Spacial articlas
Economic Growth in Independent India Lumbering Elephant or Running Tiger?
The story of economic development in independent India is often distorted by beliefs in fashion or caricatures of perceptions which shape conventional wisdom. This is misleading, not only in analysing the past but also in contemplating the future. If we consider India during the 20th century as a whole, the turning point in economic growth was circa 1951. If we consider India since independence, the turning point in economic growth was circa 1980. And it is clear that the turning point in the early 1950s was much more significant than the structural break in the early 1980s. In the first phase of growth in post-independent India, from 1950 to 1980, India was not the lumbering elephant that it is often made out to be. In the second phase, from 1980 to 2005, India was not quite the running tiger that some believe it has become. The real failure, throughout the second half of the 20th century, was India’s inability to transform its growth into development, which would have brought about an improvement in the living conditions of ordinary people.
DEEPAK NAYYAR
T
The structure of the discussion is as follows. Section I outlines the dramatic changes in perceptions about the story of economic development in India, in retrospect and prospect, to set the stage before the play begins. Section II examines the turning points in India’s economic performance during the 20th century by situating it in historical perspective, to provide a comparison with the colonial era. Section III provides an assessment of economic growth in India since independence, with reference to the past and compared with the performance of other countries, to suggest that it was respectable to begin with and impressive thereafter. Section IV draws together some conclusions.
I Changing Perceptions in Retrospect and Prospect
The second half of the 20th century witnessed remarkable swings of the pendulum in perceptions about economic development in independent India. In the early 1950s, India was a pathsetter, if not a role model. And the optimism extended beyond those who had a dream about India.1 For some, its mixed economy was an answer to the challenge posed by communism in China.
For others, its strategy represented a non-capitalist path to development. For yet others, who recognised the problems of industrial capitalism, India was on the road to their ideal of a social democracy and a welfare state. Just 25 years later, in the mid-1970s, perceptions were almost the polar opposite. India became an exemplar of everything gone wrong.2 For some, the slow growth and the persistent poverty in the economy represented failure. For others, the inefficient industrialisation was a disaster. For yet others, the political democracy was unaffordable if not unviable. Another 25 years later, in the early 2000s, there was a dramatic change in perceptions once again. The same India came to be seen as a star performer, if not a role model.3 For some, rapid economic growth turned the lumbering elephant into a running tiger. For others, the impressive economic performance combined with strong institutions which have matured over time in a political democracy mean that India may be the next Asian giant competing with, if not displacing, China.4 For yet others, India’s economy is the latest poster child to demonstrate the virtues of markets and openness.
These are, of course, caricatures of perceptions. Even so, these do reflect the popular mood at each of the junctures in time. It would be natural to ask: what has changed? In part, the process of development has changed realities in India over five decades. But, in part, changes in thinking about development have shaped perceptions over time. And it needs to be said that perceptions have changed more than realities.
The present juncture, strongly influenced by the dominant ideology of our times, has not only shaped thinking about the future but has also reshaped thinking about the past. In caricature form, the orthodox story about the economy of independent India, half a century later, runs as follows. The era of planned
development, which began life in 1950, was characterised by Figure 1A: Trends in National Income: India: 1900-01 to 1946-47
(In Rupees Million at 1938-39 Prices)
misguided, possibly counterproductive, economic policies. The
500000
strategy of industrialisation, which protected domestic industries
y= 16029e0.0103x
450000
from foreign competition and led to excessive state intervention, R2 = 0.9321 400000
in the market, was responsible for high costs and low growth
350000
in the economy. The prime culprits were inward-looking policies,
particularly in the sphere of trade, which stifled competition, and
300000
extraordinarily cumbersome licensing with controls on domestic
economic activity that suffocated entrepreneurship and initiative
in the private sector.5Jawaharlal Nehru, who was strongly influenced by the colonial past and the socialist present, in this error of judgment. Others lay the blame at the door of post-colonial elites who were followers of Fabian socialists in Britain. And a few blame the political process in which mobilising the poor through rhetoric
Some blame the first prime minister,
25000 20000 15000Rupees million000100000
50000 00
Year
was seen as more important than resolving their problems through growth.6 In this world view, which almost ignores the Figure 1B: Trends in Per Capita Income: India: 1900-01 to 1946-47
(In Rupees at 1938-39 Prices)
significant achievements of that era, more than four decades
were simply wasted. For them, the economic liberalisation in the early 1990s, which reduced the role of the state to rely more on the market, dismantled controls to rely more on prices, cut back on the public sector to rely more on the private sector and increased the degree of openness of the economy at a rapid pace, represented a new dawn. It is almost as if the economy began life in 1991. And the ideologues are convinced that the economic reforms of the early 1990s unleashed economic growth and led to the superb economic performance that is now much admired.7
This world view is also beginning to shape thinking about the future. It has led to many aspirations for India 2025. The incorrigible optimists hope for a developed India that has caught up with industrial societies. Political leaders aspire for recognition as a nuclear power in the P-5 club, membership of the Security
100 90 80 70 60 50 40 30 20 10 0 Rupees 00000000000y= 59.019e0.0024x R2 = 0.3936 Year
Council in the United Nations, and a seat at the dinner table with the G-8. Their ultimate aspiration is India as a superpower in the world. The corporate elite hope for dynamic entrepreneurship, technological capabilities, and wealth creation. Their ultimate aspiration is India as a lead player in the global market with its own transnational firms. The pink pages of our newspapers and the electronic media have similar, even if somewhat more nuanced, hopes for India two decades hence. Such beliefs about India in the world stem primarily from aspirations about the economy in 2025: that it would become the third largest economy in the world in terms of national income at purchasing power parity; that it would become a middle-income country in terms of per capita income; and that poverty would be banished from the republic. And if China is the world’s factory, India would be the world’s office.
