Galloping growth, why it remains a fantasy

The massive strain riding on this year's budget is undeniable; it not only has to make the country's growth rate gallop to 7.2 percent from an estimated current of 6.03 percent, but also has to ensure prudency to avoid harming other economic activities. This target seems to be overly optimistic by simply observing past growth trends, but more importantly the question is why do we fail to reach our growth targets time and again?
Every year the country's growth targets are set on certain expectations and one of them is that total investment as a proportion to gross domestic product (GDP) will increase. However in recent years, investment to GDP ratio has been hovering around a narrow band of around 25 percent.
The country's Sixth Five Year Plan envisages increasing the investment to GDP ratio to 32.5 percent in fiscal 2015 from the estimated current of 26.8 percent. The plan also stipulates that the lion's share of the investment will come from the private sector.
Private sector investment compared to GDP is expected to leap to 25 percent from a current 18.9 percent; this is going to be a formidable task in the face of inadequate energy, infrastructural support, political instability and labour unrests.
An interesting point to note here is that the ratio of private sector credit to GDP has been on the rise -- it has escalated from 32 percent to 45 percent between fiscal 2007 to fiscal 2012, but on the contrary, private sector investment compared to GDP has been floating within 19 percent! So where is all the extra money going?
It is no surprise that this money has been used for speculative purposes and real estates. The formation of the stock market bubble and its burst in recent times can be easily attributed to the rise in private sector credit. The price inflation in real estates and land may also be linked to this.
Needless to say, investment money used in these purposes hardly acts as a catalyst to growth. Foreign direct investment (FDI) is another aspect which needs attention. As of April of fiscal 2013, net FDI stood at $1.1 billion, which is less than 1 percent of the GDP.
Neighbouring countries like Malaysia and Vietnam raked in FDI of $11 billion and $7.4 billion respectively in 2011, indicating the sizable prospect for FDI. If the energy and infrastructure crisis is addressed, FDI can generate employment opportunities and introduce technological know-how that can in turn augment the growth rate.
An area of concern is how the government is financing the deficit. The budget implies that the government will borrow Tk 25,993 crore from the banking system; the target is quite high and risks crowding out the private sector, which can further dampen investment. The government exceeded bank borrowing targets by Tk 5,500 crores in fiscal 2013, and a similar scenario can be expected in fiscal 2014 if revenue targets are not materialised.
On the positive side, foreign aid inflows have been rising and this may help restrain government's domestic borrowing from the banking system as well as improve the balance of payments.
Education has been a major device for many Asian countries for their growth successes. However, public expenditure compared to GDP stands at a meagre 2.1 percent in fiscal 2014, whereas neighbouring countries like India, Thailand and Malaysia are allocating 3 percent to 6 percent. The increment of Tk 4,097 crore in the budget for education isn't satisfactory given the rising number of students and the rate of inflation.
The Millennium Development Goal number 2 targets to achieve universal primary education. As far as net enrolment ratio of primary education is concerned, we have done very well with a rate of 95 percent.
Net enrolment rate for girls is higher than boys in both primary and secondary level institutions, indicating that we are also reaching well in MDG target 3, which specifies promotion of gender equality and empowering women.
However, when taken a closer look, deeper problems can be perceived. Even though net enrolment rates are so high in primary, dropout rates stood at 40 percent in 2010, according to Bangladesh Bureau of Educational Information and Statistics. This means 40 percent of the students who were enrolled in grade I dropped out of school by the time they were in grade V.
The scenario gets worse in case of secondary education, where dropout rate is 53 percent, according to the BANBEIS. It means only 47 percent of the students enrolled in grade VI actually complete the cycle of grade VI-X.
The corollary of high dropout rates in the face of a limited education budget is huge because this translates into a massive loss of public expenditure as public money is being spent on the students.
Stipends given to students have been a successful instrument in increasing enrolment rates and receding dropout rates; however, the social safety net programmes in fiscal 2014 implies that funds allocated for stipend programmes have reduced by 13 percent as compared to the preceding fiscal year.
More money should indubitably be allocated for stipends as they act as an incentive for the students to remain in schools and complete the education cycles.
Just like education, health is another component of the Human Development Index, but the share of health sector in the national budget has declined this fiscal year.
Political instability is another entity which makes the country's growth rate stumble. Past trends show that the country's growth rate has always performed relatively poorly in election years due to increased political chaos. In fact, growth rate already starts sliding a year prior to election years. By looking at the present political settings, this election year seems to be no exception.
On a positive note, the manufacturing sector can be expected to bring about the much needed glory to growth. The International Monetary Fund expects world output to rise in 2014 and the European Union has started to bounce back from recession.
This is welcoming news for our exports and we can hope that this sector will supplement to growth, even if it is unable to reach the staggering target of 7.2 percent under the current circumstances.

The writer is the head of research at The Daily Star and can be reached at [email protected]