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A Questionable Account

Aspects of India

A Questionable Account

Aspects of India’s Economic Growth and Reforms

by R Nagaraj; Academic Foundation, New Delhi, 2006; pp 352, Rs 795.


his book is composed of 12 articles on the recent (“orthodox”) economic reforms written by the author during 19902003. Eleven of these articles were published in the EPW and one was published in a book (Economic Reforms and Industrial Structure, edited by Suji Uchikawa, Manohar, Delhi, 2002). The first-time readers of these articles, as also those who would like to revert to them, would find this book handy.

The book assesses the performance of the Indian economy under economic reforms since the 1980s. It is divided into three parts: macroeconomic performance, industrial growth and some aspects of economic policy, each having three, four and five chapters respectively. The chapters are organised systematically. Generally, the chapter begins with a short summary of the main findings of previous researches and/or the propositions commonly propounded. This is followed by the statistical and related material, which is used to answer the questions posed for investigation. The last part is devoted to summary and conclusions, which also includes explanations, interpretations and implications. There is also a short introduction by the author.

A collection of articles on a monothematic subject of growth and reforms published during the short period of about a decade or so is bound to be repetitive and overlapping in varying measures. Further, if the statistics used are from different sources, relate to non-uniform or different years/ periods, and changes thereon differently calculated, they may yield different numbers showing dissimilar conclusions and also necessitating changes in explanations, interpretations and implications. These are some of the pitfalls of such collections, and this book is not free from them. To avoid such pitfalls, I have adopted the following course in this review. I treat the three chapters of part I as one piece, and the four chapters of part II as another piece, as these parts have one single theme each. In such a broad sweep, I have had to pass over the details. I begin with a summary and then give my comments and observations. Chapters of part III have specific themes, so they are dealt with theme-wise, but only very briefly.

Macroeconomic Performance

The growth rate of gross domestic product (GDP) for 1980/81-1990/91 was 5.6 per cent and that for 1980/81-1999/2000 5.7 per cent. If 1991-92 is excluded from the latter, the rate becomes 6.2 per cent. At 99 per cent confidence level, these rates are not significant. Although the rate for the period 1990/911999/2000 is not given there separately, the rate for that period implicit in the rate for the period 1990/91-1999/2000 will be higher than the rate for 1980/81-1990/91.

Secondly, the rates for all three reform periods (1980/81-1990/91, 1990/911999/2000, 1980/81-1999/2000 are substantially higher than those during the prereform periods of 1951/52-1959/60, 1960/61-1969/70 and 1970/71-1979/80.

Economic and Political Weekly November 11, 2006

In chapter 3, the author presents some statistics on poverty, employment and income distribution in the context of GDP growth. While noting that economic growth has been faster since 1980-81 than before, he also points out that the gains of growth “have been unequally shared by different sections of the Indian society”. Those favoured are “urban India, organised sector, richer states and property-owners against rural India, unorganised sector, poorer states and wage-earners”. The sum and substance of the part on macroeconomic performance is “India’s growth process does not seem to have been a virtuous one – it has polarised the economy” (all quotations from p 106).

A number of observations and comments are called for on these conclusions. First, the GDP growth data show a growth of 5.7 per cent during 1990/91-1999/2000, and of 5.6 per cent during 1980/81-1990/91. The author has noted that these rates are not significant (at 99 per cent confidence interval). At another place, he has labelled these rates as “the same” (p 103). This calls for three comments. (1) It is not accurate or proper, to say that 5.7 and 5.6 are the same. The former is higher than the latter, admittedly in a small measure. Further, when the year 1991-92 is excluded from the 1980/81-1999/2000 period, the rate turns out to be 6.2 per cent, high by a fair measure over the 1980/81-1990/91 rate.

