When did India move to a new growth path?

INDEPENDENCE SPECIAL: ECONOMY

Most believe it was in the post-1991 period, but the structural break took place in 1980-85.

With the latest estimates indicating that the Indian economy grew by 9.4 per cent during 2007, the average rate of growth over the last four years has been 8.6 per cent.

This is unprecedented, both in terms of magnitude and persistence. Growth at this rate will cause real GDP to double in slightly over eight years. Is it sustainable?

One way to address this is through the analysis of "structural breaks". Two recent papers have attempted to pin-point breaks in the various sectors from the 1950s. Structural Breaks in Indian Macroeconomic Data by Jessica S. Wallack (Economic and Political Weekly, October 11, 2003) used data from 1950 to 2001.

However, due to data limitations, the tests were effectively conducted for 1958-1993. For overall GDP, structural breaks were identified in 1980-84. No break can be inferred in agriculture during the sub-period, 1958-1993.

In the manufacturing sector, no year came close to meeting the statistical criteria. Within services, the only component to come close to satisfying the criteria was public administration in 1993.

India's Economic Growth History: Fluctuations, Trends, Break Points and Phases by Arvind Virmani (ICRIER Occasional Paper, January 2005) used data from 1950-2002 and applied a somewhat different methodology.

It also identified 1980 as a break point for overall GDP, and there was no identifiable break point in agriculture. In manufacturing, it identified 1980 as break point. In services, it identified 1980-85 as a phase during which a break occurred in the sector.

Looking qualitatively at sectoral and aggregate GDP growth rates in more recent periods against the backdrop of these findings, we have the following points to make. In agriculture, the relatively flat trend in growth rates persists into the past two decades, although there is some narrowing of the band of volatility.

The Green Revolution of the 1960s did not have much impact on the average growth rate, but did increase the amplitude. This suggests that, even as it contributed to growth through enhanced productivity in some years, it increased the risk of cultivation. That volatility seems to have moderated in more recent years, as productivity growth has plateaued.

In industry, the early 1980s were the beginning of a steady increase in annual growth rates, which ended in the crisis of 1990-91. Compared to this phase, the recovery in the years after the crisis and reform initiatives was spectacular.

That came to an equally spectacular halt in the second half of the 1990s, to which three factors contributed: an increase in volatility of agriculture after a period of relative stability; a sharp decline in exports as the East Asian crisis caused several currencies in the region to depreciate sharply; and the monetary policy response to accelerating domestic inflation, which made domestic interest rates surge.

The recovery from these shocks took several years, but it has now persisted for four years and combines the characteristics of the surges during the 1980s and the early 1990s. It is steady, but also quite rapid.

But, is it vulnerable to the same threats as its predecessor? This does not seem very likely. Of course, this does not mean that other risks are not part of the environment. But in comparison with past vulnerabilities, the situation appears a lot safer.

Services show a far steadier progression towards higher growth rates beginning in the 1980s. This long expansion appears to be based on the most fundamental of drivers, abundant labour.

Therefore, the main threat to it is a constraint on labour supplies. These are becoming visible in some skill segments, but expansion of educational and training capacities will help to ease these.

With respect to overall GDP, clearly, the increasing significance of industry and services relative to agriculture is showing up in a sustained acceleration in growth rates in the last years of the entire period.

Agriculture still imposes a drag, though, which obviously prevents the aggregate from appearing as impressive as the recent performances of industry and the sustained performance of services may have warranted.