30 March 2014

translating growth into development

Indians Unfinished Journey Transforming Growth into Development
Author(s): Deepak NayyarSource: Modern Asian Studies, Vol. 40, No. 3 (Jul., 2006), pp. 797-832Published by: Cambridge University PressStable URL: http://www.jstor.org/stable/3876547 .Accessed: 26/06/2013 07:52Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp .JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org. .Cambridge University Press is collaborating with JSTOR to digitize, preserve and extend access to ModernAsian Studies.http://www.jstor.org
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ModernA sian Studies4 0, 3 (2006) pp. 797-832. ? 2006 Cambridge University Press
doi: 10.1017/S0026749X06002393 Printed in the United Kingdom
India's UnjinishedJourney
TransformingG rowthi nto Development*
DEEPAK NAYYAR
JawaharlalN ehruU niversityN, ew Delhi
Abstract
This paper situates the economic performance of independent India in historical
perspective to evaluate the past and reflect on the future. It shows that the
turning point in economic growth was circa 1951 in the long twentieth century
and circa 1980 in India since independence. Thus, it is not possible to attribute
the turnaround in India's performance to economic liberalization beginning
1991. During the period 1950-1980, economic growth in India was respectable,
for it was a radical departure from the past and no worse than the performance
of most countries. During the period 1980-2005, economic growth in India was
impressive, indeed much better than in most countries. The real failure in both
these periods was India's inability to transform this growth into well-being for
all its people. And India's unfinished journey in development cannot be complete
as long as poverty, deprivation and exclusion persist. Even so, with correctives, it
should be possible to reach the destination.
This essay is about independent India's unfinished journey in
development. The destination not yet reached is the well-being of its
people. The object is to assess the performance of the economy, since
independence, situated in the wider context of polity and society. In
doing so, the paper evaluates the past and contemplates the future, to
analyse the implications for economic development and social progress
in India. The structure of the discussion is as follows. Section I outlines
the dramatic changes in perceptions about the story of economic
development in India, in retrospect and prospect, to set the stage
*The author can be contacted at: Centre for Economic Studies and Planning, School
of Social Sciences,Jawaharlal Nehru University, New Delhi 1 10o 067, India or by email:
deepaknayyar @ mail.j nu.ac.in
* *This paper is based on the text of the author's Kingsley Martin Lecture at the
University of Cambridge on 7th November 200oo5. The author would like to thank
Amit Bhaduri and Romila Thapar for helpful suggestions.
oo 26-749X/o6/$7.5 0 + $o. 1 o
797
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798 DEEPAK NAYYAR
before the play begins. Section II examines the turning points in India's
economic performance during the twentieth century by situating it
in historical perspective, to provide a comparison with the colonial
era. Section III provides an assessment of economic growth in India
since independence, with reference to the past and compared with the
performance of other countries, to suggest that it was respectable to
begin with and impressive thereafter. Section IV shows that India did
not succeed in transforming this growth into development, for there
was almost no improvement in the living conditions of a large number
of people and a significant proportion of the population. Section V
explores the opportunities and the challenges of bringing about this
transformation in the future. Section VI discusses some essentials that
have been forgotten. Section VII draws together some conclusions.
I. The Context: Retrospect and Prospect
The second half of the twentieth century witnessed remarkable swings
of the pendulum in perceptions about economic development in
independent India. In the early 1950s, India was a path-setter, if
not a role model. And the optimism extended beyond those who had
a dream about India.' For some, its mixed economy was an answer to
the challenge posed by communism in China. For others, its strategy
represented a non-capitalist path to development. For yet others, who
recognized the problems of industrial capitalism, India was on the road
to their ideal of a social democracy and a welfare state.Just 25 years
later, in the mid-197os, perceptions were almost the polar opposite.
India became an exemplar of everything gone wrong.2 For some, the
slow growth and the persistent poverty in the economy represented
failure. For others, the inefficient industrialization was a disaster. For
yet others, the political democracy was unaffordable if not unviable.
Another 25 years later, in the early 2000s, there was a dramatic
change in perceptions once again. The same India came to be seen as
a star performer, if not a role model.3 For some, rapid economic growth
turned the lumbering elephant into a running tiger. For others, the
For a discussion on perceptions about India in the early 1950s, see Nayyar (1998).
SThis strongly critical view of India is articulated by Lal (1998).
3 Such optimism about India is more characteristic of international business and
captured attention in the media following the study on BRICs by Goldman Sachs
(Wilson and Purushothaman, 200oo3). But it is beginning to find mention in the
academic literature on the subject.
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INDIA'S UNFINISHED JOURNEY 799
impressive economic performance combined with strong institutions
which have matured over time in a political democracy mean that
India may be the next Asian giant competing with, if not displacing,
China.4 For yet others, India's economy is the latest poster child to
demonstrate the virtues of markets and openness.
These are, of course, caricatures of perceptions. Even so, these do
reflect the popular mood at each of the junctures in time. It would be
natural to ask: what has changed? In part, the process of development
has changed realities in India over five decades. But, in part, changes in
thinking about development have shaped perceptions over time. And
it needs to be said that perceptions have changed more than realities.
The present juncture, strongly influenced by the dominant ideology
of our times, has not only shaped thinking about the future but has
also reshaped thinking about the past. In caricature form, the orthodox
story about the economy of independent India, half a century later,
runs as follows. The era of planned development, which began life
in 1950, was characterized by misguided, possibly counterproductive,
economic policies. The strategy of industrialization, which protected
domestic industries from foreign competition and led to excessive
state intervention, in the market, was responsible for high costs and
low growth in the economy. The prime culprits were inward-looking
policies, particularly in the sphere of trade, which stifled competition,
and extraordinarily cumbersome licensing with controls on domestic
economic activity that suffocated entrepreneurship and initiative in
the private sector.5 Some blame the first Prime Minister, Jawaharlal
Nehru, who was strongly influenced by the colonial past and the
socialist present, in this error ofjudgment. Others lay the blame at the
door of post-colonial elites who were followers of Fabian socialists in
Britain. And a few blame the political process in which mobilizing the
poor through rhetoric was seen as more important than resolving their
problems through growth.6 In this worldview, which almost ignores
the significant achievements of that era, more than four decades were
simply wasted. For them, the economic liberalization in the early
199os, which reduced the role of the state to rely more on the market,
dismantled controls to rely more on prices, cut back on the public
sector to rely more on the private sector and increased the degree of
" See, for example, Khanna and Huang (2003).
5 Bhagwati and Desai (1970) developed this view in their elaborate critique of the
industrialization experience in India.
G These perceptions, which border on rhetoric, are summed up nicely by DeLong
(2003).
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800 DEEPAK NAYYAR
openness of the economy at a rapid pace, represented a new dawn.
It is almost as if the economy began life in 1991. And the ideologues
are convinced that the economic reforms of the early 1990s unleashed
economic growth and led to the superb economic performance that is
now much admired.'
This worldview is also beginning to shape thinking about the future.
It has led to many aspirations for India 2025. The incorrigible
optimists hope for a developed India that has caught up with industrial
societies. Political leaders aspire for recognition as a nuclear power
in the P-5 club, membership of the Security Council in the United
Nations, and a seat at the dinner table with the G-8. Their ultimate
aspiration is India as a superpower in the world. The corporate elite
hope for dynamic entrepreneurship, technological capabilities, and
wealth creation. Their ultimate aspiration is India as a lead player in
the global market with its own transnational firms. The pink pages
of our newspapers and the electronic media have similar, even if
somewhat more nuanced, hopes for India two decades hence. Such
beliefs about India in the world stem primarily from aspirations about
the economy in 2025: that it would become the third largest economy
in the world in terms of national income at purchasing power parity;
that it would become a middle-income country in terms of per capita
income; and that poverty would be banished from the republic. And if
China is the world's factory, India would be the world's office.
In my view, this belief system about the story of economic
development in independent India is open to serious question for two
reasons. First, it represents a misreading, if not a misinterpretation of
the past. Second, it rests on over-simplified thinking about the future.
II. The Long Twentieth Century
In seeking to establish turning points in the performance of the
economy, or structural breaks in the pace of economic growth, most
studies focus on the period since 195o. This is not quite appropriate.
