Economics - India's Economic Growth - Actual and Potential

May 2007

India's trade deficit with the rest of the world has gone up to US $ 7.05 billion for the month of April 2007. This is a record. India's non-oil imports are also up significantly on the back of unprecedented demand for capital goods and machinery by Indian companies. Inflation which was up at above 6% a year in January 2007 has fallen to 5.06% in April 2007.

So what does all this gobbledegook mean for non-economists? Good news. Indian companies are investing in additional capacities because they are optimistic about India's future growth prospects. This means more factories, more services, etc. Which translates into more jobs and higher salaries for you and me.

Combine that with low inflation and you have a dream scenario - high GDP growth of over 9% a year coupled with low inflation of about 5% a year. So will this dream scenario happen? Like all economists say (to the frustration of most people) - it depends.

If the world economy continues to grow at 5.5% a year (last year's average), the good times will keep rolling. If there is a tragedy like the World Trade Center bombing and the world economy crashes, India will suffer.

The sad part is that while 9% is very good (and this growth is taking place precisely because the Indian government is not interfering in economic policy at the moment), it could be so much higher. It could easily be 10% or more if India opens up her retail and insurance sectors.

Opening up the retail sector to foreign investment means more than buying your favorite designer labels in India. It means the creation of millions of jobs in India's hinterlands of UP, Rajasthan, etc., bringing jobs, education and prosperity to the places that need it the most.

Opening up the insurance sector to foreign direct investment means that there will be better insurance products available for you and me. More importantly, it also means that huge long-term funds (billions of dollars) will be available for infrastructure development in India - roads, highways, ports and airports - critical for our country's growth. Poor infrastructure is one of the main reasons India's economic growth is not as robust as it could be.

Remember all of this the next time you vote. Many of India's leftist politicians (exceptions are Buddhadeb Bhattacharya of West Bengal) take pride in our poverty. They have stymied every effort to open up the retail and insurance sectors. They wear poverty like it is some kind of badge. They have prevented our country from becoming as prosperous as it could be. They have denied millions of people the opportunity to participate in India's success.

Our annual economic growth is 9% - it could easily have been 10.5% - that extra 1.5% could lift millions out of poverty and ensure the future prosperity of their families. It would answer the questions that all critics of India's economic growth keep raising - why is India's growth not inclusive? Why is it excluding the rural poor? Why are only educated people in India's cities benefitting from economic liberalisation? Over a period of ten years, it could transform the face of our country and we could all be proud of our progress.

I apologize for the lecture. But this is something I am passionate about - it is the future of our country and the future of 20% of the world's population. It is worth fighting for.