The Political Economy of Recent Economic Growth in India

Raghbendra Jha





ABSTRACT

The political economy of India’s economic growth is an issue of abiding interest. Higher and
sustained economic growth has, all over the world, been the surest and most time tested
means of raising living standards and reducing poverty. Further, given that it is a functioning
democracy, economic policy in India can often be dictated by political expediency as political
parties indulge in competitive populism in the face of improvements in social indicators such
as literacy, infant mortality and the like lagging behind rises in the rate of economic growth.
Thus the political economy of policy formulation is an important area of concern. Finally, an
analysis of what policies can be undertaken given these constraints is an important indicator
of potential welfare implications of policies for such a large section of humanity.
Several recent reviews of India’s recent growth experience exist (Rodrik and Subrahmanian,
2004, Kelkar, 2004, and Thirlwell, 2004 are three examples). The value added of the present
paper is to place India’s growth experience within a broader political economy perspective. It
documents the broad contours of economic growth in India; it then analyzes some emerging
obstacles to higher economic growth and finally the prospects for accelerating the economic
reforms program to place India on a sustained higher economic growth path.




All correspondence to:

Prof. Raghbendra Jha,
Australia South Asia Research Centre,
Research School of Pacific and Asian Studies,
Australian National University,
Canberra, ACT 0200, Australia

Fax: + 61 2 6125 0443
Email: r.jha@anu.edu.au






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The Political Economy of Recent Economic Growth in India
Raghbendra Jha


I. Introduction

The political economy of India’s economic growth is an issue of abiding interest. Higher and
sustained economic growth has, all over the world, been the surest and most time tested
means of raising living standards and reducing poverty. Further, given that it is a functioning
democracy, economic policy in India can often be dictated by political expediency as political
parties indulge in competitive populism in the face of improvements in social indicators such
as literacy, infant mortality and the like lagging behind rises in the rate of economic growth.
Thus the political economy of policy formulation is an important area of concern. Finally, an
analysis of what policies can be undertaken given these constraints is an important indicator
of potential welfare implications of policies for such a large section of humanity.
Several recent reviews of India’s recent growth experience exist (Rodrik and Subrahmanian,
2004, Kelkar, 2004, and Thirlwell, 2004 are three examples). The value added of the present
paper is to place India’s growth experience within a broader political economy perspective. It
documents the broad contours of economic growth in India (section II); then analyzes the
emerging obstacles to higher economic growth (section III) and finally the prospects for
accelerating the economic reforms program to place India on a sustained higher economic
growth path (section IV). Section V concludes.
II. The Record of Economic Growth in India
The record of economic growth (annual rate of growth of real GNP) in independent India has
been uneven. Until about 1980 growth rates were low and subject to considerable volatility.
This record has improved since then. In Table 1 we depict salient characteristics of aggregate
economic growth in India.
Table 1: Some Basic Characteristics of Growth of Real GNP in India

