Despite being hit by a series of major commercial scandals in recent years, India remains on the high growth trajectory. As Banerjee has recently argued "functional" corruption flourishes in India - the sort of corruption that spurs investment growth and does not prey upon it.
During the 1970s, South Korea and Chile also witnessed the growth of "functional" corruption chronicled in a major debate on the state-market relationship in late capitalism at the New York New School. During 2005-06 to 2007-08 Indian real GDP had grown at an annual average rate of 9.5 percent. In 2008-09 growth decelerated to 6.8 percent reflecting according to many analysts, a major increase in India's dependence on metropolitan capitalist markets.
However, while the growth revival in America and Europe remains subdued and vulnerable to systemic shocks, Indian recovery has been robust, real GDP growth averaging 8.3 percent over 2010-11, India's expectation of regaining a 9 percent real growth rate in FY12 and achieving double digit growth over the medium run appears achievable.
Since independence Indian growth has remained mainly spurred by high levels of domestic savings and investment and these have not been significantly effected by the global downturn. Over the FY06-11 period, the saving GDP ratio has averaged over 34 percent and the investment GDP ratio has averaged 35 percent, with minor annual fluctuations. Export growth has rebounded strongly in 2010-11. It averaged about 25 percent per annum during FY05 to FY08 fell to 13.6 percent in 2008-09 and was minus 3.5 percent in 2009-10.
In 2010-11 however, exports are estimated to have grown by 29.5 percent (Indian Quick Estimates). In normal years, import growth exceeds growth in exports significantly - import growth averaged 28.6 percent during FY05-09, fell to minus 5 percent in 2009-10 and grew by 19 percent - significantly lower than export growth - during 2010-11. The current account deficit through not large, has almost doubled since the global downturn averaging about 2.5 percent of GDP during FY09 to FY11.
Foreign exchange reserves have continued to grow robustly - averaging 8 percent per annum in dollar term during FY09 to FY11 and almost reaching $300 billion that year. It is largely because of this factor that the Indian rupee remains one of the most stable currencies in the world. In $ terms there has been hardly any variation at all during FY05 to FY11 - the Indian rupee dollar rate appreciated by about 4 percent in NEER terms during 2010-11. Indian growth has traditionally been sustained by an expansionary fiscal policy.
The gross fiscal deficit to GDP ratio averaged about 4.5 percent during FY05 to FY11. There has been a major growth in this ratio in response to growth deceleration - it averaged 6.2 percent during 2008-10 but has fallen to 4.8 percent in 2010-11. The primary deficit is much lower - just 1.7 percent of GDP in FY11. Neo-classical economists regard a high deficit to GDP ratio as "a bad thing" and there has been some World Bank and ADB pressure on India to reduce public expenditure but since a large proportion of such expenditure is currently dedicated to bailing out national and multinational private enterprises the criticism has become muted. On the other hand, India has outback subsidies on petroleum, agricultural debt relief, postal services, fertilisers and public enterprise production to a significant extent in the 2011-12 union budget.
The Indian economy has been subjected to a major surge of inflationary pressure. The CPI inflation which averaged 5.7 percent during FY06 to FY10 has entered double-digit growth. It averaged 10.8 percent per annum during FY09 to FY11. It exceeded 11 percent in FY11 and there is every likelihood that it will be higher in the current year. The Indian nominal GDP has grown at an annual average rate of about 17 percent per annum during FY09 to FY11, which is not significantly different from the annual average rate of growth of broad money (M2) during this period. Hence, despite maintaining relatively low interest rate structures the monetary policy has not been overtly "loose", significantly food grain production in FY11 is lower than in FY09 and the growth of FY10 has been more than offset by the decline in FY11. This is some evidence to show that inflation in India, as in Pakistan is essentially a supply-side phenomena.
The decline in food production in FY11 has occurred despite a 5.4 percent increase in total agricultural production. Clearly a capitalist "revolution" is occurring in the Indian countryside Indian farmers are producing for the market and not for the poor.
