It was three years ago when I wrote the article “Globalization and the Chinese Bamboo” (Business Standard, Jan 4, 2003). The rain induced 8 % plus GDP growth of 2003/04 was not yet a reality, but I still predicted that “there is virtually nothing that the politicians, or bureaucrats, or industrialists, can do to prevent the 8 percent target from being achieved by India in the near future”. This forecast was met with near universal derision, and some of my friends were even hasty with the bet that I would be way off the mark. Today, I am going to write about how 8 % GDP growth for India is no longer a “man bites dog” story. And how, despite the best efforts of the present populist government, there is little that they can do from this reality continuing.

As befits populism, the UPA government has gone all over the town (villages) proclaiming from tin rooftops that in order for India to grow above 8 percent, agriculture must grow above 4 percent. And hence, we need the Employment Guarantee Program to provide jobs in agriculture, reservation quotas by the dozen, more government control over pricing of crops etc i.e. more money for the state to squirrel away into the pockets of the politicians, their mandarins, and their supplicants. How realistic is 4 percent agricultural growth? Not very, since the long run 55 year average is close to 2.8 percent. Also, isn't development about facilitating the movement of individuals out of low productivity agriculture into higher productivity non-agricultural jobs i.e. should not one be facilitating non-agricultural growth?

But there is not that much to contribute to the "white man's NGO burden" by policies which enhance growth in industry and services, not much gain in talking about modernization of infrastructure, and even less gain in increasing the supply and quality of the already "rich" college going population. There is a great need for increasing competition in the supply of education, yet this government has stopped the miniscule, but high quality, higher education provision in India by foreign universities. Why? I don't know but it may have something to do with the fact that politicians are heavily involved in non-profit making education NGO's which supply not so good quality higher education!

The future role of India, an economy growing at a 10 % plus rate, requires an increasing participation of NGO entrepreneurs. (This description is much better than the vulgar term, private sector). But what does the present government do - advocate a cess for every burden that the political elite wants to become rich on. And it is right in believing that such schemes provide it with far more money than all the oil for food scams that the world can muster. And money that comes with a shabash from the white burdened left and other sundry intellectuals.

That 8 % GDP growth is here already is indicated by some simple math. Industrial growth has averaged over 6 percent over the last decade, and is on track to average over 8 % annually. Why this mildest of accelerations? Because real corporate borrowing rates have declined by over 5 percentage points in the last four years. This phenomenon is the real story behind India's resurgent GDP growth, and the reality of 8 percent. But shockingly, none of our populist intellectuals/politicians cite this policy change as the real factor behind the acceleration in GDP growth. A facilitating factor, and a hallmark of Indian policy since the reforms of 1991, is that the exchange rate has been kept at a competitive level by some astute FX management by the RBI.

What is the danger that either of these two policies will reverse course in the next few years? On interest rates, little. Because we are in a truly global capital market where long term interest rates are determined by the supply of global capital. The Asian economies, led by China, are keen to keep their undervalued exchange rates undervalued, and are happy to increase reserves. Asia is the global saver, and undervaluation means more savings and therefore a lower real cost of capital.

Given the recent appreciation of the rupee (over the last month or so, it has been the strongest currency in the world), there is some apprehension that this FX machoism will derail the 8 % prospects. As I have mentioned several times earlier, the RBI should send its able Deputy Governor, Dr. Rakesh Mohan, to China for training in how to keep the exchange rate undervalued. Given recent trends in the rupee, such a trip should be of the highest priority.

Assuming India does learn the tricks from the Chinese masters, industrial growth should easily coast at 8 plus levels. Growth in services has historically averaged about 2 % higher than industry, which means that services growth should be at least 9 % plus. These two sectors, accounting for 80 % of GDP, should allow GDP growth to be above 7 %. And if agricultural grows matches its long run average, Indian GDP growth will be 8 %.

These calculations suggest that there is a lot of populist hyperbole in the UPA government's claim that if Indians want GDP growth to be 8 % plus, then agriculture has to grow at 4 percent. Given that agriculture's share in GDP is 20 % and falling, all that an extra 1 % agricultural growth would give us is an extra 0.2 % GDP growth! All that populist cess and nonsense for an extra 0.2 % GDP growth?