Gujarat Before and After Modi

https://m.rediff.com/news/2012/jul/25gujarat-growth-rate-after-modi-compared-with-peer-large-states.pdf

guj growth rate before and after modi post economic liberalization

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Economy under the Nehru-Gandys

Rahul GandhiRahul Gandhi
Snapshot
  • Why the average Indian was growing more than 1 per cent poorer than the average East Asian every year during the 40 years of Nehru family rule.

The economist who stumped Rahul Gandhi in Singapore, answers the question that Gandhi could not reply to: “Why is it that, in the years that your family ruled India, our per capita income was growing less than the world average? And yet, in the years since your family relinquished the prime ministership, India’s per capita income has grown substantially faster than the world average?”

On Thursday 8 March, I had just spent five hours teaching students at the Asia-Pacific campus of ESSEC, the leading French business school, about the economies of Asia. At my daughter Meghna’s suggestion, I joined her at Congress President Rahul Gandhi’s talk at the Lee Kuan Yew School of Public Policy. Having heard Rahul Gandhi claim credit for everything good that India had achieved, the obvious question emerged:

“Why is it that, in the years that your family ruled India, our per capita income was growing less than the world average? And yet, in the years since your family relinquished the prime ministership, India’s per capita income has grown substantially faster than the world average?”

Rahul Gandhi fumbled, cleared his throat, and eventually mumbled, “What is your hypothesis?” I told him that it wasn’t for me to give my hypothesis (although it was in my book Asia Reborn) but for him to answer the question. I then explained that India was among the poorest countries in the world at Independence. Our life expectancy at birth was 32 years, well below the African average of 38.

Being among the poorest countries on earth, we should have grown much faster than the world average, in order to catch up with the world’s average income. Yet, during the period that we were ruled by his family, we grew much less than the world average. (This implies, of course, that the average Indian was becoming poorer over this period than the average human being on earth — about as damning an indictment of his family’s performance as is possible).

After clearing his throat, and taking a long sip of water, Rahul Gandhi still failed to answer the factual query. Instead, he asked whether I agreed that India is a success today. I said, “Yes of course. But since your family relinquished the prime ministership, not before.” Eventually he asked me to tell him whether he had any role in India’s politics from 2004 until today — which is neither here nor there. That was the sum total of his “answer”.

The Congress party’s heavy artillery was quickly turned upon me. A morphed video was circulated, editing out Rahul Gandhi’s failure to answer, instead splicing it with the next “questioner’s” obsequious remarks in praise of the Nehru family, and how the man desperately wanted “my India back”. The doctored video (which made it seem as if my question was followed immediately by the obsequious one, with Gandhi then acting like a magnanimous umpire) was posted on Twitter by the Congress party and the “Office of RG”.

This quickly went viral, and Sanjay Jha, Tharoorians and sundry other Congress trolls launched a concerted attack on me. A greenhorn Singapore-based professor of mass communications (with an undergraduate degree in agricultural technology!) launched a character assassination of me (on thecitizen.in) and questioned the very premise of looking at per capita income — dismissing it as a “neo-liberal” construct, the classic Marxist dismissal of rational economic analysis. I learnt about his defamatory article only on Sunday evening.

But even the viral Congress video only came to my attention some three hours after the event. To my surprise, I also found that shorter videos of the actual interaction had begun circulating. The following day (just before lunch time in Singapore), I got a surprise phone call from Arnab Goswami, asking for a live interview on Republic TV, which I immediately gave. That too seems to have gone viral, and I spent all of Friday speaking to numerous TV channels back home in India (ending a little after midnight Singapore time).

As a result, my side of the story is now known to many of my fellow-Indian citizens, although the formidable Lutyens establishment has managed to bury the factual issues under a mountain of obfuscation.

I’m glad therefore to have this opportunity to respond at somewhat greater length. The reason I asked the question should be clear: Rahul has zero administrative experience; and, given his dismal attendance record in Parliament during 2004-14, precious little real political experience. Lineage is his only claim to leadership, indeed to being in politics at all. Hence, it is worth examining the record of his family’s leadership of India.

My students had just read Robert Fogel’s classic paper, The Impact of the Asian Miracle on the Theory of Economic Growth, which incidentally constitutes a damning indictment of the Nehru family record, although the author is kind in his analysis. Fogel’s main data source is Maddison’s magisterial work on economic history over the millennium, with a detailed focus on the 20th century.

Maddison shows unambiguously that, between 1950 and 1973, India’s per capita income was crawling upward at just 1.4 per cent annually, while the world was galloping ahead at 2.93 per cent annually. Every year, the average Indian (already desperately poor to begin with) was seeing her income decline by 1.5 percentage points relative to the average human being on earth.