In my view, this belief system about the story of economic development in independent India is open to serious question for two reasons. First, it represents a misreading, if not a misinterpretation of the past. Second, it rests on over-simplified thinking about the future.
II The Long Twentieth Century
In seeking to establish turning points in the performance of the economy, or structural breaks in the pace of economic growth, most studies focus on the period since 1950. This is not quite appropriate. Indeed, any meaningful assessment of economic
Source: Sivasubramonian (2000).
performance in independent India must situate it in a long-term historical perspective to provide at least some comparison with the colonial era. Therefore, it would be logical to consider the performance of the economy before and after independence during the 20th century.
In this historical perspective, available evidence shows that the turning point came in the early 1950s. The trends in national income and per capita income, at constant prices, during the period from 1900-01 to 1946-47 are outlined in Figure 1. It reveals that during the first half of the 20th century, there was a nearstagnation in per capita income while the growth in national income was minimal. The trends in GDP and GDP per capita, at constant prices, during the period 1950-51 to 2004-05 are outlined in Figure 2. The contrast is clear. There was a steady growth in both GDP and GDP per capita during the second half of the 20th century. This is confirmed by Table 1, which sets out average annual rates of growth in national income and per capita income during each of the two periods. There are two sets of growth rates for the period 1900-01 to 1946-47 based on two different estimates of national income. The Sivasubramonian estimates suggest that, in real terms, the growth in national income was 1 per cent per annum, whereas the growth in per capita income was 0.2 per cent per annum. The Maddison estimates suggest that the growth in national income was 0.8 per cent per annum, whereas the growth in per capita income was almost negligible at 0.04 per cent per annum. The growth rates for the period from Figure 2A: Trends in GDP: India: 1950-51 to 2004-05 trend is clearly discernible in 1980-81 with a marked acceleration
(At Factor Cost in Rupees Million at 1993-94 Prices)
in economic growth thereafter. This is also borne out by Figure 4, which outlines trends in GDP and GDP per capita, at constant
18000000
prices, during the period from 1980-81 to 2004-05. In doing so,
16000000
it makes a distinction between two sub-periods: 1980-81 to
1990-91 and 1991-92 to 2004-05. The picture that emerges is
10000000
= = 14000000 12000000 y= 1000000e0.0427x R2 = 0.9851
8000000
on average annual rates of growth in GDP and GDP per capita,
6000000
for each of these sub-periods, provides further confirmation.
4000000
During the period from 1950-51 to 1979-80, growth in GDP was
2000000
3.5 per cent per annum while growth in GDP per capita was 1.4 per
0
growth rates were almost the same. In fact, during the period clear enough. Almost the same trend continues, without any
cent per annum. During the period from 1980-81 to 2004-05, growth in GDP was 5.6 per cent per annum while growth in GDP per capita was 3.6 per cent per annum. The sharp step-up in growth rates, not only aggregate but also sectoral, suggests that 198081 was the turning point. This conclusion is reinforced by a
Year
Figure 2B: Trends in GDP Per Capita: India: 1950-51 to 2004-05
comparison of growth rates, aggregate and sectoral, during the
(At Factor Cost in Rupees at 1993-94 Prices)
sub-periods 1980-81 to 1990-91 and 1991-92 to 2004-05. The
16000
14000
12000 10000 8000 6000 4000 2000
0
= = y= 3491.3e0.0215x R2 = 0.9368 from 1991-92 to 2004-05, growth in the primary sector and the
secondary sector was somewhat slower while growth in the tertiary sector was somewhat faster in comparison with the period from 1980-81 to 1990-91. Growth in GDP was 5.9 per cent per annum as compared with 5.4 per cent per annum, while growth in GDP per capita was 4.1 per cent per annum as compared with
3.2 per cent per annum. There was some acceleration in the rate of growth of GDP per capita which was largely attributable to
the slow down in population growth. For those not persuaded by trends in graphs or comparison of growth rates, statistical analysis should be conclusive. And there is now some literature on this subject.11 Econometric analysis of time series data on GDP and GDP per capita for the period from the early 1950s to the early 2000s establishes that the structural break in economic growth since independence, which is statistically the most significant, occurs around 1980.12
There are two conclusions that emerge from the available evidence and the preceding discussion. First, if we consider the 20th century in its entirety, the turning point in economic performance, or the structural break in economic growth, is 1951-52.
