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Copyright © The Author 2007. Published by Oxford University Press.
This article appears in the following Oxford Review of Economic Policy issue: INDIA [View the issue table of contents]
The pattern and causes of economic growth in India
* Cornell University and Indian Statistical Institute, New Delhi, kb40{at}cornell.edu
** Cornell University, am445{at}cornell.edu
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Abstract |
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This paper presents the broad macro parameters of the growth of the Indian economy since the nation's independence and a cross-country evaluation of where India stands, drawing out the patterns discernible in these aggregative statistics. The paper gives an overview of the on-going debate on the components of the Indian growth and the relative importance of the different policies in the 1980s and 1990s. It contributes to this debate by identifying the landmark years, and analysing the politics behind some of the economics. The paper also analyses the factors behind the changes in India's savings rate and the relation between growth and development, on the one hand, and the nature of labour market regulation, on the other.
Key Words: India • growth • labour market • savings
The paper has benefited greatly from the comments and suggestions received from Alaka Basu, V. Bhaskar, Annelies Deuss, Bishnupriya Gupta, Abhijit Patnaik, and two anonymous referees of this journal. We are also grateful to Charan Singh of the Reserve Bank of India for help and advice with data at several stages, and to Ashokankur Datta and Namrata Gulati of the Indian Statistical Institute, New Delhi, for research assistance.
1 Sources, respectively: Selected Education Statistics (age 15 and above), Ministry of Human Resource Development, from Indiastat; our Table 1; Age-group Wise Expectation of Life in India, Ministry of Health and Family Welfare, from Indiastat;Dyson et al. (2004, Table 2.1, p. 20); our Table 1; estimated literacy rate age 15 and above of UNESCO; our Table 1; World Development Indicators 2006, World Bank; Dyson et al. (2004, Table 2.1, p. 20); our Table 1.
2 ‘Hindu rate of growth’ is the tongue-in-cheek expression, coined by the Indian economist, the late Raj Krishna, to capture the frustrations India's planners faced with growth. No matter what they did, growth seemed, invariably, to revert back to 3.5 per cent per annum, almost as if this magic figure was written in the land's scriptures. The possibility of Hinduism having something to do with economic growth was earlier suggested by B. P. R. Vithal.
3 The first census of India was carried out throughout the 1860s and completed in 1871. Since then there have been 13 more censuses, one per decade, the latest one being the 2001 census.
4 The PPP-corrected GDP takes into account the difference in prices of goods and services between countries. As the exchange rate only takes into account the differences in tradable goods and services and several countries have non-market-based exchange-rate determination, it is arguable that the PPP allows us to make more meaningful comparisons of standards of living across countries.
5 If India's rank is measured in GDP (constant 2000 international dollars), India ranks 13th.
6 Sources: Reserve Bank of India, Handbook of Statistics of the Indian Economy 2005–2006 (Table 172) and National Sample Survey (NSS) 55th Round Official Estimates. Note that the measurement of poverty has been a hotly debated subject especially since the 55th round of the NSS tried to change the reference period of household consumption (see Deaton and Drèze, 2002; Himanshu and Sen, 2005; Lancaster and Ray, 2005; Subramanian, 2006, ch. 10).
7 This changing perception is cited and discussed in Basu (2006b).
8 Source: Dyson et al. (2004, Table 2.1, p. 20).
9 Thereby hinting at the main critique of this approach: that TFP is a residual and, as such, incorporates also all kinds of shocks, such as political turmoil, external shifts, and measurement errors.
10 Other studies confirm this general trend (see, for instance, Dholakia, 2002). A more detailed discussion can be found in Virmani (2004b).
11 According to Rodrik and Subramanian (2004b), a structural shift can only explain 10 per cent of the TFP growth.
12 The reforms of the 1980s are extensively discussed by, among others, Kohli (2006a), Virmani (2004b), and Panagariya (2004).
13 Rodrik and Subramanian (2004b) provide evidence for this attitudinal shift by the government in the early 1980s that favoured the interests of existing businesses rather than new entrants or consumers. This evidence has been contested by Srinivasan (2005).
14 The current gross irrigated area is 40 per cent of the cultivated area. This area has increased greatly over the last 40 years (see Ministry of Agriculture, 2004, Table 14.2).
15 See, for instance, Durlauf et al. (2004). See also Bosworth and Collins (2003) for additional references on these critiques.
16 Note that the World Bank figures consider only the official costs and times involved for a standardized firm, assuming perfect knowledge about the procedures, and these measures most likely underestimate the real costs involved. In addition, the rankings do not take into account that the opportunity cost of time differs across countries; one day waiting in India is not the same as one day waiting in the USA. On a similar note, as the gross national income (GNI) is much higher in the high-income countries, a low cost as a percentage of the GNI is in a way ‘easier’ to achieve; also, as this cost is not calculated as a percentage of the PPP GNI, the actual perceived costs in developing countries might be lower than is suggested by the World Bank figures. It is unclear how these data issues affect the relative ranking of the countries.
17 Some first-hand descriptive accounts of India's burgeoning bureaucracy occur in Basu (2007b).
18 See, for instance, Srinivasan (2005).
19 One of these is the current year, 2006/7, the growth rate for which is estimated to be 9.2 per cent.
20 To the extent that the value of democracy is not purely instrumental but as an end in itself, 1975–7 must overall go down as dark years in India's history. For a discussion of India's democracy and development, see Sen (2004).
21 Why the Indian reforms came so late, and only when the nation was up against the wall, is itself an interesting question. It may have something to do with India's democracy, which is quite unique. All the currently developed democratic nations adopted democracy with universal suffrage, after the process of industrialization was firmly in place. India adopted universal suffrage at independence, at a level of poverty with few parallels, and so it has had to contend with the opinion of the poor in ways that are quite alien to the industrialized nations of today (Varshney, 2007). This may also have something to do with the tenacity of India's labour laws, discussed below.
22 See Majumdar (1997) for discussion of growth theory in the context of the Indian economy.
23 The Supreme Court of India initially declared the nationalization to be invalid. But Indira Gandhi amended the law and passed the nationalization decision by an ordinance.
24 ‘The banking system touches the lives of millions and has to be inspired by larger social purpose and has to subserve national priorities and objectives such as rapid growth of agriculture, small industries and exports, raising of employment levels, encouragement of new entrepreneurs and development of backward areas. For this purpose it is necessary for the government to take direct responsibility for the extension and diversification of banking services and for the working of a substantial part of the banking system.’ (Bank Company Acquisition Act, 1969).
25 Economic analysis of banking reform is a relatively scarce discipline in India. For recent work, see Banerjee et al. (2003, 2004).
26 Sanjay Gandhi died when a plane that he was flying crashed on 23 June 1980.
27 See, for instance, Desai (1994), Srinivasan (2000), Ahluwalia (2002), Bardhan (2004), Basu (2004), and Chidambaram (2007).
28 For an analysis of India's success in software and information technology, see Kapur (2002) and Murthy (2004).
29 A more detailed discussion of this occurs in Basu (2006b).
30 Interestingly, Indo–Chinese relations have also improved steadily since Rajiv Gandhi's visit to China in 1989; and trade between India and China has grown exponentially over the last 4 years (see Ramesh, 2005).
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