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Growth and Economic Policies in India: 1950-2006

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Title: Growth and Economic Policies in India: 1950-2006


1
Growth and Economic Policies in India 1950-2006
  • Arvind Panagariya

2
Growth Summary
  • 1951-88 3.8 percent per annum
  • 1988-2006 6.3 percent
  • 2003-07 8.6
  • Observation
  • No miracle, no debacle

3
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?

4
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)

5
Table 1.1 Annual Growth Rates of The GDP
6
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

7
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

8
(No Transcript)
9
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

10
Has India Entered Phase V?
11
Dollar GDP has grown 16.3 annually during 2003-06
12
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.

13
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.

14
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.

15
Table 1.2 Growth Rates of Sectoral GDP (at
factor cost)
16
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

17
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

18
Table 1.3 The Composition of the GDP
19
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

20
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

21
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.

22
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.

23
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

24
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.

25
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.
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