Growth and Economic Policies in India: 1950-2006

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Growth and Economic Policies in India 1950-2006

• Arvind Panagariya

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Growth Summary

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

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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?

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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)

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Table 1.1 Annual Growth Rates of The GDP
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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

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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

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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

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Has India Entered Phase V?
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Dollar GDP has grown 16.3 annually during 2003-06
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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.

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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.

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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.

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

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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

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Table 1.3 The Composition of the GDP
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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

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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 1975-79,
  1980-84 and then more substantial liberalization
  during 1985-86 and 1986-87.
• Phase IV Systemic and systematic liberalization

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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).
• Critique by Panagariya (2004)
• 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.

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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.

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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. Pro-business 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

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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.
• Panagariya (2007)
• 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.

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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.
• Khatkhate (2006)
• 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.
• If socialism is so good, growth during 1965-81
  should have been even higher than in 1951-65.