Raghuram Rajan: India is approaching the Hindu Rate of Growth

  • Former Reserve Bank of India Governor Raghuram Rajan has warned that India is dangerously close to the Hindu rate of growth.

What is the Hindu Growth Rate?

  • The “Hindu Rate of Growth” is a term used to describe the Indian economy’s slow growth rate between the 1950s and the 1980s.
  • Raj Krishna, an Indian economist, coined the phrase in the 1970s.
  • During this time, the Indian economy grew at a much slower rate than that of other developing countries such as South Korea, Taiwan, and Hong Kong.
  • The term is debatable because it implies that the slow growth rate was caused by cultural or religious factors rather than economic policies and structural issues.
  • However, the term is still used in academic and policy discussions to refer to the Indian economy’s slow growth during this time period.

Characteristics of the Hindu Rate of Growth

  • Low GDP growth rate: The term refers to the period from the 1950s to the 1980s when India’s economy grew at an average rate of around 3.5% per year, which was significantly lower than that of other developing countries.
  • Slow Industrialization: The industrial sector was dominated by a few public-sector firms, while the private sector was heavily regulated.
  • Agriculture Stagnant: There was little investment in agriculture, and the sector was not given much priority in government policies.
  • License Raj: India had a socialist economic model with extensive government regulation. The License Raj system required businesses to obtain permits and licences, resulting in a bureaucratic and corrupt system that hampered innovation and entrepreneurship.
  • Import Substitution: India pursued an import substitution policy in which the government attempted to develop domestic industries by shielding them from foreign competition. This resulted in a lack of competition, low product quality, and high prices.
  • Inefficient Public Sector: Although the public sector dominated the economy, it was inefficient, unproductive, and corrupt. Government agencies were frequently overstaffed and poorly managed, resulting in low productivity.
  • Lack of Foreign Investment: During this period, India was unappealing to foreign investors, and there was little foreign investment in the economy. The government imposed strict controls on foreign investment, and the regulatory environment was unfavourable.

Concerns flagged by Rajan

Rajan Rajan expressed concern that India’s economic growth rate had been declining even before the COVID-19 pandemic hit the country.

(a) Decline in GDP growth rate

  • Before the pandemic hit in early 2020, India’s economic growth rate had fallen to 4.5% in the September quarter of 2019.
  • During the pandemic, the Indian economy contracted dramatically, with GDP falling by 7.7% in the fiscal year 2020-21.
  • The economy has begun to recover, with the IMF forecasting 9.5% GDP growth for the current fiscal year.

(b) Lower growth potential than hyped

  • However, Rajan cautioned that India’s potential growth rate is likely to be lower than in the past due to factors such as an ageing population, a decline in the working-age population, and slow investment.
  • He also cited the country’s poor performance on human development indicators like education and health as a growth constraint.

Important recommendations

  • Rajan advocated for measures to address the structural factors impeding growth, such as infrastructure and education investment, as well as improving the ease of doing business in India.
  • He also emphasised the importance of maintaining macroeconomic stability and fiscal discipline in order to avoid inflation and currency depreciation.
  • He also advocated for measures to combat inequality, such as better targeting of subsidies to those in greatest need.

@the end

Overall, Rajan’s comments imply that India faces significant challenges in maintaining high levels of economic growth, and that structural reforms will be required to address these challenges.

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