India DEV

Rajeet Guha

Economic Development: Predictability and Challenge: the Indian Experience

While the last 4 decades have seen the proliferation of theories of development, some of the fundamental issues of growth, elimination of poverty and human development have continued to generate debate and controversy. This essay seeks to investigate these theoretical approaches with reference to India’s development experience. The three major strands of such debate that this essay concerns itself with are: first the different stages of development transformation and their predictability, secondly the key macro economic conditions which act as preconditions for development and finally the link between economic growth and poverty reduction. W.W Rostow in 19 visualized Harrod Domar



More recently, particularly since the nineties a fundamental question that has baffled both economists and political thinkers and practitioners alike is the so called persistent poverty trap in which countries like India find themselves despite registering some of the fastest growth rates in the world since the eighties. While it is true that India like China has succeeded in substantial reduction of poverty, particularly since the seventies, there is no doubt a certain slowing down of poverty reduction discernible in the last decade or so. As a result the growth in per capita income has stagnated despite impressive economic growth. India enjoyed a growth rate of over 6% per year for almost two decades: 1980-2000. The ratio of India’s population below the poverty line fell from 39% in 1987-88 to 25.3% in 1999-2000 in rural areas and from 22.8% to 12.5% in urban areas (Angus Deaton (2001) cited by T.N.Srinivasan in China and India: Growth and Poverty, 1980-2000: www.1.gsb.columbia.edu) In absolute numbers, however, the poor in India still number over 250 million, almost twice as many as in Sub Saharan Africa. A more disaggregated picture shows that the large poor states of India (Uttar Pradesh, Madhya Pradesh, Rajasthan, Orissa etc.) containing 40% of India’s population have lagged behind in reducing poverty since the late 1970s. This has also had its inevitable impact on politics. India’s vibrant democratic polity lent a crushing defeat to the ruling Bharatiya Janata Party (BJP) in 2004 which had been basking in the glow of a near 7% growth rate for two successive years, unprecedented growth in the IT and IT enabled services sectors, rising foreign direct investments and tremendous expansion in outsourcing from the US. Defying all predictions (national and international) this electoral reverse for the ruling right of center political party has been widely explained as a rejection by India’s poor of what was a growth strategy benefiting the middle and upper classes and bypassing the poor. In a sense this political development has once again brought to sharp focus the fundamental question whether economic growth fuelled by free markets, globalization and sound macro economic management can constitute the necessary and sufficient conditions for economic development that enhances the well being of people. But more about this later: in order to understand India and her development experience better we need to go back into history to the dawn of independence.

