Growth and Economic Policies in India: 1950-2006

Arvind Panagariya

Growth: Summary
1951-88: 3.8 percent per annum 1988-2006: 6.3 percent 2003-07 8.6 Observation: No miracle, no debacle

Key Questions

Unlike most countries in Africa and Latin America how did India escape prolonged stagnation or decline? why was India unable to break out of the relatively low rate of growth until the late 1980s? what accounts for the shift in the growth rate in recent years? how has the Indian economy managed to sustain the higher growth rate of 6.3 percent during the past two decades? What accounts for the shift to 8.6 percent?

Distinguishing Four Phases of Growth

Table 1.1 How do we divide these 55 years into a small number of sub-periods (phases) for orderly discussion? Chart (a few slides later)

Growth Year Rate Year

Growth Rate Year

Growth Rate Year

Growth Rate

Table 1.1: Annual Growth Rates of The GDP

At 1993-94 Prices 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 2.3 2.8 6.1 4.2 2.6 5.7 -1.2 7.6 2.2 7.1 3.1 2.1 5.1 7.6 -3.7 1.0 8.1 2.6 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 6.5 5.0 1.0 -0.3 4.6 1.2 9.0 1.2 7.5 5.5 -5.2 7.2 6.0 3.1 7.7 4.3 4.5 4.3 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 3.8 10.5 6.7 5.6 1.3 5.1 5.9 7.3 7.3 7.8 4.8 6.5

At 1999-2000 Prices 2000-01 2001-02 2002-03 4.4 5.8 3.8

2003-04P 8.5 2004-05QE 7.5 2005-06QE 9.0 2006-07AE 9.2

1999-2000 6.1 2000-01 2001-02 4.4 5.8

2002-03P 4.0 2003-04QE 8.5 2004-05QE 6.9

How to Divide into Sub-periods?

According to Five Year Plans Decades The Global Economic Environment Changes in the Policy Regime Differences in the Growth Performance

Our Preferred Division

According to the sharpness of differences in the growth rates tempered by the consideration that we want to connect the performance with policy changes. We distinguish four phases

Phase I: 1950-65 Phase II: 1965-81 Phase III: 1981-88 Phase IV: 1988-06

Figure 1.1: Average Growth Rate 7 6.3 6 4.8 4.1 4 3.2 3

0 1951-65 1965-81 1981-88 1988-06

Defending the Phases

Issues raised by Wallacks work on structural breaks Cut off between Phases I and II: deceleration, which is especially large if we compare with S. Korea and Taiwan; major shift in the policy regime Cut off between Phases II and III: not controversial Cut off between Phases III and IV: Perhaps most controversial

Has India Entered Phase V?

Figure 1.2: GDP Growth: Business cycle effect or a shift in the growth rate? 10.0 9.0 8.0 7.0 6.0 5.0 4.0 4.0 3.0 2.0 1.0 0.0 1990-93 1993-97 1997-03 2003-07 5.2 7.1 8.6

Dollar GDP has grown 16.3 annually during 2003-06

Figure 1.3: GDP in current dollars ($billion) 900 800 700 600 500 452 400 300 200 100 0 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 461 478 506 601 696 806

Other highlights during 2003-04 to 2005-06

Exports doubled in 9 years during 1990-2000. They doubled in three years during 2002-06 from $52.7 billion to $102.7 billion. Services exports doubled in just two years: from $26.9 billion in 2003-04 to $60.6 billion in 2005-06. Share in the world merchandise exports: 0.5% in 1990-91, 0.7% in 1999-00 and 1.0% in 2005-06. Services exports: 2.5% in 2005-06. The exports of goods and services as a proportion of the GDP: 7.2% in 1990-91, 11.6% in 1999-00 and 20.5% in 2005-06. The total foreign investment has risen from $6 billion in 2002-03 to $20.2 billion in 2005-06. DFI is less. In 1990-91, India had approximately 5 million phone lines in total. Currently, India is adding more than 7 million phone lines per month. The sales of passenger vehicles rose from 707,000 in 2002-03 to 1.14 million in 2005-06.

Why this growth is likely to sustain

Fundamentally altered initial conditions Demographic transition Rising savings rate and excellent prospects for its continued rise Large stock of foreign exchange means a major external sector crisis is less likely A pure cycle effect should have begun to show signs of a return to the 5-6% range by now. There are no signs of such a slowdown.

Sectoral Growth

Agriculture grew consistently slower than the GDP Industrial growth picked up in Phase I but dropped drastically in Phase II Services showed a more stable pattern with growth accelerating particularly in Phase IV.

