India’s economic performance during the first 3 decades since independence was christened the ‘Hindu rate of growth’. The growth rate was not enough to meet the needs of a country where the initial level of income was so low.
Since 1980, its economic growth rate has more than doubled, rising from 1.7 per cent (in per capita terms) in 1950-80 to nearly 4 per cent thereafter. Shackled by the socialist policies and the ‘license-permit-quota raj’ of the past, India used to serve as an exemplar of development strategies which went wrong. It has now become the latest poster child for how economic growth can be unleashed with a turn towards free markets and open trade. Thanks to its solid democratic institutions and impressive performance in information technology, the country is increasingly trying with china as the country of the future.
Its documents the facts on India’s aggregate growth performance over time and presents a view on when and why it turned around. It lists the facts relating to growth across states within India, and offers explanations for the variation in state-level economic growth. It raises some questions for the future, relating aggregate and state-level growth.
India’s performance in terms of economic growth was about the same as in most countries in the world. It was not as good as East Asia but, definitely not as bad as Africa. The rate of growth predicted for India, based on its initial output per worker, its share of investment in GDP and its population growth rate was also very close to world’s average.
There was a sharp acceleration in the growth rate since 1980. It went almost unnoticed and India grew almost by stealth. It came into limelight in early 2000s. The growth rates achieved on an average, during the period from 1980 to 2005, means that GDP doubled in 12.5 years where GDP per capita doubled in 20 years. In fact between 1980-81 to 2004-05, GDP multiplied by 3.81 while GDP per capita multiplied by 2.37.
AGGRERATE GROWTH
There were few significant policy changes in the early 1980s, and the changes later on were restricted largely to some internal liberalization relating to the relaxation of industrial licensing. The limited nature of these changes, as well as the form they took, is best understood by appreciating the political logic of Indira Gandhi.
Output per capita, output per worker as well as total factor productivity accelerated sharply after 1980. For example, total factor productivity, which grew at about 0.2 per cent per annum during the 1960-80 period, grew at close to 2 per cent per annum in the following 2 decades.
India has become the model for high and efficient growth and this acceleration in the growth rate can be attributed to several factors.
Ø Expansionary macroeconomic policies
Expansionary macroeconomic policies which led to an increase in aggregate demand did stimulate an increase in the rate of growth of output.
Ø Increase in public investment
Starting with 1970s there was a significant increase in the public investment which was sustained through the 1980s which contributed to an increase in aggregate demand.
Ø External liberalization
Trade liberalization began in late 1970s, combined with some deregulation in industrial policies introduced in early 80s, contributed to productivity increase and economic growth. Very little internal reform, of products and labor markets, was witnessed in the 1980s, and the only serious effort in this area- the delicensing of Indian manufacturing-started late in the 1980s and was fairly limited in the scope.
It’s even argued that external liberalization could not have been a factor because the Indian trade regime actually became more restrictive during the 1980s, and the full impact of trade reforms implemented in the 1990s was only felt at the end of the 1990s.
Ø Attitudinal shift
There was an attitudinal change on the part of the government of the 1980s, signaling in shift in favor of the private sector, with this shift validated in very haphazard and gradual manner through actual policy changes.
This shift and the limited policy charges were pro business rather than pro competition, aimed primarily at benefiting incumbents in the formal industrial and commercial sectors. The pro market focuses on removing impediments to markets and aims to achieve this through economic liberalization. It favors entrants and consumers. A pro business, on the other hand, is one that focuses on the raising profitability of the established industrial and commercial establishments. It tends to favor incumbents and producers. Nevertheless, this shift towards a pro business orientation was the essential trigger that set of the boom of the 1980s.
These small shifts elicited a large productivity response because India was far away from its income possibility frontier.
Ø Reduction in the instability of growth
The surge in Indian growth after 1980 was accompanied by a reduction in the instability of growth. The standard deviation in the growth of output per worker which was 3.7percent pre-1980 declined sharply to 1.9 per cent thereafter, a performance that surpassed that of nearly every other country.