Indeed, any meaningful assessment of economic performance in
independent India must situate it in a long-term historical perspective
to provide at least some comparison with the colonial era. Therefore,
it would be logical to consider the performance of the economy before
and after independence during the twentieth century.
7 India's impressive economic performance is attributed to the economic reforms of
the early 1990s by several economists. See, in particular, Ahluwalia (200oo2), Srinivasan
and Tendulkar (200oo3), and Panagariya (200oo4).
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INDIA'S UNFINISHED JOURNEY 801
A 50000- y = 1629e003x
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Figure 1. (A) Trends in National Income: India: 1900-01 to 1946-47 (in Rupees
million at 1938-39 prices). (B) Trends in Per Capita Income: India: 1900-01 to
1946-47 (in Rupees at 1938-39 prices).
Source: Sivasubramonian (2000).
In this historical perspective, available evidence shows that the
turning point came in the early 1950s. The trends in national income
and per capita income, at constant prices, during the period from
1900-01 to 1946-47 are outlined in Figure 1. It reveals that during
the first half of the twentieth century, there was a near-stagnation in
per capita income while the growth in national income was minimal.
The trends in GDP and GDP per capita, at constant prices, during the
period 1950-51 to 2004-2005 are outlined in Figure 2. The contrast
is clear. There was a steady growth in both GDP and GDP per capita
during the second half of the twentieth century. This is confirmed by
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802 DEEPAK NAYYAR
A 180000000
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Year
Figure 2. (A) Trends in GDP: India: 1950-51 to 2004-05 (at factor cost in Rupees
million at 1993-94 prices). (B) Trends in GDP Per Capita: India: 1950-51 to 2004-
05 (at factor cost in Rupees at 1993-94 prices).
Source: CSO and EPW Research Foundation, National Accounts Statistics of India.
Table i which sets out average annual rates of growth in national
income and per capita income during each of the two periods. There
are two sets of growth rates for the period 19goo00-01 to 1946-47 based
on two different estimates of national income. The Sivasubramonian
estimates suggest that, in real terms, the growth in national income
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INDIA'S UNFINISHED JOURNEY 803
TABLE 1
Rates ofEconomic Growth in India during the Twentieth Century (percentp er annum)
Sivasubramonian Estimates Maddison Estimates
A. 1900-01 to 1946-47
Primary Sector 0o.4 o.8
SecondaryS ector 1.7 1.1
Tertiary Sector 1.7 o.8
National Income 1.o 0.8
Per Capita Income 0.2 0.04
B. 1950-51 to 2004-05
Primary Sector 2.5
Secondary Sector
5.3
Tertiary Sector
GDPT otal 5.4 4.2
GDP per capita 2.1
Note: The average annual rates of growth, sectoral and aggregate, for the period
1950-51 to 2004-05, have been calculated by fitting a semi-log linear regression
equation Ln Y = a + bt and estimating the values of b.
SourcesF: or 1900-ol to 1946-47, Sivasubramonian(2 ooo) and Maddison( 1985).
For 1950-51 to 2004-05, CSO and EPW ResearchF oundationN, ationaAl ccounts
Statisticos fIndia.
was 1 per cent per annum whereas the growth in per capita income
was o.2 per cent per annum. The Maddison estimates suggest that the
growth in national income was o.8 per cent per annum whereas the
growth in per capita income was almost negligible at 0o.o04 per cent
per annum. The growth rates for the period from 1950-51 to 2004-
05 provide a sharp contrast. In real terms, the growth in GDP was
4.2 per cent per annum while the growth in per capita income
was 2.1 per cent per annum. The step-up in sectoral growth rates
was just as substantial. The magnitude of the increase over the entire
period is also revealing. Between 1900oo-o01 and 1946-47, at constant
1938-39 prices, national income for the undivided India increased
from Rs. 15.4 billion to Rs.
24.-9
billion by 6o per cent, whereas per
capita income increased from Rs. 54 to Rs. 6o by a mere 11 per
cent.8 Between 1950-51 and 2004-05, at constant 1993-94 prices,
GDP increased by 1ooo per cent, while GDP per capita increased
by 250 per cent.9 For those who are not persuaded by the trends in
graphs, the step-up in growth rates, or the proportionate increases in
8 Cf. Sivasubramonian (200ooo), pp. 369-371.
9 Between 1950-51 and 200oo4-05, GDP at factor cost in 1993-94 prices increased
from Rs. 1405 billion to Rs. 15294 billion while GDP per capita increased from
Rs. 3913 to Rs. 14018.
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804 DEEPAK NAYYAR
income, there is conclusive evidence provided by statistical analysis.
There is a complete time series for national income aggregates, GDP
at constant 1948-49 prices, for the entire period 1900oo-o to 1999-
2ooo. Econometric analysis based on this data set shows that the most
important structural break, which is statistically the most significant,
for the growth rate in national income is 1951-52.10
Interestingly enough, even if we focus on the performance of the
economy in India since independence, it is clear that the turning point
in economic growth is circa 1980, more than a decade before economic
liberalization began in 1991.
Figure 3 outlines the trends in GDP and GDP per capita, at constant
prices, in India during the period from 1950-51 to 2004-05. In
doing so, it makes a distinction between two sub-periods 1950-51
to 1979-80 and 1980-81 to 2004-05. The break in the trend is
clearly discernible in 1980-81 with a marked acceleration in economic
growth thereafter. This is also borne out by Figure 4, which outlines
trends in GDP and GDP per capita, at constant prices, during the
period from 1980-81 to 2004-05. In doing so, it makes a distinction
between two sub-periods: 1980-81 to 199o-91 and 1991-92 to 2004-
05. The picture that emerges is clear enough. Almost the same trend
continues, without any break, throughout the period. The evidence
presented in Table 2, on average annual rates of growth in GDP
and GDP per capita, for each of these sub-periods, provides further
confirmation. During the period from 1950-51 to 1979-80, growth in
GDP was 3-5 per cent per annum while growth in GDP per capita was
1.4 per cent per annum. During the period from 1980-81 to 2004-
05, growth in GDP was 5.6 per cent per annum while growth in GDP
per capita was 3.6 per cent per annum. The sharp step-up in growth
rates, not only aggregate but also sectoral, suggests that 1980-81 was
the turning point. This conclusion is reinforced by a comparison of
growth rates, aggregate and sectoral, during the sub-periods 1980-81
to 1990--91 and 1991-92 to 2004-05. The growth rates were almost
"'1S0 ee Hatekar and Dongre (2005). The authors situate the debate on structural
breaks in India's economic growth in a longer term perspective by considering the
period from 1900oo-191 to i1999-2000. This exercise is based on the Sivasubramonian
estimates of national income at 1948-49 prices. It needs to be said that the time-series
before 1947, which relates to undivided India, is not strictly comparable with that after
1947, which relates to partitioned India. In addition, there are also some definitional
differences in national income accounts for India before and after independence. Even
so, the statistical analysis carried out by Hatekar and Dongre is based on plausible
assumptions which minimize the problems of comparability and provide the basis for
robust conclusions.
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INDIA'S UNFINISHED JOURNEY 805
A 18000000-
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y = 1000000e 035x y = 693720e0.0558x
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Year
Figure 3. Two Phases of Economic Growth in India: 1950-51 to 1979-80 and
198o-81 to 2004-05. (A) GDP (at factor cost in Rupees million at 1993-94
prices). (B) GDP Per Capita (at factor cost in Rupees at 1993-94 prices).
Source: CSO and EPW Research Foundation, National Accounts Statistics ofIndia.
the same. In fact, during the period from 1991-92 to 2004-05, growth
in the primary sector and the secondary sector was somewhat slower
while growth in the tertiary sector was somewhat faster in comparison
with the period from 1980-81 to 199o-91. Growth in GDP was
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806 DEEPAK NAYYAR
A 18000000
16000000 y = 4000000e?o537x
14000000 -
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Year
Figure 4. (A) Trends in India's GDP: 1980-81 to 1990-91 and 1991-92 to 2004-05
(at factor cost in Rupees million at 1993-94 prices). (B) Trends in India's GDP Per
Capita: 1980-81 to 199o-g1 and 1991-92 to 2004-05 (at factor cost in Rupees at
1993-94 prices).
Source: CSO, National Accounts Statistics ofIndia.
