Economy Growth of India 1980-1999: The Origin, Causes, and Consequences
By Muhammad Arif Mustunsir
The mainspring of an economy’s growth and take-off continues to puzzle economists. Even though, thanks to years of sustained research, many of the pieces of the jigsaw puzzle are in place, it remains very difficult to predict when an economy that has floundered for decades might suddenly take off. The economy, embedded as it is in politics, culture and institutions, is a sufficiently complex organism for this not to be surprising. However, growth tends to beget growth, though of course missteps can bring it to a halt. Hence, our understanding of an economy’s rapid growth has to focus largely on what causes the first stirrings.
This short paper attempts is to analyze and understand the constellation of forces that have determined the growth performance of the Indian economy, including its long period of hibernation and sudden, recent show of dynamism and the major drivers of Indian economy growth since 1980s to 1999. The consequence of growth and its impact on overall Indian society.
GROWTH: THE TRENDS AND PATTERNS
Thanks to a long history of data collection, the basic numbers of the Indian economy are well documented. At the time of its independence, India had a literacy rate of 18%, an investment rate of around 9% of its GDP, life expectancy at birth of around 32 years, annual population growth rate of around 1.25%, and an average annual growth rate of GDP around 3% (Census India, 2011).
In 2011, India had a literacy rate of around 74.04%% (Ibid), an investment rate of around 36% of its GDP (India,2012-13), life expectancy at birth of around 67 years. The annual population growth rate of around 1.5%, and an annual growth rate of GDP is around 4.80%.
Given that the focus of the paper is on growth, let us take a look at GDP growth and growth rate as displayed in Table 1 below. This table presents annual averages of growth rates and averages over plan periods.
|Table 1: Annual Growth Rate of Real GDP and Gross Capital Formation, 1980- 1999.00|
|Year||Annual Growth Rate of GDP at Factor Costs||Gross Domestic Capital Formation (% of GDP at Factor Cost)|
|Source: Handbook of Statistics on the Indian Economy. 2006. Reserve Bank of India.|
Without going into any detailed analysis as yet, by just eyeballing the data in Table 1, it seems that the rate of growth in the 1950s, 60s and 70s has been fluctuating around 3.5%per annum, the so-called “Hindu rate of growth”. With an average annual rate of population growth of around 1.9%, this results in an average annual growth in per-capita growth rate GDP of around 1.6%. However, what is remarkable about the Indian economy is that from the mid-1980s onwards, the rate of growth exhibits an upward trend, averaging around 6% for the period 1980-1999.
Now to get a basic idea of the absolute numbers involved, Table 2 gives the size of the Indian population, the real GDP (at market prices) and the real GDP per capita (at market prices). The key difference between the GDP at factor costs and the GDP at market prices` is that the latter includes indirect taxes net of subsidies. As the latter is considered a better measure of the standard of living, I have opted to report the absolute figures of the GDP and GDP per capita at market prices.
|Table 2: Population, GDP and GDP per Capita at Market Prices, Selected Years|
|Year||Population (in millions||GDP (in millions constant 2000 US$)||GDP per Capita (constant 2000 US$)|
Source: World Development Indicators 2006. World Bank
From Table 2 it is clear that while the Indian population has more than doubled since the 1980s, GDP has increased more than eightfold since then (see figure 1 in Annex). As the population figures for India are based on projections from Census of India data, I have opted not to show the entire time series for population or GDP per capita.
To conclude is section it is worth emphasizing here that India not only have emerged a regional economic power in South Asia but it is also emerging as the global economic power among developing countries. This is evident form the fact that since the availability of data on the Purchasing Power Parity (PPP) India has always ranked in top countries. At present, the economy of India is the tenth-largest in the world by nominal GDP and the third-largest by PPP (Bank, 2012).
GROWTH: THE ORIGIN, CAUSES AND CONSEQUENCES
Turning to details of the growth performance, let us take another look at the growth rate of the GDP in Table 1. Observe that the spikes in annual growth rates have not changed very much over the years; it is the downturns that have become less severe and frequent. Since 1980’s there were only three years when the economy experiences a slight downfall.
Due to the huge amount of noise the trends are not too evident to the naked eye. But once we smoothen out these annual fluctuations and look, instead, at averages of several years of growth (see Table 1), a pattern emerges.
The average growth holds steady till about the mid-seventies and then, somewhere after that, it begins to move up and that upward incline has persisted till current times. This is corroborated by the average, annual growth rate figures for each of the five-year plan periods. Average annual growth broke the 5% mark for the first time during the Fifth Plan period, 1974-79, and has never dropped below that. The sharp spike occurred during the Eighth Plan period, 1992-97, when annual growth averaged 6.7%.
All the portents are that during the Tenth Plan period the economy will grow at close to 8% per annum. Given that India’s population growth rate is much slower than what it used to be three or four decades ago (1.5% in 2012-13 versus 2.22% in 1971-728) this means that the rise in per capita income growth rate from the sixties and seventies to current times has been even more marked.
