Anecdotal memory sometimes catches the flavour best. In the late eighties I recall engaging Raja Chellaiah in an extended discussion in the Planning Commission on whether a 6 per cent growth rate, as spelt out by Rajiv Gandhi, was sustainable. He seemed to think not.
Where were the resources? Today there is intense discussion over what needs doing to make an 8 per cent growth rate sustainable.
Not only has the incremental capital output ratio gone down through the nineties, allowing the economy to get a bigger bang for its investment buck, currently domestic investment is forging ahead of savings, getting reflected in an emerging current account deficit. Very lately there has been downward pressure on the rupee. That is not yet a cause for worry, but for how long?
The sustainability is important as China has had sustained double- digit growth which has after cooling off efforts come down to single digits. On the other hand, India post-1991 has seen a clear phase of heating up (1994-97) and an extended cooling-off that ended in 2002-03.
A significant aspect of the recent pickup in economic activity has been the rise in capital investment, which has resulted from a tremendous resurgence of confidence--the same kind of confidence that briefly prevailed around 1994-97. Will this confidence ebb again, as it did after 1996 or be long-lasting, as it has been in the case of China?
The floating of the rupee and reduction in tariffs post-1991 first severely jolted Indian industry, which somewhere in the late nineties underwent a change of heart. It stopped clamouring for protection and began to actively pursue the goal of becoming globally competitive.
The change in attitude and prospects is nicely captured by the Indian machine tools sector. Since the early nineties, it was severely affected by rising imports made possible by trade liberalisation.
Then somewhere down the line it decided to modernise itself, found a competitive niche for itself in more complex machine tools, and, since 2001, has not looked back, buoyed by burgeoning demand from galloping sectors like automobiles.
After automobiles, auto components, and machine tools, it now seems the turn of textiles to carry growth and employment forward. Considering the high weighting that textiles have in the economy, it is likely to significantly impact overall manufacturing growth over the next few years, thus providing one of the key building blocks for sustainable high growth.
The combination of good corporate results over the last several quarters and overall confidence has wrought a remarkable transformation across India's corporate sector. While firms have been growing rapidly domestically, they have of late begun to make aggressive acquisitions overseas.
Significantly, this is not to acquire size but capability, most of the acquisitions being carefully targeted to acquire technology and R&D platforms.
If to this we add the rapid outsourcing of R&D work, again across industries, to India over the last few years then an intriguing scenario emerges. India or Indians have the R&D capability to produce globally cutting-edge technology but not the corporate vehicles of sufficient size to own such technology and becoming a leader like Samsung.
But the way in which domestic growth and overseas acquisitions are progressing, some small Indian Samsungs may not be far away.
The difference with China is critical. Large Chinese firms have size and acquired technology. Indian leaders now are deficient in both but are ahead in their entrepreneurial drive, managerial skills, and their ability to absorb technology and benefit from the maturity of Indian free market institutions and practices.
As has been said with a bit of over- simplification, Indians are good at the soft stuff (this goes well beyond software) and Chinese are good at the hard stuff (this goes beyond plants and infrastructure into hard policy decisions facilitated by one-party rule). Given all this, if Indian companies are allowed to grow for a few more years, the way they have over the last few, then the country may not have to look back.
What can spoil this dream or stand in its way? Growing competitiveness is, to begin with, all about cutting costs. The two areas in which costs need to be cut are power and money.
The problems in the power sector, as also what needs to be done to set it right, are well-known. Related to this are the roadblocks in the way of exploiting India's huge coal reserves. The incentive to move on the latter front is huge, given current global oil and gas prices.
The falling cost of funds through the late nineties is widely recognised as a key contributor to emerging Indian competitiveness. So the need to cut the cost of money further is not so widely recognised.
Lower banking spreads resulting from higher deposit rates will restore some of the attractiveness of financial savings for the household sector and make available more resources for investment.
Bringing lending rates down a bit more will enable Indian banks not to lose their best customers to overseas markets as also bolster their bottom line. Recent reports indicate that the finance minister put a stop to public sector banks trying to jack up lending rates to prime customers in unison.
The finance minister has to now help the banks reduce manning levels as they make huge investments in IT so as to reap the cost benefits of such investments. That is a tough task, but so is sustaining 8 per cent growth.
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