The real origin of reforms

OKONOMOS

Life would be dull without coincidences, which is why two papers on the same topic "" economic growth in India "" by authors with the same first name have been made available at exactly the same time.

And believe it or not, both say much the same thing "" the roots of the current growth phase in India can be traced back to 1980-81 and that the 1991-92 reforms only helped it along with a swift kick in the pants.

Cross-industry studies show that the positive impact of liberalisation on productivity in the 1990s was small because much had already happened in the 1980s.

One of the papers is by Arvind Virmani* Director of ICRIER. He reviews India's growth performance since Independence. The other is by Dani Rodrik** of Harvard and Arvind Subramanian** of the IMF, who analyse the 1980s.

Both papers say that by the end of the 1970s, the political attitude to the private sector had changed. Virmani says that this led to a "change in the rhetoric of the government and intellectuals and, consequently, in the atmosphere/environment in which private agents and investors operate".

Roderik and Subramanian say that "growth was triggered by an attitude shift on the part of the national government towards a pro-business (as opposed to pro-liberalisation) approach".

Virmani says that with the acceleration in the growth of private investment in the 1980s and move towards machinery and equipment of a superior quality, there were huge gains in productivity.

"This played an important role in the growth acceleration" because an "output gap had opened up during the socialist growth sub-phase due to the suppression of economic growth below its potential".

Roderik and Subramanian say that "the attitudinal shift signaled by the Congress governments in the 1980s elicited a large productivity response, a phenomenon facilitated by the fact that India was far away from its income possibility frontier".

It wasn't just the L K Jha-induced Keynesian pump priming but several other factors, for which time-series and cross-section evidence is available, that led to a growth spurt.

Virmani says that the acceleration of growth during the first half of the 1980s "had a substantial element of temporary acceleration above its potential" and that this "bridged the output gap by around 1990-91. In the second half, following broader reforms, "there was a small increase in the growth rate".

Roderik and Subramanian make the same point but take it is whisker further. Referring to the differences in the Indian and Latin American experiences after a severe payments crisis, they say "it is hard not to draw the conclusion that the quick rebound (in India) was rendered possible by the strength of the 1980s performance".

However, like much of the rest of economic research, these two papers also don't quite get to the bottom of things. They tell us what happened "" changed political attitudes "" but not why it changed.

They tell us a lot about the impact but not as much about the process. This is a vital shortcoming, because process in one period influences policy in the next.

Also, Virmani at least, is unfair to the period starting around the early mid-1960s and ending around 1975. That was a period of terrible upheaval and battening down the hatches was the only response available. That it affected growth adversely has to be seen against the overall backdrop.

The truth is that there was no real change in political attitudes to dirigisme. And if you look at the election manifestos of different parties, there still isn't. The political risk of abandoning control is too great, or so the political parties believe.

Thus, what happened in the mid-1970s was the result of importuning by persons close to political power, or as in the case of Sanjay Gandhi, political power itself.

The "liberalisation" of 1974-77 was not because of any change of heart on Indira Gandhi's part but because the existing rules were impeding Sanjay's plans for Maruti. His attempts to circumvent them had led to huge uproars in Parliament.

The changes of 1977-80 were slightly more genuine and Virmani is right in identifying the old Congress (0) elements and Jana Sangh as being responsible. But even there, the former was paying some old dues and the latter was pandering to its trader base. There wasn't much else, really.

During 1980-84, there were no reforms. In fact, dirigisme became stronger. The real break occurred only when Rajiv Gandhi became prime minister in October 1984.

But after mid-1986, when the rumbling first started, even his government's reforms were driven not by any overall conviction but by lobbies. By the summer of 1987, Rajiv had run into deep political trouble and reform practically stopped.

Since the authors of both papers call for more research, here is a suggestion: get beyond the numbers. The politics will make the economics richer.

*India's Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth, ICRIER Working Paper No. 122, February 2004
**"Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition, NBER Working Paper No. 10376, March 2004