'India will be world's fastest economy for the next decade'

'India is already a great success story and will continue to grow rapidly for the next decade and beyond.'

'I hope this interview will help your readers appreciate how much India has already accomplished as well as the opportunities that lie ahead.'

Economist Dale W Jorgenson steadfastly believes that India is the fastest-growing economy on the planet.

He declares that India is doing “very, very well” and forecasts that India might continue to outrun other world economies, including China (Chairman Xi Jinpeng, are you reading this?) over the next many years.

Many more encores of this rosy performance -- the Harvard’s Samuel W Morris University Professor of Economics (he’s been at Harvard since 1969) is cautious to point out -- are contingent on the introduction of a few long-overdue reforms and policy tweaks in connection with quick job creation and our labour market.   

Jorgenson’s optimism is based on, among other key indices, an early October 2016 World Bank global GDP report which said: 'South Asia has defied a sluggish world economy and solidified its lead as the fastest growing region in the world in 2016… Given its weight in the region, India sets the pace for South Asia as a whole. Its economic activity is expected to accelerate to 7.7 per cent in 2017, after maintaining a solid 7.6 per cent in 2016. (Its) performance is based on solid growth contributions from consumption -- boosted by normal monsoon and civil service pay revisions. Over the medium term, accelerated infrastructure spending and a better investment climate may help increase private investment and exports'.

The economist delves into the reasons for India's excellent report card, looking for solid criterion for its economic phenomenon. While giving the Second Kotak Family Distinguished Lecture in early December, at the School of International and Public Affairs, Columbia University, Jorgenson spoke about how its demographic dividend has a key role in India’s happy growth story.

The Montana-born Jorgenson, described by a colleague recently as a "poly-man," has a string of honorary doctorates after his name, from universities ranging from Uppsala to Kansai. The professor of economics -- who has had a long and illustrious career in teaching, lecturing, writing (37 books, 300+ papers), research collaborations -- published last year, with two co-authors, The World Economy: Growth or Stagnation?

This book examines the factors that form the backbone of a country’s economic growth -- India is part of the study -- and checks how significant is the role of the five KLEMS components (K for Capital, L for labour, E for energy, M for materials, and S for services purchased). His main sources of information for his assessment of India’s economy, he tells Rediff.com, are India KLEMS (part of World KLEMS that analyses growth and productivity patterns around the world) and official reports of government agencies, which he pronounces are "excellent."

He visited India eight years ago, spending he says most of the time in Delhi although he did make the Golden Triangle tour of Delhi-Agra-Jaipur-Delhi. Jorgenson recalls, "I was very impressed with the beautiful sights and the energetic people. I did not anticipate India would become the fastest growing economy in the world. I also did not appreciate how much India had already accomplished at the time of my visit."

In an interview to Rediff.com's Vaihayasi Pande Daniel over email, that went back and forth over a month with questions and counter-questions, Jorgenson, image, below, is firm about his bullishness on India, in spite of the effect of demonetisation:

During your lecture on India at Columbia in New York, you said India is the fastest growing economy in the world and would be so for many years to come. Prime Minister Narendra Modi may now be the major general in charge of India’s growth picture. Before that, Prime Minister Manmohan Singh laboured long and hard to get us on the road that brought us up to this point, even if his government, later in its tenure perhaps lost some of the plot, and its steam and inflation began to gallop. Who do you credit for India's growth?

India is the fastest growing economy in the world due to a series of successful reforms that began in 1991 under an IMF programme administered by Manmohan Singh, as the minister of finance. Singh continued to play an important role in reform of the Indian economy as prime minister.

The momentum has been maintained by his successor Prime Minister Narendra Modi.

Who would you credit more for it?

Both!     

The specifics of recent reforms are discussed in my lecture. Of these, the most important are the reform of monetary policy and financial policy under the Reserve Bank of India and the institution of a Goods and Services Tax, scheduled for this year.

Governor Raghuram Rajan of the Reserve Bank of India and Finance Minister Arun Jaitley have been particularly influential as leaders of these reforms.

As a consequence of this extensive programme of economic reforms, the Indian economy has gradually gained momentum and is now the world’s most rapidly growing major economy. This is likely to continue for the next decade and, possibly, longer.

In my lecture I compare India with China, which has been the fastest growing economy until 2015. While India's performance has been impressive, my starting point is that China and India were at the same level of per capita income in 1990.

China's performance has been much more impressive (till) now. China has been more successful than India, but India’s performance is outstanding by international standards. China nullified much of its demographic dividend by the adoption of the “one-child” policy and its continuation with the current “two-child” policy.

Although India has experimented with this type of demographic intervention on a small scale, these policies have not taken hold and have had little impact. As a consequence, India now faces a huge opportunity and has the leadership to exploit it successfully. India has already made important progress in reducing extreme poverty, beginning a decade ago.

Over the past decade India has had mediocre performance on monetary and fiscal policy, but is now doing much better in both dimensions. A full realisation of India’s success in these areas is still a year or two ahead of us.