India was liberated from the yoke of British imperialism in 1947 after a long and arduous non-violent struggle punctuated occasionally with spells of violence. India was a fractured nation in 1947. India adopted the framework of democratic, centralized planning in the incipient development of the country. It will be easier to understand this in a historical context. During the pre-independence era of British India, the govt. had not played an effective role of promoting development and in fact had subjugated the interests of Indian economy to the British imperial interests impoverishing India through skewed trade, heavy taxation and high-handed, illegitimate extortion. The havoc wreaked on the Indian economy by the English East India Company, one of the earliest multinational corporations, in conjunction with neoclassical laissez-faire economics is well known to most Indians. Prior to independence India suffered from devastating famines and stagnation. Hence poverty reduction and national self-reliance were central themes of India’s founding fathers. Keeping this historical perspective in mind, the leaders of India’s Gandhian revolution decided that it was time for the government to play the chief role in the allocation of resources for productive purposes even while operating within a democratic polity guaranteeing private property and a coexisting private sector. Hence, arose the necessity of a central planning agency, which would operate within a democratic framework.
India’s infatuation with Fabian socialism continued far beyond the embryonic stages of development of the country and spanned more than four decades. It was only in 1991 after four decades of state planning that India decided to cast away the fetters on markets. From 1991 till now India has liberated the private sector from regulation and price distortions and embraced globalization as the only alternative in its elusive quest for economic development. India has made modest strides so far in its effort to remove debilitating poverty, illiteracy, unemployment, high infant mortality, severe child malnutrition, a burgeoning population, inadequate healthcare, halfhearted land reforms, lack of social security and blatant discrimination against women. India still has a long way to go.
The First Five Year Plan was from 1951-56. It was a modest one and it was concerned more with the immediate objectives of repairing the damage caused by the Second World War and the Partition. In this plan agriculture and industry were given equal weightage and India exported surplus food to foreign nations. There was considerable investment in transport, power, irrigation, technical education and scientific research in the First Plan. At the end of the first plan India’s per capita income was lower than Egypt, Brazil, Chile, Peru and Yugoslavia. India was ranked 53rd in terms of per capita income for developing countries in the list compiled by the United Nations. The standard of living of large masses of people then was lower than what was indicated by per capita income because of unequal distribution of income and large unemployment and underemployment. In 1955 out of the total working force of 170 million about 8 million were unemployed and about 15 million were underemployed. In 1955 with regard to steel output India was around sixty years to eighty years behind France, Germany, U.K., and U.S.A. As far as education was concerned India was about eighty to hundred years behind all these countries then.
The Second Five Year Plan, christened the Mahalanobis Plan after its architect P.C. Mahalanobis, laid the design for planned economic development in India with a focus on heavy and basic industrialization as the top priority while agriculture and light, consumer goods industries were relegated to a secondary role. The state extended near monopoly of steel, mines including coal, fertilizers, banking and insurance while co-existing with the private sector in other areas such as hotel and tourism, transport, heavy and light engineering etc. In some areas such as agriculture, plantations, jute, cotton the state had no presence at all except to step in when private sector units needed to be bailed out under situations of financial crisis. The state’s policy of centralized planning over resource allocation was played out through an elaborate system of controls and regulations articulated through various licensing regulations and price controls. However, according to Prof. Jagdish Bhagwati the Mahalanobis plan and the controls gripped the economy in a low-level equilibrium trap.
The oil shocks following the West Asian conflict of the 60’s had their toll on the economy. At the end of the 60’s about 50% of India’s population was living in absolute poverty. During the end of the fourth plan and beginning of the fifth plan period, a notable development was the ushering in of the wheat-based green revolution in India which in one go catapulted India from a food deficit nation up to the 60’s dependent on PL 480 food imports from the US to a food surplus nation (based on effective demand) in the late 70’s and 80’s onwards.
19 % of investment in the second plan was devoted to social services like education, health and residential reconstruction. However, in the third plan the share of investment for social services was reduced to 16 %. Expenditure on basic education was curtailed while the share of higher education especially that catering to fields of engineering and medicine was expanded. Till 1965 national income was estimated to have increased by 3.7 % per annum while population increased by 2 % per annum leading to an annual per capita income increase of 1.7 %. Compared to the pre-independence period the achievements were remarkable but they were still inadequate from the point of view of raising the standards of people significantly.
In 1980, at the end of the fifth plan around 40 % of the Indian population lived in absolute poverty. They could not afford the incomes necessary to purchase the minimum calorie-equivalent amounts of food. The incidence of poverty was highest in rural India. More than 70 % of the population lived in rural areas and it was estimated that 40 % to 50 % of the rural population could be designated as absolutely poor that is those who could not afford nutritionally determined minimum food requirements. Although life expectancy at birth had gone up from 33 years in 1950 to 50 years in 1980, it was still lower than other Asian countries. India also had a high infant mortality rate of 121 per thousand in 1980. The adult literacy rate at that point of time was 36 %. Unemployment in 1980 was estimated to be 12 %. There were widespread disparities between the high-income states of Punjab, Haryana, Maharashtra and Gujarat and the low-income states of Bihar, Orissa, Uttar Pradesh, Madhya Pradesh, Assam and Rajasthan. Despite all this, there was a silver lining. India produced more scientific and technical personnel than any other developing country. This was a result of the large investments made by India in the fields of science & technology. According to Jagdish Bhagwati, India had lagged behind China, South Korea, Taiwan, Malaysia, Indonesia, Thailand, Singapore and Sri Lanka in economic growth, provision of services like education and healthcare, and eradication of poverty and income inequality. Population control also seems to have been more effective in these countries where levels of education and healthcare were higher than in India. This is also evinced by the fact that within India itself population growth was lower in states where there were high levels of education and healthcare. This is exactly what happened in the states of Kerala, Gujarat, Maharashtra, Punjab, Tamil Nadu and West Bengal. India’s massive population played a major part in depressing per capita income.

