By V. Ramakrishnan - Analysis
MUMBAI (Reuters) - More than a decade of reform has shifted India’s long-term economic growth rate to a higher level.
With that, analysts agree. Where they disagree, is in deciding what that higher rate is.
Over the last three years, growth has averaged about 8 percent and the government is shooting for an average of 9 percent over the next five years.
That’s a big jump from trend growth of about 6 percent in the two prior decades and would move the economy’s momentum closer to neighboring China which is sustaining growth of about 10 percent.
While the central bank is not sure if 9 percent growth is so rapid the economy will overheat, analysts are convinced trend growth has shifted to a higher gear, leaving debate to dwell on what growth rate is sustainable.
Goldman Sachs analyst Tushar Poddar reckons trend growth is now 8 percent, driven by productivity gains.
Other analysts say it is closer to 6.5 percent, as a lack of infrastructure and skilled workers will eventually limit the economy’s ability to expand.
“In our view, overheating concerns are overdone,” Poddar said. “Demand pressures are well-contained and high credit growth is due to financial deepening.”
Since 1991, India has gradually opened its economy to more competition and encouraged freer international trade.
Signs of its rapid growth are visible on India’s streets from new cars to new houses. Airport lounges teem with a new middle class and mobile phones are ubiquitous in cities.
In the April-September half of the 2006/2007 fiscal year, annual economic growth was running at 9.1 percent, backed by 30 percent annual growth in credit.
November’s industrial output grew at its fastest annual pace in more than a decade, suggesting the economy maintained its brisk growth rate in the latest quarter.
N. Vaghul, chairman of ICICI Bank, India’s second-largest bank, said changes in manufacturing have helped economic growth pick up the pace.
In particular, Indian companies do not find funding expansion to meet increased demand a big problem because they are far less leveraged now than a decade back, he said.
“There is a fundamental shift due to lessons learned by corporates (in the mid-1990s) because they paid a very high price for over leveraging,” he said at a recent graduation ceremony.
Manufacturers, particularly in auto components, textiles and pharmaceuticals, have gained considerable expertise in the past decade, analysts said.
Policy makers say the economy has shown resilience in the face of consistently high global oil prices, an optimism reflected in stock prices, which hit a fresh record high last week.
The central bank’s deputy governor, Rakesh Mohan, said the growth trend of the past few years indicated the economy had entered a new phase of stronger expansion.
“Most importantly, the current growth process is not a flash in the pan and is exhibiting signs of sustainability along with financial stability, notwithstanding the pressures from unforeseen external shocks,” Mohan said.
Not everyone is so bullish.
Inflation is running at above 6 percent, higher than the central bank would like, so some analysts believe the authority could tug harder on the monetary policy reins when it reviews policy on January 31.
Vice president of Moody’s Investors Service, Kristin Lindow, and HSBC’s Robert Prior-Wandesforde say India’s sustainable growth rate is more like 6.5 percent.
Prior-Wandesforde cited a lack of skilled labor and record-high capacity utilisation in the economy as the main limiting factors.
“India cannot continue at 9 percent-plus growth momentum as capacity bottlenecks may prove a constraining factor,” Lindow said.
To maintain its current rate of expansion, the economy needs to overcome several problems, said Julian Jessop, chief international economist at London-based research consultancy Capital Economics Ltd..
Apart from upgrading infrastructure and improving public finances, it should relax labor market laws and restrictions on foreign investment to boost manufacturing still further, he said. Industry accounts for about a quarter of India’s GDP.
Indian Prime Minister Manmohan Singh has acknowledged that poor roads, rail, ports and insufficient power supply were holding the economy back.
India has said it needs $1.5 trillion in investment in the next 5 years to improve infrastructure and raise manufacturing and farm output.
But ICICI’s Vaghul said he was now less worried about problems such as weak infrastructure and more concerned about a shortage of skilled labor, which was sending wages spiraling.
“Shortage of human resources has created a serious situation in the country and we are not recognising it,” he said.
“The major threat for growth is going to come from shortage of human resources.”
Prior-Wandesforde said the economy would continue to grow above trend of 6.5 percent for now as there were no triggers for an immediate, sharp slowdown.
“The longer this goes on, however, the bigger will be the ultimate downturn,” he said.