Facets of indias economy and her society volume i recent economic and social history and political economy

Volume I is entitled Facets of India’s Economy and Her Society: Recent Economic and Social History and Political Economy.. Contents 1.1 Introduction: Indian Gross Domestic Product Prio

‘Professor Raghbendra Jha is the right scholar and economist to take readers through the development of the Indian economy Readers will be in good hands.’

—Edmund Phelps, Columbia University, USA, winner of the 2006

Nobel Prize in Economics

‘This two-volume study on India’s economy and society by Professor Raghbendra Jha skilfully combines high quality analytical scholarship, and nuanced exposition of empiri- cal evidence to bear on India’s development policies and challenges As linking of econ- omy and society is increasingly recognised as essential for addressing policy challenges by the current phase of globalisation, this study should be valuable not just for those study- ing India, but also for those interested in global developments.’

—Mukul Asher, National University of Singapore, Singapore

‘Over the years, I have benefited from reading the works of Professor Raghbendra Jha, and from teaching from them I enthusiastically recommend these two volumes to you.’

—Raaj Kumar Sah, University of Chicago, USA

‘It is perhaps the best and most scholarly contribution to understanding the Indian economy and society Its rich historical perspective and a profound understanding of how India has evolved into a major economic power set standards of scholarship and analytical rigour that will be hard to surpass.’

—Raghav Gaiha, University of Manchester, UK

‘India is critical for the world Knowing India is vital This book is a tour-de-force review of the fundamental topics on the Indian political economy and society that are relevant for any committed social scientist to be aware of Raghbendra Jha is one of the leading contempo- rary India scholars globally, and he has conscientiously put together the materials in a careful and structured way that will find substantial and immediate user acceptance worldwide.’

—Sumit K. Majumdar, University of Texas at Dallas, USA

Her Society Volume I

Facets of India's Economy and Her Society Volume I

Recent Economic and Social History

and Political Economy

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To Mother India and Mataji with love

These two volumes cover aspects of Indian economy and society They take a long view of both and try to position them on a broader cultural and historical canvas These are the most important characteristics that distinguish this work from the vast literature that already exists about India

India has a continuing cultural history spanning about 7000  years The country has some key beliefs and practices that have survived inter-nal challenges and encounters with hostile external civilizations over sev-eral millennia In the process, a composite culture has also grown, testifying to India’s ability to absorb and assimilate external ideas and practices in a largely peaceful manner, even when these ideas and prac-tices are imposed in an aggressive fashion

Even since attaining independence from foreign rule on August 15,

1947 and declaring herself a democratic republic on January 26, 1950, India has faced a multitude of problems of a scale and intensity that would test the most mature of societies These have included intense mass poverty and hunger, very poor literacy and educational abilities of the population, the task of uniting a country with scores of languages and ethnicities ruled by different entities for decades and persistent threats of external aggression, to name just a few At a deeper level, India has had to regain her self-confidence and rediscover her ancient cultural moorings in order to define the kind of nation she wants to be in the future Unlike

Preface

The selection of topics has been made keeping this in mind Volume I

is entitled Facets of India’s Economy and Her Society: Recent Economic and

Social History and Political Economy It begins with a section entitled

“India’s economy in historical and spatial perspective.” This presents a long view of the performance of the Indian economy, and then discusses key aspects of the country’s population, land and labor, before moving on

to human development The impact of Muslim rule is considered next, and then the state of the Indian economy under British rule is discussed Economy and society were deeply affected by India’s struggle for free-dom, so one chapter is devoted to an account of this

The second section, “Basic Structure of India’s Governance,” contains two chapters that deal with India’s political economy The first covers the Indian Constitution and basic structure of governance; the second pro-vides a brief overview of major economic and political developments in independent India

Volume II is entitled Facets of India’s Economy and Her Society: Current

State and Future Prospects It is divided into three sections The first is

entitled “Principal sectors of the Indian economy” and contains three chapters These discuss the performance and prospects for India’s agricul-ture, manufacturing and services sectors

The second section is entitled “Emerging issues in India’s economy,” and this consists of four chapters The first discusses India’s links with the external world through international trade, investment, migration and

remittances Since the onset of major economic reforms in 1991 regional inequality across Indian states has increased Hence, the next chapter dis-cusses the evolution of regional inequality in India and the role of indi-rect tax reform and vertical fiscal transfers A discussion of the newly instituted Goods and Services Tax is also included The next chapter dis-cusses India’s performance in education and health services and suggests some policy initiatives in these areas The final chapter overviews the state

of the environment

The third and final section, entitled “Some aspects of India’s society and prospects for the future,” consists of three chapters The first dis-cusses gender issues, the second intercommunity relations and the last future prospects

