Growth, development and the Indian economy

VN Balasubramanyam

Introduction
The accelerating rate of growth of India’s GDP over the past ten years has put the country in the news. A growth rate of 7 to 8 percent per annum on the average, compared with the so called Hindu Growth rate of 3 percent per annum for more than four decades is indeed dramatic news. This leap in the country’s growth rate is of immense interest for several reasons – it has been achieved within the framework of a democratic system of government, and it parallels though does not exactly match the much heralded growth performance of China with an authoritarian regime (Table). It reflects the success of a relatively liberal economic regime, which India put in place in the year 1991. It also has far reaching consequences for the global economy in the near future because of the huge population of the country of 1.02 billion, which together with the population of China, accounts for a third of the world’s population of 6.6 billion people.

The debate on India’s economy is broadly four fold; first, whether or not India will move up the growth league tables ahead of China. Second, whether or not India will sustain its record as the world’s most populous democracy. Third is the implication of the growth of India and China for the future of the world economy. Fourth, and most importantly, whether the structure of the economy and growth reduces the high level of poverty in most of the states in the union.

My hunch is that India will maintain her growth momentum and preserve her status as the world’s most populous democracy. Whether or not India will surpass China and rank as the world’s largest economy, measured by the size of GNP, by 2030 is debatable. The recent decline of the Chinese stock market and a deceleration in the growth rate of its GDP has had worldwide repercussions. Whilst the developed countries have experienced a downturn in their exports to China with a depressing impact on their growth prospects, India seems to have benefited from China’s economic problems. Substantial volumes of capital flows have been diverted to India from China and India’s markets for goods and services are eagerly watched by the developed countries. China’s problems have aggravated in recent years, but these are short-term problems that China’s adroit policy makers will soon overcome.

However, it is wise for India not to place hope on capturing China’s capital flows and markets. For several reasons comparisons between the two countries may be a futile exercise. The one and only commonality between the two countries is the size of their population. They are vastly different from each other in the type of institutions they possess, their history, their geo-physical features and their political setup. India, a democracy with a large electorate with differing institutions and objectives, can hardly match the sort of control China exercises over its labour force and financial institutions. The none-too-successful experience of India with the small scale industries that were bestowed with various subsidies and protection from competition contrasts with the successful promotion of Town and Village enterprises (TVEs) in China. The TVEs were state-owned but their managers were allowed freedom to manage their enterprises with the proviso that they could have a share in the profits they made but had to bear all the losses. Arguably it may be easier to exercise control and manage the economy of a country such as China that is relatively homogenous in terms of the socio-cultural attributes of its population than a heterogeneous one such as India with its 16 languages and a complex religion with castes and sub castes.

This rosy picture I have painted is not without its problems. India’s growth at the current rate, in excess of 6 percent, will have a major impact on the environment. It will have to invest considerable resources in preserving the environment and limiting the consequences of climate change if only in the interests of its citizens. Growth, which, does not percolate substantially to the poor of India, who number around 300 million at present, cannot be sustained. Yet another danger is Hindu fundamentalism, which has cropped up its ugly head more than once with grave consequences in recent years. My optimism, subject to these two qualifications, is grounded in India’s socio-cultural attributes and her inheritance from the British and the Nehruvian era in post-independence India. The rest of the article will elaborate this thesis.

Heterogeneity of culture

The most arresting feature of India, apart from her population size of 1.02 billion people, is her immense heterogeneity. India is indeed a land of contradictions. Adult literacy rate in the country is only 70 percent, but India possesses the world’s third largest pool of scientists and engineers. India is home to a large pool of middle-income citizens, around 150 million people, but it has also the world’s largest number of poor around 300 million or 26 percent of the population. The share of the women in the labour force, a good indicator of the level of development of a country, is low at around 30 percent, yet India was one of the first amongst the developing countries to elect a woman as its Prime Minister. Equally marked are the vast differences in cultural and physical characteristics of the country. On the estimated heterogeneity index, which ranges from 0 to 1, India scores high, along with the African countries, with an index of 0.89, compared with Japan with an index of 0.2.

The British legacy

A major achievement of British rule in India was bringing together this vast and disparate country under one banner. The railways built under British rule, also contributed to knitting the regions of the country together. The idea of India was construed by the British as was the land tenure system and the civil service. Whilst many of the institutions and systems of administration the British instituted were designed to serve the interests of the empire they nonetheless laid the basis for independent India’s system of administration in a democratic framework. It is of interest that Karl Marx, no admirer of British colonial rule, saw the benefits it sparked for India. As a chronicler of the history of the East India Company summarizing Marx writes

“…motivated by the ‘vilest interests’ it may have been, but Marx saw British domination producing all the conditions for modernization; political unification, a well-equipped army, a free press and rapid communications, along with the creation of a new class imbued with European science.”

Yet another British legacy for India is the English language – the lingua franca of business in the world and the language of instruction in most schools and institutions of higher education in India. It was the famous 1834 minute on education of Thomas Babington Macaulay which introduced English as the language of the civil service in India.

