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Abstract
After an extended period of indifferent economic growth, the Indian economy has been one of the fastest growing economies of the world since the 1980s. Both the timing of India's growth acceleration and the causes of India's economic growth remain contested. The paper argues that India's growth turnaround occurred in the late 1970s, and not in the 1980s or 1990s as commonly understood. Furthermore, most interpretations of India's growth acceleration have tended to privilege one dimension of the growth experience over another, and that an analysis of the causes of India's growth suggest a more complex story and that no single perspective can provide a convincing explanation of India's growth phenomenon.
Acknowledgements
Earlier versions of this paper have been presented in the Annual Lecture of the British Association for South Asian Studies (BASAS) in November 2008 and in the South Asia Institute, University of Heidelberg, in December 2008. I am grateful to participants in these events for their comments. The usual disclaimer applies.
Notes
1. The average growth of GDP in 1980–1990 was 5.9% per annum.
2. The timing of the growth acceleration is also supported by the rigorous statistical analysis of Balakrishnan and Parameswaran (2007) who find that there is a single shift in the GDP series in the post-independence period which occurred in 1978–1979.
3. The increase in the accumulation of machines rather than of housing in the initial phases of India's growth acceleration may explain why the latter has been sustained over such a long period, in contrast to the experiences of other developing countries where by and large growth accelerations have been short-lived (Hausman, Pritchett and Rodrik 2005). In Latin America and in East Asia just before the 1997 financial crisis (and to some extent in the US and the UK more recently), several episodes of growth have been cut short as growth was driven by a housing (and consumer durable spending) boom fuelled by cheap credit that eventually led to financial and exchange rate crises. In contrast to these episodes, India's growth experience has perhaps been built on more solid foundations. Furthermore, the relative stagnation in housing investment in India's strong growth period suggests that accounts of India's growth which identify Keynesian style demand driven investment led growth mechanisms as the sole cause of growth in the 1980s (e.g. Bhaduri 2008) are wholly not supported by the data – there is no reason to expect that demand side factors will favour machinery over housing.
4. We find that the correlation between aggregate productivity and private machinery investment is 0.96 for the period 1960–2003.
5. The increase in productivity growth occurred initially in the agricultural sector in the second half of the 1970s, as farmers started investing in new machines during the Green Revolution. The productivity growth then occurred in the manufacturing sector, as corporate firms started investing in machines in the 1980s. The increase in productivity finally spilled over to services as new telecommunication equipment became available following the telecommunication revolution that occurred in the 1990s in India. These inferences can be drawn from analysing the disaggregated estimates of total factor productivity of Bosworth, Collins and Virmani (2007).
6. The detailed statistical analysis that supports this assertion has been undertaken in Athukorala and Sen (2002), Sen (2007) and Sen (2008).
7. The increase in the growth of bank branches in rural and semi-urban areas occurred primarily in the late 1970s and early 1980s rather than just after the bank nationalisation in the early 1970s (Panagariya 2008).
8. The share of commercial banks' investments in the bonds and debentures of term-lending institutions and insurance/mutual funds companies as a source of funds for the latter set of institutions increased from 5.9% in 1971–1975 to 12.1% in 1976–1980, and remained at around that level in 1981–1985 (Sen and Vaidya Citation1997).The share of funds going from these institutions to the private corporate sector increased from 12.9% of the total use of funds by these institutions in 1971–1975 to 21.1% in 1981–1985.
9. The view that bank nationalisation exerted a strong positive effect on India's economic growth at the early stages is also shared by Basu and Maertens (2007) and Basu (2008), who comments that ‘it does seem very likely that the bank nationalization contributed to the first break in growth rate, via a boost to savings and investment’ (Basu Citation2008, 399).
10. The loss of control over public finances can be traced to the changing political economy of the country, as socio- economic groups (such as public sector workers, small-scale industrialists and medium and large farmers) that were dormant in the past began to be increasingly assertive and asked for a greater share of government subsidies. At the same time, with the weakening of political power at the Centre, the Indian state became increasingly populist as it resorted to settling the claims of various ‘pressure-groups’ through the budgetary process. Kohli (1991) describes these developments in India's political economy as its ‘growing crisis of governability’, and Vijay Joshi and Ian Little (Citation1994) attribute these developments to ‘political decay’ and ‘political awakening’.
11. Examining the sectoral data on public investment, we find that public investment in agriculture started declining from 1979 onwards, which may explain why household machinery investment stagnated in the 1980s. The complementarity of public and private investment is particularly strong in the case of the agricultural sector.
12. Econometric analysis also backs up this point – Jones (Citation1994) shows that there is a strong negative relationship between the real price of machines and economic growth, and that the former causes the latter.
13. Nayyar (Citation2006) also argues that the liberalisation of the regime for the import of capital goods contributed to the turn-around in economic growth in the 1980s.
14. Ahluwalia noted that, ‘the second half of the seventies can be characterized as a period of ‘official reflection’ marked as it was by a number of official committees reviewing different aspects of industrial and trade policies’ (1991, 5).