Thursday, November 16, 2006

Does India need more reforms?

An excellent article written by Prof. T.T. Ram Mohan of IIM, Ahmedabad pooh-poohed the notion that the country is in need of second generation reforms.

He observes that the growth rate in the first decade after reforms was not significantly different from the growth rate in the eighties.

That the fall in interest rates has helped fiscal consolidation, boosted competitiveness and led to a huge increase in retail credit.

The turnaround in firm performance has embraced the public sector as well.

He argues that the following structural changes are responsible for the kind of growth that we have witnessed recently:

  • The rise in savings rate from 23.5% in 2000-01 to 29.1% in 2004-05 has come from the turnaround in public savings. With this the economy has moved on to a higher investment rate.
  • Enhanced export competitiveness, reflected in the rising share of exports.
  • Financial deepening. That is the bank aassets/GDP ratio rose from 48% in 2000 to 80% in 2005-06 on the back of a surge in bank credit.

The factor that is common to all these three structural changes is the interest rate. The decline in interest rates ahs helped fiscal consolidation; boosted firms’ competitiveness and led to huge increase in retail credit.

He opines that an understanding of this is likely to contribute to a nuanced appreciation of what the future course of economic policy might be.