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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. Growth Growth Growth Growth
Year Rate Year Rate Year Rate Year Rate
Table 1.1: Annual
At 1993-94 Prices At 1999-2000 Prices
Growth Rates of
The GDP 1951-52 2.3 1969-70 6.5 1987-88 3.8 2000-01 4.4
1952-53 2.8 1970-71 5.0 1988-89 10.5 2001-02 5.8
1953-54 6.1 1971-72 1.0 1989-90 6.7 2002-03 3.8
1954-55 4.2 1972-73 -0.3 1990-91 5.6 2003-04P 8.5
1955-56 2.6 1973-74 4.6 1991-92 1.3 2004-05QE 7.5
1956-57 5.7 1974-75 1.2 1992-93 5.1 2005-06QE 9.0
1957-58 -1.2 1975-76 9.0 1993-94 5.9 2006-07AE 9.2
1958-59 7.6 1976-77 1.2 1994-95 7.3
1959-60 2.2 1977-78 7.5 1995-96 7.3
1960-61 7.1 1978-79 5.5 1996-97 7.8
1961-62 3.1 1979-80 -5.2 1997-98 4.8
1962-63 2.1 1980-81 7.2 1998-99 6.5
1963-64 5.1 1981-82 6.0 1999-2000 6.1
1964-65 7.6 1982-83 3.1 2000-01 4.4
1965-66 -3.7 1983-84 7.7 2001-02 5.8
1966-67 1.0 1984-85 4.3 2002-03P 4.0
1967-68 8.1 1985-86 4.5 2003-04QE 8.5
1968-69 2.6 1986-87 4.3 2004-05QE 6.9

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. Figure 1.1: Average Growth Rate
7
6.3
6
5 4.8
4.1
4
3.2
3
2
1
0
1951-65 1965-81 1981-88 1988-06

9. Defending the Phases
 Issues raised by Wallack’s 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?
Figure 1.2: GDP Growth: Business cycle effect or a shift in the growth rate?
10.0
9.0 8.6
8.0
7.1
7.0
6.0
5.2
5.0
4.0
4.0
3.0
2.0
1.0
0.0
1990-93 1993-97 1997-03 2003-07

11. Dollar GDP has grown 16.3 annually during
2003-06
Figure 1.3: GDP in current dollars ($billion)
900
800 806
700 696
600 601
500 506
461 478
452
400
300
200
100
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

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

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
problems—no 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
Year Agriculture and Allied Industry Manufacturing Services
1950-51 57 15 9 28
1964-65 49 21 12 31
1980-81 40 24 14 36
1987-88 33 26 16 41
2004-05 21 27 17 52

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 stealth—this
constrained the government to reforms within the existing
policy framework—i.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 India’s
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.