When writing about the economy and society of a country as complex

as India’s it is important to remember that the country represents a tinuing ancient culture: Hindu civilization Indeed, this is the dominant reason for India’s cultural unity even at those times when the country did not constitute a single sovereign geographical entity and faced continu-ous assault from hostile invaders and settlers This cultural continuity has had deep influences on, among other things, social relations, laws, attitudes toward science, progress, policy, and people’s response to eco-nomic incentives Hence, these books will often allude to cultural issues and Hindu scriptures To accomplish this I have studied and attempted

con-to absorb the major Hindu scriptures, and con-to dwell on them I have also

studied Shri Guru Granth Sahib—the holy book of the Sikhs During this

process, I was surprised to learn that many religious practices are actually gross aberrations It is my conviction that overlooking the true tenets of India’s civilization and concentrating on the aberrations, as some treatises

on the country’s economics and politics have done, does not help our understanding of developments We can’t discuss a country with an ancient culture, which is even now at the core of the country’s civiliza-tion, by ignoring that culture

When writing a work such as this, it helps if the author can have a broad perspective on and understanding of the history and traditions of the country This is what my former professor at Columbia University, Ronald Findlay, told me when he was visiting my department at the Australian National University in 2012 He had confidence that I had

x Preface

these two characteristics and thus encouraged me to write such a book; but hr is clearly not responsible for its contents! I would argue that my early education in India, and later teaching experience in various leading economics educational institutions (Delhi School of Economics, Indian Institute of Management, Bangalore, and Indira Gandhi Institute of Development Research) in India and working on topics related to the Indian economy have kept me connected with my roots At the same time, my long experience in teaching in the USA (Columbia University and Williams College), Canada (Queen’s University), Australia (Australian National University) and the UK (University of Warwick) has hopefully provided me with the distance and the perspective needed to view Indian issues objectively

Having completed these volumes I now realize that I could not have done so without a lifetime of reading, introspection and meaningful dia-logue with people with wide experience and expertise As a result, I have run up a long list of debts First and foremost, I would like to thank my dear wife, Alka, who has long been an excellent sounding board for my ideas and has contributed much to the substance and the arguments made here Her contributions to this book and to our life together have been truly immeasurable and I cannot express them in words Suffice it

to say that she and our dear son, Abhay, have made the task of writing this book an absolute delight I would also like to thank my many friends, current and former students and collaborators who have influenced my thinking on the issues discussed here and also helped in other ways I will mention only a few of them here They include Sures Jain, K.V. Bhanu Murthy, Anurag Sharma, Ashima Goyal, Gerald Epstein, L. Sridharan, Tulsi Tawari, Raghav Gaiha, Hari Nagarajan, Duc Nguyen Truong, Nguyen Hieu, Hai Anh La, Tu Dang, (the late) D.P. Chaudhuri and (the late) Ashok Seth None of these fine people is responsible for the content

of this work The comments of anonymous referees have also been ful The stimulating and supportive working conditions at Arndt-Corden Department of Economics, Australian National University, have been invaluable in helping me to design and complete this work

help-I should like to take this statistically improbable opportunity to thank and honor Edmund S. Phelps, my PhD supervisor at Columbia University Professor Phelps, a Nobel Laureate and arguably one of the most imagi-

native economists of our time, taught me to appreciate that at a deep level economics is about human beings Hence, our analysis must embody not just scientific precision but also a strong concern for the people to whom this analysis is addressed.

This is the fourth time I have published with Palgrave Macmillan and,

as in the past, it has been a pleasure to work with them Laura Pacey, economics editor, has been very helpful with her time and advice since this work’s initial inception Clara Heathcock and other professional staff

at Palgrave have been most generous in addressing any problems and responding to all queries

I have tried to cover considerable ground in this work, from history to politics to culture, arts, societal affairs and, most prominently, econom-ics Perhaps enough justice has not been done to all of these areas, but I would argue that this is probably impossible to deliver in a single book Nevertheless, I have tried to build up a cogent argument that links them all, but shortcomings will remain To quote the legendary nineteenth- century Urdu poet Ghalib Mirza Asadullah Khan:

Hazaaron khwahishen aisi ke har khwahish pe dam nikle

Bohat niklay mere armaan, lekin phir bhi kam nikle

Thousands of desires, each worth dying for…

many of them I have realized … yet I yearn for more…

I do hope readers find these volumes stimulating reading

November 2017

Contents

1.1 Introduction: Indian Gross Domestic Product Prior

1.2 India’s GDP since Year 0 AD 5 1.3 India’s GDP under British Rule 9 1.4 Indian Economy at Independence 12 1.5 Indian GDP Since Independence 13 1.6 Regional Variation in Indian GDP 18 1.7 India’s Performance with Respect to International Trade 21 1.8 Saving, Investment and Productivity 23

