The last two years have been of ferment on the understanding of Indian growth. That India has been growing from the 1980s has finally been accepted. But the fulcrum of that growth—the policy initiatives of the 1980s decade, is neither fully understood nor causally related with the economy’s growth upsurgence. Technology as the main factor, strategic economic reform at home (with the rest of the world as instruments), decentralized government and widespread agricultural growth in a decentralized agro-climatic scheme were the overarching paradigms underlying the policy initiatives that succeeded since.
We have had very talented NRI economists giving alternative explanations of “growth in the 1980s”. They miss the larger, and in some cases, essential aspects of the story. Arvind Panagariya says the 1980s covered an activist programme—for example, by 1990, around 20% of the tariff lines and 30% of imports had come under OGL and import licensing on many other products was eased. But growth during the 1980s, he argues, was “fragile and volatile”. However, there are two characteristics of growth in recent years—it is higher and it is more stable.
As regards the “causes”, Meghnad Desai sums up the dominant argument outside India: “Opening...the economy to foreign borrowing on official account in the 1980s was the beginning of an admission that self-reliance was not a successful strategy.” Therefore, “a lifetime of living off tariffs and subsidized interest rates has inured the big business classes against the virtues of competition.” Others say growth in the 1980s was on account of a regime dominated by business. But the argument that policy was designed to establish a cosy relationship between the capitalists and the establishment through tariffs and directed credit is factually incorrect. By the mid-1980s, around two-thirds of the Indian industry was free from domestic controls on prices and output and, to a large extent, investment. So, policy broke the back of the link between the bureaucrat and the capitalist and it was very clear that globalization-based reforms would follow.
What lies ahead? It’s argued that India will grow between 6% and 8% annually. The drivers of this growth will be investment, technology and productivity, trade and competition. (One-third of India’s GDP growth in 1997-2003 was technology driven.) An excellent analysis of productivity growth scenarios by ISI Kolkata (which I sponsored) indicates that to sustain growth at 8-9%, total factor productivity has to grow by 5% or more, as compared with around 4% in the past.
In its approach paper to the 11th Plan, the Planning Commission says savings, investment and factor productivity must go up, but spells out only the first two numbers. It is perhaps being realistic. For the Indian mindset, it may be easier to be more frugal than more efficient. I agree with the panel’s implicit understanding that the growth potential has only marginally improved and the real task lies ahead. But clearly, the jury is still out in terms of feasible growth paths. In 2003, the finance ministry’s economic survey had said that a 6% growth rate had become a habit. And habits are not easy to change.
At a broader level, while the Goldman Sachs BRICSAM study saw India in terms of its democracy, youth, market size and buying power, the Harvard Review has looked at the country’s enterprise, institutions and its planning focus. Within India, the policy focus now is more on governance issues as the key to faster, more broad-based and sustainable growth. The key concerns, emerging from extensive consultation, are: A regulatory framework for the functioning of the economic and social sectors and to take care of the victims of the processes of globalization and liberalization; the scarcity of water and energy; security, including energy security and food security; urban systems management; rights of individuals and groups and the rule of law; and Constitutional amendments that resulted in the devolution of powers to local bodies.
Goldman Sachs and CIA told the world that not only was India growing, but also that its population was an asset. We got billions of dollars of free publicity. They were right, but not necessarily for the right reasons. Growth doesn’t happen when you take a slide rule, multiply per capita income by consumption propensities and air conditioners and refrigerators come out of your ears. But this is a khatta-meetha business. When populations are hungry, feel unfairly treated, don’t have a job, or are sick, they are not an asset.
P.N. Mari Bhat has neat numbers where the labour force grows faster than the population, the dependency ratio goes down, savings rise, women work more as fertility rates go down and we gather bonuses right up till the middle of the century. But the numbers vary in alternate visions. Historically, population growth has been associated with economic growth. At Wharton, Richard Easterlin, taught us that North America was in an epoch of growth, and the people were its architects. Ester Boserup, working with Gunnar Myrdal at the same time, was showing this in parts of Africa and South India. These early lessons were forgotten. From the early 1980s, the message was that a falling population growth was at the heart of the East Asian story. Our economic survey said this in 2000. The point is, if we misuse land, water and energy and the number of persons who don’t have jobs and food rises, the population will not be a bonus. As Bhat shows, there is real demographic dividend in labour force growth rates that are higher than population growth, but it could be as low as 0.07%.
When India’s demographic transition nears completion, the age at first birth would be 21-22 years (less than 20 now) and the age at last birth would be around 28 years (38 now). Women could enter the labour force in large numbers and give an edge that’s additional to the change in age structure. But it won’t be easy in a patriarchal society. Dipak Mazumdar and Sandip Sarkar, in a World Bank sponsored study, estimated that in contrast to the 1980s, when employment had risen, “loss in subsidiary employment for females between 1993-94 and 2000 is 4.88 million just in cereal growing”. Messing up agriculture means a negative dividend of women withdrawing from the work force.
Fortune never came to the timid. But societies do respond to crises. And as the Harvard Business Review rightly points out, in large countries such as India, decentralized enterprise and planning—I suspect they mean strategic vision—are the sources of growth.
Y.K. Alagh is chairman, Irma, and has been member of the Planning Commission and a Union minister.