Informist, Friday, Apr 19, 2024
--Virmani: India needs avg 6.5% growth to be developed econ by 2047
--CONTEXT: NITI Aayog Member Virmani's comments in an interview
--Virmani: India to become upper middle-income country by 2031-32
--Virmani: India to become high-income country by 2047-50
--Virmani: Don't see big hit to India's exports from Red Sea crisis
--Virmani: GDP growth shockingly high on govt capex multiplier effect
--Virmani: Govt capex impact working better than expectations
--Virmani: Pvt investment slow, not seeing the expected sharp rise
--Virmani: Pvt invest slow on high rates, uncertainty on China econ
--Virmani:Seeing private invest picking up in sectors such as cement
--Virmani: FY24 export hit by US inventory issue, China extra capacity
--Virmani: India must get bigger share of labour-intensive mfg sector
By Shubham Rana and Krity Ambey
NEW DELHI - The Indian economy will need to grow only 6.5% on an average to become a developed nation by 2047, says Arvind Virmani, member of the NITI Aayog. This estimate by the former chief economic adviser is sharply lower than most economists' projections that say India’s GDP needs to grow about 8-9% on an average to reach the goal. The government aims to make India a developed economy by 2047, the year when the country celebrates a century of Independence.
"My forecast and judgement is that it requires only a per capita income growth of about 6%, which is about real GDP growth of 6.5%. This is very, very different from 90% of what you hear of 8%, 9% growth," says Virmani in an interview to Informist.
In July, a Reserve Bank of India staff paper had said India's real GDP needs to grow 7.6% annually over the next 25 years to achieve the per capita income level to become a developed economy.
While there is no particular definition of a developed nation, the World Bank tags countries as low-, lower middle-, upper middle-, and high-income based on their per capita incomes. According to its classification, a country's per capita nominal GDP must be more than $21,664 to become a high-income country. According to the latest available data from the World Bank, India's real GDP per capita was $2,090 in 2022, while the nominal per capita GDP was $2,411.
"To achieve this target, the required real GDP CAGR (compound annual growth rate) for India works out to be 7.6% during 2023-24 to 2047-48," the RBI staff paper had said.
Virmani expects India to become an upper middle-income economy around 2031-32, and a high-income one between 2047 and 2050. He says the growth projection is based on the purchasing power parity at constant prices: "I cannot compare India with any other country unless I do purchasing power parity."
"I look at a country which became upper middle-income and translate that and what its purchasing power parity per capita GDP was at that time," Virmani says. "So all my projections are for GDP at purchasing power parity at 2017 prices. Then, I apply the growth rate, which I said is 6.5% average for GDP and that gives me an upper middle-income by around 2031 when we pass that $10,000 or $11,000 mark."
"So I do not agree with the forecasts which say you need to grow 8-9% for 50 years. No, I don't think so. So this is the average, the actual very roughly would be 7% in the next 10 years, and then going down slowly, let's say to 6.5-6.0%. So the average comes out roughly 6.5%," says the former executive director of the International Monetary Fund.
Below are edited excerpts from the interview with Virmani, who spoke in his personal capacity:
Q. India’s GDP growth is expected to be around 7% in 2024-25, and in the next year. How much does India need to grow in real terms every year to become a developed country by 2047?
A. My forecast and judgement is that it requires only a per capita income growth of about 6%, which is about real GDP growth of 6.5%. This is very, very different from 90% of what you hear of 8%, 9% growth. So, my growth rates are based on PPP (purchasing power parity) because I cannot compare India with any other country unless I do purchasing power parity. So everything is based on purchasing power parity, the growth rates—past, present, future--are all in terms of what will happen to GDP purchasing power parity at constant prices.
How do I say that we are a low middle-income country and we will become an upper middle-income country, in my forecast, by around 2031-32 and a high income country between 2047 and 2050. How do I do that? I look at a country that became upper middle-income and translate that and what its purchasing power parity per capita GDP was at that time. You can take any country. In my case, I picked Indonesia, which, when it became an upper middle-income country, had a purchasing power parity per capita income of about $10,000-$11,000. And then, I pick a high-income country, which happens to be Romania. I picked recent countries, like in the last few years, who have gone from one to the other. At that point, Romania had a per capita GDP of roughly $32,000 in purchasing power parity at 2017 prices.
