A talk on India

Given all the chatter about what’s happening to the Indian economy, I thought I’d post the slides and speaking points of a talk I gave to a class of graduate students — a mix of ‘national security and foreign policy suits’ and ‘liberal humanities hippies’ — about a year ago.

Thank you.  By way of background: I work as a macroeconomist, and have worked on SA economic stuff now and then.  Ground rules: question of clarification throughout, but substantive questions at the end.

We are supposed to talk about development and PE in SA.  Primary focus is on India.  And we will use the language and technique of economics.  Particularly, GDP per capita. 

Not because it’s the most important thing.  It is correlated with a lot of important things, and it’s a means to an end about important things.  But it’s not the most important thing.  Nor is economics or india focus right in and of itself.

But we’ll do so because that’s the easy thing to do.  A case of looking under the lamp post.  Also a case of elephants and the blind men of India. 

Important to keep the elephant parable in mind.  Need for multi-disciplinary and critical analysis.

Quick notes about data: sources are GGDC, WB, CEIC Asia; PPP adjusted, internationally comparable.

The is in 4 parts:

– Economic history

 

– How Indian growth experience has differed from elsewhere

 

– Questions about the Indian state’s ability to do things

 

– What might the future hold

 

  

 

 

 

 

Economic History

Kaushik Basu writes about India being a land of present participle — rising, shining, arriving.  Let’s look a bit into the past.

 A bit, not much — no mention of pre-independence stuff, though in a sense India (like China) is just going back to where it was in great scheme of things, and there is a literature and research agenda out there about ‘why not India’ re: industrialisation, or the effects of the Raj etc.

We’ll not talk about those.  instead, we begin with Nehru — destiny refers to the speech.

Basic fact – India (and SA) still very poor, though things are getting better.

At independence, India’s economic thinking was dominated by a suspicion of foreign capital, and the outside world as such.  East India Company came to trade, and became the ruler.  This left a deep mark in the Indian psyche. 

Among the nationalists: Gandhi’s village republics, didn’t really have many takers; domestic organised labor, some communist backed; domestic capitalists supported Congress.  

Skepticism about the market was not just an Indian thing in the post-war world.  In the west, great depression and the war convinced the intellectual mainstream that capitalism needed govt intervention.  Keynesianism.  Soviet Union provided a more radical model.  And for the poor countries, everyone agreed on the need for the ‘big push’ – govt should provide support to the key sector, and spur growth. 

Nehru synthesised these domestic and global ideas.  He talked about science and technology being India’s new religion, and dams and steel mills its temples.  PC Mahalanobis, a physicist turned statistician, symbolised the Independence generation’s ideals. 

India started with good institutions (relative to other countries).  Planning Commission.

Importantly, vast part of the economy was never ‘nationalised’.  Particularly, agriculture.  Key difference from the eastern bloc countries, and with important consequences.

Planning doesn’t work because of information and incentive problems.  Govt cannot know how technology and preference changes.  When the price mechanism doesn’t work, there is rationing.  The system breeds corruption.  Rajaji’s critique.

India faced a series of political and economic crises in the 1960s and early 1970s.  Wars with China and Pakistan.  Congress leadership tussle post-Nehru.  Severe drought and crop failure.  Rise of Indira and populism – garibi hatao.  Bank nationalisation.

Then early 1970s oil shock. 

All these led to the ‘Hindu rate of growth’ (Raj Krishna).

3-3.5% a yr GDP. 2-2.5% a yr population. 0.5-1.5% per capita income.

Note the slowdown in the 1960s.

When and how did the Indian economy turn around? 

The simple story of stagnation until 1991, crisis, heroic budget, epic reforms, and happily ever after.

But economists are a multi-limbed mob (Truman wanted a one-handed economist).

And the story is more complicated. We see three separate accelerations. Late 1970s. 1990s. 2000s.

Even during the hindu rate years, there were two notable things.  First, green revolution.  Self sufficiency in grains.  Recall: india didn’t have collectivisation.  Second, while banks were nationalised out of populism, it did have a positive side effect – higher domestic savings è eventually translate into investment.

After returning to power in 1980, Indira tilted towards business.  Rajiv also business friendly.  But these reforms were ad hoc and had little overall framework.

The well known story of 1991.

The 2000s — the greatest decade. 

Sustainable?

What boomed?

3 modern services. 

Also construction – infrastructure building.

Manufacturing is middling.

Agri and public lags behind.

Largely the same story in Pakistan and Bangladesh. 

To note:

-1971 lowered BD starting point

 

– Pak’s disfunction in the past decade.

 

 

 Indian exceptionalisms

 

Typically, growth is accompanied by industrialisation.  

Surplus labour goes to factories, trickle down. India not industrialising.  Whether service sector led growth can create broad-based prosperity is a subject of exciting research.

Similar to industrialising is urbanising.  India is less urban than others. 

Why?  And what are the implications?  Consequences for welfare?

Recall GDP is means to an end.  Money can’t buy you love, or happiness.  But money should buy you stuff.

Turns out that growth hasn’t trickled down as much as it should have.

Political economy

Why? 

 I’ll sketch some very tentative research agendas.

Weak vs strong state.  Lant Pritchett’s flailing state. 

India started out with good institutions that were weakened during the licence raj years.  In the post-reform era they seem to have weakened further. 

Why?  And how should we think about these?

Some people talk about China’s strong state, or the Chinese model of benevolent authoritarianism. 

Well, here is one way to think about it.

Independent India didn’t have the Great Leap or Cultural Revolution. 

Weak democracies can’t screw up too badly!

Future

Two possible paths.

The area of darkness – Naipaul, Adiga. 

Neoclassical theory says that if all else equal, poor states should catch up. 

Theory fails.

Why? 

Convergence is the ultimate policy challenge for Nehru’s Noble Mansion.