A short history of India's economy: A chapter in the Asian drama
Summary (3 min read)
2 Politics first
- From the vantage point of hindsight, it seems quite remarkable that India did what no other newly independent developing country did.
- But the fact remains that whether or not this causal explanation from politics to economics has any merit, two things do stand out: early India’s remarkable political achievements and the persistent economic stagnation for at least three decades after its independence.
- Indira Gandhi was also a deep influence on India’s politics and the nature of the state.
- Despite the two-year retreat from 1975 to 1977 caused by the Emergency, and despite its complicated and many-splendored manifestation, democracy is a remarkable achievement for India.
3 India’s economic trajectory since independence
- Before getting into a discussion of India’s trajectory, let us begin with a quick overview of where India stands among the Asian economies.
- In the cluster of 10 Asian countries on display, India is the eighth poorest in terms of per capita GDP, ahead of Pakistan and Bangladesh.
- At least two nations in this group, South Korea and Singapore, are actually highincome nations.
- Given that all the countries in this cluster were roughly in the same per capita income band in the 1950s, this shows what persistent good growth and the magic of compounding can do.
- It is heartening to see that there is some catching-up taking place now, because the poorer nations seem to have the higher growth.
4 Contemporary challenges
- Having described the Indian economy’s history and trajectory thus far, I want to now discuss some contemporary challenges that the nation faces.
- While India’s growth has picked up in the last few decades, and especially since 2005, as just discussed, India still faces formidable challenges—of deep-seated poverty, endemic corruption, growing inequality, and other anxieties of early growth.
- As the data cited in the previous section show, basic literacy is beginning to catch up now but there is a tendency towards a slide in terms of higher education and research.
4.1 Bureaucratic costs
- Let me begin with a matter that I have not commented on in this paper but is, I believe, a major restraint on India’s development.
- In India, the cost of transactions with the bureaucracy is too high.
- India’s disadvantage in this is caught well by the World Bank’s Doing Business indicator, which is explicitly designed to capture how hard it is for small businesses to do their essential transactions with the government.
- The authors cannot allow enterprises to choke their rivers, lakes, and oceans with plastic and chemicals on the grounds of free-market efficiency.
4.2 Corruption control
- The above topic naturally leads us to the problem of endemic corruption, which was a major concern of Myrdal.
- To understand this, the authors need to dissect the problem carefully.
- According to Transparency International’s data, Singapore has less corruption than the UK and USA; Hong Kong less than the USA.8.
- To understand this, consider a nation where corruption is endemic.
- In other words, what begins as an anti-corruption policy becomes an instrument of disciplining the opposition and the media.
4.3 Norms and institutions
- Turing to broader issues, the challenge of mitigating corruption entails thinking of the state as an endogenous institution consisting of individuals with their own objectives and motivations, as assumed in the literature on new institutional economics, of which Myrdal’s work was clearly a precursor (see Evans 1995; Stiglitz 2017; Basu 2018).
- In controlling corruption, the design of incentives with which economists have been concerned matter, but the social and political setting is just as important.
- And even though it is true that, at this stage, the authors do not fully understand what causes culture and social norms to change, the mere recognition that they do change and can potentially respond to policy is important and can help set up a useful research agenda exploring the link between various policies and what they do to their mores.
- Second, even when their norms and culture are fixed, knowing how they intertwine with economic variables enables us to think of new policy interventions and assess more accurately the costs and benefits of interventions.
- A multi-country study in which researchers made surprise visits to government-run primary schools shows that in terms of teacher truancy, India is second only to Uganda (Kremer et al. 2004)—and by a short head.
4.4 Technology and labour
- Turning finally to the challenge of technology and labour, for India this is as yet a problem in its early stages, but it may come to be the dominant problem in the medium to long term.
- Worldwide and in high- and upper-middle-income countries the problem is acute.
- Since the reforms to India’s economy during 1991– 93, growth has been higher but job creation has lagged behind growth quite significantly (Ghose 2016; Nayyar 2017).
- Attention needs to be directed to the other sectors, which also happen to be more labourintensive.
- There will be a challenge later when wages rise and India becomes part of the global story.
5 The next 25 years
- Even a small decline in its production can cause food inflation, large welfare losses among the poor, and even political instability.
- While the growth story has been exemplary, various indicators show that growth has not been distributed well across society (see Subramanian 2016).
- The more likely outcome is that the authors will rise to the occasion with novel regulations and laws, as they did in the early 19th century in response to the Industrial Revolution.
- With its early investment in the political institutions of democracy, secularism, and openness to ideas, as well as in good universities and institutes of higher learning, including science and engineering, and in its more recent improvements in savings and investment rates, India, with its enormous size, has the potential to be in the frontline.
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"A short history of India's economy:..." refers background in this paper
...The economic reforms of 1991–93 in India have been analysed extensively (see Nayyar 1996; Ahluwalia 2002; Mohan 2002)....
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488 citations
"A short history of India's economy:..." refers background in this paper
...For one of the most authoritative studies of the interface between politics and economics in India, see Bardhan (1998)....
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...2 For discussion, see Sen (2005) and Basu (2009). For one of the most authoritative studies of the interface between politics and economics in India, see Bardhan (1998)....
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423 citations
"A short history of India's economy:..." refers background in this paper
...It is otherwise hard to explain why, though teachers are paid the same salary and subjected to the same rules of economic incentives and punishments across the nation, teacher truancy is Jharkhand is about three times as high as that in Maharashtra, as the Kremer et al. (2004) study shows....
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...A multi-country study in which researchers made surprise visits to government-run primary schools shows that in terms of teacher truancy, India is second only to Uganda (Kremer et al. 2004)—and by a short head....
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Frequently Asked Questions (8)
Q2. What is the role of incentives in creating greater work discipline among teachers?
11 For an innovative scheme of corruption control which does not involve the government but entails self-enforcing contracts among private sector firms and corporations, see Dixit (2015).sanctions—both carrots and sticks—in creating greater work discipline among teachers.
Q3. What was the main reason for India’s economic reforms?
As has been emphasized by Narayana Murthy (2004), the reforms were critically important because they cut down government bureaucracy and enabled speed in a sector that depends on that.
Q4. What are the two areas that need to be done?
For this, work is needed in two areas that have already been mentioned: namely, creating better infrastructure and cutting down bureaucracy.
Q5. What was the time to jettison the old exchange rate regime?
The oil price shock of 1973 affected the whole world; and this was also, for many countries, the time to jettison the old exchange rate regime in favour of a more flexible one.
Q6. Why did it leave its mark on economics?
Its mark on economics occurred because what Myrdal was attempting, admittedly in an inchoate way, amounted to an early precursor of both New Institutional Economics and Behavioural Economics.
Q7. What is the main argument that castes have played a role in India’s democracy?
While in itself caste is a deplorable inheritance—and, at least in speech, most founding political leaders of India spoke out against it—it has been argued by some that the castes have played a role in nurturing India’s democracy by providing focal points of coalition and political mobilization for disadvantaged groups (see Varshney 2013).
Q8. What is the problem of nations with a complex history of law-making?
There is also the problem of nations with a complex history of law-making, such as India9, where there has been such a build-up of layers of law and custom that it is now virtually impossible to avoid violating the law.