Table 1: Rates of Economic Growth in India during the Twentieth Century
(Per cent per annum)
Sivasubramonian Estimates Maddison Estimates
A 1900-01 to 1946-47
Primary sector 0.4 0.8 Secondary sector 1.7 1.1 Tertiary sector 1.7 0.8 National income 1.0 0.8 Per capita income 0.2 0.04
B 1950-51 to 2004-05
Primary sector 2.5 Secondary sector 5.3 Tertiary sector 5.4 GDP total 4.2 GDP per capita 2.1
Note: The average annual rates of growth, sectoral and aggregate, for the period 1950-51 to 2004-05, have been calculated by fitting a semi-log linear regression equation Ln Y = a + bt and estimating the values of b.
Sources: For 1900-01 to 1946-47, Sivasubramonian (2000) and Maddison (1985). For 1950-51 to 2004-05, National Accounts Statistics of India, CSO and EPW Research Foundation.
1950-511954-551958-591962-631966-671970-711974-751978-791982-831986-871990-911994-951998-992002-03
Source: National Accounts Statistics of India, CSO and EPW Research Foundation.
1950-51 to 2004-05 provide a sharp contrast. In real terms, the growth in GDP was 4.2 per cent per annum while the growth in per capita income was 2.1 per cent per annum. The step-up in sectoral growth rates was just as substantial. The magnitude of the increase over the entire period is also revealing. Between 1900-01 and 1946-47, at constant 1938-39 prices, national income for the undivided India increased from Rs 15.4 billion to Rs 24.9 billion by 60 per cent, whereas per capita income increased from Rs 54 to Rs 60 by a mere 11 per cent.8 Between 1950-51 and 2004-05, at constant 1993-94 prices, GDP increased by 1,000 per cent, while GDP per capita increased by 250 per cent.9 For those who are not persuaded by the trends in graphs, the step-up in growth rates, or the proportionate increases in income, there is conclusive evidence provide by statistical analysis. There is a complete time series for national income aggregates, GDP at constant 1948-49 prices, for the entire period 1900-01 to 1999-2000. Econometric analysis based on this data set shows that the most important structural break, which is statistically the most significant, for the growth rate in national income is 1951-52.10
Interestingly enough, even if we focus on the performance of the economy in India since independence, it is clear that the turning point in economic growth is circa 1980, more than a decade before economic liberalisation began in 1991.
Figure 3 outlines the trends in GDP and GDP per capita, at constant prices, in India during the period from 1950-51 to 2004
05. In doing so, it makes a distinction between two sub-periods 1950-51 to 1979-80 and 1980-81 to 2004-05. The break in the
Year
Figure 3: Two Phases of Economic Growth in India:much more about autonomous space for the nation than about
1950-51 to 1979-80 and 1980-81 to 2004-05
freedom for the individual. Indeed, the Gandhian notion of a just
A: GDP (at factor cost in Rupees million at 1993-94 prices) state was premised on the idea that the collective interest must 18000000
take precedence over individual interests. Yet, the Constitution
adopted by independent India created a democratic republic and
16000000
Year
Source: National Accounts Statistics of India, CSO and EPW Research Foundation.
Second, if we consider India since independence, during the second half of the 20th century, the turning point in economic performance, or structural break in economic growth, is 1980-81. In either case, 1991-92 is not a turning point. Therefore, it is simply not possible to attribute India’s growth performance to economic liberalisation even on a post hoc ergo propter hoc basis. It is also clear that the turning point in the early 1950s was much more significant than the structural break during the early 1980s. This proposition is validated by econometric analysis.13 It is also worth noting that the proportionate change in growth rates, both aggregate and sectoral, was much larger circa 1950 than it was circa 1980.
It needs to be stressed that this turning point in the early 1950s was not just statistical, nor was it simply about growth rates. It was far more significant for the polity and economy of independent India in a substantive sense.