Period
Mean Annual Growth Rate
Standard Deviation of Year to Year Growth Rate
(percentages)
(percentages)
1951-52 to 1959-60
3.58
2.62
1960-61 to 1969-70
3.91
3.64
1970-71 to 1979-80
3.05
4.16
1980-81 to 1989-90
5.65
2.27
1990-91 to 1999-00
5.83
1.97
1992-93 to 1999-00
6.46
1.16
Source: Author’s calculation based on data from Reserve Bank of India Handbook of Statistics on the Indian Economy
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The Political Economy of Recent Economic Growth in India
Raghbendra Jha
In aggregate terms growth appears to have picked up significantly since the 1980s. Further,
the variability of this growth (as measured by the standard deviation) has come down
significantly. Per capita GDP growth which was 1.2 percent per annum during 1972-82,
accelerated to 3.0 percent during 1982-92 and further to 3.9 percent during 1992-2002. So the
Indian economy has been enjoying high and relatively stable rates of growth for almost a
quarter century now.1
However, although India’s economic growth record has been truly impressive the country
does not perform as well on a broader set of human development indicators. India’s Human
Development Indicator (HDI) score, for example, improved only marginally from 0.302 in
1981 to 0.381 in 1991 and 0.472 in 2001. India’s HDI rank in 2002 was 124th – which was a
deterioration on the rank (of 115th) attained in the previous year. In 2003 there was further
slippage and India was 127th in the global ranking.
Assessment of performance according to a broader criteria such as human development
indicators is important for at least two reasons – first, these figures indicate whether
economic growth, as such, has been impacting upon the poor. Second, the poor progress in
areas other than GDP (but which are of considerable significance to the population at large)
might risk loss of popular support for the policies that made high GDP growth possible in the
first place. This, as argued later in the chapter, might then appear as a constraint on attaining
high growth rates.
What is the sectoral distribution of India’s economic growth? Table 2 displays broad
averages of sectoral growth rates as well as the significance of these sectors measured by
their shares in GDP. Agricultural growth has continued to fluctuate considerably even as the
share of agriculture in GDP has come down sharply.2 Manufacturing sector growth rates
have not been particularly high and the share of industry in GDP has been stagnant at about
22 per cent. Manufacturing growth was high in the initial years of the post reforms period but
fell sharply in 2001-02. The subsequent pick-up in 2002-03 was probably because of the

1 Latest available data (RBI 2004) indicates that there has been a further sharp acceleration in the
growth rate of real GDP in the second quarter of 2003-04. In the third quarter this reached double-
digit levels. All sectors grew sharply. Agriculture recovered smartly from a downturn in 2002-03 on
the back of two successive good harvests. The manufacturing and services sector continued their rapid
growth. It remains to be season whether this sharp rise is a temporary blip in the growth trend.

2 The share of agriculture in employment is, however, much higher. One of the current important
anomalies in the Indian economy is that a sector that produces 25 percent of GDP employs 65 precent
of the labour force.
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The Political Economy of Recent Economic Growth in India
Raghbendra Jha
lower base in 2001-02. Similar comments hold for mining. Growth in electricity production
has been slow – perhaps reflecting the poor state of electricity generation and, particularly,
transmission and distribution in India. The highest growth sector has been services. Growth
in this sector has occurred across a broad range and has been the most stable of all sectoral
growth rates. As a consequence, the share of services in GDP has gone up substantially.

Table 2: Growth Rates of Real GDP (Per cent)

1992-93
Sector 2002-03
2001-02
to 2001 average
Agriculture and Allied Activities
-3.2
5.7
3.0
(22.1)
(23.9)
(27.9)
Industry, of which
5.7
3.2
6.6
(21.8)
(21.5)
(22.0)
(i) manufacturing
6.1 3.4 7.2
(ii) mining and quarrying
5.0 1.0 4.1
(iii) Electricity, gas and water supply
3.9 4.3 5.9
Services, of which
7.1
6.5
7.7
(56.1)
(54.6)
(50.1)
(i) Trade, hotels, restaurants, transport and communication
7.8 8.7 8.3
(ii) Financing, insurance, real estate and business services
6.1 4.5 8.1
(iii) Community, social and personal services
6.8 5.6 7.3
(iv) Construction
7.2 3.7 5.5
GDP at factor cost
4.3 5.6 6.1
Note: Figures in brackets indicate share in GDP.
Source: Central Statistical Organization.


