Sunil Jain: Indira shining!

RATIONAL EXPECTATIONS

While HRD minister Murli Manohar Joshi continues to get flak for, among other things, the rewriting of history, there's a whole lot of people taking another look at India's economic history, and concluding that India's big break came in 1980-81, and not in 1991 as many would believe.

So, whether India's shining or not, Indira certainly was! While ICRIER director Arvind Virmani has made this point earlier, he's buttressed it with a lot more econometric analysis, and made a powerful (power point, actually) presentation at Delhi's India Habitat Centre a few days ago.

More important, according to Virmani's analysis, the current growth we're seeing doesn't really represent a statistically significant break from the past (Virmani, of course, is too politically correct to put it so bluntly).

In other words, we're not going to get another 8 per cent growth year for a long time. That, of course, is old hat, but what's important about the ICRIER analysis is that it flies in the face of what most of us would feel is obvious, after all the economy today looks so dramatically different from what it was in, say, 1990. But more of that later.

Virmani breaks up India's growth in the last 50 years into two distinct phases (1951-52 to 1979-80 and 1980-81 to 2001-02), and two sub-phases within each (1951-64 and 1965-79 in Phase I and 1980-91 and 1991-2001 in Phase II), based on the values he gets from using statistical tools like the coefficient of variation, Chow test and so on.

While he gets a definite break in trend in 1979-80, there is no statistically significant change in GDP growth after this for the next 20 years, including in 1990-91 when the Manmohan Singh reforms happened.

Even without the sophisticated statistical analysis, the break seems obvious (once it is pointed out!) to even the lay person. GDP growth fell from 4.1 per cent per annum in Phase IA (1951-64) to 2.9 in IB (1965-79), and then suddenly jumped to 5.5 in IIA(1980-91) and then remained in the same ballpark at 6.1 in IIB(1991-2001).

Look at manufacturing, and it's clear this is what is driving the break "" this falls from 6.6 in IA to 4.1 in IB, and then suddenly jumps to 6.1 in IIA and then graduates to 6.8 in IIB. Agriculture also shows a similar jump from IB to IIA.

So why did growth plummet during the heydays of socialism and why was there a huge surge in 1980-81? Phase IB, or 1965-79, clearly was a volatile period with two severe droughts in 1965 and 1966, the oil crises, and the devaluation.

What worsened things was the introduction of MRTP, bank/insurance nationalisation, more licensing, tightening of labour laws, and so on, including a ridiculous period when marginal rates of tax were higher than 100 per cent!

Naturally, industrial growth plummeted, and with a lot more inefficiency forced into the system, the efficiency of capital as measured by the incremental capital output ratio (ICOR) declined dramatically with the ICOR rising from 3.9 in IA to 6.7 in IB.

Virmani finds this fall in industrial growth to be statistically meaningful (meaningful as in a distinct break from trend). His statistical tools then show that the removal of some of these barriers played a far greater role in the jump in manufacturing growth post 1981 than any other factor.

This is best demonstrated by what happens to investment. Between IB when growth falls and IIA when it surges, there is hardly any change in overall investment levels in the economy. Yet, the critical difference is that, once machinery imports are freed up, there is a dramatic surge "" growth in machinery investment suddenly surges from 3.7 per cent per annum in IB to 8.5 per cent in IIA.

Equally interesting, and something that should be an important learning for both the Congress and the NDA which want to increase public spending dramatically, is that the sharp surge in growth from IB to IIA takes place while public investment growth is falling.

Another interesting result is that the Green Revolution didn't lead to any statistically significant jump in agricultural growth. That is, once the effects of variation of rainfall are put into the model, there is no break in growth due to the Green Revolution.

This sounds counter-intuitive since productivity did go up after the Green Revolution, but an explanation probably lies in the fact that, due to worsening water availability for instance, productivity in the non-green revolution states probably fell.

It speaks very poorly of the progress made that, even today, 45 per cent of the change in GDP growth is explained by variations in rain.

But why, is the critical question, hasn't there been a break in the growth pattern in 2000 since, for all practical purposes, the economy is dramatically different from what it was in 1990. In just the last 10 years, the export share of GDP has doubled and import tariffs are also much lower.

Virmani's explanation is that India's reforms are incomplete and that is why the impact is not being translated into a big break. Take telecom, for instance.

In the 1980s, the STD booths seemed revolutionary and it looked like we'd extracted all we could from the sector. With NTP 1999, however, the country saw a huge surge in cellular telephony and an equally dramatic fall in rates. And even before this surge peaks, fresh reforms are seeing the stirrings of a surge in Internet connectivity.

In other words, there's a huge productivity gap waiting to be exploited. And while this is yet to happen, infrastructure shortages and policy bottlenecks (such as powerloom tax breaks till recently) are lowering productivity in other areas.

The lesson for the next government is clear. Only a slew of reforms will give India the big break it needs. If this doesn't happen, the Indira Gandhi period is soon going to be the only thing that's shining.

suniljain@business-standard.com