Sub-prime not prime

The 11th Five Year Plan (2007-12) came up for ratification at the National Development Council on Wednesday. The 10th Plan (2002-07) averaged 7.5 per cent real GDP growth, with acceleration in the last three years. The 11th Plan contemplates growth of 9 per cent, accelerating to 10 per cent, and a decline in poverty by 10 percentage points. There are valid reasons for optimism about achieving these targets and, at the NDC meeting, Prime Minister Manmohan Singh flagged increases in savings/investment rates and the more elusive target of increasing infrastructure investment to 9 per cent of GDP from the present 5 per cent. Understandably, he also raised concerns about inclusiveness of growth and equity issues across regions and sectors. India’s growth has both internal and external drivers. In a large country, exogenous sources should not be as important as endogenous ones — China is an exception. External critics often flag India’s insularity, despite liberalisation of trade and investments. However, India’s trade/GDP ratio is already 40 per cent higher than that of the US, and high export growth — lower now because of rupee appreciation — had contributed to both manufacturing and GDP growth. Consequently, any external trigger can affect growth prospects.

The PM has mentioned three such inter-related triggers: global slowdown (particularly in the US), worsening capital flows and the sub-prime lending crisis. While a dollar crisis is always possible, driving global economies into a downward spiral, it’s unlikely. Nor does a sharp plummeting of growth in developed economies seem plausible, as opposed to softening. One should also remember geographical diversification in India’s trade, away from classic developed country partners in Europe and North America. Indeed, China is now India’s largest trading partner and growth there shows no signs of flagging or, for that matter, in East Asia. As for capital inflows, reduction is good for the cause of rupee appreciation.

That leaves the sub-prime crisis, whose implications will take several months to sort out in the US. Before reacting to implications for India, we need to remember this concerns a limited segment of the US economy — the mortgage and housing markets. It is one thing to argue this underlines the need for sound banking practices, but if one says the sub-prime crisis alone has great adverse implications for India’s growth, that’s stretching things too far.