In India the immediate reason for economic reforms was clearly the economic and foreign exchange crisis in 1991 when India was left with enough foreign exchange reserves to last only a fortnight and its international credit rating being severely eroded with the risk of default in interest payment obligation looming in the horizon. The genesis of this crisis however can be traced to the high growth period of the 6th and 7th Five Year Plans when India registered some of the highest growth rates (around 8%), breaking out of the low growth rate trap as it were. These growth rates of the eighties were achieved through an aggressive government led expenditure strategy fuelled by external commercial borrowings and internal borrowings and increase in money circulation. This resulted in major macro economic imbalances: such as gross fiscal deficit of 8.3% in 1991, inflation rate close to 16% in 1991, internal debt amounting to 52.9% of GDP in 1991 and interest charges amounting to 4% of GDP in the same year (working out to 20% of total government expenditure). (Nirupam Bajpai and T. Jain 1996). The Government of India in 1991 had to pledge gold to obtain foreign exchange in 1991 adding to national humiliation.
Reform was therefore inevitable. Foreign direct investment in India had to focus more on getting its macro economic essentials right and stabilized with stringent internationally imposed time bound targets to achieve. Being crisis induced, the first phase of reforms was on macro economic stabilization efforts including getting the fiscal deficit in check, removing price distortions through the reduction of subsidies and changing the exchange rate polices. The second phase of reforms was directed at increasing factor productivity by slowly dismantling the elaborate system of industrial licensing etc., which had for long stifled the economy. It also saw the gradual removal of restrictions on imports and high tariff regimes, with focus on boosting exports. A major aspect of this third phase was also in the withdrawal of controls on foreign investment and foreign equity participation. Taxation reforms and reform of interest rates have also followed. The third phase of reforms aimed at liberalizing the labor markets by allowing grater mobility and flexibility has got mired in lack of consensus and the power of trade unions. Trade liberalization has also been part of this phase involving compliance with WTO obligations regarding patents on intellectual property, lowering of tariffs etc. This phase has also been grappling with reforms in the insurance sector allowing for foreign equity participation and withdrawal of government from a wide variety of areas where the private sector and the markets could have performed with far greater efficiency. The latter includes the hotel and tourism industry, the steel industry, the textile sector, the electricity sector etc. Public sector and disinvestments have not been easy with consensus building proving to be extremely difficult.
There have been many satisfactory results from the Indian reform process. Inflation has been brought down to 4-5 %, the foreign exchange reserves are today a staggering $75 billion, GDP growth has been a steady 5.6 % since 1980, external commercial borrowings, external assistance, IMF loans etc. have gone down very substantially. Foreign direct investment has also been growing: FDI flow in 2004 was $8 billion. India’s institutional framework in terms of democracy, functioning courts, free press, good information, efficient stock markets and property rights are amongst the country’s greatest assets. Yet other indicators still lag. Unlike China and South Korea, India has not seen major growth in per capita GDP. At a literacy rate of about 65% India still has the largest number of illiterate people (about 250 million) in the world and the largest number of people in absolute poverty of any country in the world. The East Asian Countries, even in the post financial crisis period have a much lower incidence of poverty and better social indicators than India. Indonesia which was the hardest hit by the financial crisis has a literacy rate of 80% and poverty incidence of less than 20% (World Bank: India:. Policies to Reduce Poverty and Accelerate Sustainable Development: http://wbIn1018.worldbank.org ) in 1998.