The conception and the birth of political democracy in independent India was unique in its wider historical context.14 For democracy did not follow but preceded capitalist industrialisation and development. What is more, democracy came to India neither as a response to an absolutist state nor as the realisation of an individualist conception of society. In each of these attributes, it provided a sharp contrast with the experience elsewhere, particularly Europe. In fact, it was not even an obvious outcome of the nationalist movement. The struggle for independence was
0 2000 4000 6000 8000 10000 12000 14000 16000 Rupees y = 1885e0.0358x R2 = 0.9926 y = 3940e0.0138x R2 = 0.9498 Rupees million
1950-51
1954-55
1958-59
1962-63
1966-67
1970-71
1974-75
1978-79
1982-831986-87
1990-91
1994-95
1998-99
Year and the claim from below. In this construct, the state was the essential mediator. It had to perform a critical role in reconciling
B: GDP Per Capita (at factor cost in Rupees at 1993-94 prices) the conflict between market economy and political economy as
14000000 12000000 10000000 8000000 6000000 4000000 2000000 0
1950-51
1955-56
1960-61
1965-66
1970-71
1975-76
1980-81
1985-86
1990-91
1995-96
2000-01
2002-03
also mediating between economic development and social needs.
In this milieu, the strategy of economic development was shaped by the colonial past and the nationalist present. For one, there was a conscious attempt to limit the degree of openness and of integration with the world economy, in pursuit of a more autonomous path to development. For another, the state was assigned a strategic role in development because the market, by itself, was not perceived as sufficient to meet the aspirations of a latecomer to industrialisation. Both represented points of departure from the colonial era which was characterised by open economies and unregulated markets. But this approach also represented a consensus in thinking about the most appropriate strategy for industrialisation. It was, in fact, the development consensus of the times. The objectives were clear enough: to catch up with the industrialised world and to improve the living conditions of the people.
It should be obvious that the economic liberalisation which began in the early 1990s did not match the significance of the changes in the realm of politics and the sphere of economics in the early 1950s. In fact, the changes that were introduced in the early 1990s were concerned with economic policies and did not even touch upon the political domain. In the wider context of
Table 2: Sectoral and Aggregate Economic Growth in Indiasince Independence
(Per cent per annum)
Sector/Period 1950-51 to 1980-81 to 1980-81 to 1991-92 to 1979-80 2004-05 1990-91 2004-05
Primary sector 2.2 2.9 3.1 2.5 Secondary sector 5.3 6.1 6.7 6.0 Tertiary sector 4.5 7.1 6.6 7.8 GDP total 3.5 5.6 5.4 5.9 GDP per capita 1.4 3.6 3.2 4.1
Notes:(a) This table is based on data for GDP at factor cost and at 1993-94 prices.
Source: National Accounts Statistics of India, CSO and EPW Research Foundation.
pledged to secure justice, liberty, equality and fraternity for all its citizens. Universal adult franchise was provided at one stroke. The republicanism of the western world was perhaps the role model. This was, in a sense, India invented. A liberal democracy was constructed by an enlightened elite in accordance with its conception of a modern nation state. It was democracy from above provided to the people. And not democracy from below claimed by the people. This is perhaps an oversimplified view. The reality was obviously more complex. For the nationalist movement meant a dialectical relationship between the provision from above
1454
Figure 4A: Trends in India’s GDP: 1980-81 to 1990-91was about creating the initial conditions for development in a
and 1991-92 to 2004-05
country that was a latecomer to industrialisation. It was about
(at factor cost in Rupees million at 1993-94 prices)
the pursuit of national development objectives in a long term
18000000
perspective.
III
4000000 6000000 8000000 10000000 12000000 14000000 16000000 y = 3000000e0.0594x R2 = 0.9972 y = 4000000e0.0537x R2 = 0.9895Rupees millionTwo Phases of Growth
Growth matters because it is cumulative. If GDP growth, in
real terms, is 3.5 per cent per annum income doubles over 20
years, if it is 5 per cent per annum income doubles over 14 years,
if it is 7 per cent per annum income doubles over 10 years, and
2000000
if it is 10 per cent per annum income doubles over seven years.
0
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-012002-03
Year
Figure 4B: Trends in India’s GDP Per Capita:1980-81 to 1990-91 and 1991-92 to 2004-05
2004-05
2004-05
Of course, the complexity of economic growth cannot be reduced to a simple arithmetic of compound growth rates, for there is nothing automatic about growth. In retrospect, however, the cumulative impact of growth on output is a fact.
There are two discernible phases of economic growth in India
since independence: 1950 to 1980 and 1980 to 2005. It is worth
(at factor cost in Rupees at 1993-94 prices) providing an assessment of economic performance during these
periods. An assessment of performance, in terms of economic
growth, should address two questions. First, how does this
performance compare with performance in the past? Second, how
does this performance compare with the performance of other
countries?
