India story

A theoretically informed, rigorously analysed and elegantly written book on the growth of the Indian economy in the past century.

IN popular parlance, as also in professional discourse to a large extent, the reforms' of 1991 constitute the great divide in Indian economic history. It is as though the pre- and post-reform years belong to different eras altogether, making it legitimate to talk about before reforms' (BR) and after reforms' (AR) periods. And the alleged sharp distinctions between the two are brought out by referring to the former as socialist, state-controlled, public-sector dominated and of low rates of growth and the latter as capitalist, liberal, market-oriented and of high growth rates.

One of the objectives of Pulapre Balakrishnan's work Economic Growth in India: History & Prospect is to interrogate this exaggerated and indeed arbitrary claim about the changes that have come about since 1991. There have been many recent studies of India's economic performance, a number of them relating to the post-reform period and some starting from Independence. Even while granting that the events referred to are important milestones in the life of the nation, it is not the case that economic performance necessarily follows such changes. In his study, Balakrishnan brings in the role of political factors, including changes in leadership, as influencing economic change and performance. But there are underlying factors that contribute to economic growth, he insists. About the book he says: It attempts to be an investigative account of growth and its future in India, one informed by theory and guided by method. Its aim is to contribute to a conversation about how the economy works, though focussed on the process of economic growth.

End of the colonial era

One of the most impressive aspects of the book is the time span it deals with: beginning from 1900 and right up to 2008 or so. While it is not (and does not claim to be) a comprehensive economic history of this period of over a century, it deals with the end of the colonial era, concentrating on the guiding economic principles of that period, and shows what Independence meant to the performance of the economy. If a crucial indicator of economic performance is changes in per capita income, during the first half of the 20th century it was almost without any increase even though increase in population was negligible; even national income grew at less than 1 per cent per annum, indicating a stagnant economy moribund economy is how Balakrishnan describes it. The quickening of this moribund economy was the great achievement of the early Plan period, 1950 to 1964, appropriately designated the Nehru era. And the quickening was indeed significant, the growth rate of the period shooting up to 4.1 per cent a year (much higher than China's annual rate of 2.9 per cent during that period). Rightly does Balakrishnan claim it to be the mother-of-all turnarounds in this country.

In the light of this quantitative performance, Balakrishnan makes a critical evaluation of the economic strategy of the period designated as the Nehru-Mahalanobis strategy with its emphasis on import-substituting industrial growth and on basic industries. These were required to stimulate the domestic factors, including domestic demand, for sustained long-term growth. Two other aspects of that growth strategy are commented upon and documented. The industry-centred strategy did not neglect agriculture, which too performed well during the period, thus showing a balanced growth. Second, while the substantial increase in public-sector investment was the driver of growth during this period, and there were some controls as continuations of war-time administration, it is not correct to say that the private sector was discouraged or that there was a licence raj' in place.

The author's main criticism of the socio-economic strategy of the period is that it did not pay sufficient attention to education, primary education in particular, the prime requirement for sustained long-term development.

End of the Nehru era

The second period examined is from 1965 to 1991. The end of the Nehru era altered the economic environment in the country, says the author. While Nehru used his political power to shape the kind of economic policy he thought was necessary for long-term growth and development, the common characteristics of the second period, which saw many regime changes, is that economic policies became instruments to gain and retain political power. This is best seen in the case of Indira Gandhi, who started out showing Left' leanings but easily took a Right' direction when she felt it politically necessary. It was during her first administration, when she relied heavily on the bureaucracy, that controls, interpreted as socialism, became the basis of economic policies. Planning lost its edge, and the public sector lost its capacity to invest. Having lost the capacity to steer, a strategy of command and controls was put in place, says Balakrishnan.