(2) It would be interesting to know whether these figures change their significance when tested at lower level of intervals, say at 1995 or 1990. These tests are not reported, perhaps because they may not have been carried out. (3) The reader should note that the statistics stop at 1999-2000. GDP seems to have grown at a faster rate after 2002-03. The growth rates for these years are not yet firmed up, but the (provisional) estimate for 2003-04 is 8.5 per cent, the (quick) estimate for 2004-05 is 7.5 per cent and the (advance) estimate for 2005-06 is

8.1 per cent (base 1999-2000). So if these are taken into for the period 1990/91-2005/ 06 or for the decade ending 2005-06, the growth rate would be higher than 5.7 (or

6.2 per cent).1

Secondly, it is not clear why the author does not use the same logic in interpreting the numbers. Take, for example, Suryanarayana’s data on the monthly per capita consumption expenditure in rural areas under the section growth and poverty reduction in chapter 3. They show an increase in expenditure by 32 per cent during the two decades from the level of Rs 18.40 in 1973-74. The author calls it “a statistical mirage” (p 96) as this increase has come over a drop of 20 per cent during 1960-65. If there is no real increase there on that reckoning, should the 5.7 per cent (or 6.2 per cent) GDP growth of the decade of 1990s not be regarded really and substantially higher, as it has followed a high growth of 5.6 per cent during the decade of 1980s. But that logic is not applied here.

Thirdly, occasionally one finds the use of “simplistic”(p 102) statistics to drive home a point. Consider, for example, data on factor shares in value added in the private corporate sector to report on income distribution. They show a decline in wage share from 35 per cent in 1985-86 to 20 per cent in 1996-97 and an increase in profit share by about 15 percentage points during the same period. In view of the fact that this sector accounts for only a small percentage (10) of GDP, an opinion on income distribution based on its share does not serve much purpose. To base an opinion firmly, a similar exercise is necessary to have data for other sectors also, in particular the public sector, small industry sector, etc, on which the needed data can be readily had from government publications.

Industrial Growth

Registered manufacturing output grew at a faster rate during 1980/81-1986/87

(10.4 per cent per annum) than during 1959/60-1965/66 and 1966/67-1979/80 (7.6 and 5.5 per cent). Second, that sector grew at a faster rate during 1980/81-1986/87 than the unregistered manufacturing sector (5.3 per cent). Third, growth rate of manufacturing output, based on National Accounts Statistics (NAS), for 1980/811985/86 was higher than growth rates as per index number and Annual Survey of Industries’ Statistics.

Following NAS, the author also gives growth rates of two-digit level industry groups for the manufacturing sector and the registered manufacturing sector for 1981-91, 1992-2000 and 1981-2000. At the aggregate level, 1981-2000 period witnessed a growth rate of 7.2 per cent in the manufacturing sector and 8.0 per cent for registered manufacturing sector (revealing lower growth rate for the unregistered manufacturing). Second, the growth rates of these sectors were lower during 1992-2000 than during 1981-91.

Other statistics in this part relate to profitability, investment, employment, etc. It may suffice here to quote the general conclusion of the author “…the reforms neither improved the output nor the employment growth rates, in the total manufacturing sector. The distribution of the growth process across regions and between the organised and the unorganised sectors turned adverse. And above all, it seems hard to believe that the reforms enabled India to overcome the ‘macroeconomic perversity’, as India’s exports or export capability have not improved on a sustained basis, at least not as yet” (p 190).

This is a harsh and questionable judgment. First, it must be remembered that the reforms started during the 1980s, so a proper comparison should be for the pre-reform period before the 1980s and the reform period since the 1980s. In fact, the above quotations are from the chapter reporting on performance in the 1990s. Second, during this long period, reforms have not moved on a smooth path or at a steady pace. Third, after 2003-04, industry has grown, on the Index of Industrial Production statistics, at higher rates – 8.4 per cent in 2003-04, 8.6 per cent in 2004-05 and 7.8 per cent in 2005-06 (April-December, in the last two years). These rates would be reflected in the 1990/91-2005/06 growth rate (more so in the growth rate of the decade ending 2005-06) showing higher growth rate than for the rate of the decade of 1990s.2

This part has listed some major features of industrial and related policies since 1980. Among the positive features in India’s industrial economy are listed: improvement in the rate and pattern of investment, better performance of infrastructure, improved functioning of industrial markets and improvements in the quality and cheapening of industrial products, consumer durables in particular.

