India. Craig Jeffrey

and thought to have been the outcome of the bank nationalization that took place in 1969, and of increasing numbers of bank branches, the result of the policy enforced by the Reserve Bank of India for banks to open up branches in areas previously poorly served by them. The increase in the savings rate was closely matched by increased investment rates; and Sen (2007) has shown that the increase in capital formation from the mid-1970s involved a rise in investment in equipment, as opposed to investment in construction, that had predominated hitherto. Cross-country research has shown this to be the form of investment that matters most for growth, and Sen argues, ‘the increase in private investment in equipment had a strong positive effect on growth, working its way through both capital accumulation and aggregate productivity growth’ (Kar and Sen 2016: 31, citing Sen 2007). He thinks that the new trend followed both from the financial deepening that had taken place, and from the decline in the relative price of machinery that had resulted from relaxation of import controls. The analysis still leaves open, however, the important question as to why private investment increased in the way it did in the 1980s – it doesn’t automatically follow from an increase in the savings rate. We return to this question below.

Table 2.2 Sources of Growth in the Indian Economy, 1960–2012 (annual % rate of change)

      SOURCE: Bosworth and Collins (2015, table 1) (these authors’ estimates, as described in their text)

      ^a Average change of 2011–12 and 2012–13

If the broad picture of India’s history of economic growth is that it falls into two halves – with growth having been erratic in the first period, and then becoming steadier in the later one, pulling up the average – there is now some consensus around the view that it is possible to distinguish three or perhaps four distinct growth episodes, and over the possibility that India entered into a new episode after about 2010, with – the growth figures touted by the Modi government after 2014 notwithstanding – lower rates of growth, and big question marks over the maintenance of high growth rates. There were serious concerns about economic growth early in 2019, in the run-up to the national elections, confirmed by data that came in shortly after Narendra Modi’s resumption of power. Shortly after this event, data were published showing that the growth of GDP in the first quarter of 2019 had slowed to the lowest level (5.8 per cent) for five years (Kazmin 2019b). This was the fourth quarter running when GDP growth had slowed. The growth rate plunged even lower later in 2019 (as reported in The Hindu, 29 November 2019).

The identification of growth episodes is not a simple matter, and it is possible to justify different arguments about the determinants of growth by the selection of different break points. To give an example, in table 2.3 we reproduce calculations of India’s economic growth over different periods, according, on the one hand, to Atul Kohli (2006a, 2006b) – and see comparable calculations by Rodrik and Subramanian (2005) – and, on the other, to Arvind Panagariya (2008). The conclusion that Kohli drew from his periodization was that growth took off in the 1980s, probably because of a shift in the attitudes of political elites. Kohli suggests that the shift to a more business-friendly environment may have been more significant than the ‘market-friendly’ reforms initiated in 1991. Panagariya sets out to downplay the scale of the growth upturn that Rodrik and Subramanian, and then Kohli, describe for India in the 1980s, in developing his own argument about the success of liberalizing economic reforms in India in the 1990s.

      There is a strong case for a more systematic approach to the distinguishing of growth episodes in India, one not driven by a particular hypothesis. Such an approach requires both ensuring that the structural breaks identified are statistically significant and that each of the episodes distinguished has ‘a single underlying medium-term growth rate’, over a substantial period (so as to distinguish them from business cycle fluctuations and short-term shocks). This is the analytical procedure that Kar and Sen have followed (2016: 5), and it leads them to identify three distinct episodes: 1950–92, 1993–2001 and 2002–10, with a possible fourth after 2010. They do recognize, however, a ‘nascent recovery’ in the 1980s – the period of the distinct break in India’s history of growth that we and Joshi and many others have identified – and though the acceleration in that period was not sufficient to satisfy their conditions for a structural break, Sen (2014) detected a shift from the trend line of growth in the late 1970s. There is also the view – expressed, for instance, by Joshi (2017), in line with Kar and Sen’s analysis – that there was a distinct period of particularly high growth in the 2000s, from 2002–3 to the end of the decade, with a fall thereafter. There appear to be substantial grounds, therefore, for thinking in terms of the three growth episodes, with the possible fourth after 2010, that Kar and Sen distinguish, or even of five episodes, if we pick out as distinct the period from around 1980 to 1992. We now consider each of these episodes, in turn, arguments about what was going on in each of them, the settlements between political and economic elites that they reflect, and their implications for changes in those settlements.

Table 2.3 Two Analyses of Four Phases of India’s Economic Growth (total GDP growth % per annum)

      SOURCES: Panagariya (2008); Kohli (2006a, 2006b)

2.3 Economic Growth 1950–1992: A Story of Failure?

India won independence in 1947, just as the specialist field of development economics was taking off, and the approach that was taken to economic development in the new country reflected the orthodox views of the time, about market failure or absence, about the importance of economic diversification and industrialization, and about the need for strong and enlightened state actions. India had to industrialize as quickly as possible, and it seemed to make sense that this would mean protecting new domestic industries from international competition. ‘Import substitution industrialization’ was the framework to be adopted. Most imports were made subject to discretionary licensing; and on the other side of the trade regime what has been called ‘export pessimism’ seemed reasonable. There was very general agreement, even among Indian capitalists, that the state had to play a leading role in raising the finance that was required. It was generally accepted – in a context in which Soviet planning was seen as having been remarkably successful in bringing about rapid industrialization – that the state should plan development. A key instrument in the policy framework was the Industries (Development and Regulation) Act of 1951, setting up a system of licensing, controlling entry into industry and governing most aspects of firm behaviour. Licensing, of industries and of imports, together meant that competition, both domestic and foreign, was restricted, and this in turn – it came to be recognized – led to inefficiency (Bhagwati and Desai 1970 – the first sustained intellectual critique of planned industrialization – and Bhagwati and Srinivasan 1975 are definitive sources on the arguments involved). Indian entrepreneurs found themselves tied up in red tape or mired in rent-seeking activities, given the revenues that could be obtained by securing a licence with an actual or a near monopoly in a particular industry. Inefficiency was not at all incompatible with profitability. The era of what came later to be pilloried as the ‘licence-permit raj’ was once described by a leading industrialist to one of us as that of the ‘handkerchief-on-seat’ culture – meaning that customers just had to wait their turn, whether for the supply of vital equipment or for consumer goods such as motor-cycles or cars.

      The story of India’s economic growth in the long period of the political dominance of the Congress Party, from the foundations of the republic through to 1989 – only briefly interrupted, by the Janata government that ruled from April 1977 to the beginning of 1980, following Mrs Gandhi’s Emergency of 1975–77, when democracy was suspended – is, therefore, often represented as one of failure. According to Kar and Sen, ‘For most of this period, the Indian economy experienced a prolonged