Sunday, March 13, 2005
Martin Wolf on the Indian budget
Here's another op-ed on the Indian budget that ought to have been posted a lot earlier. Martin Wolf of the Financial Times follows up his India/China piece with his take on the Chidambaram budget.
"First do no harm" is an excellent motto. The budget did, indeed, do no obvious harm. It even did some good.Between 1960 and 1980 a moving average of the previous 10 years of economic growth oscillated between 3 per cent and 4 per cent a year (see chart). Since the early 1980s, however, these 10-year moving averages have been on a rising trend. In the most recent period (the 10 years that includes fiscal year 2003-04, April to March), growth of net national product per head has reached 4.4 per cent a year. At that rate, incomes per head will double every 16 years.
The challenge is to sustain, if not accelerate, this growth. For a poor country, this is a necessary condition for eliminating mass poverty. Fortunately, the signs are good. Any country whose incomes (and so output) per head are far below those of the world's leaders enjoys a catch-up opportunity. The speed with which that opportunity is exploited depends on increases in the quality of "human capital" (above all through education), on the rate of capital accumulation, on the speed with which technology and other forms of knowhow are transferred from the more advanced economies and on the overall efficiency with which resources are used. On all these fronts, there is progress.
A moving average of the previous 10 years' household savings has risen from 7 per cent of gross domestic product in 1959-60 to more than 20 per cent in the most recent period (see chart). Private corporate savings have also risen from below 2 per cent of GDP in the 10 years to 1990-91 to 4 per cent. Even though the public savings rate has deteriorated sharply, the overall gross domestic savings rate has risen to a 10-year moving average of 24 per cent, against 10 per cent in the years up to 1959-60. The actual savings rate in 2003-04 was 28 per cent of GDP. The overall rate of investment has risen with the savings rate, from an average of 12 per cent of GDP in the 10 years up to 1960-61 to close to 25 per cent in the latest period. The return on capital has also been rising.
Mr Chidambaram also had to plead with his own side for greater openness to inward direct investment. "On foreign direct investment", he remarked, "I would urge honourable members to take a pragmatic view. At the recent meeting of the finance ministers of the G7 countries . . . the finance minister of China looked in my direction and told the gathering that China had received Dollars 500bn (Pounds 260bn) worth of foreign investment since China opened its economy in 1980. Of this nearly Dollars 60bn came in calendar 2004." Yet even if the budget offered no dramatic transformation, it contained valuable elements: reductions in peak tariffs on non-farm imports to 15 per cent; removal of 108 items from the list of products reserved for production by small-scale enterprises; a reduction in corporation tax; use of India's foreign currency reserves to fund investment in infrastructure, and increased spending on highways, rural infrastructure and primary healthcare.
"First do no harm" is an excellent motto. The budget did, indeed, do no obvious harm. It even did some good.Between 1960 and 1980 a moving average of the previous 10 years of economic growth oscillated between 3 per cent and 4 per cent a year (see chart). Since the early 1980s, however, these 10-year moving averages have been on a rising trend. In the most recent period (the 10 years that includes fiscal year 2003-04, April to March), growth of net national product per head has reached 4.4 per cent a year. At that rate, incomes per head will double every 16 years.
The challenge is to sustain, if not accelerate, this growth. For a poor country, this is a necessary condition for eliminating mass poverty. Fortunately, the signs are good. Any country whose incomes (and so output) per head are far below those of the world's leaders enjoys a catch-up opportunity. The speed with which that opportunity is exploited depends on increases in the quality of "human capital" (above all through education), on the rate of capital accumulation, on the speed with which technology and other forms of knowhow are transferred from the more advanced economies and on the overall efficiency with which resources are used. On all these fronts, there is progress.
A moving average of the previous 10 years' household savings has risen from 7 per cent of gross domestic product in 1959-60 to more than 20 per cent in the most recent period (see chart). Private corporate savings have also risen from below 2 per cent of GDP in the 10 years to 1990-91 to 4 per cent. Even though the public savings rate has deteriorated sharply, the overall gross domestic savings rate has risen to a 10-year moving average of 24 per cent, against 10 per cent in the years up to 1959-60. The actual savings rate in 2003-04 was 28 per cent of GDP. The overall rate of investment has risen with the savings rate, from an average of 12 per cent of GDP in the 10 years up to 1960-61 to close to 25 per cent in the latest period. The return on capital has also been rising.
Mr Chidambaram also had to plead with his own side for greater openness to inward direct investment. "On foreign direct investment", he remarked, "I would urge honourable members to take a pragmatic view. At the recent meeting of the finance ministers of the G7 countries . . . the finance minister of China looked in my direction and told the gathering that China had received Dollars 500bn (Pounds 260bn) worth of foreign investment since China opened its economy in 1980. Of this nearly Dollars 60bn came in calendar 2004." Yet even if the budget offered no dramatic transformation, it contained valuable elements: reductions in peak tariffs on non-farm imports to 15 per cent; removal of 108 items from the list of products reserved for production by small-scale enterprises; a reduction in corporation tax; use of India's foreign currency reserves to fund investment in infrastructure, and increased spending on highways, rural infrastructure and primary healthcare.
