It gives me great pleasure to address the 92nd conference of the Indian Economic Association. I have many happy memories of the association and its activities, from the days when I was a Professor in the Panjab University. I have also personally known many of the stalwarts who contributed to building this institution in those days.
Non-economists often describe economics as a “dismal science”, but I think this is a misleading description. Economics appears dismal only because economists often focus on problems that seem difficult to solve. Malthus’ original prediction about population running out of sustenance is perhaps the most famous dismal forecast. Similarly, forecasts about climate change in future and its likely effects will qualify as dismal in the extreme.
And yet, such analyses perform a very essential function. They draw attention to basic problems which, if not addressed in time, will snowball to unmanageable levels. Our critics should remember that we economists focus on problems not to revel in them, but only to draw public attention to these issues and their possible solutions. However, we should also recognise that once new ideas get established, they get transformed into orthodoxy, and orthodoxy typically doesn’t change when circumstances change. It is then left to other economists to enter the fray and challenge established beliefs and argue for new approaches.
Lord Keynes captured the essence of the problem when he said (and I quote) “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
The original classic work on poverty in India was Poverty and Un-British Rule in India by Dadabhai Naoroji, which was first published in 1901. It was Pandit Jawaharlal Nehru who first outlined the economic approach we need to follow for handling poverty. He chaired the committee on development planning set up by the Indian National Congress in 1938. The committee never submitted its report as it was overtaken by the Second World War, but we know that it came to the conclusion that in order to bring every Indian above the minimum levels of living standards, it was necessary for national income to increase three-fold in 10 to 15 years. Translated into GDP growth targets, this amounted to a GDP growth target varying between 7.5 per cent and 11 per cent per year. It took us a long time to live up to Panditji’s growth target.
In the 1990s, we moved away from the earlier paradigm of extensive government control, a suspicion of market forces and an excessive reliance on protection of domestic industry to an economy with much greater acceptance of the beneficial role of markets and greater openness to trade and foreign investment. This change was accompanied by a great deal of debate with economists participating actively on both sides. In the early years, I recall there were many Cassandras who argued that the new policies would be disastrous for the economy, that economic growth would be adversely affected and that external liberalisation especially would lead to a collapse in the balance of payments.
Much of that debate seems to be behind us at least as far as growth is concerned. What do we make of this experience? As professional economists, you all know that assessment of underlying trends should not be confused with cyclical behaviour. We should, therefore, look at the average growth rate after 1991. If we consider the 18 years from 1992-93 to 2009-10, the average growth rate is 6.8 per cent. I am happy to say that the Congress-led government that has been in place since 2004-05, can claim to have achieved an average growth rate between 2004-05 and 2009-10 that is likely to be 8.5 per cent.
As professional economists, you should also note that we have not had a balance of payments crisis since 1991. Based on this experience, I feel we can be reasonably certain that those who claimed that the new policies would have an adverse effect on growth or the balance of payments were clearly wrong.
(Excerpts from Prime Minister Manmohan Singh's speech at the 92nd annual conference of the Indian Economic Association in Bhubaneswar on December 27, 2009)