5.9 per cent per annum as compared with 5.4 per cent per annum,
while growth in GDP per capita was 4.1 per cent per annum as
compared with 3.2 per cent per annum. There was some acceleration
in the rate of growth of GDP per capita which was largely attributable
to the slow-down in population growth. For those not persuaded by
trends in graphs or comparison of growth rates, statistical analysis
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INDIA'S UNFINISHED JOURNEY 807
TABLE 2
Sectoral and Aggregate Economic Growth in India since Independence( percentp er annum)
1950-51 to 1980-81 to 1980-81 to 1991-92 to
Sector/Period 1979-80 2004-05 1990-91 2004-05
Primary Sector 2.2 2.9 3.1 2.5
Secondary Sector 5-3 6.1 6.7 6.o
Tertiary Sector 4.5 7.1 6.6 7.8
GDP Total 3.5 5.6 5-4 5.9
GDP per capita 1.4 3.6 3.2 4.1
Notes: (a) This table is based on data for GDP at factor cost and at 1993-94 prices.
(b) The primary sector includes agriculture, forestry and fishing. The secondary
sector includes: mining and quarrying; manufacturing; electricity, gas and water; and
construction. The tertiary sector includes: trade, hotels and restaurants; transport,
storage and communication; financing, insurance, real estate and business services,
and community, social and personal services.
(c) The average annual rates of growth, sectoral and aggregate, for each of the
selected periods, have been calculated by fitting a semi-log linear regression equation
LnY = a + bt and estimating the values of b.
Source: CSO and EPW Research Foundation, National Accounts Statistics ofIndia.
should be conclusive. And there is now some literature on this
subject." Econometric analysis of time series data on GDP and
GDP per capita for the period from the early 1950S to the early
2ooos establishes that the structural break in economic growth since
independence, which is statistically the most significant, occurs around
1980.12
There are two conclusions that emerge from the available evidence
and the preceding discussion. First, if we consider the twentieth
century in its entirety, the turning point in economic performance,
or the structural break in economic growth, is 1951-52. Second,
if we consider India since independence, during the second half of
the twentieth century, the turning point in economic performance,
or structural break in economic growth, is 1980-81. In either case,
1991-92 is not a turning point. Therefore, it is simply not possible to
attribute India's growth performance to economic liberalization even
on apost hoc ergopropterh oc basis. It is also clear that the turning point in
the early 1950s was much more significant than the structural break
" Indeed, there are several papers that seek to establish structural breaks in
economic growth in India since independence: DeLong (2003), Wallack (2oo3),
Rodrik and Subramanian (200oo4), Sinha and Tejani (200oo4) and Virmani (200oo4).
12 See Wallack (200oo3) and Rodrik and Subramanian (200oo4). See also DeLong
(2003) and Sinha and Tejani (2004).
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808 DEEPAK NAYYAR
during the early 1980s. This proposition is validated by econometric
analysis.'3 It is also worth noting that the proportionate change in
growth rates, both aggregate and sectoral, was much larger circa 1950
than it was circa 1980.
It needs to be stressed that this turning point in the early 1950s
was not just statistical, nor was it simply about growth rates. It was
far more significant for the polity and economy of independent India
in a substantive sense.
The conception and the birth of political democracy in independent
India was unique in its wider historical context.14 For democracy did
not follow but preceded capitalist industrialization and development.
What is more, democracy came to India neither as a response to an
absolutist state nor as the realization of an individualist conception of
society. In each of these attributes, it provided a sharp contrast with
the experience elsewhere, particularly Europe. In fact, it was not even
an obvious outcome of the nationalist movement. The struggle for
independence was much more about autonomous space for the nation
than about freedom for the individual. Indeed, the Gandhian notion
of a just state was premised on the idea that the collective interest
must take precedence over individual interests. Yet, the Constitution
adopted by independent India created a democratic republic and
pledged to secure justice, liberty, equality and fraternity for all its
citizens. Universal adult franchise was provided at one stroke. The
republicanism of the Western world was perhaps the role model. This
was, in a sense, India invented. A liberal democracy was constructed
by an enlightened elite in accordance with its conception of a modern
nation state. It was democracy from above provided to the people. And
not democracy from below claimed by the people. This is perhaps an
over-simplified view. The reality was obviously more complex. For the
nationalist movement meant a dialectical relationship between the
provision from above and the claim from below. In this construct,
the state was the essential mediator. It had to perform a critical
role in reconciling the conflict between market economy and political
economy as also mediating between economic development and social
needs.
In this milieu, the strategy of economic development was shaped
by the colonial past and the nationalist present. For one, there was a
conscious attempt to limit the degree of openness and of integration
13 Cf. Hatekar and Dongre (200o5).
14 For a more detailed discussion, see Nayyar (1998).
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INDIA'S UNFINISHED JOURNEY 809
with the world economy, in pursuit of a more autonomous path to
development. For another, the state was assigned a strategic role
in development because the market, by itself, was not perceived as
sufficient to meet the aspirations of a late-comer to industrialization.
Both represented points of departure from the colonial era which
was characterized by open economies and unregulated markets. But
this approach also represented a consensus in thinking about the
most appropriate strategy for industrialization. It was, in fact, the
development consensus of the times. The objectives were clear enough:
to catch up with the industrialized world and to improve the living
conditions of the people.
It should be obvious that the economic liberalization which began
in the early 199os did not match the significance of the changes in
the realm of politics and the sphere of economics in the early 1950s.
In fact, the changes that were introduced in the early 199os were
concerned with economic policies and did not even touch upon the
political domain. In the wider context of the economy, the changes
were significant.'5 And it is worth highlighting three dimensions of
the change. First, economic growth combined with economic efficiency
became the explicit objective. The earlier concern about preventing
a concentration of economic power or attempting a re-distribution
of wealth, never more than rhetoric, was explicitly abandoned. The
objective of bringing about a reduction in poverty and inequality was
not set aside but such concerns about equity were subsumed in the
pursuit of growth on the premise that it is both necessary and sufficient
for an improvement in the living conditions of people. Second, there
was a conscious decision to substantively reduce the role of the state
in the process of economic development and rely far more on the
market. The government no longer sought to guide the allocation
of scarce investible resources, whether directly through industrial
licensing or indirectly through intervention in the financial sector,
and left this role to the market. Third, the degree of openness of the
economy was increased significantly and at a rapid pace. The object
was not simply to enforce a cost-discipline on the supply side through
international competition, but also to narrow the difference between
domestic and world prices. Foreign capital and foreign technology
were expected to perform a strategic role in the process of integration
with the world economy. These changes in policies did represent a
15 This issue is discussed, at some length, in Nayyar (1996). See also Bhaduri and
Nayyar (1996).
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810 DEEPAK NAYYAR
radical departure from the past. But these were changes in economic
policies. In contrast, the regime change during the early 1950s was
wide-ranging and far-reaching. It was in part about policies but only
in part. It was about establishing institutions, not only economic but
also social and political. It was about creating the initial conditions for
development in a country that was a latecomer to industrialization.
It was about the pursuit of national development objectives in a long
term perspective.
III. Phases of Growth: An Assessment
Growth matters because it is cumulative. If GDP growth, in real terms,
is 3-5 per cent per annum income doubles over 20 years, if it is 5 per
cent per annum income doubles over 14 years, if it is 7 per cent per
annum income doubles over 1o years, and if it is 1o per cent per annum
income doubles over 7 years. Of course, the complexity of economic
growth cannot be reduced to a simple arithmetic of compound growth
rates, for there is nothing automatic about growth. In retrospect,
however, the cumulative impact of growth on output is a fact.
There are two discernible phases of economic growth in India since
independence: 1950 to 1980 and 1980 to 2005. It is worth providing
an assessment of economic performance during these periods. An
assessment of performance, in terms of economic growth, should
address two questions. First, how does this performance compare with
performance in the past? Second, how does this performance compare
with the performance of other countries?
It is clear that the pace of economic growth during the period from
1950 to 1980 constituted a radical departure from the colonial past.
For the period 1900oo to 1947, there are two sets of growth rates
based on alternative estimates of national income. If the economy
had continued to grow at the rate based on the Sivasubramonian
estimates, national income would have doubled in 70 years whereas
per capita income would have doubled in 350 years. If the economy had
continued to grow at the lower rate, based on the Maddison estimates,
national income would have doubled in 87.5 years whereas per capita
income would have doubled in 1750 years. The reality in independent
India turned out to be different. The growth rates achieved during the
period from 1950 to 1980 meant that GDP doubled in 20o years while
GDP per capita would have doubled in 50 years. In fact, between 1950
and 1980, GDP multiplied by 2.86 while GDP per capita multiplied
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INDIA'S UNFINISHED JOURNEY 811
by 1.5.16 The latter was not as modest as it seems because, during this
phase, the rate of population growth was more than 2 per cent per
annum.
