India After 20 Years

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January, 2007

INDIA’s GROWTH: PAST AND FUTURE

by

Shankar Acharya*

* Honorary Professor and Member Board of Governors, Indian Council for Research on International Economic Relations (ICRIER)

Paper for presentation at the Eighth Annual Global Development Conference of the Global Development Network, January 14-16, Beijing.

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India’s Growth: Past and Future
By
Shankar Acharya1

This paper is divided into five sections. Section I briefly reviews India’s growth performance since 1950 and indicates a few salient features and turning points. Section II discusses some of the major drivers of India’s current growth momentum (which has averaged 8 percent in the last 3 years) and raised widespread expectations (at least, in India) that 8 percent plus growth has become the new norm for the Indian economy. Section III points to some of the risks and vulnerabilities that could stall the current dynamism if corrective action is not taken. Section IV appraises the country’s medium term growth prospects. The final section assesses some implications of India’s rise for the world economy.

I

Review of Growth Performance, (1950-2006)
Table 1 summarizes India’s growth experience since the middle of the twentieth

century. For the first thirty years, economic growth averaged a modest 3.6 percent, with per capita growth of a meager 1.4 percent per year. Those were the heydays of state-led, import-substituting industrialization, especially after the 1957 foreign exchange crisis and the heavy industrialization bias of the Second Five Year Plan (1956-61). While the strategy achieved some success in raising the level of resource mobilization and investment in the economy, it turned out to be hugely costly in terms of economic efficiency. The inefficiencies stemmed not just from the adoption of a statist, inward1

The author is Member, Board of Governors and Honorary Professor at Indian Council for Research on International Economic Relations (ICRIER). He was Chief Economic Adviser to Government of India (1993-2000). This paper draws liberally on his recent paper, “India’s Growth: Past Performance and Future Prospects”, presented at the Tokyo Club Macro Economy Conference on “India and China Rising”, December 6-7, 2006, Tokyo.

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looking policy stance (at a time when world trade was expanding rapidly) but also from the extremely detailed, dysfunctional and corruption-breeding controls that were imposed on industry and trade (see, for example, the classic study by Bhagwati and Desai (1970)). Table 1: Growth of GDP and Major Sectors

(% per year)

Year

1951/521980/81
(1)

1981/821990/91
(2)

1992/931996/97
(3)

1997/982001/02
(4)

2002/032005/06
(5)

1992/932005/06
(6)

1981/822005/06
(7)

Agriculture
and Allied
Industry

2.5

3.5

4.7

2.0

1.9

3.0

3.0

5.3

7.1

7.6

4.4

8.0

6.6

6.5

Services

4.5

6.7

7.6

8.2

8.9

8.2

7.4

GDP

3.6

5.6

6.7

5.5

7.0

6.4

5.9

GDP per
capita

1.4

3.4

4.6

3.6

5.3

4.4

3.8

Source: CSO . Note: Industry includes Construction.

At the same time, one should not forget that the GDP growth rate of 3.6 percent was four times greater than the 0.9 percent growth estimated for the previous half century of British colonial rule (Table 2). Moreover the growth was reasonably sustained, with no extended periods of decline. Nor were there inflationary bouts of the kind which racked many countries in Latin America. However, growth was far below potential and much less than the 7-8 percent rates being achieved in some countries of East Asia and Latin America. Worst of all, the proportion of the Indian population below a (minimalist) poverty line actually increased from 45 to 51 percent (Table 3). Table 2: Economic Growth: Pre -independence

(% per year)
Year

1900-46

1900-29

1930-46

GDP

0.9

0.9

0.8

Population

0.8

0.5

1.3

Per...
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