A short history of India's economy: A chapter in the Asian drama

TL;DR: A short history of the Indian economy since 1968 is presented in this paper, where the authors analyse the economic policies and the politics behind this transformation and use that as a backdrop to take stock of the huge challenges that lie ahead.

Abstract: This paper is a short history of the Indian economy since 1968. India today is a changed country from what it was half a century ago, when Myrdal published his Asian Drama. The stranglehold of low growth has been broken, its population below the poverty line has fallen markedly, and India has joined the pantheon of major players globally. This paper analyses the economic policies and the politics behind this transformation; and uses that as a backdrop to take stock of the huge challenges that lie ahead.

Summary

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.

Figures

Table 7: Bureaucratic efficiency, 2017

Table 3: India’s decadal GDP growth and investment rates

Figure 2: India’s foreign exchange reserves

Table 4: India’s foreign exchange reserves

Table 1: The Asian landscape, 2017

Table 6: Poverty: Percentages of population consuming less than $1.90 and $3.20 (PPP adjusted) per day

Figure 1: Growth rate of India’s real gross value-added at factor cost,1951–2017, with four period averages

Table 2: India’s annual GDP growth rate and investment rate, 1950–2018

Table 5: Adult literacy

Full text

WIDER Working Paper 2018/124
A short history of India's economy
A chapter in the Asian drama
Kaushik Basu*
October 2018

* Department of Economics and SC Johnson College of Business Cornell University, Ithaca and New York, kb40@cornell.edu.
This study has been prepared within the UNU-WIDER project on ‘Asian Transformations: An Inquiry into the Development of
Nations’.
Copyright © UNU-WIDER 2018
Information and requests: publications@wider.unu.edu
ISSN 1798-7237 ISBN 978-92-9256-566-4 https://doi.org/10.35188/UNU-WIDER/2018/566-4
Typescript prepared by Joseph Laredo.
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Abstract: This paper is a short history of the Indian economy since 1968. India today is a changed
country from what it was half a century ago, when Myrdal published his Asian Drama. The
stranglehold of low growth has been broken, its population below the poverty line has fallen
markedly, and India has joined the pantheon of major players globally. This paper analyses the
economic policies and the politics behind this transformation; and uses that as a backdrop to take
stock of the huge challenges that lie ahead.
Keywords: India, growth history, political economy, corruption, technological change
JEL classification: A12, B10, B31, N14, O10
Acknowledgements: This paper was presented at WIDER conferences in Hanoi, on 9–10 March
2018, and in Shanghai, on 29–30 June 2018. It has benefitted greatly from comments and
suggestions by Tony Addison, Alaka Basu, Amit Bhaduri, Prasenjit Duara, Guanghua Wan, Rolph
van der Hoeven, Sudipto Mundle, Siddiq Osmani, Daniel Poon, Frances Stewart, and Finn Tarp.
I am also grateful to Deepak Nayyar and an anonymous referee for detailed comments on the
penultimate version. I thank Haokun Sun and Gowtham Muthukkumaran for very able research
assistance.

