Understanding India's growth: Lessons from its economic episodes

How can we create conditions for a next Indian growth episode?

Most people think of economic growth as the norm, as a steady state, as something that happens (on average) for a long time. This intuition is based on the experience of the first world, most notably the United States (US) and the United Kingdom (UK). These countries have a remarkable experience with extremely stable, low average growth rates over long periods of time.

 

They got there through the power of compounding: A 1.5 per cent per capita real GDP (gross domestic product) growth for 200 years starting from 1820, which gave gains of about 20 times. Surrounding this long-term average, they had ups and downs — of world wars, recessions, and depressions. The intellectual and institutional capabilities of countries like the UK and the US were able to grapple with the challenges that came along, maintain social cohesion, and create conditions for safety and optimism for private persons, through which low stable growth was sustained across an astonishing array of challenges.

 

For many of us in India, it is easy to slip into this illusion: The idea that there is a stable long-term growth rate which is baked in, and then around that we have business-cycle fluctuations. However, this is not how underdevelopment works. The essence of development macroeconomics is the analogy with a hare and not a tortoise.

 

In the Indian story, there are clear phases which help us organise our thinking. At first, from 1947-62 (15 years), we got a nice phase of growth. Some colonial repression was eased. The political and bureaucratic leadership was of very high quality. The repressive apparatus of Indian socialism was not yet in play. Growth accelerated compared with the 1757-1947 period.

 

And then, we got a batch of bad years. Wars in 1962, 1965, and 1971 were expensive and emotionally bruising. Jawaharlal Nehru’s death created political complexities. There were two droughts. Indian socialism was built out with repressive laws, and the slow emergence of state capability that actually enforced the laws. This gave a bad period for 1962-76 (a period of 14 years). Indian exceptionalism was questioned, and we looked more like a normal third world country with a government that crushed freedom and harmed economic growth. Growth slumped to the “Hindu rate” of 3.5 per cent.

 

Under the Janata Party, the first liberalisation began with Morarji Desai, H M Patel, and D T Lakdawala. This was carried forward by Indira Gandhi and Rajiv Gandhi. This gave a small growth acceleration 1979-91 (12 years). And then, a better opening up to the world happened after 1991, giving a grand growth episode 1991-2011 (20 years). The best growth episode of India’s history was 1991-2011, and Indian exceptionalism was firmly back. 

These are large fluctuations of average growth: In the periods 1947-61, 1962-76, 1977-90, and then 1991-2011. This is not a mature society with stable political institutions, with stable elite bargains, where the engine of growth purrs away at a stable long-term compound growth rate. Instead, it’s a society that sometimes got its act together with intellectual clarity and an elite bargain, and a growth episode happened.

 

In the world of business and finance, the horizons in the spreadsheet are three to seven years. Short horizons are often baked into the residual time horizon of the chief executive officer. In this environment, many miss the deeper phenomena that shape business and financial success. Particularly in India, where the tortoise is not assured, strategic thinking in the business world needs to contemplate the social forces, the conditions of the superstructure which are conducive to a growth episode.

 

Let’s peer into the start and end of each of these episodes. Growth episodes are complex social phenomena and resist monocausal explanations. Many things came together in each of them. Each successful period was fashioned by the knowledge and community of the previous 20-40 years. And, the mistakes made in the middle of successful growth episodes sowed the seeds of failure through which the growth episode petered out. We think in terms of sharp demarcating dates such as the China war in 1962. But the seeds of failure of that particular growth episode were well in place in the intellectual failures of the Second Five-Year Plan (1956-61).

 

For growth episodes in India, the world economy matters. The world economy began into a great period at the fall of the Berlin Wall (1989). There was a global “peace dividend” as defence expenditures went down. The organised assault on liberal democracy, which the Eastern bloc represented, came to an end. Fear subsided. Sensible economic policies emerged in many countries. In an increasingly globalised world, economic strength in each country bolstered that in others. The wise Indian moves in foreign policy and economics, by Narasimha Rao and Atal Bihari Vajpayee, were shaped by that context: They saw the failure of communism and made the break with Soviet Russia and with socialist policies. Unilateral opening up is always a good idea, and it helped that the world economy was faring well in those years.

 

The world today looks daunting. Seeds of political and economic policy changes that bode ill are visible worldwide. The President-elect of the US has a special relationship with Vladimir Putin. The internet and social media have significantly tilted power in favour of right-wing populism and nationalism. This is unusual when compared with the history of the West.

 

The intellectual and institutional capabilities of the advanced economies are facing unprecedented challenges in their attempt at maintaining social cohesion, and creating conditions of safety and optimism for private persons. Will the tortoise persevere? Is this a small blip comparable with the US Civil War of 1861-65? Will trend growth in the advanced economies falter? This is the grand question of the age. This shapes the context for India. How can we create conditions for a next growth episode? We have to think about the possible adverse impact of global economic difficulties, the vulnerability to Chinese aggression, and the domestic difficulties of intellectual and institutional quality.

 

The writer is a researcher at XKDR Forum