It is clear that the pace of economic growth during the period
16000
14000
y = 5030e0.0407x R2 = 0.995 y = 5668.8e0.0324x R2 = 0.970912000 10000 8000
6000
Rupees
4000
2000
from 1950 to 1980 constituted a radical departure from the
0
colonial past. For the period 1900 to 1947, there are two sets of growth rates based on alternative estimates of national income. If the economy had continued to grow at the rate based on the Sivasubramonian estimates, national income would have doubled in 70 years whereas per capita income would have doubled in 350 years. If the economy had continued to grow at the lower rate, based on the Maddison estimates, national income would have doubled in 87.5 years whereas per capita income would have doubled in 1,750 years. The reality in independent India turned out to be different. The growth rates achieved during the period from 1950 to 1980 meant that GDP doubled in 20 years while GDP per capita would have doubled in 50 years. In fact, between 1950 and 1980, GDP multiplied by 2.86 while GDP per capita multiplied by 1.5.16 The latter was not as modest as it seems because, during this phase, the rate of population growth was more than 2 per cent per annum.
Obviously, this growth was impressive with reference to the near-stagnation during the colonial era. It was also much better than the performance of the now industrialised countries at comparable stages of their development.17 However, this growth was not enough to meet the needs of a country where the initial level of income was so low. For this reason, perhaps, it was described as the Hindu rate of growth by Raj Krishna. This phrase, which became larger than life with the passage of time, meant different things to different people. For some, it meant a performance that was disappointing but not bad. For others, it meant an acceptance of the performance in a spirit of contentment without an effort to change. Interestingly enough, the phrase which was used to describe a reality was used by a few to deride the same reality. But this was not warranted.
It has been shown that, during this period, India’s performance in terms of economic growth was about the same as in most countries in the world.18 It was certainly not as good as east Asia. But it was definitely not as bad as Africa. It was average. In fact,
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
Year
Source: National Accounts Statistics of India, CSO.
the economy, the changes were significant.15 And it is worth highlighting three dimensions of the change. First, economic growth combined with economic efficiency became the explicit objective. The earlier concern about preventing a concentration of economic power or attempting a redistribution of wealth, never more than rhetoric, was explicitly abandoned. The objective of bringing about a reduction in poverty and inequality was not set aside but such concerns about equity were subsumed in the pursuit of growth on the premise that it is both necessary and sufficient for an improvement in the living conditions of people. Second, there was a conscious decision to substantively reduce the role of the state in the process of economic development and rely far more on the market. The government no longer sought to guide the allocation of scarce investible resources, whether directly through industrial licensing or indirectly through intervention in the financial sector, and left this role to the market. Third, the degree of openness of the economy was increased significantly and at a rapid pace. The object was not simply to enforce a cost-discipline on the supply side through international competition, but also to narrow the difference between domestic and world prices. Foreign capital and foreign technology were expected to perform a strategic role in the process of integration with the world economy. These changes in policies did represent a radical departure from the past. But these were changes in economic policies. In contrast, the regime change during the early 1950s was wide-ranging and far-reaching. It was in part about policies but only in part. It was about establishing institutions, not only economic but also social and political. It the actual rate of growth of output per worker in India was very close to the average across the world. What is more, 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 the world’s average.19 Is it possible to reconcile this conclusion with the view that India did badly in this era? There are two possible explanations: either that inefficiencies of the regime in India were paralleled by similar shortcomings in most countries of the world, or that without its misguided policies India would have experienced a miracle in growth.20 Neither of these explanations is plausible. It would seem that the story that depicts an average India is much more plausible than the caricature which portrays a failed India.
It is clear that there was a sharp acceleration in the rate of growth circa 1980. It went almost unnoticed but for a few of us. And India grew almost by stealth. It came into the limelight in the early 2000s. Some analysts, as also many casual observers, attributed this performance to economic liberalisation which began in the early 1990s.21 However, discerning scholars recognised the reality that the structural break, which was a second turning point in the economic performance of independent India, occurred around 1980.22
In comparison with the preceding 30 years, there was a distinct step-up in rates of growth for GDP and GDP per capita. The growth rates achieved on an average, during the period from 1980 to 2005, meant that GDP doubled in 12.5 years where GDP per capita doubled in 20 years. In fact, between 1980-81 and 2004-05, GDP multiplied by 3.81 while GDP per capita multiplied by 2.37.23 This growth was impressive, not only in comparison with the past in India but also in comparison with the performance of most countries in the world. Indeed, in terms of growth, India performed much better than the industrialised countries which experienced a slow down in growth, the transition economies which did badly, and much of the developing world. And it was only east Asia, particularly China, which performed better.
