risks to India’s growth forecasts, though the picture would continue to be rosy in the long term. The risks are a spike in oil prices, a serious crisis in any of the major industrialized nations and a sharp deterioration in weather conditions.

The Survey also warned that since the savings rate and investment rate based predictions of growth become meaningless once the Indian economy begins to “operate close to its capacity” by giving employment to most of its workforce over the next few years.

Once it reaches this stage, continued growth will depend on skill development and innovation, rather than giving employment to the unemployed.

“Fortunately, there is awareness of this in India and efforts are afoot in terms of budgetary allocation and actual initiatives to boost the development of skill and human capital. Innovative activity in a nation is difficult to measure but, judging by patenting activity, there seems to be a pickup in research and innovation in India,” it pointed out.

Not everyone, however, was impressed at the trumpeting of India’s achievements.”Important risk factors have been glossed over,” said Shanto Ghosh Principal Economist of global consulting and audit firm Deloitte in India.

“There are significant risks faced by the country from becoming increasingly dependent on the services sector to continue to serve as the engine of growth without adequate focus on skill development is not dealt with adequately. Risks to the exchange rate arising from volatile FII flows impacting the state of the current account deficit is also understated. Finally, while the report does get into the issue of social sector priorities and inclusive growth, it fails to provide a clear roadmap on how this can be achieved,” he said.

Industry association FICCI warned the government not to focus too much on inflation and cutting down deficits. “it should not squeeze the growth momentum as this would adversely hit employment generation. Every year 9 million people join the labor force and it is only through high and sustained growth that gainful employment opportunities can be generated for all these people,” it said in its comments on the Survey.

“Relatively slower growth in critical sectors such as power generation, cement and fertilizer production, railway freight traffic and cargo handling at major ports is of concern as they have powerful spin-off effects on the rest of the economy,” said CII, the other industry lobby group.