More than political constraints, an adherence to orthodoxy on the part of policy makers may have been responsible for the economy operating at well below the growth rate that it is capable of achieving. Part of the problem is orthodoxy’s (limited) understanding of the East Asian trade strategy, which was as far from laissez faire as can be imagined. A purposeful and massive under valuation of their currency was part of the strategy, which while making the ratio of importables to exportables close to their international prices, provided for simultaneous export growth and import substitution, something not possible in orthodoxy’s standard work horse – the 2x2x2 model of international trade. Simultaneous import substitution and export production is theoretically possible for economies with idle resources, with the introduction of third non-traded goods corrected would bring exports and growth itself tumbling down. An examination of causal links among macroeconomic variables would indicate that exports, agriculture and public sector GDP are most “exogenous”. Private sector GDP is strongly influenced by exports and agriculture. The prospect for a sustained growth at 9% or more is real. It is well below the point at inflation can be expected to rise. The need of the hour is expenditure (investment) expansion. The current budget in providing for a tax cut for industry, has done the right thing. But that in itself would not be enough. For structural and other reasons private investment would not show the same bouncy in the years to come that it shown in the past. Further increases in the share of private investment would have to wait many clarifications of legal and other (such as regulatory) tangles. This raises the scope for renewal of public investments in areas like power, with even deficit financing. If the agricultural constraint too can be relaxed via institutional reform, and a disequilibrium exchange rate strategy is in place the 9% may itself be an underestimate of the rate of growth the economy is capable of. Of course the present orthodoxy of the policy makers and the RBI would have to go.
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Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number
1364.
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