So all my projections are for GDP at purchasing power parity at 2017 prices. Then I apply the growth rate, which I said is 6.5% average for GDP and that gives me an upper middle-income by around 2031 when we pass that $10,000 or $11,000 mark. That is my forecast. So I do not know how people get 8% and 9%. I do everything in purchasing power parity and then compare relative to other countries. I don't take an arbitrary dollar number, I go by purchasing power parity. So I do not agree with the forecasts which say you need to grow 8-9% for 50 years. So this is the average. The actual very roughly would be 7% in the next 10 years, and then going down slowly, let's say to 6.5-6.0%. So the average comes out roughly 6.5%.
Q. So an average real growth of 6.5% plus in purchasing power parity terms till 2047 - that would help India become developed?
A. That's right.
Q. So in that sense, the 2047 goal is achievable.
A. I believe it is achievable. Yes.
Q. Two aspects on India's growth are struggling. One is private sector investment, and the other is private consumption, especially rural consumption. In your view, how can we improve both of these? What can be done?
A. The rural economy part is an easy one, actually. It is very clear that last year was the modern equivalent of a drought - El Nino happened. I have dealt with different droughts in my career in government. I have dealt with two consecutive droughts. This is a standard thing which happens. The only thing different was that this happened after a pandemic.
It's not exactly like a double drought, but the actual El Nino effect is more complicated now. For the old type of droughts, we knew exactly what would happen in terms of less rainfall, etc. It's more random now. So what will happen next year, it will recover. We know the pattern. When there is a drought, the first thing is you get less income, you draw down your savings, etc. You start down shifting of consumer goods. So, instead of buying branded goods, you start switching to ordinary goods. This happens in every drought. This will recover next year. I'm not worried about it for next year. We've had an average of 3.0-3.5% growth over a period of several decades, so we will be back on track. I'm not really worried, everything will recover. This is not a long-term problem. The long-term problem remains the water issue and diversification (of crops), which we have been talking about for 30-40 years.
The second part you said was private sector investment. So private investment is obviously very important because that's going to drive all this growth. There are parts of the private economy which have recovered. I analysed the statements, which people keep making, about seven years ago where I showed two important things. One is there's a big difference between the real investment GDP ratio versus the nominal one. So simply put, the nominal GDP ratio went to a peak and then reduced sharply. The real one had a lower peak, but didn't reduce so much. What does that mean? It means that the price of capital goods has increased more slowly than the GDP inflation. That means, with the same money, you can buy more capital goods. So the real investment did not fall as much as people keep talking about. The second thing which I showed was that even for the real decline, 95% of it was due to household investment in structures. There is a component, which is called direct saving and investment. Households mean all non-incorporated businesses. All businesses which are not corporations, they count as household investment. There is a thing in the national accounts, which is called physical savings. This is exactly equal to physical investment. This does not go through the financial system. This is separately estimated. So all the decline was in this. Everything else together was more or less steady. All the investment decline was in this, and not just in machinery. All the decline in household investment was in structures. This part is now recovering sharply.
The government has increased its capital expenditures hugely and the effect of that can be seen in GDP. That multiplier is working, that is why we get the shockingly high GDP growth. It is working even better than I expected, when I made the forecast. I am not surprised that it's 7%, what I am surprised by is that it is 7.5 or 8%.
What is slow is private investment, which is not seeing as sharp an increase which has been expected. Why is that slower? The two big reasons for this are international. The interest rate rise. And second is this uncertainty arising in large part from China because of excess capacity. So that is delaying some of this private investment. But there are some signs that it's picking up, some cement and some other construction related sectors are picking up. I think the big stimulus will come when this supply chain policies come in. We need to get a lot more in multinational corporations, more supply chains in here. Everybody's waiting for Tesla, but there should be many more in my view.
Q. Because of the climate-related idiosyncrasies we see a very volatile food inflation, particularly in the items like vegetables, which have short cycles. So what do you think can be done to minimise such shocks?
A. Everybody thinks in terms of what can we do on the supply side. The demand side is also important. What is the demand side issue? Onions and tomatoes are inherently volatile, we know this. Everywhere in the world, onions and tomatoes are preserved in a different form for the cooking purpose. There are two types of demand, one is for fresh eating like in a salad and the other is cooking. You just need minor changes in the demand and in the way you cook that all the stuff could be preserved in different forms like dried, canned, or frozen. All those can be used for cooking. Whenever there is an excess, you could convert into preserved stuff. When supply is down, you can take it out and use it. That will take out all the volatility, and then you will have a stable price of onions and tomatoes for normal eating. This is my personal view. That is all you need to do, change the habits of people.
Q. India's merchandise exports declined for the first time in three years in 2023-24. With this, what is your outlook for exports in 2024-25?
