Tuesday, February 28, 2012

India's non-inflationary growth rate

The RBI Governor D Subba Rao candidly admitted that India's non-inflationary economic growth rate was 7%. In other words, in order to grow beyond 7% without stoking high inflation, India should take steps to ease supply-side constraints like infrastructure bottlenecks, food production deficiency, labour supply shortages and so on.

In this context, a linear extrapolation of India's GDP growth rates since 1951 reveal that the current trend growth rate may be at about 7%. It is obvious that the economy has been growing above the trend growth rate for a some time now, thereby stoking the inevitable inflationary pressures.

If this trend growth rate has to move upwards, it is important to increase the productive capacity of the economy. This can be achieved only with increased investment activity, especially in fixed capital formation. However, on both counts, investment rate and gross fixed capital formation, the Indian economy has been doing badly since the onset of the recession.

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