There is an emerging literature on the subject which seeks to analyse this rapid economic growth in India that has been sustained for 25 years. Interestingly enough, the search for explanations is competitive. And some hypotheses are driven by an ideological world view. It would be impossible to provide an exhaustive analysis. It would also mean too much of a digression. Nevertheless, some explanations deserve mention.
The earliest explanation suggested that the expansion of aggregate demand, mostly through a rapid increase in public expenditure on investment and consumption, was the major factor underlying rapid economic growth during the 1980s.24 This is widely accepted. Even so, orthodoxy argues that this growth supported by the expansionary macroeconomic policies was not sustainable and culminated in the crisis of 1991.25 But this view is not quite correct. Insofar as the increase in fiscal deficits did not translate into a corresponding increase in current account deficits, the increase in aggregate demand would, in the presence of excess capacity and unemployment, have led to an increase in output. Such an increase in capacity utilisation would also have raised the productivity of investment which is reflected in significant productivity growth during the 1980s.26 And even if the macroeconomic crisis of 1991 was induced in large part by the fiscal imbalances, the expansion in aggregate demand does provide a plausible expansion for the rapid growth during the 1980s.
The most fashionable explanation, advocated by orthodoxy, is that the rapid economic growth in India is largely attributable to economic reforms. There is, however, a fly in the ointment. The turning point in growth was 1980, whereas economic liberalisation began in 1991. Confronted with this reality, orthodoxy relies on two explanations. First, it argues that the economic growth of the 1980s was not sustainable.27 But there was growth. Second, it argues that the growth could have been unleashed by the mild doses of industrial deregulation and trade liberalisation.28 But this process started only in the mid-1980s. Therefore, such hypotheses which seek to explain the step-up in economic growth entirely in terms of economic reforms are simply not plausible.
There is yet another explanation.29 It argues that there was an attitudinal change on the part of government in the early 1980s, which signalled a shift in favour of the private sector although this was not quite reflected in actual policy changes. The limited policy changes that were introduced were pro-business rather than pro-competition or pro-market so that the benefit accrued to existing players rather than new entrants. Even these small changes elicited a large productivity response because India was far away from its production possibility frontier. And existing manufacturing capacities established earlier performed a critical role in shaping responses. This explanation is both interesting and perceptive, although it is somewhat far-fetched. And there are some obvious questions that arise. Why did the change in attitudes alone spur growth starting 1980 even though the mild policy changes were introduced in the mid-1980s? Why did the economic liberalisation of the early 1990s not produce a similar response in terms of productivity increase and output growth because, even in 1991, India was somewhere inside its production possibility frontier?
In my judgment, the search for a single explanation which seeks to exclude, or to deny, competing explanations is futile. There is, perhaps, the bit of truth in every nook. Hence, a convincing explanation must recognise that the acceleration in economic growth, circa 1980, was attributable to several factors. First, expansionary macroeconomic policies which led to an increase in aggregate demand did stimulate an increase in the rate of growth of output.30 Second, beginning in the late 1970s, there was a significant increase in the investment-GDP ratio which was sustained through the 1980s.31 Unless there was a decline in the productivity of investment, which was not the case, this would also have contributed to the step-up in economic growth during the 1980s. Third, starting in the late 1970s, there was also a significant increase in public investment which was sustained through the 1980s.32 Obviously, this contributed to the increase in aggregate demand. However, insofar as such public investment created new infrastructure or improved existing infrastructure, it could have stimulated growth in output by alleviating supply constraints. Fourth, trade liberalisation beginning in the late 1970s, combined with some deregulation in industrial policies introduced in the early 1980s, also probably contributed to productivity increase and economic growth.33 In particular, liberalisation of the regime for the import of capital goods and broad-banding which reduced industrial licensing, could have played a contributory role.
It is also misleading, perhaps, to search for explanations which focus on observed changes circa 1980 that might explain the turning point in economic growth. Insofar as outcomes are shaped by initial conditions, the cumulative impact of economic policies or public actions over the preceding 30 years possibly played an important role in the turnaround.34 Institutional capacities were created. The social institutions 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. The capital goods sector was established. Much of this did not exist in colonial India. But it was in place by 1980 and probably provided the essential foundations. In other words, the second turning point in the economic performance of independent India may not have been possible starting from scratch.
