Is an 8% economic growth rate feasible for India?

NEW DELHI: Amidst the mixed signals from economic indicators such as IIP, inflation and trade data, analysts and economists are in a dilemma - has the economy bottomed out? Adding to the uncertainty are the likely policy announcements by the next government. The formation of a new government is being viewed by many as a make-or-break event for the economy.

While opinion polls and markets are largely favouring a Narendra Modi-led NDA government to rescue the economy from the rut of low growth, major ratings agencies are of the view that a decisive, rather than fractured mandate would bode well for the country as a whole.

What is the growth rate potential of the Indian economy? Having plunged to decade-low sub-five per cent growth rate levels, how feasible is it for India to achieve 8% plus levels of GDP growth?

C Rangarajan, Chairman of PMEAC is of the opinion that India can easily achieve 7.5 to 8 per cent growth, given its high savings and investment rate. "What is the potential rate of growth in the economy? The analogy is from capacity utilisation. The savings and investment rates are still high enough. Even as late as 2012-2013, the savings rate of the economy was 30% of the GDP and the investment rate was 34% or plus," Rangarajan told ET Now.

"Therefore given the incremental capital output of 4:1, the rate of growth in the economy should have been 7.5 to 8%. Therefore, given this level of savings and investment rate, the potential rate of the growth of the economy is somewhere around 7.5 to 8%," he said. "If you are able to raise the savings rate and the investment rate to a much higher levels we can go back to 9%," Rangarajan added.

Recently, Montek Singh Ahluwalia, Deputy Chairman-Planning Commission also expressed hope that in the long-term, the economy would be able to achieve an above 7.5% growth rate. "I would not be surprised if the long-term growth potential of the Indian economy is somewhere between 7 and 7.5%, but right now we are below potential. In the next three to four years we should be aiming at better than 7 to 7.4%, but over a longer period if India manages to grow, I would hope for 8% for several years," Ahluwalia told ET Now in an interview.

Ahluwalia, however was quick to caution that with a dynamic global economy, the growth potential is an ever-changing indicator. "I would not be so surprised if 7.5% is the long-term potential. After all, China is projecting a growth rate as 7.5%. So the world has changed, everybody else has slowed down also and that is bound to affect us to some extent."

So, if economists have little doubts about the robust growth prospects of the country, what is stopping India from achieving a high GDP growth rate? Rangarajan feels that bottlenecks and delay in the completion of projects is the root cause of the problem. "The gross fixed capital formation rate, even according to the latest numbers is somewhere around 31% of the GDP. Therefore, if the normal incremental capital output ratio held good, we should have get something like 7% to 7.5% very easily. But, we got less and that is precisely because of delay in the completion of projects, the lack of complementary investments and perhaps in some cases the non-availability of critical inputs," he said.

"The most important thing that needs to be done is to get the maximum out of the investments that are being made. Savings in the form of financial assets are much less than what used to be as a proportion of GDP. We need to raise it," he said.

"Even as of now the gross fixed capital formation is high enough to give us the growth rate of 7.5 to 8%, provided we take action for speedy completion of projects, remove the bottlenecks that come in the way of the fulfilment of projects," Rangarajan reiterated.

Recently, ratings agency Fitch said it expects the economy to expand 5.5% in the current fiscal and 6% in 2015-16, but added that that "the course of the Indian economy is uncertain" because of the political uncertainty.

The will and decisiveness in carrying through reform measures to get India back on the track for high economic growth will play a big role in global ratings agencies' perception on India's investment potential. The new government's pace of implementing reforms would decide the course of growth, feel analysts.