Other Aspects

Of the five chapters in this part, two are on the public sector and one each on employment and wages, capital markets and foreign direct investment. In what follows, I summarise very briefly the main conclusion/s of these chapters. Additionally, there are two comments on the public sector. Public sector: There is no deceleration in the growth rate of output of public sector in the 1980s. The overall deficit of public sector has deteriorated (the author has put this soothingly: “...the overall deficit of PSEs has increased marginally over two decades (but) the increase seems insignificant compared to the sharp deterioration in the gross fiscal deficit” (p 250)). A rising

Economic and Political Weekly November 11, 2006 tide, it is said, lifts all boats. The 1980s had high growth rates in GDP and industry; also administered prices of goods/services of public sector enterprises were raised during this period. These high tides of growth and price increases have not only not lifted the boat of the public sector but it has actually sunk, counteracting those tides by other more powerful factors. Secondly, the absence of tabular presentation of statistics on this sector is striking. Employment and wages: Earnings for workers in registered manufacturing show a higher growth rate during 1980/81-1988/89 than during 1973/741988/89 (3.6 and 3.2 per cent). However, the employment growth rate was negative during 1980/81-1988/89 but positive during 1973/74-1988/89. Capital markets: There is no statistically valid association between capital market growth and growth of investment and output in the corporate sector. Also, growth had little impact on aggregate saving and investment rates in the economy. Foreign direct investment: The author suggests that a strategic review of foreign direct investment and policy thereon be undertaken. Such a review should take into account the role and scope of foreign direct investment in increasing domestic production, technological capabilities and access to foreign markets.

Concluding Remarks

The interpretations of statistical and other information given in this book has to be reviewed judiciously. The reader is better advised to explore whether other interpretations are possible and called for. Also, there are other statistics and other researches on this subject that come to different conclusions, some of which are cited in the reference section of the chapters. Their findings and interpretations have to be juxtaposed with those of this book to arrive at a balanced view. There is also a need for a more up-to-date account up to 2005-06. All this is very necessary in the context of this book, where the conclusions, explanations, interpretations and implications of its chapters are qualified as being preliminary, tentative and indicative. Meanwhile, I welcome this book as a part of the researches on this subject. I also recommend it for perusal to the readers who have not read these articles from


their original source, as also to those who have read them but not judiciously.




1 This point needs an explanation. The rates for2003-04, 2004-05 and 2005-06 are on the 19992000 base. On the other hand, the rates of 5.7 and

6.2 per cent given in the first para of this section areon the 1980-81 base. So as such, the two are not comparable. To make them comparable, they haveto be put on the common base, say 1980-81. Butsince rates after 2002-03 are quite high, they wouldshow higher growth on that base for 1990/912005/06 and for the decade ending 2005-06 than

5.7 for the period 1980/81-1999/2000 (or 6.2per cent if 1991-92 is excluded from this period).

2 This point also needs an explanation. The rates for2003-04, 2004-05 and 2005-06 are based on the Index of Industrial Production with base year1993-94. On the other hand, the rates for 19922000 and 1981-2000 given in the second para ofthis section are on gross/net value added as perNAS with base year 1980-81. So as such, the twoare not comparable. Since, however, the aboveindex-based rates are quite high, they would bereflected in the gross/net value added rates for theperiod 1991/92-2005/06 or for the decade ending2005-06, showing higher rates than 7.2 and 8per cent of 1992-2000 and 1981-2000. Thispoint gets support from the statistics of growthrates based on index number and gross valueadded for 1980/81-1985/86, which show higherrates on the latter measure (p 128, Table 5.1).

Economic and Political Weekly November 11, 2006

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