Obviously, this growth was impressive with reference to the nearstagnation
during the colonial era. It was also much better than the
performance of the now industrialized countries at comparable stages
of their development.'7 However, this growth was not enough to meet
the needs of a country where the initial level of income was so low. For
this reason, perhaps, it was described as the Hindu rate ofgrowth by Raj
Krishna. This phrase, which became larger than life with the passage
of time, meant different things to different people. For some, it meant
a performance that was disappointing but not bad. For others, it meant
an acceptance of the performance in a spirit of contentment without
an effort to change. Interestingly enough, the phrase which was used
to describe a reality was used by a few to deride the same reality. But
this was not warranted.
It has been shown that, during this period, India's performance in
terms of economic growth was about the same as in most countries
in the world.'8 It was certainly not as good as East Asia. But it was
definitely not as bad as Africa. It was average. In fact, the actual rate
of growth of output per worker in India was very close to the average
across the world. What is more, the rate of growth predicted for India,
based on its initial output per worker, its share of investment in GDP
and its population growth rate, was also very close to the world's
average.19 Is it possible to reconcile this conclusion with the view
that India did badly in this era? There are two possible explanations:
either that inefficiencies of the regime in India were paralleled by
similar shortcomings in most countries of the world, or that without its
misguided policies India would have experienced a miracle in growth.20
Neither of these explanations is plausible. It would seem that the
16 Between 1950-51 and 1980-81, GDP at factor cost in 1993-94 prices increased
from Rs. 1405 billion to Rs. 4011 billion while GDP per capita increased from
Rs. 3913 to Rs. 5908.
17 See Bairoch (1993) and Maddison (1995). See also Chang (2002).
18 For a lucid analysis of, with evidence on, this proposition, see DeLong (2003).
19T his is establishedb y DeLong( 2003).
20 These twop ossiblee xplanationsa re suggestedb y DeLong( 2003), who also puts
forward a third explanation which is somewhat more plausible. It suggests that if
there was a failure of economic policies it was in large part offset by the success at
mobilizing resources which raised levels of saving and investment in the economy. In
other words, even if resource-allocation or resource-utilisation constrained growth,
resource-mobilization fostered growth. This macroeconomic perspective, somewhat
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812 DEEPAK NAYYAR
story that depicts an average India is much more plausible than the
caricature which portrays a failed India.
It is clear that there was a sharp acceleration in the rate of growth
circa 1980. It went almost unnoticed but for a few of us. And India grew
almost by stealth. It came into the limelight in the early 2ooos. Some
analysts, as also many casual observers, attributed this performance
to economic liberalization which began in the early 1990s.21 However,
discerning scholars recognized the reality that the structural break,
which was a second turning point in the economic performance of
independent India, occurred around 1980.22
In comparison with the preceding 30 years, there was a distinct
step-up in rates of growth for GDP and GDP per capita. The growth
rates achieved on an average, during the period from 1980 to 2005,
meant that GDP doubled in 12.5 years where GDP per capita doubled
in 2o years. In fact, between 1980-81 and 2004-05, GDP multiplied
by 3.81 while GDP per capita multiplied by 2.37.23 This growth was
impressive, not only in comparison with the past in India but also
in comparison with the performance of most countries in the world.
Indeed, in terms of growth, India performed much better than the
industrialized countries which experienced a slow-down in growth,
the transition economies which did badly, and much of the developing
world. And it was only East Asia, particularly China, which performed
better.
There is an emerging literature on the subject which seeks to analyse
this rapid economic growth in India that has been sustained for
25 years. Interestingly enough, the search for explanations is
competitive. And some hypotheses are driven by an ideological
worldview. It would be impossible to provide an exhaustive analysis.
It would also mean too much of a digression. Nevertheless, some
explanations deserve mention.
The earliest explanation suggested that the expansion of aggregate
demand, mostly through a rapid increase in public expenditure on
different from the orthodox view, is developed elsewhere by the author (Nayyar, 1994
and 1997).
9' See, for example, Ahluwalia (2002) and Srinivasan and Tendulkar (2003).
22 See, in particular, DeLong (2003) and Rodrik and Subramanian (2004), who
highlighted the fact that the structural break in economic growth in India since
independence occurred around 1980 and not in 1991. 23 Between 1980-81 and 2004-o5, GDP at factor cost in 1993-94 prices increased
from Rs. 4011 billion to Rs. 15294 billion while GDP per capita increased from
Rs. 5908 to Rs. 14018.
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INDIA'S UNFINISHED JOURNEY 813
investment and consumption, was the major factor underlying rapid
economic growth during the 1980s.24 This is widely accepted. Even
so, orthodoxy argues that this growth supported by the expansionary
macroeconomic policies was not sustainable and culminated in the
crisis of 1991.25 But this view is not quite correct. In so far as
the increase in fiscal deficits did not translate into a corresponding
increase in current account deficits, the increase in aggregate demand
would, in the presence of excess capacity and unemployment, have
led to an increase in output. Such an increase in capacity utilization
would also have raised the productivity of investment which is reflected
in significant productivity growth during the 1980s.26 And even if
the macroeconomic crisis of 1991 was induced in large part by the
fiscal imbalances, the expansion in aggregate demand does provide a
plausible expansion for the rapid growth during the 198os.
The most fashionable explanation, advocated by orthodoxy, is that
the rapid economic growth in India is largely attributable to economic
reforms. There is, however, a fly in the ointment. The turning point
in growth was 1980, whereas economic liberalization began in 1991.
Confronted with this reality, orthodoxy relies on two explanations.
First, it argues that the economic growth of the 198os was not
sustainable.27 But there was growth. Second, it argues that the growth
could have been unleashed by the mild doses of industrial deregulation
and trade liberalization.28 But this process started only in the mid-
198os. Therefore, such hypotheses which seek to explain the step-up
in economic growth entirely in terms of economic reforms are simply
not plausible.
There is yet another explanation.29 It argues that there was an
attitudinal change on the part of government in the early 1980s,
which signalled a shift in favour of the private sector although this was
24 See Nayyar (1994) and Joshi and Little (1994).
25 Cf. Ahluwalia (2oo2), Srinivasan and Tendulkar (2003), and Panagariya (2004). 26 Rodrik and Subramanian (2oo4) develop this argument to question the orthodox
view, but conclude that the increase in capacity utilization was not enough to explain
the actual productivity increase in the period since 198o.
27 See Ahluwalia (20o02) and Srinivasan and Tendulkar (2003).
28 See Panagariya (2004).Joshi and Little (1994), on the other hand, believe that
these changes were more than trivial but were piecemeal and limited. Hence they do
not attribute rapid growth to this mild dose of reforms. It is also worth noting that
Rodrik and Subramanian (2004) do not accept this as a possible explanation for the
step-up in growth during the 1980s.
29 This is the main hypothesis put forward by Rodrik and Subramanian (200oo4),
who argue that none of the other explanations are plausible or convincing.
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814 DEEPAK NAYYAR
not quite reflected in actual policy changes. The limited policy changes
that were introduced were pro-business rather than pro-competition or
pro-market so that the benefit accrued to existing players rather than
new entrants. Even these small changes elicited a large productivity
response because India was far away from its production possibility
frontier. And existing manufacturing capacities established earlier
performed a critical role in shaping responses. This explanation is
both interesting and perceptive, although it is somewhat far-fetched.
And there are some obvious questions that arise. Why did the change in
attitudes alone spur growth starting 1980 even though the mild policy
changes were introduced in the mid-198os? Why did the economic
liberalization of the early 199os not produce a similar response in
terms of productivity increase and output growth because, even in
1991, India was somewhere inside its production possibility frontier?
