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IMF Pegs India To Be One Of World's Fastest Growing Economies

This article is more than 8 years old.

As India should be one of the world's fastest growing economies of course. For, given what we know about economic growth the poorer a country is the easier it ought be to have fast growth. On the very simple grounds that the things that are necessary to have growth have already been invented elsewhere and it's only implementation that needs to happen.

That said it is still welcome to see India growing well. That well over a billion people are getting richer is welcome in itself. It's not all roses and plain sailing though. While it looks like there will be good growth for the next couple of years, barring disasters, there's some structural problems that need to be addressed if that's to continue on into the medium term. This all comes from the International Monetary Fund's recent report on the economic outlook for the region:

India's growth rate is expected to rise to 7.5 per cent this year and next, making it one of the fastest growing economies in the world, according to the IMF's latest economic health check.

The other Asian giant China's economy is slowing to a more sustainable pace - 6.8 per cent GDP growth in 2015, and 6.3 per cent in 2016, according to the International Monetary Fund's (IMF) Regional Economic Outlook for Asia and the Pacific.

We generally assume that catch up growth is easier than growth at the technological margin. This is because in the advanced countries it is necessary to actually go out and invent whatever it is which is going to bring on the economic growth. When an economy is within that technological envelope of what has already been invented then that invention doesn't need to happen: all that is necessary is the implementation. This doesn't mean that growth is easy, only that catch up growth is easier. We thus expect poorer place to grow more quickly. The end result of this is something called "convergence", where the poorer countries catch up with the rich ones.

However, it's not quite as simple as that:

"While several recent policy measures have helped eased supply-side constraints, further measures are needed in the energy, mining and power sectors," it said.

Reforms to streamline and expedite land and environmental clearances, increase labour market flexibility, and simplify business procedures should continue to improve India's business climate which is crucial for sustaining faster and more inclusive growth, the International Monetary Fund said.

It's not so much that government can cause or even direct future growth. It can very definitely prevent it as many countries have successfully proven. Bad governance, bad economic policy, can not only prevent growth it can reverse it. But while government can't really create growth it must also create the structure within which growth can happen. Good legal systems, secure property rights and so on. This is the sort of reform that the IMF is talking about. Perhaps not those specifically but the creation of that structure within which good growth can happen.

We generally think that India's growth is about as good as it can possibly get. 7%-10% per year is pretty much the limit at which an economy can grow. So that short term seems taken care of: it's not really possible for growth to be any faster than it already is. But given where India's starting from the desire is, of course, to have that sort of growth for many decades yet, as China has had. To drive India through being a developing and then middle income country into what it ought to be, a rich country. That will require continual tending to the creation of those structures inside which growth can occur. A free marketeer like myself is never going to say that the government should be directly planning the economy nor directly intervening to create growth. But as that free marketeer it's also true that government has to create the environment in which private economic actors can generate that growth.

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