This was also a period of shocks, external and internal, that significantly affected economic policy and performance. The devaluation of the rupee in 1966, the two wars with Pakistan, the oil shocks of 1973 and 1979 and the balance of payments crisis of 1980, which led to a hefty borrowing from the International Monetary Fund, were the external shocks. Simultaneously, there were internal shocks as well the droughts of 1965-66 and 1966-67. The growth of the economy was affected by these happenings. But the performance could not be described as poor. The Green Revolution and the stimulus that agriculture received from it were the main factors that sustained growth. It was also a period of steady increase in public investment in agriculture. For the first time in the 20th century, the rate of growth of foodgrains production in the country exceeded the rate of growth of population. That enabled the industrial sector also to grow, though sporadically. The two Janata Party years, which saw the new Industrial Policy Statement of 1977, were years of very high industrial growth. But during the period as a whole, there was considerable variation in public sector investment, which also affected the performance of the private sector.

A notable feature of the growth of this period was the divergence in growth patterns of different sectors of the economy. From the mid-1960s, there was a distinct acceleration of the growth of agriculture, while the industrial sector was heading somewhat in the opposite direction. And, for the first time the services sector began to pick up momentum. The total impact of these changes was a perceptible upward shift of aggregate growth. The growth rate, which was between 3.5 per cent and 3.8 per cent per annum in the preceding three decades, moved up to 5.2 per cent during the decade of the 1980s, not far below the 6.1 per cent in the first decade after the 1991 reforms.

It is on this basis that Balakrishnan posits that the reforms as such did not achieve any perceptible break in the growth rates and that taking the period from 1950 to the present, if there has been an upward shift in the growth path it happened around 1980. How is this to be explained? The first factor that the author identifies is that from Indira Gandhi's return to power in 1980 there was some easing of industrial regulation and some liberalisation of trade, followed up with greater vigour by Rajiv Gandhi. Second, there was also some revival of public investment from the early 1980s and a significant rise in the corporate investment rate. And third, it is our judgement that the agricultural transformation of the mid-1960s trumps all other factors when it comes to an explanation of the transition.

The post-reforms period

With that observation Balakrishnan turns to the final phase of the growth story, the post-reforms period. What exactly did the reforms of 1991 do? There are those who claim that the reforms brought in liberalisation, privatisation and globalisation' (LPG for short). It does not take much intellectual effort to see that (unlike what happened in eastern Europe and indeed in the Soviet Union itself around this time) it was not a transformation from a Soviettype, centrally controlled economy to an economy run by the market: India never had a largely state-owned, centrally controlled economy, and the market was quite active throughout India's long economic history. Nor was it a case of privatisation: even in 1991, over 80 per cent of the gross domestic product (GDP) was generated in a barely regulated private sector. The essential feature of the reforms was, thus, the opening up of the Indian economy to the rest of the world, in terms of trade, but essentially in terms of foreign capital.

What has been its impact on growth rates? Not particularly striking in the first decade, as has been noted already. In 2002-03 it was a dismal 3.8 per cent. From then on, as is well known, it has been a case of India Shining growth rates of close to 9 per cent almost every year, even 9.7 per cent in 2006-07, suggesting that a double digit growth rate is both possible and necessary to get rid of chronic poverty, ignorance and disease which still afflict millions of our people as the Prime Minister stated in mid-2008.

Balakrishnan has some comments to offer about the pattern of growth in the post-reforms period before he turns to the future. Examining the sectoral patterns of growth, he points out that the share of agriculture in GDP has sharply declined, that of industry has barely increased and the biggest share is that of services. So the growth rate maintains a high level mainly because of the contribution of services, resulting largely from the growth of wages and salaries in public administration and the sharply rising remunerations in corporate enterprises.

The author draws some inferences about the impact of this pattern of growth on the lives of the common people and on the future prospects of growth itself. He is concerned about the neglect of agriculture during this period of high' growth, as witnessed by the fall in public investment in that sector from over Rs.12,000 crore in 1980-81 to around Rs.6,800 crore in 1997-98 (both in 1999-2000 prices) after which it began to pick up slowly. There has been a fall in public support for R&D in agriculture as well. The result has been a fall in agricultural production, with foodgrains production barely keeping up with population growth since 1991. Food prices have also been rising, particularly in the more recent years. Apart from being harsh on common people, it also acts as a damper on the expansion of the market for goods of mass consumption, thus retarding overall growth as well. Agricultural expansion led by increase in productivity is a precondition for sustained growth, and surely for inclusive growth. To make that possible there has to be greater emphasis on education and the raising of skills of workers. Measures to increase agricultural productivity and to improve education and skills have not been receiving the attention they deserve, and this neglect may prevent growth from being sustained.

