Friday, 24 June 2011

India: Growth in the 2000s—Key Facts

by Arvind Subramanian, Peterson Institute for International Economics

Op-ed in the Business Standard, New Delhi
June 22, 2011

© Business Standard

India's policy turnaround enters its third decade this month, but the remarkable Indian growth turnaround is now in its fourth decade. The first two decades of higher growth—the 1980s and 1990s—have been well explored. Only now, with data becoming available, can we begin studying Indian growth patterns in the third decade, the 2000s.

My ongoing research with Utsav Kumar of the Asian Development Bank throws up four key findings about growth within India in the 2000s compared to the 1990s.

1. The good news: Average growth has doubled. Figure 1 [pdf] illustrates this fact. It plots the per capita growth rate for the 21 largest states for two time periods: between 1993 and 2001 (horizontal axis) and between 2001 and 2009 (vertical axis). The figure shows that with the exception of Himachal Pradesh and Rajasthan, all states are above the 45 degree line, indicating that growth in the 2000s was substantially greater than in the 1990s. Indeed, average per capita growth across the 21 states increased from 2.8 percent in the 1990s to 5.8 percent in the 2000s. The largest improvements were posted by Uttarakhand (7.1 percentage points), Maharashtra (5.8) and Chhattisgarh (5) with Gujarat and Bihar not far behind. The figure provides a clue both to the long-standing success of the Communist party in West Bengal and its overthrow in the recent elections: West Bengal was one of the strongest performers in the 1990s but was one of the few states that stagnated in the 2000s while others surged.

2. Less good news: Divergence continues. The strong performance of the hitherto laggards—Bihar, Orissa and Chhattisgarh—has been one of the remarkable stories of the 2000s. But this should not obscure the more general pattern that across the Indian states, we still do not see a trend towards greater equality—that is, we do not see the phenomenon of convergence within India, whereby the poorer states, by virtue of growing faster than the richer states, start catching up with the latter's level of income. In fact, figure 2 [pdf] portrays a picture of divergence. It plots the growth rate of the states for the period 2001–09 against their starting level of per capita GDP (in 2001). If convergence holds, the relationship should be downward sloping because the poorer the initial standard of living, the faster the subsequent growth ought to be. But, as the figure shows, richer states on average grew faster so that inequality across states increased.

What is surprising is that the 2000s, far from reversing the unequalizing pattern of growth in the 1990s, continues it. In fact, if Bihar is excluded from the sample, the tendency towards divergence and inequality is even stronger in the 2000s.

3. Globalized but vulnerable states? India's rapid globalization is one of the clichés of our time. The crisis of 2008–10 highlighted the vulnerability that is the flip side of the dynamism that globalization has engendered: growth declined in, and capital fled from, India, as in most other countries, albeit to a lesser extent. But the question remained as to which states were more dependent on foreign markets and hence more susceptible to a downturn as conditions abroad faltered.

Our analysis shows, unsurprisingly, that Karnataka, with Bangalore as the globalized IT-hub of India, fared the worst with a dramatic growth drop of about 4.4 percentage points during the crisis. Andhra Pradesh and Maharashtra also saw a decline in growth of about two to three percentage points. Gujarat and Tamil Nadu experienced a smaller decline. On average, it seems those states that grew faster before the crisis experienced a greater decline in growth during the crisis. While the multiplicity of factors at work precludes drawing clear conclusions, the evidence is consistent with globalization conferring benefits and at the same time increasing downside risks.

4. Whither demographic dividend? Hope in India's future growth is founded on the demographic dividend: a rapidly expanding young population will save more and inject entrepreneurial vigor that will lift the country to a faster growth trajectory. And corroborative evidence was provided in an excellent recent paper by Shekhar Aiyar and Ashoka Mody of the International Monetary Fund. But the pattern of growth in the 2000s appears to muddy the waters. Our preliminary analysis, based on the 2001 Census projections rather than actual data from the 2011 Census, suggests that key demographic factors such as changes in the share of working-age population are not correlated—they may indeed be negatively correlated—with growth performance. This may not be surprising given that many of the demographically aging states such as Kerala, Tamil Nadu, and, to a lesser extent, Maharashtra and Gujarat have done remarkably well while demographically dynamic states such as Uttar Pradesh, Rajasthan and Madhya Pradesh have not fared as well. The preliminary nature of these results must be stressed, but succumbing to a demography-based complacency must be resisted.

A final intriguing factoid relates to Kerala. The conventional wisdom is of a state that is Scandinavian in its social achievements but sclerotic in its growth performance because of investment-chilling labor laws and militant trade unions, and reflected in a labor force that has voted with its feet by emigrating to West Asia. The abiding caricature is of the lazy, argumentative Malayali, discussing Foucault and Gramsci over endless cups of chai while living parasitically off the remittances sent by the relatives-in-exile. Well, the data suggest that the conventional wisdom and the caricature are dead wrong. Kerala posted amongst the highest rates of growth in the 1990s (4 percent per capita), continued its stellar performance in the go-go 2000s (7.5 percent), and exhibited great resilience during the crisis, experiencing virtually no decline in growth.

India, evidently, is capacious enough to allow both Bania, reforming Gujarat and Marxist, reform-resistant Kerala to flourish. Or, to put it more honestly, the Indian growth miracle continues to confound.

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