The evolution over time of the sectoral composition of Indian GDP is portrayed in Figure 1.
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The Political Economy of Recent Economic Growth in India
Raghbendra Jha
Figure 1: Se ctoral C omposition of India's GDP
60.00
50.00
40.00
Share of Agr in GDP
30.00
Share of Manuf in GDP
Share of Ser vices in GDP
20.00
10.00
0.00
Ye a r s

Source: Based on data from Handbook of Indian Statistics (2001), Reserve Bank of India.
The higher GDP growth rate beginning in the 1980s has been accompanied by an even
sharper acceleration in total factor productivity growth. Rodrik and Subramanian (2004)
examine a number of possible explanations for this rise in productivity/growth. Such
explanations include Keynesian type demand-led expansion in the 1980s, the advent of the
Green Revolution, and possible external and internal liberalization. However, they find
empirical support for attitudinal changes in the governments of Indira and later, Rajiv
Gandhi. These administrations, it is argued, began viewing private investment and enterprise
more favorably. This had salutary effects on manufacturing sector productivity and later had
substantial spillover effects. Such beneficial synergies were helped by the climate of
deregulation and delicensing started in the early 1990s. Other authors have placed a much
stronger emphasis on the role of the post 1991 reforms and downplayed the role of policy
initiatives of the 1980s. 3 To be sure, financial sector reforms began only in 1993 and are yet
to be completed.4


3 There has been a debate of sorts about whether attitudinal changes in the government bureaucracy or
actual policy changes are better explanations for the acceleration in economic growth in India. In a
country with an autarkic trade regime and a highly centralized administrative structure, attitudinal
changes may well be the hardest to make. Hence, both policy measures as well as attitudinal changes
should be regarded as essential as well as complementary explanations for this surge in the rate of
growth.
4 For a review of financial sector reforms in India see Sharma (2004).
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The Political Economy of Recent Economic Growth in India
Raghbendra Jha
The current high rate of economic growth could well accelerate further as Kelkar (2004) has
opined. Contributing to this acceleration is a broad series of reforms including financial
sector reforms, increased globalization and widening and deepening of product and financial
markets. The impact of such reforms gets reflected in key indicators such as market
capitalization of the stock market, the technology and transparency of transactions, the sets of
instruments traded, balance sheets of financial institutions and the degree of openness of the
economy. At the same time a benign FDI policy framework has permitted greater tie-ups in
high technology areas for production for domestic as well as external markets.
Adding to the impetus for higher economic growth are certain structural changes occurring in
the Indian economy – particularly on the supply side. In 2000 the proportion of the Indian
population in the working age group (15-64 age bracket) was 60.9%. The UN’s Population
Division has projected that this ratio will surpass the proportion of Japanese in this age group
by 2012 and climb to over 66% in 30 years. At that point in time it is poised to overtake
China’s population in the same age group. This is a very significant projection.
At the same time a quiet revolution is taking place in nutritional status in India. Table 3
(based on the author’s computations) reports on the proportion of the rural population in India
that is nutritionally deprived. This assessment is based on the assumption that all persons are
working (alternately) according to three work norms – sedentary, moderate and heavy. These
three norms imply different minimum calorific requirements with the “sedentary” norm being
the lowest and the “heavy” norm being the highest. Results are reported for three time
periods – 1987-88, 1993-94 and 1999-2000 for the rural sector where almost 70 % of India’s
population (of 1,027,015,247 according to the 2001 census) resides. This table indicates the
sharp decline in nutritional deprivation that has occurred in India. An even shaper decline
has occurred in the severity of protein undernutrition in rural India.5 By all accounts, an at
least comparable decline has occurred in the incidence of undernutrition and its severity in
India’s urban sector. Further, during the period 1991 to 2001 the literacy rate climbed from
51.54 % to 65.38 % in the aggregate, from 63.3 % to 75.85 % for males and from 38.79 to
54.16 % for females, according to the figures of the 2001 Census of India.



