India’s rate of economic development has not been very impressive by most standards. But compared to what it was prior to independence, there is cause for celebration. At independence in 1947, India was an extremely poor country with an annual per capita income of only $50 for its 350 million people. Life expectancy was 32 years and literacy rate was 17 percent. National savings rate was around 10 percent. Agriculture accounted for 60 percent of GDP and 80 percent of employment. Per capita food production and per capita income had been declining continuously for nearly the prior fifty years.
After independence, even under the growth-retarding effects of Nehruvian socialism and central planning, India’s performance improved. In a study of cross-country growth experience of 85 countries from 1960 to 1992, India’s performance is almost precisely average. This is poor in relation to the potential that India has given the degree of human, institutional, and natural capital at its command. Economists such as Jagdish Bhagwati have attributed that failure to the “nearly three decades of illiberal and autarkic policies” before the reforms of the early 1990s.
It is easy to see the effect of the mid 1980s change in the dominant ideology of economic development from state intervention to decentralized economic liberalization. Before 1990, the economy had a productivity doubling time of fifty years and the expected time to reach America’s current GDP per capita was 250 years. With the post 1990 growth rates, India’s doubling time is only 16 years and only 66 years for reaching the current US per capita GDP.
Indian Growth Miracle
Some observers have called the change from an inward-looking autarkic economy to an open, market-driven one since 1990 as the Indian Growth Miracle. The neo-liberal economic reforms propelled India to become one of the fastest-growing economies in the world. Yet India should have been one of the fastest growing economies in the decades before 1990, and not just in the post 1990 period. It did not because its planners chose to insulate the economy from the global economy. That conferred some benefits in terms of shielding India from external shocks, but it paid a very high price in terms of foregone growth.
A more serious concern is regarding the slowing down of India’s growth after reaching a peak of 7.8% in 1996-97. As T.N. Srinivasan points out, since 1997, the growth rate fluctuated between 4.8% and 6.6%. He writes that “the constraints on achieving a more rapid growth are mostly self-inflicted domestic ones, largely of political economy.” The Economist in an informative survey of the Indian economy referred to “India’s boundless potential” and compared India to a caged tiger. Amartya Sen believes that “the cage that keeps the Indian economy so well tamed is not only that of bureaucracy and governmental over-activity, but also that of illiteracy, undernourishment, ill health, and social inequalities, and their causal antecedents: governmental neglect and public apathy.”
The growth rates mentioned above are averages and conceal within them a more disturbing fact that must be addressed to better understand the causes of India’s poor performance and subsequently frame the correct response to the problem.