Although in the case of both India and China poverty reduction in the last two decades have been accompanied by acceleration of growth rates, it is clear that a direct causal-effect relationship between growth and poverty reduction would be tantamount to an economic oversimplification. As Professor T.N. Srinivasan argues (ibid) “the three endogenous outcomes growth, poverty and inequality are together determined by exogenous factors including the existence and functioning of institutions most importantly the markets for goods, services and particularly for labor and capital, domestic and external policies pursued, endogenous behavioral responses to policies and opportunities of individuals, households and enterprises as well as any constraints on the responses such as on mobility of goods and factors.” One example is that the poor in India and China are largely rural and heavily dependant on agriculture either as landless laborers or small and marginal farmers. Therefore if the pattern of growth followed is one that only expands non-agricultural urban activities, such growth could bypass the poor, unless such growth creates demand for domestic agricultural output or can pull such labor out of agriculture into non-agricultural activities. The effect of growth on poverty would be determined by the elasticity of growth on poverty reduction in the sector in which growth occurs. This is amplified if we pursue the China-India comparison a little further. As Srinivasan states there is evidence to suggest that in 1980, barely two years after Deng Xiao Ping abandoned the Maoist path, the per capita incomes of the two countries were comparable. Both economies had high growth during 1980-2000 but while China’s average per capita income grew at an average of 9% per year, India’s was a mere 4% per year. By 2000 China’s per capita income was nearly 70% higher than that of India. China’s rural poverty declined by 85% between 1978 and 1998 while that of India declined by less than 50% (Srinivasan ibid). According to sources cited by Professor Srinivasan the differences in reform and growth processes along with differences in savings and investment rates contributed to these differences in growth and poverty outcomes of the two countries making Chinese growth faster and more pro-poor. China reformed agriculture while Indian reforms are yet to be extended to agriculture thus, although always in the private sector, stands isolated from world markets, riddled with government interventions and burdened by the absence of land reforms particularly in the poorer states. Further India’s reservation (till recently) of the labor-intensive sectors such as garments, leather products to the small-scale sector prevented the full exploitation of globalization by these sectors. China on the other hand increased its share of world exports of labor-intensive products, while India lost this opportunity. In addition in both the countries there have been regional disparities in the growth patterns. In India phenomenal success in software development and export has been confined to a few cities in the South (Bangalore and Hyderabad) and West (Bombay).

As Professor Amartya Sen and Jean Dreze argue (India: Development and Participation, New Delhi, OUP 2002) although “in comparative international perspective the Indian Economy has done reasonably well in the period following the economic reforms initiated in the early nineties, … relatively high aggregate economic growth coexists with the persistence of endemic deprivation and deep social failures”. Professor Sen’s seminal contribution to development economics has been marked by two points of departure linking development strategies first to the ends of development and secondly to an investigation of the means to reach such ends. In this approach he goes beyond the conventional economic ends such as high growth, sound balance of payments etc. to human well being and entitlements and secondly from conventional economic means such as savings, investment etc. to the so called social side of economic operations, viz., human capabilities. He illustrates his analysis by comparing the experiences of India and China and argues that the vastly superior performance of China should be traced to its pre-reform achievements in the communist era through sustained investments in the development of human capability. He illustrates this with reference to comparisons in the spheres of life expectancy, basic education, basic health, gender equality and fertility. In every sphere China’s performance far exceeds that of India (see tables).


