Indian Economy’s Expansionary Potency

NEW DELHI: There are no such things as limits to growth, noted Reagan, because there are no limits to the human capacity for intelligence, imagination and wonder. Economic change may seem inevitable, but growth is by and large intentional. Consider, for instance, the growth performance of the Indian economy.

In the last two years, GDP growth has accelerated by over 9% per annum, and the top economic managers appear optimistic about the growth momentum. But the mavens are already crunching numbers and poring over figures to decipher if the recent growth performance has been above potential — that is, whether the economy is “exceeding its speed limit”.

A new research paper says that the “recent shift” to a more investment-intensive growth pattern, together with sustained productivity gains, “seem to have raised India’s medium-term’’ growth potential. It adds that given the large room for catch up in productivity levels across sectors, potential growth could actually be higher.

However, to reap the economic gains, policy reform would be required to bring about improvements in labour market conditions for better job creation, along with proactive financial sector reforms for “sustaining investment efficiency”.

The study incorporates recent growth accounting analyses that estimate total-factor productivity (TFP). Now growth in TFP represents output growth not accounted for by the growth in inputs, and essentially implies technical change and efficiency improvement. And the latest estimate of TFP for India cited in the paper is in 3.2-3.5% range, much higher than the long-term trend “as well as international experience”. As the paper puts it, the obvious query is whether such a fast pace of TFP growth can really be sustained.

It is true that aggregate productivity growth for an economy is explained by resource re-allocation across sectors, say the shift of labour from low-productivity agriculture to the nonfarm sector. There could also be productivity growth within sectors and industries. It is also the case that such factors as trade openness and the development of the banking and financial sector can substantially explain the inter-sectoral shift of resources, with the objective to seek higher productivity gains.

Also, key economic aspects, such as the business environment and overall institutional quality, do affect productivity growth. Hence, the critical role for policymaking: of the need for proactive guidelines, norms and legislation to incentivise efficiency improvement. The study finds that the untapped potential for productivity improvement is high.

The paper notes that involvement in low-productivity agriculture at 57% of total employment is large in India, as against the figure of 47% in China and 34% on average in Asia. Note that non-farm labour productivity is 4-5 times that in agriculture. Also, the shift to nonfarm jobs has been slower in India than in other Asian economies, as pointed out in the paper.