1
1 Gunnar Myrdal and India
My first encounter with Gunnar Myrdal’s Asian Drama was soon after its publication. I joined
Delhi University’s St. Stephen’s College as an undergraduate in 1969. One of our professors,
Kalyanjit Roy Choudhury, a voracious reader, told us with excitement about this new, mammoth
publication. Soon the book became the ultimate fashion statement for students on our campus.
To be seen crossing the college yard with one of the volumes of the book in hand raised one’s
status. To be seen talking about what was in it raised it even more. It was a case of good
competition, which helped raise the level of erudition of my generation of students.
The publication, half a century ago, of this three-volume magnum opus, focused on South Asia,
predominantly India, and more tangentially on several Southeast Asian nations, marked a turning
point not just for the economics students of Delhi University, but for all those engaged in the
study of economic history, political economy, and development. Treating the region as focus,
Myrdal ranged over economics, history, and politics. His work would leave its mark on the region
and on economics itself. 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. This was his insistence that to understand the
performance of economies as complex as those of India and its neighbours, we have to view
economics as a discipline embedded in sociology, psychology, and politics.
Because Myrdal was charting such a new course, Asian Drama was both pioneering and flawed, as
we now know with the hindsight of recent research in behavioural and institutional economics.
We can see these twin traits in his analysis of India’s economy. In looking at India’s sluggish growth
and the vast numbers living in extreme poverty, Myrdal often allowed his pessimism to show
through. As he wrote,
If in a country like India the government were really determined to change the
prevailing attitudes and institutions, and had the courage to take the necessary
steps and accept the consequences, then these would include the effective
abolition of caste, prescribed by the constitution, […] land reform and tenancy
legislation, […] the eradication of corruption at all levels [,] forceful attack on the
problem of the educated unemployed and their refusal to do manual work, and so
on. (Myrdal 1968: 368
1
).
One senses in this a pessimism that is deep. It is a concerned pessimism, one that stems almost
from a frustration with a test case of a nation—in this case India—breaking out of the stranglehold
of colonialism, and one he wishes would succeed and become a prototype for others. This
commitment deserves appreciation, but the remark also suggests an inadequate understanding of
the complexity of interaction between economics and politics and the troublesome idea of the
endogeneity of institutions. His questioning ‘If […] the government were really determined’ and
suggestion that the ‘abolition of caste’ and ‘eradication of corruption’ are matters of choice by an
agent called government or by individuals that constitute the government reveals a rather simplistic
view of government as an exogenous institution. This is a common presumption in economics.
We would not, for instance, say that the market’s failure shows that consumers are not determined.
It is arguable that the level of determination a government exhibits is not an exogenous variable,
1
All page references to Asian Drama are to the widely used version edited by Seth King (Allen Lane 1972).

2
and, even if it were, it is not clear that governments have within their wherewithal the ability to
control many of the social ills like discrimination and corruption. The persistence of these ills is
not necessarily evidence of political leaders condoning them, even though it often is. We have to
use more sophisticated analysis to separate out the cases where the corruption is being condoned
or even encouraged, and where it is being haplessly suffered because its mitigation is beyond the
leader’s reach—or any individual’s reach, for that matter. Many of our worst social ills are collective
traps.
Fortunately, economics has moved on since then and even taken some small steps to reach out to
the neighbouring disciplines of politics, psychology, and sociology by trying to conceptualize
institutions as endogenous structures. While Myrdal deserves credit for venturing out to some of
these, rather treacherous, multi-disciplinary terrains so early, the social sciences at that time did not
have the tools and theoretical constructs to do justice to such inter-disciplinary trespassing. As a
consequence, we can now share the concern that Myrdal had for the theatre of Asia and at the
same time bring some of the more contemporary, multi-disciplinary social science methods to bear
on the project. That is what I shall attempt to do in this paper, whose focus is India and, in
particular, India’s economy. But in keeping with the above observation I look at some of
economics’ neighbouring disciplines insofar as they have a bearing on the subject matter of this
paper.
India is today a changed country from what it was half a century ago. It still has huge challenges
staring it in the face but, at the same time, the country has long since broken with the ‘Hindu rate
of growth’, its population below the poverty line has fallen steadily since the late 1960s, and sharply
over the last decade, and it has joined the pantheon of major players globally. One way of
celebrating Asian Drama is to take stock of what India has done since the time of its publication in
1968 and peer into the future to assess the challenges that lie ahead, and that is what I propose to
do in this paper. In the spirit of Myrdal’s work, my aim here is to analyse and not provide a
comprehensive description. The description is done selectively, with an eye to providing material
for the analysis. Myrdal himself noted: ‘As our main concern is analytical rather than merely
descriptive, we have not felt obligated to produce exhaustive factual details.’ (Myrdal 1968: 17).
The paper continues with a brief analysis of the political backdrop of the Indian economy. This is
followed, in Section 3, by a short and selective description of India’s growth experience since
Independence but with special attention to what happened in the 1970s onward. Thereafter, in
Section 4, I turn to some contemporary challenges for India. It should be pointed out at the outset
that the challenges are numerous; so I select areas within my expertise and where I have some
ideas to offer. The final section of the paper consists of a peering into the future.
2 Politics first
From the vantage point of hindsight, it seems quite remarkable that India did what no other newly
independent developing country did. It invested in politics first—establishing democracy, free
speech, independent media, and equal rights for all citizens. At one level all progressive leaders
around the world tried this. After the end of World War II, as nations broke from the yoke of
imperialism and became independent, we had not just Jawaharlal Nehru in India, but Bung Karno
Sukarno in Indonesia, Mohammad Ali Jinnah in Pakistan, Kwame Nkrumah in Ghana, Julius
Nyerere in Tanzania, and several other leaders trying to put their nation on an even keel politically,
and build political institutions to promote inclusive economic development. But in most cases it
did not last. Coups, chaotic responses, and the lust for power caused democracy to collapse in one
nation after another, bringing in military rule and conflict. A map of democracy around the world