Region Population (millions) Infant Mortality Rate
Orissa 31.7 124
Madhya Pradesh 66.2 117
Uttar Pradesh 139.1 97

Region Population (millions) Adult literacy rate (female/male)
Rajasthan 44 20 / 55
Bihar 86.4 23 / 52
Uttar Pradesh 139.1 25 / 56

Countries 1960 1980 1992
India 28 36 50
South Korea 71 93 97
Thailand 68 86 94
China n.a. 69 80

State Population(Millions) (1991) Female life expectancy Male life expectancy Death rate (0-4 age group) Total fertility rate
Kerala 29.1 74.4 68.8 4.3 1.8
Himachal Pradesh 5.2 n.a. n.a. 19.3 3.1
Maharashtra 78.9 64.7 63.1 16.3 3
Tamil Nadu 55.9 63.2 61 16.1 2.2
Punjab 20.3 67.5 65.4 17 3.1
Gujarat 41.3 61.3 59.1 23.3 3.1
West Bengal 68.1 62 60.5 20.6 3.2
Karnataka 45 63.6 60 23.6 3.1
Assam 22.4 n.a. n.a. 32.4 3.5
Haryana 16.5 63.6 62.2 23 4
Orissa 31.7 54.8 55.9 39 3.3
Andhra Pradesh 66.5 61.5 59 21.3 3
Madhya Pradesh 66.2 53.5 54.1 44.5 4.6
Uttar Pradesh 139.1 54.6 56.8 35.6 5.1
Bihar 86.4 58.3 n.a. 22.8 4.4
Rajasthan 44 57.8 57.6 30.9 4.6

State Population (million)1991 Female – male ratio (1991) Literacy rate in 7+ age group, 1991 (Female) Literacy rate in 7+ age group, 1991 (male)
Kerala 29.1 1.036 86 94
Himachal Prade 5.2 .976 52 75
Maharashtra 78.9 .934 52 77
Tamil Nadu 55.9 .974 51 74
Punjab 20.3 .882 50 66
Gujarat 41.3 .934 49 73
West Bengal 68.1 .917 47 68
Karnataka 45 .960 44 67
Assam 22.4 .923 43 62
Haryana 16.5 .865 41 69
Orissa 31.7 .971 35 63
Andhra Pradesh 66.5 .972 33 55
Madhya Pradesh 66.2 .931 29 58
Uttar Pradesh 139.1 .879 25 56
Bihar 86.4 .911 23 52
Rajasthan 44 .910 20 55

State Rural literacy (female) 10-14 age group (1987-88) Rural literacy (male) 10-14 age group(1987-88) Incidence of poverty (head-count ratio)(Rural) Incidence of poverty (head-count)(Urban)
Kerala 98 98 44 44.5
Himachal Pradesh 81 95 24.8 3.3
Maharashtra 68 86 54.2 35.6
Tamil Nadu 71 85 51.3 39.2
Punjab 69 76 21 11.2
Gujarat 61 78 41.6 38.8
West Bengal 61 69 57.2 30.6
Karnataka 56 74 42.3 45
Assam 78 83 53.1 11.4
Haryana 63 87 23.2 18.3
Orissa 51 70 65.6 44.5
Andhra Pradesh 42 66 31.6 40
Madhya Pradesh 40 68 49.8 46
Uttar Pradesh 39 68 47.7 41.9
Bihar 34 59 66.3 56.7
Rajasthan 22 72 41.9 41.5

Category Uttar Pradesh Kerala
% of female rural children 12-14 who have never been enrolled in school 68 % 1.8 %
% of male rural children 12-14 who have never been enrolled in school 27 % 0.4 %
% of recent births preceded by an ante-natal check-up 30 % 97 %
% of births taking place in medical institutions 4 % 92 %
No. of hospital beds per million persons 340 2418
Proportion of villages with medical facilities 10 % 96 %
Proportion of population receiving subsidized cereals from public distribution system 3 % 87 %
Proportion of children aged 12-23 months who have not received any vaccination 43 % 11 %

Country Infant Mortality Rate (1960) Infant Mortality Rate (1981) Infant Mortality Rate (1991)
India 165 110 80

Country Life Expectancy (1960) Life Expectancy (1981) Life Expectancy (1991)
India 44 53.9 59.2
State Fertility rates in 1979 Fertility rates in 1991
Kerala 3 1.8
Tamil Nadu 3.5 2.2