It is well known by now that the recent economic boom — which has just ended — was led by investment. But not many realize how dominant investment was. According to Virmani, the share of investment in income growth over the past five years was 60 per cent. The contribution of the balance of payments was negative. That means that the contribution of the third component, consumption, was somewhat more than 40 per cent. The enormous investments have raised capital invested in manufacture 1.75 times, in construction 1.92 times, and in trade 1.62 times in five years.

Virmani called this the Asian pattern of growth. That is true as far as the rising share of investment goes. But it surely is wrong insofar as Asian growth was export-led; exports lagged in India. I asked him about this; he adroitly answered that the export growth was still to come. He pointed out that the rise in oil prices had caused a tremendous shift in terms of trade: India had become poorer on account of the higher prices for oil and oil products it had to pay, relatively to the prices of its exports. And India was not the only one; most oil-importing countries had suffered the same fate. Correspondingly, oil-exporting countries had got richer at importing countries’ expense. They would eventually spend those higher export earnings. That would create demand for India’s exports. It happened once before; the oil crisis of the 1970s, when oil prices quadrupled overnight, was followed by an acceleration of growth in India’s exports. Will it happen again? Virmani may well be right.

Talking about inflation, Virmani said that between July 2007 and June 2008, global foodgrain prices had gone up 45 per cent; at home, they had risen only 6 per cent. World oil prices had risen 93 per cent, domestic oil prices a fraction of that. Thus, the commodities that had led world inflation were not the ones that led inflation in India. Foodgrain prices had risen in India, but that had nothing to do with inflation measured by the wholesale price index; the share of foodgrains in WPI was small. The only commodities whose domestic prices had gone up in tandem with global prices were edible oils, whose global prices had risen 96 per cent. Half of the rise in WPI was due to minerals. In particular, iron ore prices had shot up; there was a global shortage of iron ore, and India was an important exporter. The rise in ore prices, together with increases in coal and oil prices, had pushed up steel prices. Minerals accounted for a half of the rise in WPI; together with edible oils and steel, they accounted for two-thirds of the rise.

The inflation according to WPI in the past four months, therefore, is largely irrelevant to people’s cost of living. Inflation according to the consumer price index for industrial workers went up from 5.5 per cent in February to 7.9 per cent in March, and has remained at roughly that level since. It did not shoot up like WPI inflation, nor is it going up like the latter. Those who have got into the habit of grinding their teeth every week when WPI figures come out can stop doing so. They may have other reasons to torment themselves, but WPI need not be one of them.

Virmani fits trends to growth figures. Smooth curves emerge from his regressions. By concentrating on the trends and ignoring annual figures, Virmani has come to the conclusion that there are stable, long-term trends in GDP growth — that if it is low in some years, it will be higher in succeeding years so as to yield the trend rate of growth in the long run. Hence, the slowdown in growth, which is becoming unmistakable, does not worry him; for him, it is just a downward fluctuation. The current rate of growth is 9 per cent; the actual growth rate will bounce back eventually to yield this trend.

That sounds like superstition to me. Virmani’s growth series fluctuate enormously in unpredictable ways. There are discontinuities in the curve; at some points, the growth rate rises and stays high thenceforth. But did we pass such a discontinuity five years ago? Will the average of current years come to 9 per cent come what may? I do not know; the trend may decide to change its mind at any time.

The author is Consultant Editor of Businessworld.
ashok (dot) desai (at) gmail (dot) com

(Businessworld Issue 19-25 Aug 2008)