2.1 Introduction and Background 31 2.2 India’s Population 33 2.3 Population’s Dependence on Agriculture 46

2.4 Some Characteristics of India’s Labor Market 56 2.5 Conclusions: A Final Word on Employment and Wages 68

4.1 Introduction: Pre-Islamic Foreign Invasions of India 107 4.2 Chronology of Muslim Invasion of and Rule in India 109 4.3 Policy of Muslim Rulers in India 117 4.4 Salient Features of the Economy under Mughal Rule 118

5 India’s Economy Under the Rule of the East India

5.3 India’s Deindustrialization under British Rule 131 5.4 Economic Drain from India 138 5.5 Land Tenure Systems in British India 142

xv

Contents

6.1 Introduction: Revolts Against the British Before 1857 161 6.2 The Uprising of 1857 163 6.3 Laying the Foundations of the Next Phase

of the Freedom Struggle 166 6.4 The Freedom Struggle to 1919 169 6.5 The Freedom Struggle 1919–1935 177 6.6 Indian Freedom Struggle 1935–1942 and the Rise

of M.A. Jinnah 183 6.7 Indian Freedom Struggle 1942–1947 and the Trauma

of Partition 189

7.2 Basic Structure of Governance in India 212 7.3 Constitutional and Legal structures 219 7.4 Structure of Taxation in India 228

8.3 Slow Economic Growth and the Triumph

of Left-Oriented Policies: Shastri as Prime Minister and the First Term of Indira Gandhi 261 8.4 India’s First Non-Congress Government, Ensuing

Political Instability and Mrs Gandhi’s Second Term 268 8.5 Inherited Political Power, Its Demise and Subsequent

Instability: Rajiv Gandhi, V.P. Singh

and Chandrashekhar as Prime Ministers 271 8.6 A Period of Deep Reforms, Rollback and Reforms

Again: The Prime Ministership of P.V. Narasimha Rao, H.D. Dewe Gowda, I.K. Gujral and the First Phase

of A.B. Vajpayee 279 8.7 The Second Phase of the Vajpayee Years and the First

Term of Manmonhan Singh: 1999–2004

8.8 Manmohan Singh’s Second Term and the First Three

Years of Modi’s Government 290 8.9 Ongoing Prime Ministership of Narendra Modi 294

List of Figures

Fig 1.1 Coefficient of variations in real state domestic product per

cap-ita Source: Author’s calculation based on data from Handbook

of Statistics of the Indian Economy, Reserve Bank of India Data

for 1993–1994 to 1998–1999 at 1993–1994 prices, from 1999–2000 to 2003–2004 at 1999–2000 prices and from

Fig 2.1 Total fertility rates in India and constituent major states: 1961–

2001 Source: Author’s computation from Census of India

Fig 2.2 Child population (0–14 years with sub-groups) of India by

gender and age groups in 1951–2001 with projections to 2026 Source: Author’s compilation from Census of India: various issues including Census of India 2001: Population Tables and

Fig 2.3 Change in child population (0–6 years) (unit: million

chil-dren) Notes: (*) 1991 census was not held Sources: Author’s compilation from Census of India 1991, 2001, 2011 and cal-

Fig 3.4 Coefficient of variation of poverty gap Source: Author’s

calcu-lations based on National Sample Survey data Note: Traditional

List of Tables

inde-pendence (base for real GDP growth calculation 2004–2005 prices) 14

population 17

Table 2.4 Household size, number of children (0–14) in poor and

Table 2.5 Child population (0–14 years with sub-groups) of India by

gender and age groups in 1951–2001 with projections to

2026 41 Table 2.6 Gender bias in child population (0–6), social groups and

Table 2.10 All-India proportions of households of different social

groups possessing up to 1 hectare of land (%) and tion of non-agriculture household by major source of income (rural) (%) (1993–1994, 1999–2000, 2004–2005

