Thursday, 4 September 2014

Reading Dreze and Sen: 3 - A Short History of India's Economic Growth

At the time when Dreze and Sen were finishing their book, India’s growth rate had fallen to 6.2% which was considered by numerous people as a ‘dismal growth figure’. The decline from the previous years’ growth rates of 8-9% was considered alarming. But Dreze and Sen point out that during 2011-12 (when they were concluding this book), India’s growth rate was still the 2nd fastest in terms of economic growth among all the large economies in the world, trailing only behind China (which had also experienced a decline). Compared to the one-time ‘star performer in the economic field’ Brazil whose growth rate had fallen to 0.8%, India wasn’t doing too badly at all.  But, despite that caveat, Dreze and Sen admit that one needs to take the economic slowdown seriously. This is not because growth is important in itself; its because growth generates resources which allow India to a) expand individual incomes and b) utilize the public revenue to meet social commitments.

The authors go on to give a short history of India’s fast growth. When India gained independence, it moved at a slow (but steady) pace for 3 decades – it grew at 3.5% per year. This was ‘painfully slow’ for purposes of rapid development and poverty reduction. In the 1980s, however, India picked up (and grew at a 5% per year). Following the economic reforms of the early 1990s (led by Manmohan Singh, then the Finance Minister), India made faster progress and established a new norm of RAPID GROWTH. Dreze and Sen stress that the robustness of India’s high growth is undoubtedly connected to the economic reforms of the ‘90s. India hovered between 5 and 6%, went up to 7% and then even crossed 9% for several years (2005-08)!

But even after 2 decades of rapid growth, India is still one of the poorest countries of the world. India’s real income per head is still lower than most countries outside sub-Saharan Africa. As the authors point out, millions in India still lack basic requirements of satisfactory living: be it nutritional food or healthcare, decent work conditions or warm clothes in the winter. Growth alone is unlikely to end these problems, but growth does enable an easier solution to such deficiencies.


How did India become one of the poorest countries of the world?Dreze and Sen point out that it wasn’t always so. Adam Smith, in his book The Wealth of Nations (1776) attempted to explain the roots of India’s prosperity. When the East India Company gained its first foothold in India, India was famous of its industrial exports (their quality was apparently a cause of concern for European manufacturers!). Even a comparison of wage rates and prices indicates that the real wages of Indian labour in economically active regions were not lower- and sometimes even higher – than those received by their counterparts in many European countries.

The rapid decline of the relative position of the Indian economy took place during the British Raj (this was also recognized by Adam Smith). The decline continued throughout the 19thcentury and the first half of the 20th century. Long periods during British rule actually saw the per capita real income of India actually declining! According to a study, the annual growth rate of India per capita income was 0.1% between 1900-01 and 1946-7. The growth rate was positive, but was so only because the dismal GDP growth rate (0.9%) was countered by the low population growth rate (0.8%) which reflected the high mortality rates under British rule. 


Given this history, India’s post-independence growth rate of 3.5% per annum sure does seem like a positive change. But this growth rate did not bring about any major transformation in people’s living conditions. Till the 80s, there was virtually no reduction of poverty.

This is often blamed on India’s ‘socialist’ planning. Dreze and Sen, however, argue that this was not because of socialism per se, but because of the KIND of policies that India followed. India did not even follow the kind of policies found in Russia or most other Communist countries. For example, one thing that communist countries were committed to was free, universal school education. ‘socialist’ India did not go down that way! As a result, India advanced very little in providing schooling opportunities to its children. Unlike other communist countries, India saw under-allocation of public money to make the country literate. The authors point out that the implication of this – to blame the neglect of school education in India’s planning on ‘socialist planning’ absolves India of its own culpability in this mistake.Interestingly, Dreze and Sen suggest that even India’s economic planning was not very ‘socialist’. Most of the economy was firmly in the private sector and, while the government did intervene in many ways, there was no sweeping nationalization of industries and no land reforms.

Early economic planning failed ‘more completely’, say the authors, in social infrastructure and tertiary industries than in primary and secondary production. Growth rates in the primary and secondary sectors (roughly, agriculture and manufacturing, respectively) were HIGHER in the first 15 years that followed the 1st Five Year Plan (1951) than in the first 15 years post-economic reforms in 1991. The growth rate of the tertiary sector was slower in the first period, as was that of GDP. The notion that planning brought the economy to a halt in the Nehruvian years is not easy to substantiate).

The period of sustained moderate growth came to an end in the mid-60s when India was hit by the worst successive droughts and when it fought 2 costly wars with Pakistan (in 1965 and 1971). Agricultural production crashed and India’s GDP turned negative. This was also a period of significant changes in the politics of economic policy. Nehru (died in 1964) was succeeded by Indira Gandhi who politicized economics. Under her, commercial banks were nationalized (this was chosen for political reasons). Similarly, import quotas and industrial licenses were used to reward her supporters and punishing her opponents! Even the most inconsequential economic activity apparently now needed governmental approval. This had terrible effects on the economy; it a) stifled economic initiatives b) encouraged corruption and c) led to the abuse of power. People paid a huge price for all this.

Things started looking up in the 1980s. India experienced growth acceleration, which was helped by recovery of the agricultural sector. GDP rose to 5% per year in this decade. The green revolution began to show its effects – the agricultural sector grew faster than ever before (yields shot up by 30% in the ‘80s)! Agricultural wages grew, and there was a sustained decline in poverty.

However, the 1980s were also a period of fiscal deficits, trade deficits and foreign debt. This was compounded by rising oil prices and disruption of remittances from the Persian Gulf. India ran out of foreign exchange reserves. A ‘structural adjustment program’ followed under strict conditions imposed by the IMF.

After a while, the policy of cuts in public expenditure (inc social spending) gave way to gradual reforms. The GDP growth rate picked up post-1993 and continued to grow henceforth. The impact of reforms on economic growth in these years was definitely a significant achievement.

Some reforms - such as 1) greater openness to international trade 2) relaxation of internal controls  - occurred fairly early, and other occurred later. Some – such as 1) privatisation of certain public enterprises 2) extensive labour reforms 3) permissibility of FDI in specific sectors- are still being debated. Some people are frustrated by the gradualism of these reforms, but Dreze and Sen argue that these reforms do need informed public debate. Unfortunately, debate about them proceeds along ‘pro-market’ vs ‘anti-market’ lines, whereas these actually require a specific, case-by-case assessment of arguments. The case for specific reforms needs to be judged not by its impact on growth but by their impact on peoples’ lives. Dreze and Sen conclude by saying that one of the main problems with the reforms was not what they tried to do, but with what they did not even ATTEMPT to achieve. This, they say, has extended the deeper biases of the pre-reform period.

[The purpose of the ‘Reading Dreze and Sen’ series of blogs is to briefly summarise some of the arguments given by Jean Dreze and Amartya Sen in their book ‘An Uncertain Glory: India and its Contradictions’. The arguments are of the authors alone and the articles are merely a recapitulation (in as simple a way possible). The aim is for myself to remember them (writing always helps!) as well as to get these arguments out in the public arena and mainstream. The hope is to start conversations regarding the issues raised :)]

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