In my judgment, the search for a single explanation which seeks to
exclude, or to deny, competing explanations is futile. There is, perhaps,
the bit of truth in every nook. Hence, a convincing explanation must
recognize that the acceleration in economic growth, circa 1980, was
attributable to several factors. First, expansionary macroeconomic
policies which led to an increase in aggregate demand did stimulate
an increase in the rate of growth of output.30 Second, beginning in
the late 1970s, there was a significant increase in the investment-
GDP ratio which was sustained through the 198os.31 Unless there was
a decline in the productivity of investment, which was not the case,
this would also have contributed to the step-up in economic growth
during the 1980s. Third, starting in the late 1970s, there was also a
significant increase in public investment which was sustained through
the 198os.32 Obviously, this contributed to the increase in aggregate
30 In fact, this proposition is accepted by Ahluwalia (2oo2, p. 67), as also Srinivasan
and Tendulkar (2003, p. 9), even if they argue that the growth was not sustainable.
31 Gross capital formation as a proportion of GDP at current prices rose from 18.7
per cent in 198o-81 to 24.1 per cent in i99o-91. Adjusted for errors and omissions,
this proportion rose from 20.3 per cent in 1980-81 to 26.3 per cent in 1990-91. See
National Accounts Statistics of India 1950-51 to 2002-03, EPW Research Foundation,
Mumbai, 2004.
32 Gross capital formation in the public sector as a proportion of GDP at current
prices rose from an average level of 7.7 per cent during the period 1971-72 to 1975-
76, to 9.1 per cent during 1976-77 to i98o-8i and 1o.3 per cent during 1981-82
to 1985-86. This average level was 9.8 per cent during 1986-87 to 199o-91. See
National Accounts Statistics of India, 1950-5I to 2002-03, EPW Research Foundation,
Mumbai, 20oo4. If the effects of public investment, particularly in infrastructure, are
lagged, by say 5 years, the surge in public investment does provide an important part
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INDIA'S UNFINISHED JOURNEY 815
demand. However, in so far as such public investment created new
infrastructure or improved existing infrastructure, it could have
stimulated growth in output by alleviating supply constraints. Fourth,
trade liberalization beginning in the late 197os, combined with some
deregulation in industrial policies introduced in the early 19g8os, also
probably contributed to productivity increase and economic growth.33
In particular, liberalization of the regime for the import of capital
goods and broad-banding which reduced industrial licensing, could
have played a contributory role.
It is also misleading, perhaps, to search for explanations which
focus on observed changes circa 1980 that might explain the turning
point in economic growth. In so far as outcomes are shaped by initial
conditions, the cumulative impact of economic policies or public
actions over the preceding 30 years possibly played an important
role in the turnaround.34 Institutional capacities were created. The
social institutions and the legal framework for a market economy
were put in place. A system of higher education was developed.
Entrepreneurial talents and managerial capabilities were fostered.
Science and technology were accorded a priority. The capital goods
sector was established. Much of this did not exist in colonial India.
But it was in place by 1980 and probably provided the essential
foundations. In other words, the second turning point in the economic
performance of independent India may not have been possible starting
from scratch.
This wonderful story about economic growth in India is not quite a
fairy tale. And everybody does not live happily everafter. Both phases of
of the explanation for economic growth in India during the 198os. Statistical analysis
by Rodrik and Subramanian (2004) confirms this proposition, who argue that the
contribution of public investment to economic growth would have been small if there
were no time lags in its effects.
33 The Rodrik and Subramanian (2004) hypothesis, which is an interesting
variation around this theme, could, perhaps, constitute a part of the explanation.
The problem is their claim that it is the only possible explanation. Similarly, the
Panagariya (2004) conclusion could provide a part of the explanation but his claim in
terms of cause and effect is exaggerated. The difficulty is that the step-up in economic
growth occurred about 5 years before the much cited economic reforms of the mid-
1980s. But there were some earlier piecemeal changes in trade policies and industrial
policies, such as the liberalization in the regime for the import of capital goods, which
could also have contributed to growth, in conjunction with the other factors outlined
in this paragraph. In fact, Sinha and Tejani (2004) suggest that imported capital
goods probably contributed to increases in the productivity of labour, hence economic
growth, during the 1980s.
"' For a discussion, see Nayyar (2oo4).
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816 DEEPAK NAYYAR
economic growth had something in common. It is essential to recognize
that economic growth in independent India, respectable in the first
phase and impressive in the second phase, was not transformed into
development.
IV. The Failure in the Past
There is a vast literature on economic development which is rich
in terms of range and depth. Yet, there is not enough clarity about
the meaning of development. There are many different views. And
perceptions have changed over time. In the early 1950s, conventional
thinking identified development with growth in national income
or income per capita. The earlier literature emphasized economic
growth and capital accumulation at a macro level. The contemporary
literature emphasizes economic efficiency and productivity increases
at a micro level. Industrialization has always been seen as an essential
attribute of development. The emphasis has simply shifted from
the pace of industrialization to the efficiency of industrialization.
From time to time, dissenting voices questioned conventional wisdom
to suggest other indicators of development, but these were largely
ignored by mainstream economics. And, even 50 years later, economic
growth, or increases in per capita income remain the most important
measure of development.
The early 197os witnessed the emergence of a literature that
suggested other indicators of development such as a reduction in
poverty, inequality and unemployment, which would capture changes
in the quality of life.3" This thinking moved further. Development, it
was argued, must bring about an improvement in the living conditions
of people. It should, therefore, ensure the provision of basic human
needs for all: not just food and clothing but also shelter, health care and
education.36 This simple but powerful proposition is often forgotten
in the conventional concerns of economics. Such thinking culminated
in writings on, and an index of, human development.37
In the late 199os, Amartya Sen provided the broadest conception of
development as freedom: a process of expanding real freedoms that
"5 See, for example, Baster (1972) and Seers (1972).
36 Cf. Streeten (1981).
37S ee Ananda nd Sen (1994). See also, UNDP,H umanD evelopmeRnet portv,a rious
issues.
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INDIA'S UNFINISHED JOURNEY 817
TABLE 3
Selected Indicators of Social Development in India
1951 1981 2001
Life Expectancy at birth in years
Male 32 54 64
Female 32 55 67
Infant Mortality Rate per 1ooo births 146 110 66
Literacy Rate percentage of population 18 44 65
Adult Literacy percentage of population 28 41 61
in the age-group 15 years and above
Source: Census ofIndia I95I, I98i and 2oo001.
people enjoy for their economic well-being, social opportunities and
political rights.38 Freedoms, then, are not just the primary ends of
development (constitutive), they are also among its principal means
(instrumental). And there are strong interactions that link different
freedoms with one another. Political freedoms help promote economic
security. Social opportunities facilitate economic participation. And so
on.
It is essential, then, to make a distinction between means and
ends. Economic growth and economic efficiency, or for that matter
industrialization, are means. It is development which is an end. The
purpose of development, after all, is to create a milieu that enables
people, ordinary people, to lead a good life. Development must, therefore,
provide all men and women the rights, the opportunities and the
capabilities they need to exercise their own choice for a decent life.
In conventional terms, India has made enormous economic progress
during the second half of the twentieth century. Over the past 55 years,
GDP has multiplied by 10.9 while per capita income has multiplied by
3.6. India's growth performance was respectable in the period 1950-
1980 and impressive in the period 1980-2005. Of course, in both
phases, it could have been better. But counterfactuals serve little
purpose even in academic debate. Nevertheless, it is clear that this
growth was not enough in relation to India's needs. What is more, it
did not quite match the performance of the stunning success stories
in East Asia particularly China. The real failure, however, was that
India was unable to transform its growth into development.
Selected indicators of social development, set out in Table 3, suggest
that India has made significant progress in the five decades from
38 Sen (1999).
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818 DEEPAK NAYYAR
1951 to 2001. Life expectancy at birth has more than doubled from
32 years to 65 years. Infant mortality rates have dropped by more
than half from 146 to 66 per thousand births. The literacy rate has
more than trebled from 18 per cent to 65 percent of the population.
The adult literacy rate has more than doubled from 28 per cent to
61 per cent. There is also evidence of significant progress in health
care, housing and education. The proportion of the population that has
access to electricity, drinking water and sanitation facilities is notably
higher. This progress has been steady, even if slow, in both phases
1951 to1981 and 1981 to 2001. Yet, much remains to be done and,
in terms of social development, India has miles to go.
It is important to ask: what was the impact of economic growth and
social progress, during the second half of the twentieth century, on
the poor? The level of per capita income is only an arithmetic mean.
