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Friday, June 01, 2007

Growth In India

Well, the fact that growth in India is accelerating is hardly breaking news, but it is causing a lot of head scratching:

India has recorded its second fastest annual growth rate since gaining independence in 1947, expanding at a pace of 9.4 per cent.....Even though inflation is now coming down, most economists believe that India’s economy is continuing to grow well above its long-term sustainable rate. They predict further tightening of monetary policy and banking reserve ratios lies ahead.

Well, this is just the question, isn't it. What is India's long term growth rate. Back in September 2006 I suggested that in the case of Indian growth we were now entering "uncharted water". This view was also taken by Nandan Desai in a couple of interesting posts (and here). Essentially my argument is that it is impossible to determine whether or not India is running above capacity level, since we really have no accurate measure of what that level is at this point, but there are reasons to think that it may be well above what conventional analysis suggests.

India has grown faster than this only in one year since 1950-51, according to HSBC. In 1998-99, growth surged to 10.5 per cent before falling back in the early years of this decade.

Talk of historic levels of Indian growth is basically misleading I think, since the key issue is whether India has seen a structural change in its growth profile ex-2000, and again there are reasons for thinking it may well have (see Nandan's posts for more argumentation). Essentially India is enjoying the advantage of favourable demographics, and strong capital inflows (both of which tend to raise capacity), as well as comparatively rapid technology transfer and changes in behavioural patterns, both of these facilitated by globalisation processes, processes which were really not operative in India to anything like the extent they are today prior to 1995.

Clearly the possibility exists that India can slow a little over the coming quarters as the Reserve Bank of India continues the interest rate tightening process, but equally the possibility exists that growth may actually continue to accelerate. Again, it would be a daring economist who would risk a call on this.

Everything depends on levels of global liquidity (read risk appetite), and on the strength of momentum in the current wave of growth in the global economy (India is becoming increasingly influenced by all of this as she continues to open her economy).

Certainly the signs are that the wave is continuing. As I was arguing yesterday, the US economy seems to be moving along the soft landing path (which may be more a consequence than a cause of the wave), and growth in places as far apart as the Philippines (and here) and Argentina seems to be holding up very well indeed. So, as far as I can see right now, this show is set to go on.

That being said, the big challenge which faces all of us is to offer a coherent account of just why all this is happening, and why it is happening precisely now.

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