This wonderful story about economic growth in India is not quite a fairy tale. And everybody does not live happily hereafter. Both phases of economic growth had something in common. It is essential to recognise that economic growth in independent India, respectable in the first phase and impressive in the second phase, was not transformed into development, for it did not bring about an improvement in the well-being of people. Independent India did make significant progress during the second half of the 20th century, particularly in comparison with the colonial past. But poverty and deprivation persist, for at least one-fourth, possibly one-third, of India’s one billion people. In fact, there are more poor people in India now than the total population at the time of independence. And, in terms of social development, India has miles to go.
IV Conclusion
The story of economic development in independent India is often distorted by beliefs in fashion or caricatures of perceptions which shape conventional wisdom. I have argued that this is misleading, not only in analysing the past but also in contemplating the future. If we consider India during the 20th century as a whole, the turning point in economic growth was circa 1951. If we consider India since independence, the turning point in economic growth was circa 1980. And it is clear that the turning point in the early 1950s was much more significant than the structural break in the early 1980s. In any case, 1991 was not a watershed. Thus, it is not possible to attribute the turnaround in India’s growth performance to economic liberalisation. Economic growth in India was respectable during the period 1950-80. It was a radical departure from the colonial past. And it was no worse than the growth performance of most countries during that period. But it was simply not enough in relation to India’s needs. Economic growth in India was impressive during the period 1980-2005. Indeed, it was much better than in most countries. But even this was not enough. The moral of the story is clear. Caricature perceptions about the economic growth in India since independence are not correct. In the first phase, from 1950 to 1980, India was not the lumbering elephant that it is often made out to be. In the second phase, from 1980 to 2005, India was not quite the running tiger that some believe it has become.
The real failure, throughout the second half of the 20th century, was India’s inability to transform its growth into development, which would have brought about an improvement in the living conditions of people, ordinary people. India’s unfinished journey in development would not be complete so long as poverty, deprivation and exclusion persist. The destination, then, is clear. India must provide all its citizens with the capabilities, opportunities and rights they need to exercise their own choice for a decent life.35 In the pursuit of this objective, economic growth is essential. But it cannot be sufficient. What is more, it is neither feasible nor desirable to separate economic growth from distributional outcomes because they are inextricably linked with each other. This link is provided by employment creation. Jobless growth is not sustainable either in economics or in politics. The creation of employment would only reinforce economic growth through a virtuous circle of cumulative causation.
l:' Notes
[This paper is a shorter version of the author’s Kingsley Martin Lecture at the University of Cambridge on November 7, 2005. For the complete essay, see ‘India’s Unfinished Journey: Transforming Growth into Development’, Modern Asian Studies, Vol 40, No 3, July 2006, forthcoming. The author would like to thank Amit Bhaduri and Romila Thapar for helpful suggestions.]
1 For a discussion on perceptions about India in the early 1950s, see Nayyar
(1998). 2 This strongly critical view of India is articulated by Lal (1998). 3 Such optimism about India is more characteristic of international
business and captured attention in the media following the study on BRICs by Goldman Sachs [Wilson and Purushothaman 2003]. But it is beginning to find mention in the academic literature on the subject.
4 See, for example, Khanna and Huang (2003). 5 Bhagwati and Desai (1970) developed this view in their elaborate critique of the industrialisation experience in India. 6 These perceptions, which border on rhetoric, are summed up nicely by DeLong (2003).
7 India’s impressive economic performance is attributed to the economic reforms of the early 1990s by several economists. See, in particular, Ahluwalia (2002), Srinivasan and Tendulkar (2003) and Panagariya (2004).
8 Cf Sivasubramonian (2000), pp 369-71.
9 Between 1950-51 and 2004-05, GDP at factor cost in 1993-94 prices increased from Rs 1,405 billion to Rs 15,294 billion while GDP per capita increased from Rs 3,913 to Rs 14,018.
10 See Hatekar and Dongre (2005). The authors situate the debate on structural breaks in India’s economic growth in a longer term perspective by considering the period from 1900-1901 to 1999-2000. This exercise is based on the Sivasubramonian estimates of national income at 194849 prices. It needs to be said that the time-series before 1947, which relates to undivided India, is not strictly comparable with that after 1947, which relates to partitioned India. In addition, there are also some definitional differences in national income accounts for India before and after independence. Even so, the statistical analysis carried out by Hatekar and Dongre is based on plausible assumptions which minimise the problems of comparability and provide the basis for robust conclusions.
11 Indeed, there are several papers that seek to establish structural breaks in economic growth in India since independence: DeLong (2003), Wallack (2003), Rodrik and Subramanian (2004), Sinha and Tejani (2004) and Virmani (2004).
12 See Wallack (2003) and Rodrik and Subramanian (2004). See also DeLong
(2003) and Sinha and Tejani (2004). 13 Cf Hatekar and Dongre (2005). 14 For a more detailed discussion, see Nayyar (1998). 15 This issue is discussed, at some length, in Nayyar (1996). See also Bhaduri
and Nayyar (1996).
