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Rangarajan’s Growth Formula

Rangarajan’s Growth Formula

By Shreya Bajaj

The UPA is passing through a tough phase; with the expected growth less than 5%, inflation touching its new high, high rate of interest to arrest the inflation and a lot of uncertainty in the economy due to global factors such as QE3 which has made rupee excessively volatile and also raising concerns over foreign investment in India. UPA has already faced consequences of all these factors and suffered a defeat at various state elections.

C Rangarajan has come up with his formula of how to grow at 8.5%.

The fact is that over the eight year period beginning 2005-06, the average annual growth rate has been 8%. But the major question that needs to be addressed is that whether India has the potential to grow at a sustained rate of 8-9%? So what are the trends?

According to Rangarajan in the case of determining the potential rate of growth of the economy, one can take the maximum growth rate achieved in the recent past as the lowest estimate of the potential, if there is a reason to believe that the growth rate achieved was robust.

India achieved its maximum growth rate of 9.5% in 2005-06 followed by 9.6% and 9.3% in subsequent years. The growth rate achieved in these years was robust. The domestic saving rate, gross capital formation rate averaged around 30%. The current account deficit remained low. On many dimensions the growth rate was robust. In the wake of housing bubble burst in US, growth rate began to decline, slowed to 6.2% in 2011-12 and now it may even be below 5% among the growing uncertainty.

Now various academicians and economists regard the slum in growth to a decline in investment. However according to C Rangarajan the gross fixed capital formation rate, was around 30.6% in 2011-12 against 32.9% of GDP in 2007-08 and the decline for the private corporate sector was 4.6%. Now the question is if there was not much difference between the two then in normal circumstances it should warranty a growth rate of atleast 7%, but the actual rate was only somewhat around 6%. Rangarajan believes that the delay in completion of projects, non availability of raw materials may be the primary reasons. C Rangarajan has provided relief to UPA by pointing out the fact that saving and investment rates are at high levels, so if we are able to find ways to combat the 2 issues mentioned above then the growth will follow even in short run, which can be a great move for congress ahead of 2014 elections.

However we also need to examine some macroeconomic fundamentals.

Gross domestic savings rate – which fell by 6 percentage points between 2007-08 and 2011-12(most of it was contributed by decline in public sector savings)

Investment rate– which fell around 3 percentage points between the 2 periods

Current account deficit – which increased from 2% of the GDP in 2007-08 to 4.2% in 2011-12.

Fiscal deficit– a sharp increase in fiscal deficit from 3.5% in 2007-08 to 5.9% in 2011-12

So heres the Rangarajan’s recipe for higher growth rate- increased domestic savings, fiscal consolidation, modest current account deficit and productivity of capital need to be increased.

Shreya Bajaj is currently pursuing B.A hons. economics from Jesus and Mary College, Delhi University. She is currently working hard to improve her research skills and learn something new each day. Her main area of interest is analysing current economic issues.

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