Social indicators are also statistical averages. And neither captures
the well-being of the poor. In this context, it is worth considering the
available evidence on absolute poverty in India. It suggests that there
was no change for the better during the first two decades from the early
1950s to the early 1970s. In fact, the proportion of the population
living below the poverty line remained high. It was 45-3 per cent
in 1951-52, 47.4 per cent in 1955-56, 45-3 per cent in 1960-61,
56.8 per cent in 1965-66 and 52.9 per cent in 1970-71.39 Indeed, in
some years, during the late 1950s and the late 196os, the incidence of
poverty was even higher when poor monsoons depressed agricultural
output and incomes.
This was a failure which had economic and political consequences.40
In the sphere of economics, the response was two-fold. First, there
was a strong, new emphasis on agriculture. The new strategy for
agricultural development, which culminated in the green revolution,
was motivated by the imperative of increasing the output of foodgrains.
This quest for food security was driven, in part, by a concern that the
nation could not continue its ship-to-mouth existence and, in part,
by a concern that if there was a shortage of food it was the poor
who went without. Second, poverty alleviation programmes began life,
albeit on a modest scale. Most of these programmes sought to create
employment for the poor, while some sought to provide them with
assets for self-employment. In the realm of politics, it was recognized
that the poor who had not seen any improvement in their living
39 See Dev (1997).
4o For a more detailed discussion, see Nayyar (1998).
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INDIA'S UNFINISHED JOURNEY 819
TABLE 4
Incidence ofPoverty in India 9 73- 74 to _999- 2ooo (estimates based on quinquennial rounds)
Year 1973-74 1977-78 1983 1987-88 1993-94 1999-2000
Proportion below the poverty line (in percentages)
Rural 56.4 53-1 45.7 39-1 37-3 27.1
Urban 49.0 45.2 40.8 38.2 32-4 23.6
Total 54-9 51-3 44-5 38-9 36.0 26.1
Number below the poverty line (in millions)
Rural 261.3 264-4 252.1 231-9 244-1 193.2
Urban 6o.o 64.6 70.9 75-1 76.3 67.0
Total 321.3 329.o0 323.o0 307.o 320o.4 260.2
Source: National Sample Survey and Planning Commission.
conditions, did exercise their right to vote in a political democracy. And
populist rhetoric was borne in an endeavour to woo the people. The
slogan Garibi Hatao, even if it was mere words, captured the popular
imagination. Rapid growth in the agricultural sector, combined with
the spread of anti-poverty programmes, did make a dent on the
problem.
The data base for poverty estimates is provided by National Sample
Survey tables on consumer expenditure, which are now compiled only
on a quinquennial basis. Estimates of the proportion of the population
and the number of people living below the poverty line, during the
period 1973-74 to 1999-2ooo, are presented in Table 4. It shows
that the incidence of absolute poverty in both rural and urban India
registered a steady and continuous decline from the early 1970s to the
late 199os. The proportion of the population living below the poverty
line dropped from 54.9 per cent in 1973-74 to 51-3 per cent in 1977-
78, 44.5 per cent in 1983, 38.9 per cent in 1987-88, 36 per cent in
1993-94 and 26.1 in 1999-2ooo. The estimates for 1999-2ooo are
a point of contention. And it has been convincingly argued that the
incidence of poverty in 1999-2oo00 was significantly higher than the
26.1 per cent of the population suggested by official estimates.41 If
that is correct, the pace of the reduction in poverty may have slowed
down during the late 1990s. Even so, there can be no doubt that the
last quarter of the twentieth century witnessed a significant reduction
in the incidence of poverty in India. This reduction in poverty, to begin
41 Sen and Himanshu (200oo4). See also, Deaton and Kozel (200oo5) in which there
are several essays, with different views, on trends in poverty in India during the 1990s.
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820 DEEPAK NAYYAR
with, during the 197os, was attributable to the spread of the green
revolution and increased public expenditure on infrastructure as also
social sectors, which created employment opportunities for the poor.
The decline in poverty continued, at a faster pace through the 198os
and the 199os. This was attributable, in part, to rapid economic growth
and, in part, to the spread and the reach of anti-poverty programmes.
Yet, this was not enough, for at least one-fourth, and possibly one-third,
of India's one billion people still living in absolute poverty. What is
more, sustainable livelihoods for the poor remain a distant dream.
At the turn of the century, more than 50 years after independence
from colonial rule, India is unable to meet the basic needs of hundreds
of millions of citizens. It is estimated that at least 260 million people,
possibly 330 million people, live in absolute poverty. The poor do not
even have enough food, let alone clothing, shelter, healthcare and
education. In fact, there are more poor people in India now than
the total population at the time of independence. It is worth citing
some evidence, circa 2001, which is also the latest available, on social
indicators of development.42 More than one-third of our population is
still illiterate. This proportion is significantly higher in rural India at
40 per cent and much higher for women at 45 per cent. The infant
mortality rate at 66 per 1ooo is among the highest in the world. The
maternal mortality rate at 407 per 1oo,ooo live births is far higher
than in most developing countries. 22 per cent of the population does
not have access to drinking water, while 64 per cent of the population
does not have access to sanitation facilities; these aggregate figures
conceal the reality that the problem is far more acute in rural India
even if the situation is somewhat better in urban India. Although
enrolment rates in primary school are more than 95 per cent, dropout
rates are as high as 40 per cent. Enrolment rates in secondary
school are 33 per cent, but drop-out rates are 66 per cent. Thus, more
than 65 million children who should be in school are not; of these,
55 million are in rural India and io million are in urban India. Only
6 per cent of the population enters into the world of higher education.
And 39 per cent of the adult population, as many as 225 million people,
remains illiterate.
In my view, the most important failure during the past 25 years was
that the rapid economic growth did not create sufficient employment
42 The evidence on social indicators, cited in this paragraph, is from the Census of
India, 2001.
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INDIA'S UNFINISHED JOURNEY 821
TABLE 5
Employment Elasticities of Output in India
Total for all
Period Agriculture Manufacturing sectors
1972-73 to 1977-78 0.64 0.55 o.61
1977-78 to 1983 0.49 o.68 0.54
1983 to 1987-88 0.36 0.26 0.30
1987-88 to 1993-94 0.43 0.29 0.39
1993-94 to 1999-2000 0.01 0.33 o.16
Source: Planning Commission, Government of India.
opportunities. In this context, it is important to recognize that the
growth of the labour force in India has always been higher than the
growth in employment, so that the backlog of unemployment has
grown steadily over time. What is more, employment growth has not
kept pace with output growth. The available evidence on employment
elasticities of output is presented in Table 5. It shows that the already
low employment elasticities registered a significant decline between
the early 197os and the late 198os, for the economy as a whole as also
for the agricultural sector and the industrial sector. It appears that
this trend continued during the period from the late 1980s to the late
199os. The employment elasticities of output for the economy as a
whole declined from o.61 during the period 1972-73 to 1977-78 to
0.30 during the period 1983 to 1987-88 and o.16 during the period
1993-94 to 1999-2ooo. In agriculture, the employment elasticities
dropped to near zero.Jobless growth is a caricature description but it
does capture the unfolding reality in India. It is, perhaps, the reason
why equivalent rates of growth during the 1990s did not translate
into equivalent poverty reduction during the 199os as compared with
1980s.
Ironically enough, this asymmetry between output growth and
employment growth was reflected in an impressive growth in output
per worker, which registered an increase at the rate of 3.6 per cent
per annum during 1980-1999 as compared with 1.28 per cent per
annum during the period 1960-1980. It is worth noting that 57 per
cent of the growth in output per worker during the period 1980-
1999 was attributable to growth in total factor productivity, while
33 per cent was attributable to capital accumulation and just 1o per
cent was attributable to education. In the light of this evidence, labour
productivity growth is seen as the principal factor underlying the rapid
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822 DEEPAK NAYYAR
economic growth since 198o.43 The sharp slow-down in employment
growth during the same period is a corollary.44 The irony of this
paradoxical situation is striking.
Such an outcome is not inevitable. The simplest analytical
construct derived from Solow suggests that there are three proximate
determinants of economic growth: the investment-GDP ratio, the
population growth rate and the initial level of output per worker.
The determinants of growth, of course, are manifold and complex.
However, theoretical analysis suggests that economic growth depends
on the share of investment in GDP and the productivity of investment.
