India: India Seeks to Boost GDP Growth

2006

Raghbendra Jha

Preliminary figures released ahead of the Budget Session of the Indian Parliament beginning in February 2006 indicate that real GDP growth in the Indian economy is likely to be 8.1 per cent during 2005-06. This comes on the back of two good years for GDP growth: 8.5 per cent in 2003-04 and 6.9 per cent in 2004-05. India is now a huge market with a large and young population. As much as 95.1 per cent of India's billion plus population is below the age of 65, with almost a third being younger than 14. A Reuters report estimates that by the time these children enter the labour force India will be a US$1 trillion plus economy. By some reckoning India's middle class (those earning between US$2000 to $22,000 a year) is 300 million strong. More importantly this young labour force is keen to enrich itself quickly and to compete with the outside world - witness India's persistent double-digit export growth in recent years. Furthermore, India's growth is likely to be less dependent on global growth than other Asian countries since it does not rely excessively on manufacturing exports. The service sector accounts for more than 31 per cent of India's exports. Thus any downturn in the global economy may have less impact on India.

Central to the growth success story has been a steady rise in India's saving (investment) rates from 23.4 per cent (22.6 per cent) of GDP in 2001-02 to 28.1 per cent (26.3 per cent) in 2003-04. Public sector saving is still negative. Contributing to this are incomplete tax reforms and wasteful subsidies resulting in large fiscal deficits. With 26.3 per cent investment in 2003-04 India was able to obtain 8.5 per cent GDP growth whereas China obtains 9 per cent growth with investment rates of over 40 per cent. Thus the productivity of capital is higher in India than in China. Hence as India seeks to accelerate its growth rate even further in order to reduce poverty and become a major player in the global economy, raising the saving and investment rates through lowering fiscal deficits will be key. India needs to streamline public subsidies and increase tax revenues in order to reduce, if not eliminate, public dissaving in order to boost economic growth.

WATCHPOINT: India's federal budget for 2006-07 will be presented at the end of February. The Finance Minister's efforts in this budget to reduce the government's fiscal deficit will be a key determinant of economic growth next year.

 

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