Despite increased market orientation the role of the government remains powerful. During FY05 to FY10, government consumption grew at an annual average rate of almost 10 percent while private consumption grew at a significantly lower rate - about 8 percent per annum, government consumption growth accounted for over 20 percent growth of GDP growth during FY09 to FY11 and government consumption accounts for over 10 percent of GDP in a typical year.
The public sector share of total investment averaged at about 24 percent annually during FY05 - FY10 rising every year from 22.6 percent in FY05 to 25.3 percent in FY10. The corporate sector's share in total investment in FY10 was still only 36.4 percent and had fallen by 4.1 percentage points since the pre-crises year of 2007-08.
However, the public sector's share in gross domestic saving is low and fluctuating widely from year to year. Over FY05 to FY10 it averaged just under 8 percent - in the crisis year 2008-09, this ratio had fallen to just 1.5 percent. Over the FY05-FY10 period, the public sector saving investment to GDP gap averaged about minus 6 percent. It was as high as minus 9 percent in FY2009 and minus 7 percent in FY10. The private corporate sector's savings to gross domestic savings ratio averaged only about 23 percent during FY05-10.
Over the FY05-10 period the private corporate sector's share of investment averaged about 38 percent. There was a large negative investment to saving gap for the private corporate sector. The primary source of domestic saving in India remains the household sector. The large public investment - saving gap and the rising union fiscal deficit reflects a relative stagnation of federal revenue receipts (net of transfers to states). This averaged just 9.5 percent of GDP over FY05 to FY11. Revenue expenditure exceeds net union receipts by a large margin year after year. On the other hand capital receipts usually exceed capital expenditure significantly and a large proportion of capital receipts is sourced from borrowing and the build up of other liabilities.
There is a certain conclusion that a large portion of borrowings is used to finance the revenue deficit. We cannot yet speak of a "fiscal crisis of the state" but its possibility cannot be ruled out in the not-too-distant future. Reducing subsidies in the budget after the budget is no solution for after 2012 budget cuts account for only about 10 percent of total union expenditure.
The most important expenditure items are interest payments and defence. During FY05 to FY11, expenditure on defence and interest payments accounted for about a third of total revenue expenditure and given the nature of India's incumbent and "in waiting" governments, neither defence nor interest expenditure can be reduced in the foreseeable future. In the FY12 budget, debt service payments are expected to go up by 11.3 percent and defence expenditure by about 9 percent. India's defence expenditure during FY11-12 will probably exceed $36 billion.
Most accumulated debt represents internal market borrowings at variable rates. Total external debt outstanding accounts for only 4 percent of GDP and has declined every year during FY06 to FY11 (from 5.3 percent of GDP to 3.5 percent of GDP). Total outstanding liabilities have also been declining as a proportion of GDP and at end FY11 were about 51 percent. A major stimulant to maintaining low interest rates is the union government's penchant for borrowing from the domestic money market. In a typical year, union government expenditure equals about 15 percent of GDP and 20 percent of this takes the form of public sector capital investment. Both rising government consumption and growing public investment are factors responsible for the relatively high structural deficit in union finances. If public enterprise efficiency improves or if public investment stimulates the growth of private sector efficiency a high fiscal deficit can be an important policy instrument for sustaining a high level of GDP growth.
HOW INDIAN GROWTH PUNISHES THE POOR Accelerated growth is however punishing the Indian poor. Food inflation as measured by the Wholesale Price indices will in all probability exceed 12 percent this year. The food price index has more than tripled during FY05 to FY 11. During the calendar year 2010, the wholesale prices of green vegetables rose by 71 percent, potatoes by 67 percent, onions by 128 percent, spices by 32 percent and sunflower oil by 15 percent, CPI inflation will in all probability exceed 15 percent this year.
