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Growth is good: Acche din comes only on the back of brute economic growth and jobs

Submitted by admin on Sat, 07/21/2018 - 21:09

Growth is good: Acche din comes only on the back of brute economic growth and jobs

Arvind Subramanian's recent parting shot as chief economic adviser added a new phrase to our vocabulary, "stigmatised capitalism". By it, he was suggesting that the free market had still not found a comfortable home in India. The problem goes deeper. Many Indians have unthinkingly embraced the latest Western fad of questioning economic growth ever since the global financial crisis.

We seem to have forgotten the lesson we learned in first year economics that only through high growth can a poor country hope to become rich. To be sceptical about growth may be right when your per capita income is $40,000 but not when it is less than $2,000. UPA-2 fell partly because it traded off growth for equity; and Prime Minister Narendra Modi has not delivered acche din because he has not single-mindedly pursued jobs and brute growth.

I celebrated, on a TV programme in early 2010, India's GDP growth crossing 10% in the previous quarter; more significantly, it had grown consistently at an unprecedented 8% for almost a decade. I said India was finally harvesting the rewards of the 1991 economic reform and if it continued at this rate for two more decades, it would become a respectable middle class country. I was surprised when the other panellists pounced on me.

The first dismissed it as 'jobless growth'. The other began to educate me on the need for 'inclusive growth'. I felt sad and amused. Any country would die for such high growth year after year and here were two worthy politicians who were apologetic about it.

Growth scepticism reached a peak during the days of Sonia Gandhi's advisory council. As a result, the government took its eyes off growth and focused instead on NREGA, food security and other give-aways to the poor, and this led to the notorious 'policy paralysis'. Not surprisingly, growth plunged after 2011 and this helped to bring Modi to power on the promise of vikas, a code word for high growth and jobs. Seven years later, the economy has still not recovered its pre-2011 momentum and Modi has not fulfilled his promise.

The questioning of GDP growth is understandable in rich countries where in recent decades the benefits of growth have not been shared equitably. This is partially what brought Donald Trump to power in the US. The cautionary lesson for India is not this one but how the West and the Far East became rich in the first place.

Every country has been poor for most of human history. Serious growth began in the world around 1800 with the industrial revolution. From year 1 to 1800, average world GDP per person was stagnant, below $200; by 2000 it had grown to $6,539. This increase in living standards is the result of unprecedented economic growth. Even India's growth after Independence has risen from $71 per person in 1950 to $1,975 per year in 2018 on a comparable basis. China's has been even more dramatic.

Even David Pilling, who has questioned the concept of GDP in his recent book The Growth Delusion, admits: "If you are poor, economic growth can be transformative." I ask growth sceptics: is this enormous rise in the average standard of living in the world such a bad thing?

There are obvious limitations to the concept. GDP does not reflect the distribution of income, the value of government services, clean air, the work of subsistence farmers and those in the informal economy, which is a quarter of the world's population. Nor does it include house work and caring for the young and elderly, mostly by women.

If the economy is growing rapidly and if a large number of people are not benefitting, then it is fair to ask what is this GDP growth for. But this is not true for a poor country, where brute growth has brought enormous benefits and negated the prophecy of the Left that markets would impoverish the working class.

Growth sceptics quote the classic example of Japan, where growth has stagnated for 25 years and yet its standard of living seems to have risen with falling or stable prices. But between 1990 and 2007, Japan's real GDP per capita actually rose by 20%. The mystery lies in the mistake of using nominal GDP when the sensible way to measure growth is in per capita GDP, net of inflation.

I fully agree with environmentalists who worry about consuming more and more water, spewing out more and more carbon dioxide and burning more and more coal. Certainly, India should clean up its air and its rivers. But it is a mistake to equate economic growth with pollution and conclude that we need to de-prioritise growth. It is theoretically possible to have limitless economic growth with a clean environment.

The problem is not with GDP but how we use it for policy making. If used along with other indices, such as Human Development and Happiness, we will get a better measure of human well-being. Rather than worry about the inequality of the market, we should measure the improvement in opportunities through investment in good schools and hospitals for all.

Let's stop adopting the latest international fashions unthinkingly, and remember that at our stage of development, consistent high economic growth, jobs and openness to the world economy are the main routes to prosperity.