Table of Contents
It is a great honour and privilege for me to be invited to deliver the 2004 Narayanan Lecture at The Australian National University. ANU is one of the premier universities of the world, and to speak at this great university itself is an honour. Further, to be associated with Dr Narayanan, one of our great Presidents, amplifies the honour manifold.
Dr K R Narayanan, a noble son of India, exemplifies all that is good in India. He was President in the year when I was involved in budget-making as the Finance Secretary. As you know, in India, it is the President, who as the head of state, sends the budget to Parliament for its consideration. Hence, it is customary for the Finance Minister and the Finance Secretary to brief the President on the Budget before he gives his assent to its transmission to Parliament.
As it was my first time, I was nervous, but I was told that this would be a short and pleasant affair. The President was very warm and gracious but he asked some penetrating questions, particularly about what this budget would mean to a common citizen, and how it would accelerate growth. I was very impressed by his grasp of complex economic issues. He emphasized the need for policies that foster accelerated growth and address problems of equity. Today, in my lecture, I will endeavour to discuss some aspects of these great questions.
My lecture is titled India: On the growth turnpike. The term ‘turnpike’ — which is typically North American — refers to an expressway, and today, I propose to present logic and evidence which suggests that economic growth in India will considerably accelerate further in the coming decade.
A lot has been said and written about India’s exciting growth story, which can be dated to the beginning of the 1980s. Let me start with the most interesting and important facts about India’s growth experience.
From the early 1980s onwards, India got strong GDP growth, averaging 5.7 per cent over the last 24 years. This year, in 2003–04, GDP growth is expected to be 8.2 per cent, and GDP is expected to reach $625 billion. India’s high GDP growth is sharply visible when GDP comparisons are done on a purchasing power parity basis. As of 2001, India came in at 4th place, with output of $3 trillion. It is likely that by 2004, India will reach 3rd place, displacing Japan. That will give us a global ranking of US, China, and India in that order.
Looking back, it seems to me that we had two broad phases in our growth experience: Before 1980, and after. Before 1980, GDP growth had a mean of 3.5 per cent with a standard deviation of 3.5 per cent. In the 24 years after 1980, the mean rose to 5.7 per cent, and the standard deviation dropped to 1.9 per cent.
Many people have noticed India’s high sustained growth over the last 24 years. But the low volatility of GDP growth is equally striking. For a comparison, over 1960–99, the median value for industrial countries was 2.18. For developing countries, it was 4.28. So we have had two big changes around 1980 as a breakpoint: mean GDP growth went up, and GDP growth volatility went down.
I find it useful to look at the acceleration of growth in India using the tool of ‘rolling window’ growth rates, where at each point, we compute the average growth over the last decade. A decade is a broad enough window, which allows us to smooth out the fluctuations caused by an unusual monsoon or two. So every year, we look back at the last 10 years, and compute the mean and standard deviation of GDP growth over that decade.
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This graph gives us new insights into familiar facts about the acceleration in India’s GDP growth.[2] We departed from the ‘Hindu rate of growth’ of 3.5 per cent in 1982, and reached levels like 6 per cent from 1996 onwards. In this lecture, I am going to argue that we will go further up to substantially higher growth rates in the years to come.
We have also obtained a sharp reduction in GDP growth volatility. Along with this, inflation and interest rates have also come down sharply. We seem to have thus created an extremely benign macroeconomic environment, with low inflation, low interest rates and high GDP growth.
|
GDP growth (%) |
Years to double |
||
|
Period |
Aggregate |
Per-capita |
p.c. GDP |
|
1972–1982 |
3.5 |
1.2 |
57 |
|
1982–1992 |
5.2 |
3.0 |
23 |
|
1992–2002 |
6.0 |
3.9 |
18 |
Let me talk about this in a different way — as growth of per capita GDP. While GDP growth has accelerated, population growth rates have gone down slightly. These have combined to give an even sharper acceleration of GDP growth per capita. In the 1970s, this was 1.2 per cent and it went up to 3.9 per cent in the 1990s.
I want to emphasise that 1.2 per cent and 3.9 per cent both sound like small numbers, but there is a huge difference between the two in terms of their human impact. At 1.2 per cent a year, per capita GDP takes 57 years to double. A man sees one doubling in his adult life. At 3.9 per cent a year, per capita GDP takes 18 years to double. A man who lives to 72 sees three doublings as compared with the standard of living that he saw at age 18. This is an enormous difference!