Orthodoxy believes that the productivity of investment is determined
by the state of technology. There is a serious lacuna in this thinking.
If excess capacity and unemployment exist, an increase in investment
which creates a larger domestic market can increase capacity
utilization and, therefore, raise the productivity of investment.
Orthodox thinking misses this obvious point because it assumes that
there is always enough demand to ensure full employment of all
resources of the economy. This assumption is not quite tenable in
the Indian context. There is, perhaps, a more useful way of thinking
about GDP growth directly in terms of employment growth. The level
of employment and the growth in labour productivity, measured as
output per worker, together add up to the growth in GDP. If the
employment growth rate is increased by 1 per cent, the GDP growth
rate would also increase, provided labour productivity does not fall
by 1 per cent or more. In other words, if it is possible to raise the
employment growth rate, without inducing a drastic reduction in
labour productivity growth, the growth rate of the economy can only
be higher.45
V. The Challenge for the Future
In the first decade of the twenty-first century, there is a striking
optimism about the emerging India. The country which only had a
past is beginning to be seen as a country with a future. The land of
43 This hypothesis, based on empirical evidence, is developed by Rodrik and
Subramanian (2004).
" For a complete picture and a detailed discussion of the employment situation in
India, during this period, see Vaidyanathan (2001).
4 For a detailed discussion on this issue, See Bhaduri (2005).
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INDIA'S UNFINISHED JOURNEY 823
scarcities is being thought of as a land of opportunities. The land of
snake charmers is now considered a land of fashion designers. The land
of traditional crafts is increasingly perceived as a land of information
technology. The land of bullock-carts, or steam trains, is beginning to
be seen as a land of automobiles, or jet planes. This dramatic change
of mood is particularly discernible among the rich and the literati in
India. There is a similar change in thinking about India in the outside
world, mostly among interested individuals or concerned institutions.
The mood is contagious, and the images are larger than life, because
those who articulate such views have both voice and influence.
It would seem that perceptions about India are changing rapidly.
The realities are also changing, but much more slowly. And there is
a mismatch. The perceptions, as also the realities, depend on who
you are, what you do and where you live. Captains of industry, editors
of newspapers, or ministers of governments see one India. So does
the software engineer in Bangalore, the stockbroker in Mumbai, the
lobbyist in Delhi, or the entrepreneur in provincial India. The picture
is similar, even if shallower, for the investment banker in London,
the mutual fund manager in New York, or the chief executive in the
board room in Tokyo. These images shape thinking about India 2025
in the world. But there are also contrasting images of India, which
constitute an altogether different world. Poor tribals in Orissa or
Madhya Pradesh, landless labourers in Bihar, dalits in Uttar Pradesh,
peasants in villages everywhere, migrant construction workers in
Delhi, slum children in Mumbai, pavement dwellers in Kolkata, or
street vendors in Chennai, see quite another India. Their daily lives
are such a struggle that they simply cannot think about, or imagine, a
different India in 2025.
It is not just that there are two sharply contrasting views of India
in the world. There are two different, almost dichotomized, worlds in
India. There is an India that is global and there is a Bharat that is local.
What is more, there is a virtual disconnect between these two worlds.
Of course, India is a society in which different cultures (traditional
and modern), different divides (caste, class and religion), or even
different centuries (nineteenth and twenty-first), co-exist. There is no
clash between modernity and tradition. At the same time, the diversity
and the pluralism are necessary as also desirable. But the dichotomy
between India and Bharat is not.
This is not the India I want. What is more, thinking ahead to 2025,
such an India is neither ethically acceptable nor politically sustainable.
Therefore, my vision of India 2025 is somewhat different. Its focus
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824 DEEPAK NAYYAR
is on people, rather than on the nation. I want a society in which
India and Bharat become one: connected and integrated. The India
of my dreams, then, is one that provides capabilities, opportunities
and rights to people, ordinary people, so that they can exercise their
choices for a decent life. In the pursuit of this objective, it is essential
that we provide not only food and clothing but also shelter, healthcare
and education, for all, to create a world without poverty, deprivation
and exclusion. This will need employment creation and sustainable
livelihoods. But development must also enhance the well-being of
people in terms of expanding freedoms. This must extend beyond
freedom from hunger, disease and illiteracy, so that development
creates economic opportunities, promotes social inclusion and ensures
political liberties for people.
There could be a temptation, on the part of some, to dismiss this as
the thinking of an incurable romantic or a committed ideologue. But I
am neither. And it needs to be said that this is the dream of a concerned
citizen. It is no less plausible than other visions of India 2025. Indeed,
this is a realizable vision. It is possible to overcome hunger, disease
and illiteracy, just as it is possible to eradicate poverty, deprivation and
exclusion, during the first quarter of the twenty-first century. So many
countries in Asia have done so in shorter spans of time. The resources
exist. Mahatama Gandhi put it very simply: "There is enough in the
world for everybody's need, but there cannot be enough in the world for
everybody's greed". And I am convinced that a better world is possible.
But, by themselves, growth and markets cannot deliver such a world.
It needs far more. Above all, it needs good governance in economy,
polity and society, which we had circa 1950, where governments are
accountable to people and people are centre-stage in the process of
development. This may be different from, but is not inconsistent with,
other, grander yet narrower, visions of India. I believe that we cannot
imagine India as a superpower in politics, which some do, or as a
powerhouse in economics, which others do, unless it is built on the
strong foundations of our most abundant resource and most valuable
asset: people.
Economic growth is clearly necessary but not sufficient to bring
about a reduction in poverty. This may be attributable to the logic
of markets which give to those who have and take away from those
who have not, as the process of cumulative causation leads to market
driven virtuous circles and vicious circles. This may be the outcome
of patterns development where economic growth is uneven between
regions and the distribution of its benefits is unequal among people,
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INDIA'S UNFINISHED JOURNEY 825
so that there is a growing affluence for some and persistent poverty for
many. This may be the consequence of initial conditions and institutional
frameworks, as similar economic performances in the aggregate
could lead to egalitarian economic development in one situation and
growth which bypasses the majority of people in another situation.
It cannot suffice to say that outcomes of economic policies should be
moderated by social policies, in the form of safety nets. The dichotomy
between economic and social policies is inadequate, just as the
dichotomy between economic and social development is inappropriate.
In fact, no such distinction is ever made in industrial societies. And
the experience of the industrialized world suggests that there is a
clear need for integration, rather than a separation, of economic and
social policies. Thus, I believe, it is important to create institutional
mechanisms that mediate between economic and social development.
There are two essential correctives: foster inclusion where markets
exist, and create markets where they do not exist.46 The inclusion
of poor people, where markets exist, requires a spread of education
and an increase in social consumption. To foster inclusion, we need to
develop the capabilities of people, particularly through education, just
as we need to develop a social infrastructure which provides the poor
with access to shelter, healthcare, clean water, sanitation, and ensures
a steady increase in social consumption that depends almost entirely
on the government in a country such as India. The creation of markets,
where they are missing, requires a substantial investment in physical
infrastructure, particularly in rural areas and backward regions.
In this era of markets and globalization, surprisingly enough, the
role of the State is more critical than ever before. This role extends
beyond regulating domestic markets or correcting for market failures.
It is about creating the initial conditions to capture the benefits from
globalization, about managing the process of integration into the
world economy in terms of pace and sequence, about providing social
protection and safeguarding the vulnerable in the process of change,
and about ensuring that economic growth also creates employment
and livelihoods for the well-being of people. It is also about acting as
a guardian of civil society. In sum, governments need to regulate and
complement markets so as to make them people-friendly. The reason
is simple. Governments are accountable to people, whereas markets
are not.
46 These correctives are discussed, at some length, in Nayyar (200oo3).
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826 DEEPAK NAYYAR
The object of any sensible strategy of development in a world of
globalization, over the next 25 years, should be to create economic
space for the pursuit of national interests and development objectives.
In pursuit of this goal, it is necessary to think big and to think
long. Such thinking must extend across several spheres: first, the
creation of a world class infrastructure, to remove supply constraints
and support social consumption, where any premature withdrawal of
the State is a recipe for disaster; second, the development of human
resources, through education, both as a means and as an end, because
investing in human beings is important at every stage of development;
and, third, the fostering of managerial capabilities in individuals
and technological capabilities in firms at a micro level, which are
the essential foundations on which international competitiveness is
built and without which no latecomer to industrialization has ever
succeeded.