5 As explained in Jha (2001) the 1999-00 figures are not strictly comparable with those for earlier
years. This was because of important sampling and other methodological changes in the 55th Round of
the National Sample Survey on which these results are based.
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The Political Economy of Recent Economic Growth in India
Raghbendra Jha
Table 3 Calorie Deficiency in Rural India
Sedentary Work Norm
1987-88
1993-94
1999-2000
Proportion of rural population 0.55 0.28 0.11
below minimum norm
Moderate Work Norm
Proportion of rural population 0.69 0.38 0.188
below minimum norm
Heavy Work Norm
Proportion of rural population 0.87 0.59 0.441
below minimum norm

Source: Author’s calculations based on National Sample Survey Results for the 43rd Round (1987-88), 50th Round (1993-94)
and 55th Round (1999-00). “Sedentary” norm is defined as 2400 calories per day per adult male, 1900 per adult female and
1300 per child. “Moderate” norm is defined as 2800 calories per adult male, 2200 per adult female and 1300 per child. “Heavy”
work norm is defined as 3900 per adult male, 3000 per adult female and 1300 per child.

Clearly India’s labour force is undergoing rapid structural transformation: the proportion of
the working population is rising; the labour force is less nutritionally deprived and
increasingly literate. These changes imply substantial quality improvements in the Indian
labour force. Economic theory and international experience leads us to believe that this will
lead to sharp rises in labour productivity and an upward shift in the trend long run rate of
growth of the Indian economy.

III. Emerging Constraints on Rapid Economic Growth in India

Having analyzed the prospects for rapid economic growth in India it behooves us to examine
some emerging constraints. Evolution of the Indian economy according to the sanguine
aggregate picture sketched above is subject to how these constraints to rapid economic
growth in India work themselves out. We classify these constraints in four categories: (i)
increasing spatial inequality; (ii) stagnating employment; (iii) high fiscal deficit; and (iv)
inadequate growth of infrastructure. These constraints often reinforce each other –
particularly through the democratic political process. I now discuss these in turn.

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The Political Economy of Recent Economic Growth in India
Raghbendra Jha
i)
Increasing regional inequality
The aggregate economic growth narrative presented above masks substantial spatial
variations. The regional variation in economic growth in India has remained stubbornly high
despite the reforms. Table 4 presents mean growth rates and standard deviation for fifteen
major states of India. In almost every year the mean growth rate has been lower than the
(spatial) standard deviation of these growth rates, indicating persistently high spatial
variability. As a consequence per capita incomes show a tendency to diverge across Indian
states. Figure 2 plots the intertemporal behaviour of the coefficient of variation of per capita
incomes across fifteen major Indian states. This shows an upward trend, further underscoring
the divergence of incomes across space.

Table 4: Mean and Standard Deviation of Growth Rates of fifteen major Indian states

S.D.of growth of real SDP
Mean growth of real SDP
1981-82 6.57
6.18
1982-83 5.12
3.17
1983-84 5.95
5.93
1984-85 4.85
2.74
1985-86 6.03
5.62
1986-87 4.52
2.94
1987-88 7.68
3.83
1988-89 9.56
12.62
1989-90 5.07
5.56
1990-91 7.58
6.11
1991-92 6.41
3.16
1992-93
9.15
5.48
1993-94 4.30
5.98
1994-95 5.03
5.70
1995-96 4.41
5.27
1996-97 5.87
6.37
1997-98 4.15
4.38

Source: Author’s calculations based on data in Handbook of Statistics on the Indian Economy, 2001, Reserve Bank of India.


This increasing divergence across the states gets reflected in other critical areas as well, e.g.
the regional incidence of poverty, particularly rural poverty. Figure 3 shows that economic
reforms have been accompanied by a rising coefficient of variation (across fifteen major
Indian states) of the head count ratio of poverty. This coefficient of variation has had a
distinct upward trend – particularly in the 1990s.

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The Political Economy of Recent Economic Growth in India
Raghbendra Jha

Figure 2: CV of Real Per Capita Incomes in Fifteen Major Indian States
45
40
35
30
25
%
CV
20
15
10
5
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Source: Author’s calculations based on data in Handbook of Statistics on the Indian Economy, 2001, Reserve Bank of India.




