Squaring the circle

The Indian growth experience is challenging established wisdom in various ways. How do you explain the more than 8 per cent annual growth since 2003-04? With an ICOR of four and investment rate of around 26-27 per cent, this is exceptionally high. The explanation could lie in rising efficiency but this appears optimistic given the large body of literature suggesting productivity growth in industry has not accelerated since 1991. The answer could lie in economic growth being led by services which has a lower ICOR. Nearly 5.8 percentage points of the 8.9 per cent growth experienced in the period April-June, 2006 was due to the services sector and 1.8 percentage points due to manufacturing.

This leads to the next puzzle "" has India managed to shift from an agrarian economy to a service economy by bypassing the second stage of an industrial economy? Many argue that this is unsustainable in the long run. Not only has this services-led economic growth been empirically validated by the experience of the Indian economy for the past 20 years, there are also serious theoretical arguments to support this story. Exports of services are a major reason for our healthy balance of payments today and service sectors like telecom and IT can raise the productivity in other sectors. Further, the ageing of population in the developed world implies that the demand for services will continue to grow.

The Indian economy is supposed to have an infrastructure crisis, yet growth continues to rise higher than ever. In fact, the share of infrastructure as an input into manufacturing has declined sharply in the 1990s, which suggests that manufacturing sectors have either learnt to economise on these or are making alternative arrangements. One would expect export-oriented sectors to do well with globalisation and import-substituting sectors to be badly affected. However, the import-substituting sectors have performed well and export-oriented ones have faltered.

A sector like non-metallic mineral products, which had very high export-intensity of output, has registered a sharp decline in the rate of growth of value added from close to 12 per cent in the 1980s to 6 per cent in the period 1992-2000 and further down to 2 per cent in 2000-03. The basic metals sector that exported only 4 per cent of its output in 1994-95 registered a growth of 6.4 per cent per annum in value added between 1992 and 2003, up from an average of 5.25 per cent in the 1980s. Sectors like chemicals, basic metals, metal products and transport equipment, which had relatively very low export-intensity in 1994-95, have registered a higher rate of growth in value added during the reforms period than in the 1980s.

Another notable feature of the economic growth in the 1990s is the decline in the rate of poverty, as well as the absolute number of the poor. Yet, inequality is seen to have gone up. More importantly, the rate of unemployment continued to rise. If inequality and unemployment are not going down then how is poverty going down? There are numerous other anomalies that need to be reconciled. Either these will result in the evolution of new theories and paradigms of economic growth or the existing theories will need to change to accommodate these empirical realities.

shalabhks@gmail.com