1) When investments demanded by that growth is less than savings.
2) Shortage of labor to support that growth.
3) Adequate infrastructure to handle that growth.

1)Economy Savings and Investments:
The average saving rate in India was 10 per cent in the 1950s, which rose to 17.5 per cent in the 1970s and further to 23.4 per cent in the 1990s. The saving rate was 32.4

per cent in 2005-06.

Gross domestic investment rates increased from 22.9 per cent of GDP in 2001-02 to 33.8 per cent in 2005-06. Pls. note that 95% of the investments were supported by

domestic savings.

One would conclude that this rate of investment (~35% of GDP) would easily support ~10% GDP growth in a non-inflationary sustainable mode.
But, WAIT…

2)Labor shortages:
If we look at the composition of our GDP, about 50% of this comes from services with industrial and agriculture contributing ~22% each.
You clearly could see the labor shortage in specific services sectors that could scuttle the above growth estimates.

3)Infrastructure:
This is the most serious impediment that could dampen the above growth estimates as under-capacity in the key infrastructural areas like Roads, Ports and Power has been

knocking out the actual growth you could have versus the growth we’re limited with owing to the bottlenecks.

A serious commitment from govt. in incentivizing the infrastructure investments to attract private players to participate in enhancing these 3 infrastructural areas would

definitely debottleneck theese areas and reduce the disparity that currently exists and will be more pronounced in next 2-3 yrs.

Quantification models do exist in the market place that would quantify the discount that has to be applied to growth estimates based on the mismatch/disparity between

current infrastructural capacity and growth-demand.

conclusion:
One would be able to (atleast in theory) come up with a reasonable non-inflationary and sustainable growth rate for our economy, with the adequate discounting applied to

the estimate based on gap in the supply of critical inputs needed for that level of growth.

NOW…should this GDP come from exports-driven growth or domestic-consumption-driven one is again subject to debate.
…..CHINA is trying to get away from being an overly-export-driven GDP economy to a moderate level by bumping up the consumption rates and bring down huge (40%)

savings rates.
…..US, on the other hand is fighting to bump-up it’s domestic savings (It only manged to save 13% of it’s national income last year versus 50% with china). And that’s just

looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level — a personal saving rate in

China of about 30% of household income, compared with a U.S. rate that dipped into negative territory last year (–0.4% of after-tax household income).

We’re luckily in the middle grounds with a reasonably good balance of domestic savings and export-driven share. It has to be mainatained that way to avoid risk of negative

GDP growths in case of sudden drop in exports owing to emerging protectionism in various countries or overly-consumeristic public driving down the savings to US-levels.

On the bit on overheating, I think that certain areas like rise in property prices are a cause of concern. RBI is surely of the view that economy is overheating and that they have said that in so many words. The growth that has been shown by companies in this fiscal cannot be sustained in the next fiscal on a broad base - only some companies would be able to deliver that kind of growth. So, we are surely looking at a scenario where things would cool off a bit in the coming days.

If I see your point right, the latter (export industrialization) is important not necessarily from a macroecon perspective, but simply because the former needs to be spread out among many new millions in the labor force, in order to sustain it.

Yes, what you said made perfect sense, and I’m sure that it was more or less what you were taught.

“One of the interesting things I learned in basic econ was that consumer driven growth based on imports is actually preferable.”

Actually balanced growth is probably the most desirable of all. What balanced growth means is a cycle which is driven now by consumption, now by investment, and now and then by government spending to try and smooth out the cycle.

But beyond this I would say that there is something basic lacking in what you were taught, and that is a perspective over the development of an economy. I think it is not possible to make many valid comparisons between sources of growth and policy mixes in a relatively mature economy like the US, and a developing one like India, in the same way that it is probably not too valid to make much in the way of comparison between a developing economy like India, and one which is moving steadily sideways like Nigeria, or between a child-heavy society like Nigeria, with a rather elderly one like Japan. I suppose it is for this reason, and not simply the size one, that comparisons with China prove to be so tempting.

