India. Craig Jeffrey

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2 When and Why Has India’s Economic Growth Accelerated?

       2.1 Introduction: Thinking About Economic Growth

India’s gross domestic product (GDP – the market value of all goods and services made within the country in a given year), grew at an average annual rate of 3.7 per cent from 1950–51 to 1979–80, then at almost 6 per cent a year in the period from 1980–81 to 2000–01 – and at an even higher rate, between 7 and 8 per cent, thereafter, at least until 2009–10, after which the growth rate slowed down significantly (see table 2.1). The assessment of more recent trends has been complicated by controversial changes in the statistical procedures for the measurement of GDP, made by the Government of India (Kazmin 2019a). The authors of a World Bank research paper published late in 2018 conclude, however, that over the period 1991–2003, the annual rate of growth averaged 5.4 per cent; that in 2004–08 the growth rate reached an ‘unsustainable’ 8.8 per cent, followed by an extended slowdown; and finally that by 2018 growth had returned to around 7 per cent, considered to be the trend rate of growth (Ahmad et al. 2018). After early 2018, however, the rate of economic growth declined considerably, falling below 5 per cent per annum towards the end of 2019 (The Hindu, 29 November 2019).

Table 2.1 Independent India’s Decadal Growth Rates

      SOURCE: Calculations by Joshi (2017, table 2.1)

On the face of it, something must have happened around 1980–81, or just before then, to have caused the economy in India to take off. What might explain the initial acceleration in the growth rate, and then the subsequent surge in the 2000s? Is the later slowing down of the economy only a temporary blip, or might it persist? Can India maintain over twenty years or more the level of ‘super-fast’ growth (7 per cent per annum and above) that is calculated as being necessary if the country is to achieve standards of living to compare with those among even the lower ranked high-income countries today (Joshi 2017: ch. 1)? To answer these questions, we begin by asking what economic theory suggests.

      While it is clear that the supply of factors of production – capital and labour – fundamentally drives growth, it is also well established that whether or not supply materializes is a function of the demand for outputs. Both supply-side and demand-side factors matter. With regard to the supply side, however, empirical research and theorizing have also shown that growth is not explained simply by factor inputs, and that something else, a ‘residual’, is extremely important. A lot of research has been devoted to opening up the ‘residual’, and the consensus is that ‘the growth of gross domestic product (GDP) and divergences in per capita GDP will be closely tied to individual country performance with regard to productivity’ (Yusuf 2014: 55). What is referred to as Total Factor Productivity (TFP) – roughly defined as a measure of efficiency gains in the use of capital and labour – is reckoned to be crucial and to account for a more or less large share of economic growth. Its mainsprings, in turn, include technology and innovation, some of it embodied in equipment, but also organization – for the way in which industrial production, using more or less the same equipment, is organized, can make a great deal of difference to productivity. This was an important reason for the great success of Japanese companies in manufacturing automobiles. Knowledge, therefore, matters, and is now incorporated in economists’ growth models. Productivity is seen as depending on the learning and innovation systems of society that produce and determine the quality of human capital (the skills and knowledge that people bring), the capacity to generate ideas, and the ability to absorb and make use of technology.

With particular regard to India, and productivity, one of the more critical constraints that the country now faces is the lack of very basic skills in the labour force, because of the failures of the education system (discussed in detail in chapter 13). This is one of the reasons why later developers, like India, may be unable to benefit from ‘catching up’ by making use of advanced technologies developed elsewhere. India has, however, gained a great deal over the last years of the twentieth and the early years of the twenty-first century from the supply of people with high skills in regard to information technology – the fruit of early investments in higher education. Kotwal et al. (2011) conclude a survey of the economics literature on India’s growth story with the view that it reflects above all the happy coincidence of the availability of new technologies (in the IT sector) and of the skilled manpower to make use of them, thanks to India’s early investments in tertiary education (as in the now famous Indian Institutes of Technology) – though they also note that trade liberalization and opening to foreign investment, after 1991, contributed to this. Sustained growth, they argue, would not have been possible without the reforms that were initiated at that time.

      Even if the basics of it are quite straightforward, the complexity of the processes of economic growth have made theorizing extremely difficult. Given this complexity, and the dynamic nature of the processes involved, subject as they are – as we explain below – to circular and cumulative causation, there is really no substitute for the specific historical analysis of different cases. This is the conclusion reached by economists Kenny and Williams (2001) in a review of economic growth theory and of empirical analyses of growth based on large-n cross-country studies. Another economist, Yusuf, is quite downbeat, in a review of the field, about the achievements of economic growth theory. The limitations of theory and policy are indicated, he suggests, by the fact that between 1960 and 2011 only 8 out of 190 countries averaged growth СКАЧАТЬ