Understanding Indias economic growth

Written by Nirvikar Singh | Updated: May 18 2006, 05:30am hrs
In Hollywood horror movies, the monster often appears to die, only to unexpectedly (if we dont know how long the movie is) rear its head for a heart-stopping finale. I feel a bit like that about discussions of Indias growth performance in the last 25 years. Here was the recent state of play. After the initial euphoria about liberalisation, a revisionist view was articulated by economists like Brad DeLong, Dani Rodrik and Arvind Subramanian, that economic policy reforms in the 1990s were not key to Indias growth performance. Those authors further argued that Indias growth surge is properly understood as beginning in the 1980s, before the 1990s economic reforms. Arvind Panagariya offered a careful review of the evidence, and reached three conclusions:

One, growth during the 1980s was inconsistent, with the last three years of that decade contributing 7.6% annual growth, without which growth in the 1980s was only marginally better than that of the previous three decades. Two, the high growth in the last three years of the 1980s was preceded or accompanied by significant economic reform, including trade and industrial policy liberalisation. Three, growth in the 1980s was fueled by expansionary policies that entailed accumulation of a large external debt and contributed to an economic crisis. Panagariyas own conclusion from his review of policy changes and growth performance was that the 1991 market reforms and subsequent liberalising policy changeshelped sustain growth.

In fact, Rodrik and Subramanian seem to have moved closer to accepting this reform perspective. In a second piece (published in EPW), while they focus on meta-institutions such as democracy and the rule of law, conventional economic inputs such as human and physical capital, and productivity growth (in the process, highlighting the infrastructure and human capital built up under the pre-liberalisation policy regime), their assumptions about the impacts of policy are not that different from those of Panagariya, since they state, policy liberalisation will progressively ero-de the licence-quota-permit raj as a source of corruption and patronage that has had such a corrosive effect on public institutions. In addition to this indirect effect, they also attribute productivity growth directly to reforms that removed the shackles on the private sector.

Now, in EPW, Atul Kohli offers a resurrection of the revisionist view, in a new form (like the Hollywood monster that increases in size or takes on another shape). In addition to appealing to previous revisionists, he offers an analysis based on Indian politics. He distinguishes between a pro-market strategy [that] supports new entrants and consumers and a pro-business strategy [that] mainly supports established producers. His conclusions are typically pessimistic, since he views the pro-business model as being driven by a narrow elite for its own enrichment, with little benefit for the masses. The pro-business model is viewed as operating under the cover of pro-market rhetoric associated with the Washington consensus and neo-liberalism. Kohli himself does not favour the statist model of Japan and South Korea, but rather the social democratic model of Scandinavia.

Just as the debate on what sustained growth ends, theres fresh dissent
The revisionist view has missed what competition, innovation did for India
Realising this will lead us further, into opening up more to market competition
I think these labels, and Kohlis discussion, miss the point, as well as the realities of what happened in India. Of course there is an Indian elite that looks after its own interests, and, given the chance, will move India towards a Latin American situation with extreme income inequality, continued poverty and high levels of social conflict. Some of the danger signals are there already. Of course markets do not operate perfectly and often need regulation or government intervention. But the positive part of what happened in India has much to do with competition, entry and innovation. This is missing from Kohlis story, and understanding this part of the story tells us where India has to go next.

Indias IT industry illustrates best. It operated under the radar, but still was choked by government restrictions on entry and operation of business. Liberalisation (and initial government neglect) allowed it to flourish, with people from all backgrounds participating. Narayana Murthy, for example, has been very clear on this. When IT became successful, it was important that the government provided infrastructure (just as it had supported the creation of the necessary human capital) for continued success. It was also important that the government implemented policies that were not anti-businessthe market discipline came from the demands of foreign firms that were customers.

The spillovers from this success to ITeS all over the country, and even to some manufacturing enterprises in the South (would TVS have won a Deming award without the need to compete) are an indicator of the transformation that began to take place as a result of market competition. There was tremendous entry, some unsuccessful. Of course many of Indias existing businesses have also done well, but often only by becoming more efficient.

Indian policy needs to support this process of creative destruction, by further opening up Indian industry and formal-sector labor to market competition. Equally importantly, policy needs to increase access to education for all, so that there is greater competition for jobs at the top of the pyramid, and more people who are qualified to take jobs at every level. This requires increasing investment (including private and foreign) in education, not just a shell game with quotas. The Left in India is repeatedly, in effect, coming down on the side of privilege and the status quo. The monster of misunderstanding Indias growth process needs to be laid to rest.

The writer is professor of economics, University of California, Santa Cruz