16 Between 1950-51 and 1980-81, GDP at factor cost in 1993-94 prices increased from Rs 1,405 billion to Rs 4,011 billion while GDP per capita increased from Rs 3,913 to Rs 5,908.
17 See Bairoch (1993) and Maddison (1995). See also Chang (2002).
18 For a lucid analysis of, with evidence on, this proposition, see DeLong (2003).
19 This is established by DeLong (2003).
20 These two possible explanations are suggested by DeLong (2003), who also puts forward a third explanation which is somewhat more plausible. It suggests that if there was a failure of economic policies it was in large part offset by the success at mobilising resources which raised levels of saving and investment in the economy. In other words, even if resourceallocation or resource-utilisation constrained growth, resource-mobilisation fostered growth. This macroeconomic perspective, somewhat different from the orthodox view, is developed elsewhere by the author [Nayyar 1994 and 1997].
21 See, for example, Ahluwalia (2002) and Srinivasan and Tendulkar (2003).
22 See, in particular, DeLong (2003) and Rodrik and Subramanian (2004), who highlighted the fact that the structural break in economic growth in India since independence occurred around 1980 and not in 1991.
23 Between 1980-81 and 2004-05, GDP at factor cost in 1993-94 prices increased from Rs 4,011 billion to Rs 15,294 billion while GDP per capita increased from Rs 5,908 to Rs 1,4018.
24 See Nayyar (1994) and Joshi and Little (1994).
25 Cf Ahluwalia (2002), Srinivasan and Tendulkar (2003) and Panagariya (2004).
26 Rodrik and Subramanian (2004) develop this argument to question the orthodox view, but conclude that the increase in capacity utilisation was not enough to explain the actual productivity increase in the period since 1980.
27 See Ahluwalia (2002) and Srinivasan and Tendulkar (2003).
28 See Panagariya (2004). Joshi and Little (1994), on the other hand, believe that these changes were more than trivial but were piecemeal and limited. Hence they do not attribute rapid growth to this mild dose of reforms. It is also worth noting that Rodrik and Subramanian (2004) do not accept this as a possible explanation for the step-up in growth during the 1980s.
29 This is the main hypothesis put forward by Rodrik and Subramanian (2004), who argue that none of the other explanations are plausible or convincing.
30 In fact, this proposition is accepted by Ahluwalia (2002: 67), as also Srinivasan and Tendulkar (2003: 9), even if they argue that the growth was not sustainable.
31 Gross capital formation as a proportion of GDP at current prices rose from 18.7 per cent in 1980-81 to 24.1 per cent in 1990-91. Adjusted for errors and omissions, this proportion rose from 20.3 per cent in 1980-81 to 26.3 per cent in 1990-91. See National Accounts Statistics of India 1950-51 to 2002-03, EPW Research Foundation, Mumbai, 2004.
32 Gross capital formation in the public sector as a proportion of GDP at current prices rose from an average level of 7.7 per cent during the period 1971-72 to 1975-76, to 9.1 per cent during 1976-77 to 1980-81 and 10.3 per cent during 1981-82 to 1985-86. This average level was 9.8 per cent during 1986-87 to 1990-91. See National Accounts Statistics of India, 1950-51 to 2002-03, EPW Research Foundation, Mumbai, 2004. If the effects of public investment, particularly in infrastructure, are lagged, by say five years, the surge in public investment does provide an important part of the explanation for economic growth in India during the 1980s. Statistical analysis by Rodrik and Subramanian (2004) confirms this proposition, who argue that the contribution of public investment to economic growth would have been small if there were no time lags in its effects.
33 The Rodrik and Subramanian (2004) hypothesis, which is an interesting variation around this theme, could, perhaps, constitute a part of the explanation. The problem is their claim that it is the only possible explanation. Similarly, the Panagariya (2004) conclusion could provide a part of the explanation but his claim in terms of cause and effect is exaggerated. The difficulty is that the step-up in economic growth occurred about five years before the much cited economic reforms of the mid1980s. But there were some earlier piecemeal changes in trade policies and industrial policies, such as the liberalisation in the regime for the import of capital goods, which could also have contributed to growth, in conjunction with the other factors outlined in this paragraph. In fact, Sinha and Tejani (2004) suggest that imported capital goods probably contributed to increases in the productivity of labour, hence economic growth, during the 1980s.
34 For a discussion, see Nayyar (2004).
35 For a detailed discussion on the issues set out in this paragraph, see Deepak Nayyar, ‘India’s Unfinished Journey: Transforming Growth into Development’, Modern Asian Studies, Vol 40, No 3, pp 797-832, July 2006, forthcoming.
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