Table 2.13 Annual growth of GDP by industry (at one digit level) at

Table 2.15 Labor market participation rates for females in India in

Table 2.16 Vulnerability of unemployment: India in comparative

perspective 59

methodology 83

Table 3.7 Gini coefficient of distribution of consumption for select

xxi

List of Tables

Table 3.9 Poverty in India and states 2009–2010 and 2004–2005

Table 3.10 Number and percentage of population below poverty line by

Pakistan 152

Table 7.1 Population, area and political characteristics of states and

Table 8.1 GDP, GNP per capita and capital formation (billions of

Table 8.2 CPI annual inflation in India (% per  annum January to

December) 258 Table 8.3 GDP, GNP per capita and capital formation (billions of

2004–2005 rupees and percentages) during the Shastri and

Table 8.4 GDP, GNP per capita and capital formation (billions of

2004–2005 rupees and percentages) The Indira Gandhi and

Table 8.5 Economic performance of India during Rajiv Gandhi,

Deve Gowda and I.K.  Gujral governments and the first

Vajpayee’s prime ministership and Manmohan Singh’s first term 287

Table 8.9 List of Prime Ministers of India and their respective tenure 299 Table 8.10 List of Finance Ministers of India, their party affiliation and

tenure 300 Table 8.11 List of deputy chairmen of the Planning Commission/Niti

Ayog 303 Table 8.12 List of Finance Commissions of India and their

chairpersons 304

Part I

India’s Economy in Historical and Spatial Perspective

1.1 Introduction: Indian Gross Domestic

Product Prior to 1947

Will Durant and Friedrich Hagel, two of the finest intellectuals of the West, had very different views of Indian history Hagel (1821–1831, reprinted in 1975) stated that anyone with even a rudimentary knowl-edge of the treasures of Indian literature and spiritual achievements would conclude that India had no history, whereas Durant (1930) wrote that Indian civilization went back to 3500 bc, and that at no time in history was the country without a civilization These contrasting statements reveal the drastic change in European views of India over a century In particular, Durant meticulously recorded some of the attainments of Indian civilization, beginning with the observations of Megasthenes (Alexander’s historian who went with him to India in 326 bc) Megasthenes expressed amazement at the cultural achievements of the people living on the banks of the Indus, considering their achievements

to be comparable in every way to the civilizational and artistic ments of the Greeks

attain-Yet it is true that during the tumultuous years of foreign occupation of India there was little recorded history that was intelligible to Europeans

Of course, this changed somewhat in the later years of British occupation and after independence Now there is a substantial literature on Indian history with several, competing, visions of India’s past Indeed, some would argue that the country’s history is still viewed through imperialistic

or left-wing prisms, as if one of the world’s oldest civilizations did not have the capacity to tell its own history

This is a book about India’s economy and society, however, which means it must concern itself (at least) with recent economic and social history The novelty in this approach is that it takes as axiomatic that any meaningful study of India’s economic history cannot be divested from the prevailing social conditions or India’s deep-rooted spiritual heritage Indeed, to most Indians India is more than a tract of land It represents

an unbroken culture that is at least 7000 years old and encompasses the entire land mass of India, influencing people in other parts of the world

as well.1 As distinct from the political or linguistic unity espoused by Western countries, India has always presented a deep concept of cultural unity, which is capable of absorbing immense diversities and indeed is strengthened by such diversity Over several millennia India has had trade, investment and migration relations with various parts of the world, and thus its economy and society have been affected by the rest of the world I recognize that covering all these issues in one volume is a daunt-ing task, so will concentrate on selected facets of India’s economy and society and their relations with the world; hence the title of this book.This chapter begins with a discussion of the most important indicator

of economic performance—gross domestic product (GDP) In Chap 2 I explore key issues of population, land and labor In Chap 3 I discuss broader aspects of human development beyond GDP. Some aspects of the impact of Muslim rule in India are considered in the next chapter, after which the state of the Indian economy under British rule is dis-cussed The shape of Indian economy and society was deeply affected by India’s struggle for freedom, so one chapter is devoted to providing an account of India’s struggle for freedom The next two chapters deal with India’s recent political economy, the first with the Indian Constitution and basic structure of governance and the second with major economic and political developments in independent India

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This chapter is organized as follows In Sect 1.2 I examine historical data on India’s share of world trade and the rate of growth of real GDP. In Sect 1.3 I explore the performance of Indian GDP under British rule, whereas in Sect 1.4 I provide a quick snapshot of the Indian economy at the time of independence In Sect 1.5 I lay out the basic characteristics

of India’s GDP since independence, and in Sect 1.6 I examine regional inequality in India In Sect 1.7 I explore India’s share of international trade in GDP compared with that for other countries/country groupings

In Sect 1.8 I provide a brief description of the behavior of savings, ment and productivity in recent years, and Sect 1.9 concludes

invest-1.2 India’s GDP since Year 0 AD

Comprehensive and wide-ranging data on national income, labor, trade and investment have been complied and commented upon by Maddison (2006).2