3
in 1985 would show a bleak landscape in virtually all developing and emerging nations. India was
the exception.
While a large part of the credit for this does go to the early political leaders, Mahatma Gandhi,
Nehru, and Ambedkar, and to progressive writers and intellectuals like Rabindranath Tagore,
Periyar E.V. Ramaswamy, and Sarojini Naidu, as in all matters of history, luck also plays a role.
And India had it in ample measure. In any case, the upshot was that in terms of political design
and structure, with regular elections, a progressive constitution, secularism, free media, and an
empowered supreme court, India resembled an advanced nation, and in this respect had very few
peers in the developing world.
2
India’s downside turned out to be its economy. With growth sluggish, large swathes of population
living in abject poverty, and widespread illiteracy, the country trudged along decade after decade,
while several other nations, like South Korea, Taiwan, Singapore, and Hong Kong, starting from
roughly the same level of economic prosperity in the 1950s, took off in spectacular ways. Some
would argue that this sluggishness was in part caused by India’s democracy and progressive politics,
and that, if there had been a dictator, he or she would have pulled the economy out of the vicious
circle of poverty. I will comment on this later. 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.
Two caveats to the above claim ought to be made. First, the description should not convey the
impression of nothing happening during these first decades. Despite overall growth remaining
subdued at around 3.5 per cent per annum, much was happening beneath that. Taking a page out
of the Soviet model, India tried to institute five-year planning, with an effort to set up heavy
industries, large-scale steel production, and dam-building to generate electricity on a large scale.
Second, somewhere in the mid-1960s India had a successful ‘green revolution’ and broke out of
the trap of low agricultural productivity and frequent famines. Though this was most visible in
Punjab, Haryana, and western Uttar Pradesh, its benefits were felt across the nation.
The second caveat is that the slow growth of the early years should not be taken as an indicator of
the nation’s independence not having an impact on the economy. Independence was good for
India, even in terms of the yardstick of pure economic growth. Sivasubramonian’s (2000)
comprehensive statistical study shows that annual growth, from being negligible during the first
50 years of the 20
th
century, moved up to somewhere between 3 and 3.5 per cent in the decades
immediately after the country’s independence in 1947. Nayyar (2006) in his Kingsley Martin lecture
at Cambridge University in fact identifies 1951 and 1980 as the two turning points in India’s growth
in the 20th century. I will have occasion to dispute his second turning point but that will come
later.
There would be a short interruption in democracy in 1975, when the Prime Minister, Indira
Gandhi, declared an Emergency and took dictatorial control over the nation. For those who
believe dictatorship helps economic growth, the Emergency seemed like a godsend because, in
1975/76, India’s GDP growth rate hit 9 per cent, an unimaginable figure at that time and, it is also
believed, the trains ran on time. However, if these hardliners studied the growth trend thereafter,
they would be deflated. Growth thereafter began to decline and, by 1979/80, it had plummeted to
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).

Frequently asked questions

Q1. What is the evidence that much of it was verbal jugglery?

The evidence that much of it was verbal jugglery comes from the fact that enormous income and wealth inequality prevails in India (see, for instance, Bardhan 2007). 

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.