2003-08: The golden era of growth in the Indian economy. How can we bring it back?
It is without a doubt a very distressing time for the Indian economy, not only because of the pandemic but because of the conditions that had been prevailing in the pre-pandemic period as well. Just as the 2008 global financial crisis hit the country, we started tripping on our feet and eventually fell in what economists refer to as the decade of deceleration, the period post-2012.
The deceleration of growth experienced in this period has been a result of a multitude of factors, and while we’ve had a long time to dwell on them, it often goes unnoticed the impact of how this decade has considerably disrupted the long term growth plan that India had.
Back in 2017, India had reached a per capita GDP of USD 1800 and overall GDP of about USD 2.6 trillion. At this time, however, Chinese GDP had already reached about USD 12.2 trillion.
For India to double its per capita income in the span of the next two decades, the country needed to register a per capita growth rate of around 7 per cent on a sustained basis and over 8 per cent per year for overall GDP, assuming a population growth rate of around 1 per cent. This also incorporates the lines of which India had dreamed of the achievement of a 5 trillion dollar economy, a dream that considered doubling the 2017 overall GDP levels.
The fact of the matter, however, is that doubling of growth rate is an aftermath of sustained growth over a considerably long period of time, and just as ambitious as it sounds, it’s only reasonable for the Indian economy given the potential that the country has expressed in the past period, despite being victim to some of the worst economic and financial crises.
The Golden Era of Growth-
The period of 2003-08 is considered the golden era of growth for the Indian economy and had raised the long term potential, measured in terms of a stable point, significantly. Let’s see some of the parameters observed during this golden era and how they fare in the current context of the country’s economy.
The domestic industry had just taken restructuring measures in the previous period, and this allowed for broader base growth in the country’s corporate sector. There was an overall reduction in nominal and real interest rates, enabling firms to undertake higher credit for investment and capital formation purposes, the rate which was one of the highest in the country’s history.
With fiscal consolidation, the country enjoyed strong global demand and easy global liquidity during the period, just as is observed in the current period. What is different, however, is the production response to it. Even though production has improved, the benign investment climate seen then seems a lot far right now, for the country’s investment rate is considered very low right now, despite high domestic savings.
The corporate environment of the period was characterized by improved corporate profitability, efficient factor intensity and utilization, and broad-based capital investments.
All three key sectors- agriculture, industry and services contributed to the growth momentum of the period. As opposed to this, however, the current slacking growth levels are primarily biased in service industries, while agriculture and industry continue to struggle for optimal recovery, let alone growth.
The period of 2003-08 witnessed a progressive reduction in fiscal deficit, and overall government borrowing as a percentage of GDP was remarkably reduced. This freed us resources for investment by the private sector, allowing further space for capital demand growth. This improvement, however, was a significant result of the increase in the gross tax-to-GDP ratio of the central government, a feat that the country’s government has been struggling to achieve for the past decade, despite the reforms in indirect taxes.
Not only that, the period witnessed remarkable containment in the provision of subsidies to boost production and investment demand, supplementing the notion of how effective growth neutralizes the need for government intervention for the upkeep of the growth since the endogenous factors like savings, investment, and output-to-capital ratio themselves respond to sustain the growth in the short and medium-term, given stability in other dimensions.
The period saw higher public sector and private sector corporate savings rates, in conjunction with broadly stable households’ savings rates that led to a substantial increase in the overall level of saving in the economy, making more resources available for private investment in the country. Investment demand, in turn, also responded as vividly and engaged in a balanced, if not more, demand for capital goods.
A key notion describing the saving and investment rate at the time is described as.
“Net household financial savings were adequate to meet the financial needs of both the government and the private sector during this period.”
The achievement of a macroeconomic balance, however, is possible when this pool of resources, which is primarily a leak from the income, is utilized by investors to create investment demand that meets the amount of this leak, along with the provisions made available by the government. While this was achieved during the said period, it is still worrisome in today’s context since credit demand remains low despite low interest rates and high deposits in both the stock market and banks.
It should also be noted that monetary management succeeded in the containment of inflation during the period, despite the unprecedented volume of inward capital flows. Not only that, but global commodity inflation was also fairly high during this period, making the achievement remarkably noteworthy, especially at the current time when inflation is spiralling out of control in the country,
This was made possible through the approach including a wide number of monetary instruments, including innovations such as a market stabilization scheme to sterilize the impact of large and volatile cash inflows in the flourishing market economy.
The inflation being mentioned in the above section is inclusive of both the wholesale price index and consumer price index of the period and was maintained in broad similarity to the preceding period.
Note also that the increase in the minimum support prices in respect of agricultural support price policy was observed to be lower in the said period as compared to the wholesale market price, which, in turn, was observed to be lower than the prices observed in the entire preceding decade. This is evident of the government’s policy favour to the objective of inflation control and has been beneficial in the generalized lowering of the price level at the beginning of the latter half of the 1990s.
The financial sector was also keenly observed to be a well-performing sector, and the period marked continuous improvements in asset quality and efficiency indicators of the industry.
Also, note that infrastructure investment was stepped up by about 1 per cent of the growing GDP, and the increase was divided fairly proportionately between the public and private sectors. This can be seen through the notable share of the private sector investment in infrastructure during the said period.
The period also saw a rise in the contribution of investment in the construction and upkeep of roads, while in that of railways, the amount as a per cent of the GDP remained fairly stagnant. This improvement in infrastructure has been credited for the contribution to the high growth of the manufacturing and trade sectors of the country.