In the year 0 AD India’s share of world GDP was 32.9%, falling to 28.9% in 1000, 24.5% in 1500, 22.6% in 1600, 24.4% in 1700, 16.0%

in 1820, 12.2% in 1870 and 7.6% in 1913 Islamic occupation and British colonialism took India’s economy backwards After independence this share improved to 4.2% in 1950 but slipped to 3.1% in 1973, recov-ering somewhat to 5.0% in 1998 (after the 1991 liberalization) In con-trast, China’s share of world GDP was 26.2% in year 0 AD, 22.7% in

1000, 25.0% in 1500, 29.2% in 1600, 22.3% in 1700, 32.9% in 1820, 17.2% in 1870 and 8.9% in 1913 In 1950, after the Revolution, China’s share of world GDP had fallen to 4.5% It was 4.6% in 1973 but had more than doubled to 11.5% by 1998

The UK’s share of world GDP was 1.1% in 1500, 1.8% in 1600, 2.9%

in 1700, 5.2% in 1820, 9.1% in 1870 and 8.3% in 1913 Imperialistic rule over colonies was good for the UK. Its share of world GDP slipped

to 8.3% in 1913 (largely because of the rise of the USA), to 6.5% in

1950, 4.2% in 1973 and 3.3% in 1998 At the time of India’s dence, the UK share of world GDP was much higher than that of India’s

indepen-In 1500 the USA’s share of world GDP was 0.3%, 0.2% in 1600 and 0.1% in 1700, but then it sharply rose to 1.8% in 1820, 8.9% in 1870,

19.1% in 1913 and 27.3% in 1950 This dropped marginally to 22.0%

in 1973 and 21.9% in 1998 Western Europe’s share of world GDP has also climbed more or less steadily over time It was 10.8% in the year

0 AD, 8.7% in 1000, 17.9% in 1500, 19.9% in 1600, 22.5% in 1700, 23.6% in 1820, 33.6% in 1870 and 33.5% in 1913 This slipped after the Second World War to 26.3% in 1950, 25.7% in 1973 and 20.6% in

1998, the war taking a substantial toll on European economies alongside

a sharp growth in the US economy

The former Soviet Union’s share of the world economy rose steadily over this period It was 1.5% in the year 0 AD, 2.4% in 1000, 3.4% in

is considered to have begun in 1757 after the Battle of Plassey) Nevertheless, even in 1700 India accounted for nearly a quarter of world GDP whereas the UK accounted for just 2.9% During the colonial period India’s share of world GDP dropped precipitously to just over 4%

in 1950, whereas the UK’s share rose sharply, reaching a peak of 9.1% in

1870 before dropping slightly in 1913 and then a bit more sharply, ably as a result of the two world wars In Maddison’s calculations no sin-gle economy has ever accounted for a larger share of world GDP than India’s did in the year 0 AD

prob-Indian GDP growth did not reach 1% during the colonial period but picked up after independence, particularly in the last period considered

UK GDP growth was in excess of 2% after 1820 and never slipped below 1%

For Western Europe, the annual average compound growth rate was

−0.01% (0–1000), 0.30% (1000–1500), 0.41% (1500–1820), 1.65% (1820–1870), 2.10% (1870–1913), 1.19% (1913–1950), 4.81%

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(1950–1973) and 2.11% (1973–1998) Comparable growth rates for the former Soviet Union were 0.06% (0–1000), 0.22% (1000–1500), 0.47% (1500–1820), 1.61% (1820–1870), 2.40% (1870–1913), 2.15% (1913–1950), 4.84% (1950–1973) and −1.15% (1973–1998).

The USA’s compound annual growth rates were 0.86% (1500–1820), 4.20% (1820–1870), 3.94% (1870–1913), 2.84% (1913–1950), 3.93% (1950–1973) and 2.99% (1973–1998)

Comparable growth rates for China were 0% (0–1000), 0.17% (1000–1500), 0.41% (1500–1820), −0.37% (1870–1913), −0.02% (1913–1950), 5.02% (1950–1973) and 6.84% (1973–1998)

Japan’s compound annual growth rates were 0.10% (0–1000), 0.18% (1000–1500), 0.31% (1500–1820), 0.41% (1820–1870), 2.44% (1870–1913), 2.21% (1913–1950), 9.29% (1950–1973) and 2.97% (1973–1998)

These figures, while informative, provide information over long ods of time and for aggregate GDP. We are also interested in exploring how Indian economic performance, measured over shorter periods of time and in terms of per capita availability of goods and services, fared over the years This is depicted in Table 1.1, which is based on the well- known Barro-Lee data set I computed annual growth in real GDP per capita from 1895 to 2009 for China, France, Germany, India, Japan, the

peri-UK and the USA. These annual figures are not listed here to conserve space, but five year averages are reported in Table 1.1