While inflation is primarily a cost-push phenomena monetary policy has remained ineffective. Thus reserve money has grown significantly faster in both FY10 and FY11 than M2. The Indian economy is now significantly monetized, the M2 to GDP ratio was about 85 percent in FY11 and the currency with the public to GDP ratio is only about 9 percent. Call rates have risen in recent years but even so in most months of FY11 they rarely exceeded 6 percent. In FY201, the repo rates averaged at 6.5 percent and the reverse repo rate at 5.5 percent. It is evident that the Indian monetary authorities are not particularly concerned about inflation. The FY2011 WPI target set by the Reserve Bank of India (5.5 percent) has been seen to be ridiculously unrealistic. WPI inflation - especially food inflation - exceeded this target by well over 100 percent. The unconcern with rising levels of social deprivation of the Indian government is shown by the fact that of the total outstanding credit at end 2010 advanced by Indian banks food loans amounted to only 1.7 percent. The share of small enterprises in outstanding bank credit was only about 11 percent.
UNDP 2010 estimates show India ranks 109 out of 169 countries on the basis of the HDI. Of the union, government's total expenditure in FY201, 3 percent is allocated for education 1.9 percent for health 0.2 percent for employment projects and 0.8 percent for social welfare. These figures graphically illustrate the callous neglect of the poor by the Indian government. The "uplift" and social support union and state funded schemes (NSCFDC, NSKFDC, NBCFDC, NHFDC, PMDSY ad infinitum) are all strictly shoestring, marginal operations and do not affect the life of the vast majority of the poor.
According to UNDP estimates about 510 million Indians have a purchasing power parity per capita income of less than $1.25 a day and about 42 percent of Indians are below the UNDP global poverty line. According to India's national index the proportion of the population below the poverty line in 2009 was 26.6 percent. But such a large difference in the UN and Indian estimates reflects the extremely low level of the domestic poverty line. For over two decades, Indian researchers have been challenging the methodology used by the Indian Planning Commission for estimating population below the poverty line arguing that it is a deliberate gross underestimate of poverty in India.
UNDP estimates also show that income inequality has been rising in India during 1999-2009. There is no evidence of the existence of a "trickle down effect" and real income growth of the poor does not respond to an acceleration of GDP per capita growth. The inter state income in equality gap is rising with Occupied Kashmir Jharkhand and the North Eastern States falling more and more behind the states of Western and Southern India. A major source of the growing income inequality in India is stagnant employment growth. During 1994-08, employment in the total organised sector grew at an annual average rate of 0.05 percent only - while population annual average growth was above one percent.
Rising social inequality is partly a consequence of rising external dependence. India's invisible receipts fell by 2.6 percent in 2009-10 while invisible payments rose by 9.4 percent. The invisible balance was as high as 6 percent of GDP. There has been a major decline in investment income receipts from abroad as well as in private transfers in both FY10 and FY11. The current account deficit increased by over 37 percent in FY10 and was equivalent to almost 3 percent of GDP. In FY2011 provisional estimates suggest that the current account deficit will be much higher - indeed it may approach 4 percent of GDP.
Moreover, while the capital account balance rose from about $6 billion in FY09 to $53 billion in FY10 this was due to a massive growth in portfolio investment and trade credits. Net foreign direct investment fell by about 6 percent in FY10. Net portfolio investment equalled 2.4 percent of Indian GDP in FY10, while net foreign direct investment equalled only 1.4 percent.
The trade (exports plus imports) GDP ratio now exceeds 35 percent. Both rising trade volumes and increased global money and capital market inflows in the form of portfolio investment increases India's vulnerability to global systemic shocks and emphasises the need to reorient macroeconomic policy towards stimulating domestic demand and income enhancement of the deprived masses.
Overall the last few years have seen India pursuing a high growth strategy which concentrates the benefit of this growth within a decreasing proportion of the population. This exacerbates both inter-personal and inter-regional distributional inequities and is in the (not very) long run unsustainable for it neglects the development of the country's main economic resource - her billion strong population. When five hundred million Indians are literally starving to death prosperity purchased by catering to the preferences of global capital can only lead to political implosion. 'Functional' corruption undermines the political legitimacy of the state and necessarily increases its vulnerability to both external shocks and domestic upheavals. Part of a larger study on "India's potential as a great power and its implications for the Muslim word". All statistical are cited from Indian official sources.
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