It is this inheritance of the English language, the civil service, and a system of jurisprudence underlying India’s legal institutions, which have shaped India as a democracy and will help preserve the tradition. As a wag put it the diverse country India is held together by English, Cricket, and film music.

Nehru’s grand design and the Nehruvian legacy

It is fashionable in some circles in India today to blame Jawaharlal Nehru, India’s first Prime Minister, and his economic philosophy for the low rate of growth, high levels of absolute poverty and backwardness of several regions of India. Whilst there may be some truth in these criticisms, it should not be forgotten that India owes much to Nehru’s vision. The Nehruvian legacy for India is many fold – his determination to shape and preserve India as a secular democracy, his respect for the rule of law as enshrined in India’s constitution, his belief in industrialization as the primum mobile of development and above all his faith in science which has endowed India with a large pool of scientists and engineers.

The grand strategy of industrialization through planned development was conceived by Nehru during the fifties and shaped for implementation by Mahalanobis. The basic tenet of the Mahalanobis model was that India should be self-sufficient in investment goods or heavy industry goods. Independence from imports can be achieved by investing the bulk of available resources in the production of heavy goods such as steel, railway equipment, and machinery. Once on stream, these producer goods or mother goods could be used to produce consumer goods. The core message of the model was that the citizens of the country should tighten their belts now and wait for the time when the investible goods would produce consumer goods. Apart from self–reliant industrialization, the Nehruvian strategy for the country included democratic socialism and social redistribution. The instruments of policy for the execution of the strategy included extensive public ownership of the means of production in industry, bureaucratic control of the private sector investment, and international trade.

Nehru’s grand design unfortunately went wrong around the year 1958 when the Second Five-year plan was in its third year. The balance of payments went into the red with a substantial deficit and inflation reared its ugly head. The economy was saved from meltdown with substantial aid from the Aid India club and policy intervention in the form of controls over imports and trade. In fact, the import substitution strategy though a part of the design appeared to have gained a new lease of life and vigour with the crisis. One policy response to the balance of payments crisis was the imposition of quotas and tariffs on imports.

What began as an instrument for reducing the balance of payments deficit ended up as a tool for the promotion of industrialization. The consequences of the inward looking strategy are well-known – low rates of growth, widespread inefficiencies in the publicly owned enterprises, pervasive corruption, stifling red tape and bureaucracy, increasing inequalities of wealth and incomes and little impact on the absolute level of poverty.

This is quite a formidable list which should have alerted the policy makers. But the strategy was not relinquished, mostly because the controls over imports sealed off competition and provided monopolistic havens for businessmen, the vast array of controls provided lucrative avenues of additional income for the bureaucrats and politicians. As one economist put it, everyone gained from the strategy except the hapless consumers, which included a vast majority of the population. Moreover government intervention in economic activity was so pervasive that no one could fathom where it began and where it ended. The Byzantine web of controls was the delight of the bureaucrats and the bane of the businessmen who nonetheless put up with it because of the protected markets, which they could exploit. Opposition to the policies from the electorate was absent mostly because influential groups who could influence the electorate such as landlords were appeased by the politicians with substantial subsidies of various sorts.

The Nehruvian years were not all doom and gloom. The Nehruvian strategy included the development of a core of scientists and engineers to man the engineering and science based industries. Higher education institutions were heavily subsidized and India acquired the highly prestigious Indian Institutes of Management, the five Indian Institutes of Technology and scientific research establishments such as the Tata Institute for Fundamental Research. Many of India’s diaspora are leaders of the software industry in the Silicon Valley. They adorn many of the US and UK universities and Indian physicians have a major presence in the National Health Service of the UK.

This bequest of scientists and engineers from an earlier era is a factor in the emergence of India as an economic power of substance in the 21st century. Apart from the education pool, the Nehruvian strategy has also endowed India with a small but progressive high-tech oriented manufacturing sector centred on chemicals, pharmaceuticals, machinery, and transport equipment including automobiles.

The strategy of import substituting industrialization persisted until the year 1991, though attempts were made to loosen some of the controls on trade and industry in the mid-eighties by the then Prime Minister Rajiv Gandhi. His policies did yield fruit, for the first time the growth rate perked up to an average of around 6 percent per annum during the late eighties. But the spend and expand policies of Rajiv Gandhi and his successor the BJP government resulted in unsustainable levels of fiscal deficits of around 10 percent of the GDP. These Keynesian type pump priming policies with their adverse impact on the budget and the balance of payments coincided with the Iran-Iraq war which sent oil prices soaring. India’s diaspora withdrew their substantial bank deposits following the uncertainties caused by the increase in the price of oil. All this translated into a substantial balance of payments deficit, which the then Congress government was unable to bridge. The economy was in a deep crisis with foreign exchange reserves worth only two months of imports, one which proved to be a blessing in disguise.