There is a high level of debated between economist over what contributed to Indian economy growth. The available literature points two dominant perspective. The formal evidence that the GDP growth series exhibits a structural break at the end of the seventies – beginning of the 1980s can be found in Virmani (2004), Rodrik and Subramanian (2004), Wallack (2003), and Balakrishnan and Parameswaran (2006).
The latter, for instance, use a regression-based least squares approach that does not arbitrarily partition the data according to pre-selected break points and identify 1978-79 as a structural break year for the GDP growth series. These authors challenged the standard view held in the 1990s by the public and a large majority of the economists that the policy reforms of the early 1990s had caused or played a major role in the growth acceleration (views held by for instance Ahluwalia, 2002.
To further understand this debate and the components of the post-80s growth let us take a look at the results of the growth accounting exercise of Bosworth et al (2007). The objective of growth accounting is to decompose the economic growth rate of a country into contributions of different factors.
Assuming a certain aggregate production function and competitive markets, the method identifies the contribution of the different factors (such as labor and physical capital) and a residual, called the Total Factor Productivity (TFP). Changes in the TFP represent changes in efficiency and/or changes in production technology. Table 3 below shows the results of this exercise.
|Table 3: Contributions to Growth (in Annual Percentage Rate of Change)
|Selected periods||Output||Employment||Output per Worker||Physical Capital||Land||Education||Factor Productivity|
Source: Bosworth et al (2007)
The above table shows that the pre-1980 growth is mainly associated with an increase in factors while the post-1980 growth is associated with an increase in factors, but more importantly an increase in TFP. Looking at the entire time series, they conclude that the TFP growth took off around the early 80s, and has shown an increasing trend since then. This finding is consistent with other studies on TFP growth (Rodrik and Subramanian 2004, Virmani 2004).
Despite the large structural change in the economy, this increase in TFP, according to these authors, mainly reflects an improvement of the performance of the individual sectors rather than a re-allocation of resources from low-productivity sectors (agriculture) to higher productivity sectors (manufacturing and services).
But how did this sudden surge in TFP come about? Rodrik and Subramanian (2004) suggest that even though the reforms of the 80s, which consisted of industrial delicensing measures, lowering of tax rates, limited import liberalization, and anti-labor policies, were not substantial, this small trigger could have elicited a large response in TFP because India was below its production possibility frontier.
The increases in TFP would in that case just be a reflection of the move towards the frontier rather than a shift of the frontier itself. As a whole, they see an attitudinal shift towards “pro-business” (in contrast to the “pro-market” policies of the 90s) as crucial in explaining the surge in the aggregate growth rate and TFP.
Given the page limitation and without going into the technical details of these debates, let me conclude this paper by pointing the ‘fundamental determinants of growth’ for the Indian case. Most scholars seem to agree on the fundamental determinants of growth: physical and human capital investments, quality of institutions or governance, and investment climate.
While the gross domestic capital formation ratio (33% – see Table 1) is rather high, India’s high literacy rate (74.4% is also potentially becoming a growth factor in India’s long term growth prospects.
If India wants to sustain and raise even higher its current growth the main bottlenecks in the Indian economy will need to be addressed. These are infrastructure (roads, expensive freight rates, power supply, ports and airports), labor and bankruptcy regulations, and the high level of corruption in the government bureaucracy.
In addition, the current erratic and low growth pattern of the agricultural sector, and the rising inequality, between states, between rural-urban areas, and within urban and rural areas mainly since the 1990s, are a concern.
Figure 1: India GDP Annual Growth Rate since 1980-1999
- Ahluwalia, Montek S. (2002). Economic Reforms in India since 1991: Has Gradualism
- Worked? Journal of Economic Perspectives, 16(3), 67-88.
- Balakrishnan, P. and Parameswaran M. (2006). Identifying Growth Regimes in India. Presented at the South and South East Asian Econometric Society, December 19, Chennai, India.
- Bosworth, Barry P. and Collins, Susan M. (2003). The Empirics of Growth: An Update.
- Working Paper Brookings Institution, Washington.
- Bank, W., April 2013. World Economic Outlook Database. [Online]
Available at: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weorept.aspx?pr.x=38&pr.y=13&sy=2011&ey=2018&scsm=1&ssd=1&sort=country&ds=.&br=1&c=534&s=NGDP_RPCH%2CNGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC&grp=0&a=
[Accessed 12 December 2013].
- Dani Rodrik and Arvind Subramanian, 2004. From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition, Washington D.C: IMF Working Paper No.WP/04/77.
- India, C., 2011. Chapter 03: Size, Growth Rate and Distribution of Population, New Delhi-110011: Ministry of Home Affaris, Government of India, The Registrar General & Census Commissioner.
- Virmani, A., 2004. India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth, New Delhi: Working Paper No. 122, Indian Council for Research on International Economic Relations.
- Wallack, J., 2003. Structural Breaks in Indian Macroeconomic Data. Political Weekly, 11(12), pp. 4312-4315.