A. There are a number of factors. Of course, the US economy is doing quite well now. But there was some period in which there was an inventory cycle. The US built excess inventories and then they drew them down over the last year. Now the rebuilding was expected to begin but because interest rates are high, you want to keep inventories down. So that cycle is delayed. So part of the problem is that the inventory cycle is being extended because of the higher interest rates, so that is a bit of an issue.
The second one is the Chinese extra excess capacity. So that’s how the PRC (People’s Republic of China) operates a lot of dumping. So these two factors are kind of restraining our exports. But definitely, I would expect some pickup in the next year.
Q. There were already worries over India’s exports growth due to disruption of shipping lanes in the Red Sea, now there are added concerns due to the conflict between Israel and Iran. How do you see these geopolitical tensions affect India’s trade, as well as the economic growth?
A. I don't expect big differential impact on India’s exports due to disruption in the Red Sea. Of course, everybody's exports from East will be more costly because of the longer roadmaps. But that applies to all actual and potential competitors. So it really depends on the demand in Europe. You have a rise in prices because of shipping costs, and then that will have some effect on demand in Europe, and I'm sure it has on India as well as all the countries of East Asia.
What now is a new thing is the Israel-Iran conflict. The sudden rise in oil prices is a little bit of a worry because oil prices do matter to us. That issue again is unpredictable. We obviously prefer peace because in the event of a conflict in that area--which has many oil producers such as Iraq and Iran—there would definitely be a negative effect on oil prices.
If oil production in Iran or neighbouring countries is affected, there'll be less oil in the market. Fortunately, now there is some greater coordination coming back between Saudi Arabia and America. So some of that will be diluted, I hope. We'll have to see what happens.
Q. You have been advocating trade agreements with developed countries. What are the advantages do you think this can have?
A. I have said that we must focus on FTAs (Foreign Trade Agreements) with the high-income developed countries, and I was contrasting that with RCEP (Regional Comprehensive Economic Partnership). We didn't sign RCEP, and I was one of the few economists who agreed with that decision.
We need to focus on the high-income developed countries because that's where our comparative advantage is for the next 10-15 years. Now what are the high-income developed countries? They are US number one, EU (European Union). So these two are the most important. And then you have a list like the UK, Japan, South Korea, Taiwan, which are also all high-income developed countries.
We have a comparative advantage with these countries. We have to attract supply chains, and these two things will support each other along with something like the PLI (production-linked incentive), and a few other policies. I am strongly in favour of that. I have been hearing that the discussion for the UK agreement is in advanced stage. I expect it would be signed soon after election, once the new government is formed.
We recently signed a deal with the EFTA (European Free Trade Association). It's systematically one by one and the momentum, therefore, builds up. The next place to emphasise will be the EU. An FTA between EU and India, because of our comparative advantage, will help both of us to compete better with the People's Republic (of China).
The only difficulty is that as far as the US is concerned, their present political outlook is sort of ruling out FTAs. Now, they may not want an FTA per se but there could be some other deal, something which amounts to the same thing, because the key is the manufacturing. If we can have some kind of a deal, similar to an FTA, but at least focused on the manufacturing sector.
My point is FTA or whatever version of that we can do on manufacturing with all the high-income developed countries. The more deals we sign, the better will be the de-risking and movement of supply chains to India.
Q. Can you elaborate on the benefits of trade deals that prioritise the manufacturing sector?
A. We missed the bus on labour-intensive manufacturing in the last 30 years. This is our last chance. And one of the reasons why we missed the bus is that every other country in Southeast Asia, which had a manufacturing growth, and which has grown faster than us, invited multinational enterprises and corporations to set up supply chains. These are the source of their manufacturing growth and exports.
We must do that now to get labour-intensive manufacturing share higher and therefore get better employment. When I say labour-intensive, it is not just industries now. It's section of industries also, which have a labour-intensive part. When people talk about China’s sophistication of the industry, what they don't see is that it may be telecom which is considered a high tech industry, but they are doing the labour-intensive parts for other countries. When it appears as a telecom export, they are exporting the labour-intensive part of it. It's not just leather and textiles, it is the labour-intensive parts of every other industry, including semiconductors.
Semiconductors also have a labour-intensive part, which is the packaging and testing. What I am saying applies to all those labour-intensive industries and labour-intensive section of industries. Another dimension of semiconductor manufacturing is security. If you don't manufacture any semiconductors, there's no way you can become a superpower. Everything has semiconductors. End
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