The leap frog model of development

Faced with dwindling foreign exchange reserves, the government was forced to go a begging to the IMF and sell substantial amounts of its gold reserves to the Bank of England. The IMF as expected required the Indian government to reduce the fiscal deficit, relax controls over trade and investment and fl oat the exchange rate. The prime minister of the newly elected Congress party led government appointed an Oxford trained economist, Manmohan Singh, as the Minister for Finance with responsibility for the liberalization of the economy. Manmohan Singh in collaboration with a select team of advisors set in motion a series of reforms including the abolition of the much abused industrial licensing system, reduction of tariffs on a wide range of imports, flotation of the exchange rate, liberalization of the foreign direct investment regime (here was opposition to the measures, but it was muted because of the severity of the crisis). The consequences of the liberalization episode for the Indian economy are well-known. The growth rate increased to a substantial 6 percent, the balance of payments steadily improved. India now has foreign exchange reserves worth $165 billion, absolute level of poverty has declined to 26 percent from more than 36 percent during pre-liberalization, and productive efficiency of the manufacturing sector has improved substantially.

The good news has to be qualified. The persistence of poverty at unacceptable levels and growing regional disparities has been referred to earlier. Both of these problems are a consequence of the sort of growth India has experienced. Services now account for 59 percent of national output, agriculture for around 14 percent, and manufacturing for 26 percent. The sectoral shares of the economy more nearly resemble that of a developed economy than that of a developing country on the move. This is to be attributed to he Nehruvian strategy’s emphasis on higher education and the neglect of agriculture for the most part. Unfortunately, neither the services sector nor the manufacturing sector generates jobs on the required scale. Services contribute only 21 percent to total employment, manufacturing for a tiny 17 percent and a vast number of people depend on agriculture. And agriculture for various reasons including the vagaries of rainfall has not matched the productive efficiency of the other two sectors or the efficiency levels of China’s agriculture sector. Although India’s exports have increased over the years, the economy continues to be geared to the domestic market. India’ share of exports in world markets has continued to be less than 1 percent compared with China’s share of 7 percent. Again inflows of foreign direct investment have increased from a meagre $125 million in 1991 to more than $5 billion in recent years but it is nowhere near the $70 billion that China attracts every year. No doubt economic liberalization has produced high growth rates and over the years the absolute number of people in poverty has declined from as high a proportion as 36 percent to 26 percent in recent years. Even so, a total number of 315 million people live below the poverty line, they cannot afford the income required to purchase food which could give them the minimum number of 2400 calories per day required to function effectively. Such a large number of under fed and undernourished people in any country is bad enough but it is deplorable in a country whose high growth rates have earned her kudos. India is regarded as a likely candidate to overtake the US in growth and income league tables in he future. The poor are mostly in the rural areas, as many as 70 percent of the poor live in rural areas in India.

Wide differences in growth and development between the 29 states of India, is another worrying feature of the Indian economy. At one extreme is the state of Kerala on the south west coast of India whose levels of literacy, infant mortality, and population growth match that of the developed countries. At the other extreme is Bihar with a literacy rate of only 48 percent, infant mortality rate as high as 64 per thousand persons and population growth rate of 2.4 percent. Noting this wide regional disparities, India’s Nobel Laureate in Economics Amartya Sen has remarked that there are two Indias now one consisting of the four southern states, the western states of Maharashtra and Gujarat and West Bengal, and the rest of India. The former group resembles California in the levels of their growth and development and the rest is closer to Zaire in Africa.

Concluding comments

The foregoing is a bare sketch of India’s recent economic history. Here I have argued that India is not only likely to survive as a democracy because of her legacy from the past including the English language but it is also likely to figure high up on the growth league table.

India is likely to sustain the high growth rate it has achieved in recent years mostly because of the structure and composition of the economy – technology and skill intensive services and manufactures. The model of growth and development which has evolved since the year 1991 – what can be termed as the elitist model – mostly because of the legacy from the past, is one which is likely to endow India with substantial and stable markets.

As said earlier, because of the structure and composition of India’s economy as it has evolved over the years, it is likely to complement rather than compete with the US and the EU economies. There are signs of this sort of a development in the unfolding pattern of India’s foreign direct investment in the UK and the US mostly in information technology oriented industries. It is for this reason of complementarity between India’s economy and that of the UK and the US that it is likely that India will be a partner rather than a competitor for the western economies.

I should end on a note of caution to the optimistic picture of India I have painted. First, India has to address the problem of regional disparities and poverty. In the absence of measures to reduce poverty the country maybe subject to instability and frequent changes of regimes though democracy itself may not be in danger. India’s growth is likely to have a major impact on the environment. India is dependent on imports for more than 75 percent of her oil requirements and the coal produced in India is rich in carbon emissions. It may be in the country’s self-interest to deploy resources to combat climate change. Changes in the environment may be as harmful to countries such as India as they are to the others. The other danger lurking for India is Hindu fundamentalism which has reared its ugly head much too often in the recent past. Indeed, the party in power is said to owe its electoral triumph to its adherence to Hindu fundamentalism. Nehru’s dream of a secular India is in danger of being shattered with religious strife endangering the stability of the country. Finally, India’s growth would be of some assistance to the poor countries of the world but not a great deal because a large proportion of the world’s poor are in India.

The author is with the Department of Economics, Lancaster University, Lancaster, United Kingdom. He can be reached at v.balasubramanyam@lancaster.ac.uk.