It follows that the role of the State in the process of development
will continue to be important for sometime to come, even as the scope
of the market increases through liberalization in the wider context of
globalization.47 Most would find this argument persuasive. Yet, many
would doubt whether such a role is feasible in terms of politics. And the
mood of the moment is not receptive to such ideas anywhere, for there
is disillusionment with the economic role of the State. It is essential
to recognize that there are some things that markets can and should
do. Even so, there are other things that governments can and must
do. If governments do those things badly, it does not mean that we
can dispense with governments. We have to ensure that governments
perform better.
The real issue is not about more or less government. It is about
the quality of government performance. And the importance of good
governance cannot be stressed enough. Governance is largely about
rules and institutions that regulate the public realm in civil society. A
democratic system seeks to provide for equal participation of the rich
and the poor, or the strong and the weak, individuals as citizens in
political processes. And good governance is a process characterized by
communication and consultation, through which disputes are resolved,
consensus is built and performance is reviewed on a continuous basis.
The basis for good governance is a democratic political system that
ensures representative and honest governments responsive to the
7 Cf. Nayyar (1997). See also Bhaduri and Nayyar (1996).
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INDIA'S UNFINISHED JOURNEY 827
needs of people. This involves more than simply free and fair elections.
It implies a respect for economic, social and political rights of citizens.
The rule of law is a foundation. An equitable legal framework, applied
consistently to everyone, defends people from the abuse of power
by State and non-State actors. It empowers people to assert their
rights. The need for good governance extends to economic, social
and political institutions. A vibrant civil society is just as important
for good governance insofar as it provides checks and balances when
governments do not act as they should. In this context, it is essential
to stress the importance of values. In effect, values provide the
foundations of ethical principles and social norms which, in turn,
ensure the effectiveness of institutions and the accountability of actors.
Much of this exists in principle. In practice, however, good governance
is not possible without transparency and accountability in the political
system.
VI. Some Forgotten Essentials
The debate in India tends to focus on what is said or done, but does
not always consider what is not said or not done. In the process some
essentials are forgotten.48
First, it is essential to remember that the well-being of humankind
is the essence of development. Therefore, development must bring
about an improvement in the living conditions of people, ordinary
people. It should ensure the provision of basic human needs for all,
not just food and clothing but also shelter, healthcare and education.
This simple but powerful proposition is often forgotten in the pursuit
of material wealth and the conventional concerns of economics. Yet,
people view the world through the optic of their living conditions and
daily lives. The litmus test for the performance of an economy, hence
government, is neither economic growth, nor economic efficiency,
indeed not even equity in an abstract sense, but whether or not it
meets the basic needs and the growing aspirations of people. Austerity
now for prosperity later is neither credible nor acceptable. The essence
of the tension between the economics of markets that works on the
principle of one-rupee-one-vote, and the politics of democracy that
works on the principle of one-person-one-vote, must be recognized.
48 The discussion in this section draws upon some earlier work of the author
(Nayyar2, 004).
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828 DEEPAK NAYYAR
For those excluded by the economics of markets are included by the
politics of democracy.
The second essential we have almost forgotten is that there is a
rural hinterland. Indeed, India lives in its villages. Yet, the discourse
proceeds as if the rural sector does not exist, or if it exists it does
not matter. This is incredible in an economy where two-thirds of
the work-force is employed in agriculture and where three-fourths
of the population lives in the rural sector. The rural-urban divide is
wider than ever before. And farmers' suicides, or starvation deaths,
are symptoms of an acute problem. Indeed, there is a quiet crisis
in agriculture that runs deep. Even if the share of rural India in
national income is less than its share in the population, its share of
votes is directly proportional. And rural India decides for the republic
at election time. The electoral, if not political, compulsions of a
democracy cannot be set aside for long.
Third, it is not recognized that distributional outcomes are
important. So are employment and livelihoods. Structural reforms
associated with economic liberalization have important implications
for employment creation and income opportunities. For example, in
so far as such reform increases the average productivity of labour,
through the use of capital-intensive or labour-saving technologies,
or through a restructuring of firms which increases efficiency, it
reduces the contribution of any given rate of economic growth to
employment growth. There is a contraction of employment in some
sectors without a compensatory expansion of employment in other
sectors. As employment elasticities of output decline, employment
creation slows down. For any given level of employment, a globalization
of prices without a globalization of incomes also threatens livelihoods.
The poor at the margin are most vulnerable, but the non-rich are not
immune. And, in so far as there are some winners and many losers,
distributional outcomes in the sphere of economics shape electoral
outcomes in the realm of politics.
Fourth, the debate on economic reforms does not make a clear
distinction between means and ends. For example, it does not
recognize that markets, as much as States, are institutions evolved
by humankind, that are means and it is development that is the end.
What is more, there is a presumption that what is necessary is also
sufficient. The management of incentives, motivated by the objective
of minimizing costs and maximizing efficiency, or even unleashing
creativity and innovation at a micro level, is based on a set of
policies that are intended to increase competition in the market place.
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INDIA'S UNFINISHED JOURNEY 829
Competition is obviously desirable, but there is nothing automatic
about competition. Policy regimes can allow things to happen, but
cannot cause things to happen. The creation of competitive markets
that enforce efficiency may, in fact, require strategic intervention on
the part of the government. The essential missing link is that this
debate does not consider transition paths. It confuses comparisoonf one
equilibrium position with another, with change from one equilibrium
position to another. But it does not tell us anything about how we move
from one position to the other.
Fifth, the fundamental importance of good governance is not quite
recognized. Good governance, where governments are accountable
to citizens and people are centre-stage in development, is essential
for creating capabilities, providing opportunities and ensuring rights
for people. Governance capabilities matter in a much more concrete
sense, whereas the role of the State is somewhat more abstract.
Indeed, the quality of governance is an important determinant of
success or failure at development. The most striking illustration of this
proposition is provided by the wide diversity in economic performance
across States in India despite common policies, similar institutions
and an economic union.
VII. Conclusion
The story of economic development in independent India is often
distorted by beliefs in fashion or caricatures of perceptions which
shape conventional wisdom. I have argued that this is misleading, not
only in analysing the past but also in contemplating the future. If we
consider India during the twentieth century as a whole, the turning
point in economic growth was circa 1951. If we consider India since
independence, the turning point in economic growth was circa 1980.
And it is clear that the turning pointing in the early 1950s was much
more significant than the structural break in the early 198os. In any
case, 1991 was not a watershed. Thus, it is not possible to attribute the
turnaround in India's growth performance to economic liberalization.
Economic growth in India was respectable during the period 1950-
1980. It was a radical departure from the colonial past. And it was
no worse than the growth performance of most countries during that
period. But it was simply not enough in relation to India's needs.
Economic growth in India was impressive during the period 1980-
200oo5. Indeed, it was much better than in most countries. But even
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830 DEEPAK NAYYAR
this was not enough. The real failure, throughout the second half of
the twentieth century, was that India failed to transform its growth
into development, which would have brought about an improvement
in the living conditions of people, ordinary people.
India's unfinished journey in development would not be complete so
long as poverty, deprivation and exclusion persist. The destination,
then, is clear. It must be said that such an India which provides
capabilities, opportunities and rights to people, ordinary people, can
also deliver power and prosperity for the nation so cherished by
some. In this endeavour, economic growth is essential. But it cannot
be sufficient. What is more, it is neither feasible nor desirable to
separate economic growth from distributional outcomes because they
are inextricably linked with each other. This link is provided by
employment creation. Jobless growth is not sustainable either in
economics or in politics. If we create employment, it would only
reinforce economic growth through a virtuous circle of cumulative
causation. There is a critical role for the State in the process. This
role cannot be more of the same. It must be redefined to recognize
the complementarities between the State and the market. The moral
of my story in our quest for development is not less government but
good governance. Indeed, without good governance, this dream about
India simply cannot become a reality. Even if it is an imperative,
however, there is no magic wand that can deliver good governance. In
the realization of this objective, political democracy, which provides
not only checks and balances but also early-warnings and alarm-bells,
is our real asset. What it needs is transparency and accountability.
Despite its flaws, the deeply embedded political democracy is the basis
of my optimism about the future of India.
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