To take the example of Japan, Japan cannot raise interest rates since internal demand is not strong enough to support higher rates without falling back into deflation. Japan is the oldest society on the planet, and structurally needs to export - and run a continuing trade deficit - to survive.

This is not India’s case. India needs to import, not export (at this stage) technology. This technology has to be paid for. There is a limit to how much the services sector can grow in the short term due to the shortage of highly skilled labour, so other sources of exports need to be found.

Also growth in India at this stage is relatively unbalanced. Agriculture occupies an ever declining share of GDP, while the proportion of the population dependent on agriculture may well be rising (due to the comparatively high birth rates in the north). Politically this is not sustainable, so something has to change.

I would have thought this was the substance of the following from KR Athiyaman:

“Will India ever become a developed nation with one third of population
below poverty line”

So some source of employment needs to be found for the tens - and maybe even hundreds - of millions who will soon start to migrate from the rural areas. This something will, in part, be industry, but given the cost structure of an industry which uses ultra-modern technology, and has to pay things like patent royalties and management services fees to external participants (in places like Germany and Japan, which unlike the US do not live by internal consumption but need to run trade surpluses).

Of course, India need not become dependent on industrial export to anything the extent China is, the possibility of making the leap straight into services will to some extent compensate for this, but it is something which is quite likely to happen.

So what I would recommend is to try and avoid applying ‘universal’ rules to economies, and to try and see at which stage in the development process they are, and then assess what is and what is not either possible or likely to happen.

However, the underlying story is unchanged, because, unlike the US today, increased consumption is not largely fueled by rising asset values, but rising incomes (Sooner or later, I’ll try to get to estimating wealth effects on IEB). The concern about India today, as voiced by Parekh/RBI/Economist/etc is valid in that there are some short-term roadbumps ahead - and how well we navigate through them will tell a lot about our ability to seize on the greater opportunities that lie yet farther ahead.

From the financial view point, it is important to keep in mind that even the most pessimistic observers have pegged 2007 India growth around 7%. Add the 6% inflation forecast, and that implies, on average, a 10%-15% rise in earnings. Assuming the P/E is the same at year end, investors nevertheless stand to make a not-too-shabby return. High growth tends (gradually) to make valuations irrelevant. So that’s not the real roadbump. The real challenges here are related to the supply side (the operations side). Can it keep up with demand. It is up to the government to ease certain capacity constraints. Reduce the fiscal deficit to free up private investment (some good news on this front), improve governance and administration to make it easier to do business (for the largest and smallest companies), build better roads, etc.

From the macroeconomic viewpoint, it is crucial to take the long-term view. Because the factors behind the growth of the last few years are powerful and for the most part permanent changes: globalization, information and communication technology, demography, reforms, etc. Year-to-year macroeconomic performance will surely be uneven, but as Edward noted in point #2, there is something that seems almost preordained about India’s economic rise. This is because the factors responsible for growth are not top-down command-and-control measures; they are bottom-up - in that anyone who wants to and can take advantage of them, is free to do so.

This sense of destiny should not be confused with an absence of risk. But the risks, as defined by the pessimists, should not be interpreted to mean that all this is too good to be true.

Will India ever become a developed nation with one third of population
below poverty line and with poor fiscal, deteriorating
day by day ? Govt deficits, and total national debt is alarming to
say the least. Tax evasion and corruption is rampant and black
economy is much bigger than the official economy, acting as buffer
and insulting from too much govt intervention in the economy thru
high taxation and controls.

Pls do some analysis of this black economy, tax rates (and evasion)
and the fiscal health of central and state govts and national debt.

One of the interesting things I learned in basic econ was that consumer driven growth based on imports is actually preferable. Thats because such growth uses external money, and as you say that money supply is there for the foreseeable future in India(Re. Japan). The US is an excellent example of a country that is growing through imports, and that growth can continue so long as people believe the US capable of managing the imbalance.

Did that make any sense?