Table 1.2: Growth Rates of Sectoral GDP (at factor cost)

Period 1 1951-65 1965-81 1981-88 1988-06 Agriculture & Allied Industry Manufacturing Services 2 2.9 2.1 2.1 3.4 4 6.7 4.0 6.3 6.5 5 6.6 3.9 7.1 6.8 6 4.7 4.3 6.5 7.8 GDP 7 4.1 3.2 4.8 6.3

Sectoral Shares

The share of agriculture declined consistently The share of industry rose initially but stagnated in Phases III and IV The share of services rose consistently

Growth, Productivity and Policies

We focus on the growth-policy link rather than growth productivity link because Productivity studies are fraught with data problemsno reliable employment data Policies work through not just productivity but also reduced underemployment and increased savings and investment

Table 1.3: The Composition of the GDP

Year 1950-51 1964-65 1980-81 1987-88 2004-05 Agriculture and Allied Industry Manufacturing Services 57 49 40 33 21 15 21 24 26 27 9 12 14 16 17 28 31 36 41 52

Features Common to the Four Phases

Why India escaped prolonged stagnation or decline? Macroeconomic stability Political stability Gradual and predictable policy changes Capacity to implement policies

Growth and Reforms

Phase I: Open foreign investment policy; relatively open trade policy until the late 1950s; investment licensing began to tighten only towards the late 1950s, early 1960s Phase II: Socialism struck with vengeance Phase III: Ad hoc liberalization during 197579, 1980-84 and then more substantial liberalization during 1985-86 and 1986-87. Phase IV: Systemic and systematic liberalization

Debates on Growth: DeLong (2003) and Rodrik (2003)

Rodrik (2003):

J. Bradford DeLong shows that the conventional account of India, which emphasizes the liberalizing reforms of the early 1990s as the turning point, is wrong in many ways. He documents that growth took off not in the 1990s, but in the 1980s. What seems to have set off growth were some relatively minor reforms. (Rodrik 2003).
Modest reforms and modest acceleration during 1981-88 Spurt during 1988-91 was preceded and accompanied by important reforms Growth was partially fueled by unsustainable fiscal deficits and external debt, which set of a crisis the 1991 crisis.

Critique by Panagariya (2004)

Debates on Growth and Reforms: Rodrik and Subramanian (2005)

R-S: An attitudinal change on the part of the government in favor of private business around 1980 rather than liberalizing reforms resulted in a permanent shift in the growth rate. They claim that pro-business policies that favor incumbent producers rather than pro-market policies that promote new entrants and aim to benefit consumers account for once for all shift in the growth rate that took place in the early 1980s. Srinivasan (2005): This is a disappointing paper. It sees a mystery and fails to convince through analysis why it does. Had the authors been familiar with Indian economic literature, they might not have written it! The literature has not only noted the growth acceleration in the 1980s but has also questioned its sustainability on the grounds of its possibly being debt-led and fueled by employment and real wage expansion in the public sector.

Debates on Growth and Reforms: Rodrik and Subramanian (2005) (continued)

Panagariya (2007)

Play by the R-S rules: Define Phase III as 1981-92 and Phase IV as 1992-06: Growth rates at 5.2 and 6.3 still exhibit acceleration Pro-business versus pro-market: spurious distinction. Probusiness measures are an integral part of pro-market reforms. Political-economy dictated reform by stealththis constrained the government to reforms within the existing policy frameworki.e., reforms R-S call pro-business Factually, the government did introduce (pro-market) reforms that eased up entry of new firms R-S also wrong on trade liberalization

Growth and Reforms: Atul Kohli (2006)

Kohli also relies on the pro-market and pro-business terminology, but defines them differently than R-S.

He calls pro-market strategy as one that allows free play to markets to achieve efficient allocation of resources and promotes competition. As for pro-business strategy, it is viewed as one that has developed more via real world experience, especially from the rapid growth successes of some East Asian economies. This distinction also reflects confusion since outward orientation, timely depreciation to avoid overvaluation of the domestic currency, labor-market flexibilities, and license-free entry of new businesses and expansion of the existing ones, advocated by pro-market economists, were all integral part of the real world experience of the fast-growing economies of East Asia. Giving monopoly of the entire sectors (iron and steel, telecommunications equipment) to the government, as India did during the 1960s and 1970s, cannot be characterized as pro business. Likewise, creating private sector oligopolies through licensing (Ambassador and Fiat cars) may favor specific businesses but is not truly pro-business.

Panagariya (2007):

Growth and Reforms: Deepak Nayyar (2005)

It was the socialist rather than pro-market policies that yielded the most important structural change in India.

The shift from less than 1 percent growth during the first half of the 20th century to the 3 to 4 percent rate during 1951-80 was proportionately much larger than any shift subsequent to 1980. [A] comparison of the structural change in 1951-80 with the pre-independence decades is both fatuous and facetious.During the latter [pre-independence] period there was no autonomous economic policy geared to the interests of a nation. The objective functions were different. It was a colonial policy, addressing the interests of the home country. Any policy, statist or otherwise, with Indias interests at the center, would have achieved better results than under a colonial regime. The real question is whether the statist policies were superior to other alternatives but this question can never be answered for want of counterfactual evidence.

Khatkhate (2006):

If socialism is so good, growth during 1965-81 should have been even higher than in 1951-65.