It is important to note the long periods of time prior to independence

in 1947  in which India had negative growth of per capita GDP.  This retardation at worst and slow growth at best was not due to excessive population growth As a consequence of this long legacy of retardation, India’s per capita GDP in 1895 was a larger percentage than it was in

2006 than any of the other countries

Over this period China’s per capita GDP increased by nearly 30 times, France’s in excess of 9 times, Germany’s 6.36 times, Japan’s 20.58 times, the UK’s 5.77 times, the USA’s 10.40 times and India’s only 4.89 times

As a consequence, and as indicated by the last row of Table 1.1, India’s current (2010–2014) GDP per capita in purchasing power parity (PPP) terms is well below the levels in these other countries

The period between 1000 and 1500 was a period of considerable bulence in India with only short periods of an assertive central authority Digby (1982) also notes that the period 1200–1500 was one of consider-able economic decline in India, particularly northern India.3 Mughal rule was established in India in 1526 by Babur and his invading troops and this continued the stagnation, even decline, of the Indian economy However, the decline really accelerated after the establishment of the rule

tur-of the East India Company (as a sequel to the battle tur-of Plassey in 1757) The establishment of direct rule by the British government in 1858 only perpetuated this decline An important and inevitable conclusion to derive from the above is that colonial rule—Moghul and particularly British—inflicted great harm on the Indian economy Since the year

1000 India’s share in world GDP continued to decline at least until the middle of the twentieth century Therefore, before India can become a more significant player in the world economy it will have to sustain high economic growth for several decades

1.3 India’s GDP under British Rule

Sivasubramonian (2000) provides considerable details of GDP growth under colonial rule Some basic characteristics of such growth are given

in Table 1.2, which depicts ten year averages of annual GDP growth and the standard deviation of such growth for the primary, secondary and tertiary sectors and the aggregate economy, population, real per capita income and real output per worker Also presented in Table 1.2 are averages of annual growth and standard deviation for the entire period of the twentieth century before India attained independence; that is, from 1900–1901 to 1946–1947 Table 1.3 portrays the sectoral composition

of India’s real GDP at 1948–1949 prices for the period 1900–1901 to 1946–1947

The growth performance of the Indian economy during this period was dismal Average growth rates were low and sometimes negative, whereas the variability of growth was high

The average primary sector growth rate was 0.28% for the full period, and only during the period 1900–1901 to 1909–1910 did it cross 1%

Table 1.2 Time period

GDP per capita growth

Real output per worker growth

A annual growth rate (%)

Standard deviation of average annual growth rate (%)

A annual growth rate (%)

Standard deviation of average annual growth rate (%)

A annual growth rate (%)

Standard deviation of average annual growth rate (%)

A annual growth rate (%)

Standard deviation of average annual growth rate (%)

A annual growth rate (%)

Standard deviation of average annual growth rate (%)

A annual growth rate (%)

Standard deviation of average annual growth rate (%)

A annual growth rate (%)

Standard deviation of average annual growth rate (%)

Standard deviation for the annual primary sector growth rate was high The average secondary sector growth rates were modest during 1900–

1901 to 1909–1910 and 1920–1921 to 1929–1930 During 1910–1911

to 1919–1920 it was negative, and barely over 1% in the remaining sub- periods Tertiary sector growth was modest, with high year to year vari-ability The average annual growth of real GDP over the whole period was barely above 1%.4

Rapid population growth is often advanced as a reason for slow nomic growth in India However, as Table 1.2 indicates, average annual population growth over this period was less than 1% Only after 1930–1931 did population growth exceed 1%, but throughout this period it was always below 1.5% As would be expected, variability in population growth was lower than that of GDP growth Average annual GDP per capita growth was barely positive during this period After 1930–1931 GDP per capita growth was negative The standard deviation

eco-of real GDP per capita growth was high The growth eco-of output per worker was barely positive over this period and its variability was high In addi-tion, the output per worker fell significantly during 1940–1941 to 1946–1947

Table 1.3 Average sectoral shares in real GDP: 1900–1901 to 1946–1947 (%)

As depicted in Table 1.3 shares of various sectors in India’s real GDP changed only slowly during this almost 50 year period Share of the pri-mary sector fell marginally from just under 70% in 1900–1901 to just above 50% in 1946–1947 The share of the secondary sector rose from just over 10% to just under 20% The share of the tertiary sector rose from just above 20% to just under 30%

Tables 1.2 and 1.3 tell a tale of stagnation, even some instances of decline, in the Indian economy

