Updated: November 21, 2020 8:49:45 am
What drives economic growth? It is a question that preoccupies policymakers, academics, commentators and analysts. The answers, unfortunately, are elusive. Examining the experiences of different countries may seem like a promising approach. However, generalising from specific experiences can be misleading since ground conditions vary hugely across countries.
There are two ways to avoid the pitfalls of generalising from specific cases. The first is to examine the same country over time to look for changes in outcomes at specific points in time. If one can correlate the changes in outcomes with measurable policies or events, then one can potentially draw some conclusions. A second approach is to compare countries with shared history, culture and geography. If there are stark differences in outcomes between them, then there may be some policy lessons to be drawn.
The Indian subcontinent provides lessons from both approaches. The 73 years of post-Independence India has generated a lot of evidence across different political-economic regimes. This period has also provided us with the contrasting experiences of India and Pakistan, two countries that share history, geography and socio-cultural mores.
Analysing India’s real Gross Domestic Product (GDP) per person (in 2011 dollars, purchasing power parity) since 1950 reveals five distinct economic phases. The first phase was the period 1950-65. This was the Nehruvian period of state-led industrialisation. While there was creeping protectionism during this phase on account of a balance of payments crisis in 1956, the economy on the whole remained fairly open. Starting in 1950 with a GDP per person of US$841, annual per person GDP growth averaged 2 per cent during this period. This translated to aggregate annual GDP growth of around 4 per cent since the population was growing at close to 2 per cent.
The second phase of post-Independence India was the Indira Gandhi-led years, 1965-84. This period was an unmitigated economic disaster with negative per capita growth. India’s per capita GDP in 1984 was US$1041 which was lower than its 1965 level of US$1134: The average Indian in 1984 was 8 per cent poorer than the average Indian in 1965. The phase was marked with increasing state control of the economy, nationalisation of industry, closing of the economy to trade through tariff and non-tariff barriers, and a systematic weakening of institutions.
The third phase is 1984-91 when the Rajiv Gandhi government ushered in the first round of economic reforms by liberalising capital goods imports as well as starting industrial de-licensing. These reforms were rewarded by a growth take-off. India’s annual per capita GDP growth averaged 3.1 per cent while aggregate GDP grew at 5.2 per cent during 1984-91.
The period 1991-2004 is typically classified as the liberalisation phase, during which India dismantled much of its industrial licensing infrastructure and accelerated the removal of tariff and non-tariff barriers to trade. The reform effort was reflected in the 4.9 per cent annual per capita GDP growth during 1991-2004. Viewed in conjunction with the reforms that were introduced in the 1984-91 phase, this period is perhaps better classified as a period of reform consolidation.
India embarked on a distinctive phase of faster growth post-2004 on the back of large investments in infrastructure. Per person GDP growth in the period 2004-2015 averaged 7.7 per cent. The corresponding aggregate GDP growth averaged 9 per cent. The rapid growth pick-up was financed through the public-private partnership model for infrastructure investment. This came at a cost, as a number of these infrastructure projects later caused problems in the banking sector on account of burgeoning NPAs, a problem that continues till today.
To put India’s economic record in perspective, it is useful to compare with Pakistan. In 1950, Pakistan’s per person GDP was US$1268, which was almost 50 per cent greater than India that year. However, in the backdrop of sustained political uncertainty and upheaval, Pakistan stagnated throughout the 1950s while a politically stable India grew. As a result, by 1960, India had almost caught up with Pakistan in per capita GDP terms with the per capita income gap having shrunk to 15 per cent. Unfortunately, from 1964, India went into two decades of economic stagnation while Pakistan, under the military rule of Ayub Khan, opened up to foreign capital which funded a period of rapid industrialisation and economic growth, albeit at the cost of worsening inequality. By 1984, Pakistan’s per capita income was more than double that of India’s.
Pakistan’s slowdown began in the 1980s during the military regime of Zia-u-Haq. Zia enabled and institutionalised Islamic nationalism in Pakistan. This period coincided with the reforms in India. As a result, the income gap between the countries began narrowing sharply. Nevertheless, it wasn’t till as recently as 2010 that India’s per capita GDP finally overtook Pakistan. Put differently, starting in 1985, it took 25 years of faster growth for India to finally undo the damage inflicted by the inward-looking, anti-industry, anti-trade and anti-foreign capital economic regime that was erected by the Indira Gandhi government.
From the specific perspective of India, the trends reveal three key facts. First, India did reasonably well during the Nehru era. This is at odds with the increasingly strident recent criticisms of the Nehru years. Second, the biggest damage to the Indian economy was done during the Indira Gandhi years, which saw negative growth over two decades. Bizarrely, her administration appears to have escaped the virulent criticisms that have been directed at the Nehru years. Third, the Rajiv Gandhi government deserves way more credit for ushering in the first growth turnaround of the economy. In some senses, the post-1991 reforms were a consolidation of a process that began under the Rajiv Gandhi government.
The trends also suggest four general takeaways. First, openness to trade and private enterprise usually has positive effects on growth. Second, rapacious and exploitative democratic systems do not necessarily promote growth. Pakistan in the 1950s, 1990 and post-2010 is a good example. Third, the socio-economic environment surrounding religious fundamentalism may be inimical to growth. Fourth, degradation of institutions that regulate, arbitrate and enforce laws can be costly. There may be lessons in these for Indian policymakers.
This article first appeared in the print edition on November 20, 2020 under the title ‘Way to grow’. The writer is Royal Bank Research Professor, University of British Columbia
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