Balakrishnan's work is theoretically informed, rigorously analysed and elegantly written. I am broadly in agreement with his main conclusions, especially his interpretation of the Nehru era and his analysis of the post-reforms period. I recommend the book to students of economics and to any reader interested in getting a perspective on the growth of the Indian economy during the past century.

Sectoral classification

However, I must point out that Balakrishnan's analysis is within a conventional, though widely accepted, mould, which from my point of view is inadequate for an understanding of how the Indian economy works and grows. The Simon Kuznets approach to a study of growth viewing the economy as consisting of three main sectors primary (agriculture), secondary (manufacturing), and tertiary (services) has stood the test of time and has been widely used both for cross-country comparisons of growth and for understanding the long-term transformation of individual economies over time. Balakrishnan's study is set in that mould and he has been able to draw many inferences about the changing character of the Indian economy. In particular, I draw the attention of interested readers to his Table 4.3, dealing with the sectoral transformation of the Indian economy since Independence. But he does not even consider whether Kuznets' sectoral classification of the economy is the only one possible or whether it succeeds in featuring some basic aspects of the Indian economy which may have a bearing on understanding its growth.

Even in terms of the material presented and analysed in the book, it is important to ask whether the recent growth of the services sector merely means that it has the highest share in GDP now or whether the recent high' growth is just an illusion caused by the bloating of the services sector, mainly the glaring increase in the earnings in some of its segments. Is the worrying increase in inequalities associated with high growth, 2006-07 particularly (which Balakrishnan hardly recognises), in any sense related to this?

Keeping that in mind, consider other possible and widely accepted sectoral partitions of the Indian economy, such as into a formal (or organised) and an informal (or unorganised) sector, the latter accounting for over 90 per cent of the workforce and certainly for a very high proportion of the total output. Balakrishnan takes note of it when he admits that since 1991 the contribution of registered manufacturing not only has declined but is also below that of unregistered manufacturing though he does not pause to consider its significance.

Further, note that in Table 3.3 dealing with Gross Domestic Capital Formation, the sectors recognised are Public and Private, the latter further divided into Corporate and Household. What is significant in the Table is the fact that Households account for a very high proportion of domestic capital formation, ranging from 30 to over 50 per cent during the period from 1960-01 to 1990-91, with the share being 40 per cent and more during those 20 years while the share of the Corporates exceeded 5 per cent only twice during the entire period. What is the nature of these households, which can generate surpluses and can use them also, and which play a considerably higher role than the corporates in the performance of the economy? Balakrishnan goes nowhere near that issue in his entire analysis.

Let us go a step further. The households in the Indian economy constitute a very wide spectrum, from those in dire poverty to billionaires even by global standards. Obviously, the ownership of and control over the resources of the economy has something to do with these disparities. Since agriculture still has close to 60 per cent of the workforce, the ownership and use of land must have a bearing on their performance and contribution to the growth of the economy.

That is why the Five-Year Plans of the Nehru era repeatedly emphasised the role of institutional transformation, especially land reforms, as a precondition for equitable growth. And yet, Balakrishnan elides this theme, although he makes occasional references to the shrinking farm size as a factor constraining agricultural growth.

The basic issue here is how the economy' itself is conceptualised. Is it basically a set of numbers that can be readily summed up (or partitioned) according to convenience or conventions, or is it a set of social relationships mediated primarily through ownership of and control over material resources by which human beings produce the necessaries and conveniences of life (Adam Smith)? If it is the latter, an understanding of how the economy works that Balakrishnan sets out to provide can hardly be gained through a manipulation of numbers alone, however scientifically' it is done.