1.4 Indian Economy at Independence

The Indian economy at independence was, to use the terminology of Nelson (1956), in a low level stagnation or low level equilibrium trap The basis of this theory consists of elements: an exposition of output as a neoclassical function of capital, population (labor utilization) and pro-ductivity; a Malthusian type equation describing rapid population growth; and an equation describing capital accumulation Nelson argues that if population is growing rapidly (as was the case in India at the time

of independence and subsequently for several decades) and savings are meager, with opportunities for investment low, then the economy settles into a low equilibrium trap with stagnant per capita income, and is unable to move onto a sustained path of economic expansion

According to the Census of India, between 1941 and 1951 India’s population rose by 42 million to 361 million—a decadal increase of 13.1% In 1941 (1951) the crude birth rate per thousand was 45 (40) The corresponding crude death rates were 31 (27) per thousand leading

to natural increase per thousand of 14 (13) In particular, these tion growth figures for India were higher than those for China for the same period According to Lal (2005), in 1950–1951 gross domestic sav-ing in India was 8.9% of GDP whereas gross domestic capital formation was 8.7% of GDP and there was a net capital outflow of 0.3% of GDP. Although these figures are themselves not very low, there had been substantial capital outflow from India during the colonial period.5 There was therefore deficiency of productive capital and population growth was high

popula-R Jha

In addition, there was considerable stagnation of labor and land ductivity Heston (1982) reports that over the period 1900–1901 and 1946–1947 value added per worker (in 1946–1947 prices) had grown only by 32% in the primary sector, by 29% in the manufacturing sector and 55% in small-scale industry, although there were more substantial gains for professionals and “other transport and commerce.”6

pro-Similarly, Heston (1982) also reports trends in crop yield over the period 1900–1947.7 The decline over this 47-year period as a ratio of average yield was 0.25 for rice, 0.16 for wheat, 0.23 for jowar, 0.06 for bajra, 0.25 for barley, 0.13 for maize and 0.19 for gram Hence there is incontrovertible evidence of sustained stagnation in the productivity of labor and decline of productivity for land

This evidence forms the basis for the claim that at the time of dence the Indian economy satisfied the conditions for a low level equilib-rium trap in the sense of Nelson (1956).8 India’s economic growth performance since independence should be judged at least partly against this background

indepen-1.5 Indian GDP Since Independence

Table 1.4 provides a bird’s eye view of economic growth in independent India It depicts average growth and standard deviation of real (2004–2005 prices) GDP at factor cost, real GDP at market prices, real GDP per capita, population and GDP per employed person (an indicator of labor produc-tivity) for broad periods since 1951–1952 and for the period since then to 2013–2014 Real GDP growth has been much higher than in the colonial period and has indeed broadly accelerated over time Variation in this growth has been relatively stable or has declined over time Despite high population growth (much higher than in the colonial period), per capita income growth has been significant and has been broadly trending upward.Population growth was in excess of 2% per annum on average until the 1980s Since then it has declined continuously Data on GDP per employed person in 1990 PPP dollars have been available only since the 1980s This productivity figure is high and grew steadily between 1981 and the end of the 2000s, and remains high in the 2010s

Table 1.4 Period

Growth of real GDP at factor cost

Growth of real GDP at market prices

Growth of real GDP per capita

GDP per employed person 1990 PPP $

A of annual growth rates

Standard deviation of annual growth rates

A of annual growth rates

Standard deviation of annual growth rates

A of annual growth rates

Standard deviation of annual growth rates

A of annual growth rates

Standard deviation of annual growth rates

A of annual growth rates

Standard deviation of annual growth rates

a Last year for GDP per capita is 2011–2012 bClassi

c Classi

Following the release of new Index of Industrial Production (IIP) and Wholesale Price Index (WPI) data using 2011–2012 as base on May 12,

2017, new estimates of India’s GDP and gross value added (GVA) were published Previous data for these variables, as reported in Table 1.4, used 2004–2005 as base Using 2011–2012 as base, real GDP growth was 5.5% in 2012–2013, 6.4% in 2013–2014, 7.5% in 2014–2015 and 8.0% in 2015–2016 Further, advance estimates for 2016–2017 indicate

spec-Table 1.5 provides a description of the sectoral composition of India’s real GDP since independence Data are provided at intervals of five years for earlier time periods and annually since 2002–2003 The sectors con-sidered are Agriculture and Allied activities, Agriculture by itself, Industry, Mining and Quarrying, Manufacturing, Electricity, Gas and Water Supply, Service, Construction, Trade, Hotels, Transport and Communication, Financing, Insurance, Real Estate and Business Services, and Community, Social and Personal service There are several messages

to take from this table First, the share of services in GDP has been rising rapidly and has now climbed to two-thirds Within “services,” Trade, Hotels, Transport and Communication, Financing, Insurance, Real Estate and Business Services have recorded rapid growth The share of agriculture has dropped quite sharply from 42% in 1952–1953 to just below 12% in 2012–2013 Over the same period the share of agriculture and allied activities has dropped from 51.6% to 12.8% The share of the manufacturing sector has risen marginally over this 60 year period and as

of 2012–2013 stood at just below 15% of GDP.  The performance of industry has been more robust.11