Figure 3: Coefficients of Variation of Head Count Ratios in the Rural, Urban and Aggregte
Sectors
0.70
0.60
0.50
n
t
io
ria
a
0.40
cvr
f
V
t
o
cvu
n
ie
0.30
cva
ffc
e
o
C
0.20
0.10
0.00
0
58
83
92
ay
n 59 n 60 ug 61 ul 62 an 64 n 65 n 66 n 67 n 68 n 69 n 70 n 71 ep 73 un 74 n 78 c
n 87 n 88 n 90 n 91 c
n 94 n 95 n 96 n 97 200
-Ju
-Ju
-A
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
-Ju
3-De
2-De
l 58
l 59
73-J
l 60
72-S
b 63-J l 64
l 65
l 66
l 67
l 68
l 69
l 70
l 77
l 86
l 87
l 89
l 90
l 93
l 94
l 95
l 96
1999-
ep 57-MJu
Ju
ep 61-J
Ju
Ju
Ju
Ju
Ju
Ju
Ju
ct
ct
Ju
n 8 Ju
Ju
Ju
Ju
n 9 Ju
Ju
Ju
Ju
S
Ju
S
Fe
O
O
Ja
Ja
Time Period

Note: cvr= coefficient of variation of rural Head Count ratio,
cvu= coefficient of variation of urban Head Count ratio;
cva= coefficient of variation of aggregate Head Count ratio.
Source: Jha (2001)

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The Political Economy of Recent Economic Growth in India
Raghbendra Jha
Jha (2001) shows that there is lack of convergence (in a formal statistical sense) in the
incidence of rural poverty across Indian states both in terms of their ranks with respect to
poverty as well as in terms of their levels of poverty. In fact in respect of the critical
magnitudes of poverty, mean consumption and inequality of consumption, economic reforms
do not seem to have made much difference to the inequality across Indian states for any
category except urban mean consumption. This lack of convergence extends itself to the level
of NSS agro-climatic zones (NSS regions)6 as Jha and Sharma (2003) point out.

This rising regional inequality is now a matter of concern. Reducing interstate disparities has
been an important objective of government policy. The five-year plans of the Government of
India have used public investment and industrial licensing to promote balanced regional
development. Transfers from the central government to state governments under both the
capital and the current categories through the Finance Commission and the Planning
Commission are overwhelmingly equalizing in nature. Thus, the 10th Finance Commission
(Government of India, 1994), the recommendations of which guided federal transfers
between 1995-2000, advocated the following weight structure for the devolution formula: 20
percent on the basis of the population of 1971 and 60 percent on the basis of the inverse of
the distance between the per capita income of the state in question from the mean per capita
income. With the onset of market-oriented economic reforms, government transfers and
investments began to play a diminished role7 in the economic activity of states, so that
regional disparities, which exist because of divergent economic conditions among the various
states of India, get aggravated. Further, as Jha (2004) has shown, there has been some
increase of personal inequality in India as a consequence of the economic reforms program.

To further investigate the increasing concentration of the poor in India I identify five states
with the highest number of calorie-deprived and those with the highest number of
expenditure poor in 1987-88 and follow the progress of these states over time. Data

6 A National Sample Survey (NSS) region has a certain agro-climatic homogeneity within it. Small
states such as Tripura constitute one region whereas larger states such as Uttar Pradesh are made up of
more than one such region. States may not be a good unit of analysis in a regionally diversified
country such as India. Even within the states there is considerable heterogeneity – coastal Maharashtra
versus interior Maharashtra, Eastern vs. Western Madhya Pradesh etc. In the area of poverty
incidence, for example, only Orissa and a few other states are such that there is a clear-cut congruence
between high incidence of poverty and state geographical boundaries.
7 It does not help that some of these poorest states have weak governance structures. In some cases
funds are unspent because of inefficient administration, in other cases development funds are often
diverted by cash-starved states to pay current administration salaries.
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