This is very soon and I think that the results are already impressive. For example, I think that the RBI has managed to maintain its newly established independence from the ministry of finance.

Why did this combination of factors work to make India the fastest-growing economy and not, say, Brazil or Mexico or any other emerging economy? What was specifically and characteristically the India Magic?

Although other emerging economies like Brazil and Mexico have also considered impressive reforms, they have had much less success in implementation of these programmes. The leaders of successive Indian governments, especially Prime Ministers Singh and Modi, deserve credit for much of India’s success, but other leaders like Rajan and Jaitley have also made major contributions.

You spoke on how maybe a 7.5 per cent rate of growth for India might be hard to maintain, and settled on a more reasonable 6.5. What factors could bump it up to the optimistic growth rate of 7.5?

Faster growth would require accelerated reforms. This seems unlikely.

There could be many a slip between the cup and the lip. What is your assessment of how India is utilising its demographic dividend? What can hamper its use of its demography to its advantage? If India misses out or does a bad job on any one of the factors you mention in your lecture, could the picture be as promising? Is any factor considerably more crucial in this summary of yours, you feel?

India will have to be much more successful in employment creation in order to exploit its demographic dividend. The most important issue in the short run is employment creation.

This will require a complete reform of India’s highly over-regulated labour market. India has not made the labour market reforms necessary to achieve it this. The reforms would have to remove layers of employment protection. This will be very challenging politically, but the reforms are essential for progress. The best way to test this theory is to try it out. Time is not on India's side.

Failure to reform the labour markets would be fatal. The problem is faulty government policy, rather than the labour unions, which are a distraction.

This is becoming very urgent and should become the central focus of India’s domestic economic policy. This is indeed what I have in mind as “accelerated reforms.”

Failure to implement these reforms could be fatal because of the opportunity facing India through favorable demographic developments that will last for decades, but not forever. Indian employment growth over the past decade has been much too slow and this is a direct consequence of the failure to reform labour market policy.

Another important issue in the long run is education. India has made a very late start on universal education and the education system is a shambles. This is the second area that deserves highest priority. Reforms will be opposed by the teachers and their unions, again a political challenge.

The adoption of universal education in 2009 was a major step forward to dealing with India’s enormous demographic dividend. However, this has proved to be very ambitious and will require continuous high-level attention for the next several decades. This is not a one-time change that will magically produce results.

You also mentioned at Columbia that 'If you were being pessimistic: India is failing to restore fiscal balance and maintain control on inflation and is running a larger deficit than would be associated with a sustainable fiscal policy…' And that this could also perhaps represent permanent policy failure. Aren’t we as close to the picture going the wrong way too?

India has (made great strides in) controlling inflation and is restoring the fiscal balance. Neither of these is likely to result in a permanent policy failure.

This is a very layman, illiterate view: Sometimes it feels, for those of us living here, that India only putters along, reasonably successfully, because of its demographics, that assure the country has an enormous labour force and a large market. And not because of its policy makers – ie maybe governance had little to do with it. Could that be so?

India is doing very, very well. It has had outstanding leaders -- Manmohan Singh and Narendra Modi, to name only two. In fact, there have been thousands of them at every level from the village to the district to the state and to the nation as a whole. This should be the source of great national pride.

I disagree totally with the view that India’s recent success is a matter of luck. It is the consequence of more than two decades of economic reform that continues to the present.

India’s slow speed in implementing GST is a good barometer of where things can go wrong. India just doesn’t move fast enough. Could it be fatal? You said, after all, in your lecture that so many major countries (except America!) introduced a GST-style (VAT) tax many decades ago.

India's speed has been impressive. The GST will be implemented by India's excellent leadership.

How has the demonetisation policy upset this picture? Many economists and others say it was an unnecessary move by Prime Minister Modi. Will it affect India’s growth?

Demonetisation is essentially over, so the economy has had time to adjust.

No doubt, this was costly in terms of economic activity. The objective has been to deal with rampant tax evasion in India and the results have already began to show in a boost to government revenues.

A secondary objective was reducing corruption and discouraging criminal activity. It is too soon to say whether demonetisation was effective in these dimensions.

Overall, I think that the programme was a success.

There is a view that India’s growth story, from 2005 to 2015, was not one constructed by its policy-makers, but only happened because world over there was a global growth and India was swept along. What do you feel about this view?

Good leadership, especially at RBI, contributed a lot to dealing with a world-wide crisis.

I would like to close by emphasising the message that I tried to present in my lecture. India is already a great success story and will continue to grow rapidly for the next decade and beyond.

Furthermore, India is facing important opportunities that go far beyond those exploited by China and, so far, the evidence is that India will be able to deal exploit these opportunities, especially the demographic dividend.

I hope this interview will help your readers appreciate how much India has already accomplished as well as the opportunities that lie ahead. To quote the (present) prime minister: The 21st century is the Indian century!

Also see: Highlights of the Inaugural Kotak Family Distinguished Lecture, given by former RBI governor Raghuram Rajan, at the School of International and Public Affairs, Columbia University, New York, on April 19, 2016.