A description of a key challenge facing the contemporary Indian omy is depicted in Table 1.6 This shows the share of the rural sector in terms of total population, share of Agriculture and Allied sector in total

Transport and Communication; FIREBS, Financing, Insurance, Real Estate and Business Services; CS&PS, Community, Social and Personal Service

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GDP and the difference between the two The first is a broad indicator of the population being supported by the traditional sector, the second shows the share of this sector in total GDP and the third shows the evolu-tion of the gap between them The share of the rural sector in total popu-lation fell from 82.07% in 1960 to 68% in 2013, which is only a marginal decline compared with the decline in the share of agriculture and its allied sector in terms of GDP: that fell from 47.6% in 1960 to 13.9% in 2013 The difference between the two, which is a rough indicator of the differ-ential additional burden on the rural sector, grew from 34.42 to 54 This table thus illustrates the slow decline of reliance of the population on the

Table 1.6 Agricultural and allied sector: shares in GDP and rural population

Year A&A Rpopshare R-AA Year A&A Rpopshare R-AA

Source: Author’s computations based on data from World Development

Indicators, World Bank

land and highlights India’s insufficient industrialization and tion This is a key policy challenge for India

urbaniza-1.6 Regional Variation in Indian GDP

India has a large population and land mass with immense variation in economic circumstances and resources Several measure of regional varia-tion in economic outcomes across India have been analyzed Table 1.7provides information on variation of annual real net state domestic prod-uct per capita

Table 1.7 shows the average of state GDP (SGDP) per capita for each state union territory for three time periods: 1993–1994 to 1998–1999, 1999–2000 to 2003–2004 and 2004–2005 to 2013–2014 Also shown are SGDP of each state union territory as a percentage of national GDP per capita (GNP for the period 2004–2005 to 2013–2014) Bihar, Assam, Jharkhand, Chattisgarh, Rajasthan, Madhya Pradesh, Odisha, Uttar Pradesh, Jammu and Kashmir and West Bengal have SGDP per capita below the national average for each time period, with Bihar being the worst performing state Some remote small states such as Meghalaya also fall into this category, whereas a small state such as Goa consistently outperforms the national economy

In contrast China has persistently higher regional inequality (Candelaria

et al 2013) The OECD Secretariat (2010) argues that India’s regional inequality is lowest among the BRICS countries (Brazil, Russia, India, China and South Africa) However, the coefficient of variation of real SGDP per capita per year in the USA is decidedly lower than India’s In fact, an analysis of the evolution of the coefficient of variation of US real SGDP per capita based on figures from the US Bureau of Economic Analysis indicates that in the period between 1997 and 2005 this was barely above 0.33 and stayed more or less unchanged

Thus, regional inequality in India is lower than that in the BRICS countries but substantially higher than in the USA. Figure 1.1 indicates that the coefficient of variations in real state GDP per capita in India has risen over time

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A per capita Percentage of national GDP

A per capita Percentage of national GDP

Data from 1993–1994 to 1998–1999 at 1993–1994 prices, from 1999–2000 to 2003–2004 at 1999–2000 prices and from 2004–2005 to 2013–2014 at 2004–2005 prices For the period 2004–2005 to 2013–2014 I use real gross national product (GNP) per capita Data across states are not entirely comparable

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Figure 1.1 charts the evolution of the coefficient of variation of real SGDP per capita per year between 1993–1994 and 2013–2014 All points in the figure are not strictly comparable since the base year changes,

as indicated in Table 1.6 and Fig. 1.1 Yet a clear upward trend is visible for most of the period, although there is a slight drop in the coefficient of variation in the last two years considered

1.7 India’s Performance with Respect

to International Trade

Table 1.8 portrays the average decadal share of international trade in total GDP ([Exports+Imports]/GDP) for India, France, Japan, UK, USA, high income countries and low income countries Also depicted are val-ues of these shares for Russia, least developed countries, upper middle income countries and China for select periods These periods are noted within brackets in individual cells

Fig 1.1 Coefficient of variations in real state domestic product per capita

Source: Author’s calculation based on data from Handbook of Statistics of the

Indian Economy, Reserve Bank of India Data for 1993–1994 to 1998–1999 at

1993–1994 prices, from 1999–2000 to 2003–2004 at 1999–2000 prices and from 2004–2005 to 2013–2014 at 2004–2005 prices