The Indian government has recently “formally” announced a GDP growth target of 9 percent per annum. This target is very attainable, as documented in several articles (at least written by me!; see, “Growth Miracles: India is Next”, World Bank-IMF meetings, Hong Kong, Sept. 1997, available at www.oxusresearch.com). While the good news is that the Indian policy makers, and politicians, are beginning to be in tune with potential, the bad news is that, as ever, they are badly out of sync with reality. None of the necessary attendant policies are in place. Worse, world growth next year could decelerate to 3.3 percent from an above potential 4.2 percent in 2000; capital expenditures in the US are likely to grow at only a third of the 20+ percent rate in 2000; Indian software exports are likely to grow at only 30 – 40 percent compared to the 50+ growth rates of the last several years. Add it all up and it will be a miracle if India can grow at 6 percent rather than 9 percent. Any bets that the NDA coalition will wither away like the mirage of 9 percent growth in 2001?

At last count, there were more than 50 economic reform episodes in the developing world since 1980. India had its first serious economic reforms in 1991. All (except one) of the different country-reform episodes show a significant acceleration in GDP growth post reforms. That is to be expected - economic reform improves resource allocation, decreases babu-neta control and the attendant corruption, and allows citizens to march in tune with economic freedom. But as the data in the table documents, India "the incomparable" is the exception to otherwise immutable economic laws.

The striking aspect of the Indian reality cannot be exaggerated. No matter what time- period is chosen - pre-reform, post-reform, Congress, Third Front or BJP - economic growth has been stuck at around 6 percent. Further, the monetary and fiscal variables also emerge as "Hindu" constants. The consolidated fiscal deficit is a super constant at 9-10 percent of GDP. Recall that India resolved to decrease fiscal deficits back in 1985 and decrease government ownership of the means of production in 1991 - hah. And for those worried about the nuances of (irrelevant) money supply growth - that is a super- super constant at 17.40985 per cent per year! Given all the noise made about monetary policy in India, the data reveals it to be what it is - run by a robot.

What is going on? Did India not have an economic revolution starting in 1991? Are we not all reformers today? So where did all the reforms go? The clue is provided by what has happened to inflation - especially core inflation. (Oxus has combined the GDP deflator for services and manufacturing to arrive at core inflation). Inflation stayed close to double digits till 1995 after which it has declined precipitously by 500 basis points to about 4 percent today. In the real developing world, inflation fell from 11.4 percent in 1990 to 7 percent in 1999 (inflation rate of the median developing country, both years). Score one for globalization - even incomparable India could not avoid its benefits.

But never fear - in India, what does not strain our mental capacities too much is the simple policy of fixing both the quantity of money and its price. The government fixes the interest rate on small savings instruments - fixed at 12 percent (along with guaranteed pension returns) for some twenty years. Each year the government collects deposits thru small savings instruments - the net addition is estimated to be about 45,000 crores in 2000-01. These deposits help finance state deficits estimated at 90,000 crores in 1999- 2000. A different idea about the excessive collections through small savings - total increase in non-food credit in 2000-01 is estimated to be - Rs. 45,000 crores!

Thus, the core of our "clueless in wonderland" macro policy has been as follows. First, keep the money supply growth constant at 18 percent i.e. fix the quantity of domestic money. Second, also fix the price of domestic money at 12 percent - which was a smart thing to do when inflation was 9 to 10 percent. Third, control the price at which domestic money can be changed for foreign money i.e. keep the exchange rate managed and "fixed".

But for our all seasons bureaucracy (where expertise is synonymous with the gaddi being occupied) financial intermediation is for unemployed accountants and not for policy makers determining the welfare of a billion people. And real interest rates are for rocket scientists, not government conducting policies "to help the poor". So while economic reforms are implemented, the real interest rate rises inexorably up. And yet you have some "experts" arguing for even higher interest rates. It does not get crazier than this. But it always does - in India. Which is why we have no genuine monopolies, or prospects for the same, but "competition" laws aplenty; cheap talk of corporate governance, but expensive losses for share-holders; a Central Bank in name, but made robotic by the PMO and/or the Finance Ministry. And domestic corporates, and their lobbyists, who are equally clueless about what will really benefit Indian industry - instead, the analogous "clueless in wonderland" policy is to demand ever higher protection, and prevent privatization from taking place by bribing all and sundry. But their mantra remains the desire for economic reforms - as long as they affect the other corporation. Yet they don't realize that what hurts them most is high, and increasing, real interest rates - note that manufacturing price inflation has averaged less than 4 percent the last five years, and borrowing interest rates have averaged above 15 percent. That is why industrial production growth has not changed an iota despite several industrial reforms.

There are three simple policies that will get us to a 9 percent growth path. First, removal of administrative controls on the capital market i.e. interest rates to be determined by the market rather than bureaucrats in the Finance Ministry. As a transition, remove the fixing of small savings returns on a nominal basis; instead, fix returns at 3 percent above inflation. In three years, all controls on interest rates to go. Second, move rapidly towards capital account convertibility. Third, privatize at least one of the two blue-chips - MTNL or BHEL. Real interest rates will fall by at least 300 basis points, and major macro-variables will be market determined. GDP growth should then inexorably accelerate to 9 percent - and accelerate to 9 percent without the pipedreams of India ruling itself, and the world, with IIT-infotech power.