“a lot of what is going on is owing to procyclical (i.e. destabilising) macro policy. I emphasise the distinction between the long-term trend and the business cycle. What we have seen for three years is the high of the business cycle, exacerbated by poor policies, and should not be mistaken for an acceleration of Indian trend GDP growth.”
Now Prashant knew that this would be of interest to me since I have been taking a rather different line vis-a-vis the long term trend in Indian growth (see, for example, this post).
My worries about what Ajay is saying are on two counts:
i) Firstly we have no precise and reasonable measure of just what trend growth in India actually is at this point, and there is a real problem if people start making estimates simply on whether or not they like the political flavour of the current government. It is clear to me at least that the trend is accelerating, but how far and how fast? In the background there is a lot of talk of the ‘demographic dividend’ but much of this has a ‘turn your nose up at the thought’ kind of feel about it. The demographic dividend is a real phenomenon, it will raise trend growth in India, and the only outstanding issue is whether or not we have in fact reached the full take-off point yet.
ii) Ajay says that India has “been helped by powerful world GDP growth.” I would say that this is rather putting the cart before the horse: powerful global growth has been helped by very strong autonomous growth in India, China, Brazil, Turkey etc. Indeed what we need is more detailed study of the growth process in the currently developing countries.
The German and Japanese economies are definitely driven by a combination of strong developing world growth and a healthy consumer appetite in the US, as, to some extent is China. Now that the US is slowing somewhat it will be important to watch what happens in China. At present there is no sign of a loss of momentum in the Chinese economy. If this continues, and if India continues to show high GDP growth, and if the emerging markets generally stabilise after the initial weakening of confidence and outflow of funds, then the US might avoid recession in 2007, since Germany and Japan would be given another push and markets would be more vibrant, and this already reasonably long boom would then go on at least a little longer. This is how I would put the state of play in the global economy. And here India may well play an important role, since up to now the Indian and the global economies have not been that tightly interlocked, and that may be about to change.
Well, these are my feelings. But I am not in India, and I am not an Indian economy specialist, so I thought I’d take some more opinions. I mailed regular IEB commenters Nandan, Aninda, and Venkat to see what their take on Ajay’s arguments was. The results are below in the comments section, and very interesting reading they make. Anyone else who wants to chip in with something, please go ahead.
Possibly it is worth pointing out that Chetan Ahya and Mihir Sheth have a two part post about Fiscal Policy in India on the Morgan Stanley forum this week (and here), while Andy Mukherjee has himself taken up the trend growth topic here. I will try and say something about these in the comments section.