Ø Other factors related to poverty and agriculture
During the 1980s poverty alleviation programmes were in full swing coupled with increase in productivity of agriculture. Both of them gave rise to significant share in the GDP. Agricultural factors played an important role since the green revolution in the 60s and 70s had a tremendous impact on the output which made the country self-reliant. Also irrigational facilities became prominent in this era with nearly 65 percent of the area was under irrigation in 1980s. A decline in poverty observed during this period was of some sort of significance. There was a marginal decline in the poverty due to the adoption of massive poverty alleviation programmes that made it possible for the people to buy better goods and services to contribute to the growth of the country.
The cumulative impact of economic policies or public actions over the preceding 30 years possibly played an important role in the turnaround.
The social institution and the legal framework for a market economy were put in place.
A system of higher education was developed.
Entrepreneurial talents and managerial capabilities were fostered.
Science and technology was accorded a priority.
Capital goods sector was established.
This turnaround has also been true at the level of the three major sectors, especially manufacturing and services. Agricultural growth accelerated by about 2.7 per cent between the 1970s and 1980s, and manufacturing and services posted growth rates over 6 per cent in the 1980s and the 1990s.
One way to control the demand induced increase in productivity is to compute the productivity aggregates incorporating changes in capacity utilization. One estimate for the 1970s and 1980s implies an increase in capacity utilization of about 2.7 per cent, which would have the effect of reducing measured TFP growth in the 1980s by about 1 per cent per year.
STATE-LEVEL GROWTH
Prior to 1980, the growth rate of the Indian states was mediocre but relatively uniform.
It appears that two sets of factors played a role.
Ø Different states with different pre-existing capabilities.
Different states have different pre-existing capabilities. But these remained latent and could not find expression until the economic environment changed. It turns out that this capability was something more than a states level of development or educational level or geography. It is the best captured by how diversifies a state’s manufacturing base was. This diversified base is probably a proxy for some generalizes capability-human capital, entrepreneurial spirit, organizational capital-that could exploit a favorable economic environment.
Ø Liberalization
The trigger-the second set-was liberalization begun in 1980, and especially the decentralization of economic power that was changed by the changing political landscape after the 1980. The triggers of liberalization and decentralization-While the formal reforms at the centre received tremendous publicity, perhaps less noticed was the growing decentralization of policy.
The centrifugal forces created by the dispersion of political power in India did not sit well with the enormous centralization of economic power, and the inter-state cross-subsides the centre affected through its investment strategy. Something had to give, and it was the centralization of economic power.
Greater economic decentralization meant states could differentiate themselves, not least in their ability to attract the private-sector investment. This was, of course, facilitated by the gradual dismantling of the industrial licensing system that used regional equity as one of the primary criteria guiding industrial investments. Further contributing to differentiation over this period was the rising trend in private investment, as well as the falling trend in public investment with private investment likely to be more sensitive to differences in policies across states.
Economic development results from the interaction of growth triggers with the right fundamentals that allow the triggers to be exploited.
The fundamentals were not just the pools of skilled human capital built through the technology, management, and research institutes –a sort of import substitution effort is skilled human capital development-tat was integral to the Nehruvian vision.
Free mobility of capital and labor should facilitate convergence the process of divergence within India. But capital will not flow into the lagging states, which are stuck in a governance trap: because basic state functions such as law and order, an efficient bureaucracy, and competent courts have not been provided, they have remained poor, which in turn has led to exist of the middle class and the skilled, leading to the further skill groups there hollowing out of state capabilities. If this continues, the process of arresting divergence could take the form of large labor outflows from the backward states. Averting them by crafting the conditions for greater economic convergence over states and skill groups will be a big challenge for India in the years ahead.
As India faces the new century, the Indian economy stands at a crossroads. Either it can take the "business as usual" road, which also means continued poverty and a low growth trap, or take the high road to achieve prosperity, global prominence and a more egalitarian society through accelerated reforms and by energising the national innovation system. This means that government's national orientation has to shift from religious fundamentalism, re-writing history and terrorising minorities to achieving economic goals, and concomitantly the voter has to rise, or be encouraged by the intellingentsia to rise, above caste, religion and inducements to vote for performance. The task is achievable, but not by wishful thinking and armchair pontification of intellectuals.
The fiscal expansionism of the 1980s, accompanied by some liberalization controls on economic activity, generated real GDP growth of more than 5 per cent a year. This expansionism was, however, was not sustainable and led to macroeconomics of 1991.
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