The current wave of growth is not unique to the Indian economy, it is a global phenomenon. As is evident from the table, world output has been growing since 2000 at an average rate of close to 4 per cent. Even the recent trends in oil prices do not seem to have had any impact on this growth momentum. A closer scrutiny reveals two striking features of this new phase of growth: (a) the contribution of developing economies has been the engine behind the growth revival; and (b) developing Asia has emerged as a major contributor to global growth. In terms of share in world output, developing economies account for 45 per cent of the total in 2004. This indicates that unlike earlier times, when global growth was the outcome of developed economies’ performance, now developing economies play a major role in directing the course of the global growth trajectory. World output here is the real GDP of 175 countries compiled by the IMF. Advanced economies, numbering 29, account for 54.6 per cent of world output,

71.6 per cent of world exports and 15.4 per cent of world population while other emerging market and developing countries, numbering 146, account for 45.4 per cent of world output, 28.2 per cent of world exports and 84.6 per cent of world population. The predominance in world exports of the advanced economies, in spite of discussions on “free and fair” trade, point to the prevalence of large-scale barriers in the world trading system. This substantially low share of developing economies in exports is also a signal of the fact that exports as an engine of growth have yet to fructify in these economies.

A comparison of India’s growth with other emerging market and developing economies shows that the average growth rate for the five-year period is identical. This corroborates the earlier argument that the Indian economy is just being swept by the current growth wave, which the developing countries in general are experiencing. Economic policy plays a minimal role in achieving this rate of growth, as the main thrust of policy has been one of “passive accommodation”. However, India’s growth is less compared to the rest of developing Asia. While developing Asia grew at an average of 7 per cent, India grew

1.3 percentage points less at 5.7 per cent. China, a common reference point in many growth comparisons, grew at a rate of 8.76 per cent during the same period. Thus, by Asian standards, this growth does not appear to be spectacular enough to deserve self-congratulations. Interestingly, the IMF document which provides these data, and which the Economic Survey also uses quite lavishly, devotes some space on speculating whether India has emerged as the engine of global growth. The futility of the attempt is realised when one finds that “Over the past two years, India has accounted for just under one-fifth of Asian growth and almost 10 per cent of world growth, compared with 53 per cent and 28 per cent, respectively, for China” (World Economic Outlook, IMF, September 2005, p 36).

Given this scenario, the question that comes up is what has been driving growth in recent times? From the Economic Survey it is clear that it is not the result of higher savings becoming converted into investments leading to higher rates of growth, as investment has fallen short of savings in the three consecutive years of 2001-02, 2002-03 and 2003-04! This indicates the inability of the economy to absorb domestic investment, leave alone foreign investment and that the efforts to provide an investor friendly environment and improve the “investment climate” have had little bearing on accelerating the actual levels of investment in the economy. Moreover, almost all studies report a decline in

the growth of total factor productivity in the 1990s, irrespective of the methodology or data used. Thus accounting for growth due to an increase in total factor productivity growth also does not seem to be plausible.

We garner some evidence on an alternate route to growth, via credit expansion, leading to a consumption/non-production based growth. An examination of the sectoral deployment of bank credit reveals that two sectors, namely, housing and real estate loans, registered the maximum rate of growth for the 2004-05, a whopping

44.6 per cent and 90.3 per cent change over the previous year respectively. This has led to a more than 12 per cent rate of growth in the construction sector for the last two years. To quote the Economic Survey “substantive commercial bank credit flows to the housing and real estate and retail sectors continue to provide support to the boom in construction and consumer durables” (p 4). Thus, the financial intermediaries are mobilising savings from households (of the financial savings of households, deposits with banks account for 39.4 per cent and shares and debentures just 1.1 per cent, according to the RBI Annual Report for 2004-05) and channelling it to the construction sector. Experience worldwide with regard to a construction boom driven growth casts doubts about the sustainability of the current growth momentum.

In order to accelerate or keep the growth momentum we find a collection of disconnected measures in the budget. There are no specific measures to stimulate savings and investments or enhance productivity growth in the economy. Much of the euphoria on account of the reduction in the fiscal deficit wanes as fiscal correction via a decline in capital expenditure has come with a heavy price, that is, the inability to stimulate employment in the economy. The absence of a coherent approach to this problem is conspicuously visible in this budget. Much discussed labour market reforms and disinvestments take a back seat, perhaps as a result of the realisation that growth now occurs without reforms. The optimistic outlook of high growth might be short-lived in the event of a global slow down, coupled with the growing rate of unemployment in the economy, if budgets continue to concentrate only on fiscal correction and remain noncommittal on serious interventions.

m

Email: sbab77@hotmail.com