Africa as a whole was doing better, growing its per capita income 2.07 per cent annually between 1950 and 1973. Even Mao’s China was doing much better — growing its per capita income 2.86 per cent annually, only marginally below the global average, despite the depredations of the famine of the early 1960s and the destructive Cultural Revolution thereafter.

The rest of Asia (already a bit wealthier than India at the start) was out-performing the world, growing per capita income 3.56 per cent annually. Thus, the average Indian was becoming 2.16 per cent poorer than the average non-China Asian (and 1.46 per cent poorer than the average Chinese citizen) every year from 1950 to 1973.

In any normal democracy, the single family that ruled throughout this period (apart from a brief 19-month interregnum), and delivered this catastrophic result, would be thrown out by its people. To be fair, the people appeared to have had enough by the following year — as Morarji Desai’s NavNirman movement toppled the Gujarat government, and Jayaprakash Narayan’s call for Sampoorna Kranti gained traction, spreading from Bihar and Gujarat across north India.

Scroll.in has published a Congress-inspired article, using much material from the Congress Twitter feed — and very selectively-culled quotes from my book — to attempt to debunk my question. One of their quotes from my book says: “not only did real GDP grow 9 per cent in FY1975-76 (the fastest growth for any year until that time), but India also had a current account surplus, the trains and planes ran on time, and the cities were notably cleaner”.

But, in keeping with the selective amnesia that afflicts the Congress, they leave out the next few sentences from my book: “Growth did run out of momentum in FY1976-77, and India’s electorate chose freedom over bread in March 1977. But one of the best-kept secrets of India’s economic trajectory is that the next two years — during Morarji Desai’s premiership — saw India’s real GDP grow 7.5 and 5.5 per cent in successive years, the fastest two- year growth rate achieved by India until that time.”

Morarji bhai was able to achieve the fastest two-year economic growth between 1950 and 1980 despite having restored civil liberties. He and H M Patel (his savvy finance minister) modestly de-regulated the economy, and outperformed Indira Gandhi’s Emergency-aided growth rate of 5.1 per cent from the previous two years.

Maddison shows that India’s per capita income accelerated to 2.6 per cent annual growth in the 1973-90 period, only marginally below the global average pace for this period but far below the pace of China (4.8 per cent), South Korea (6.8 per cent), Taiwan (5.3 per cent), Thailand (5.3 per cent), and even Pakistan (3.1 per cent). In fact, Pakistan’s per capita income grew 0.3 percentage points faster than India’s in 1950-73, and 0.7 percentage points faster than India’s in 1973-90. Not only did India’s per capita income grow slower than the world average during the years of Nehru-family rule (1950-89), but the average Indian became steadily poorer than the average Pakistani over the period.

India’s per capita income under-performed the 15 economies Maddison labelled “Resurgent Asia” (including India, Pakistan and Bangladesh within that group) in both periods: in 1950-73, India’s per capita income was growing 1.1 percentage points slower than the average for Resurgent Asia, and India grew 1.3 percentage points slower than those economies in 1973-90.

The average Indian was growing more than 1 per cent poorer than the average East Asian during the entire period of Nehru family rule. The consequence was that India’s share of world GDP at the end of Nehru family rule (November 1989) was 3.1 per cent — slightly lower than India’s share of world GDP at the end of British rule (4.2 per cent).

Maddison estimates that India accounted for 32.9 per cent of world GDP in the year of Christ’s birth, 28.9 per cent in 1000CE (just ahead of China at 22.7 per cent), and still accounted for 24.4 per cent in 1700 (ahead of China’s 22.3 per cent share). During the following decade, Britain imposed a blanket ban on all imports of cloth from India (more than half a century before the onset of the textile-driven Industrial Revolution).

India’s share of world GDP declined to 16 per cent in 1820 — falling behind China for the first time in history (in fact falling to half China’s 32.9 per cent share of world GDP that year). By 1913, India’s share had fallen to 7.6 per cent and China’s to 8.9 per cent — and India plummeted to 4.2 per cent in 1950 (China to 4.5 per cent). The decline in India’s share of world GDP between 1700 and 1950 was by far the most dramatic relative decline in the annals of global economic history.

Sadly, while Mao’s China inched up to 4.6 per cent of world GDP by 1973, the Nehru family’s India saw its share fall to 3.1 per cent by 1973 — barely retaining that dismal share until 1989. Deng Xiaoping’s economic reforms enabled China’s share of world GDP (in PPP terms) to jump to 11.5 per cent by 1998, and India too finally began its climb out of the doldrums, reaching 5 per cent of world GDP that year, and climbing sharply in each successive decade.Fogel has India’s per capita income growing 4 per cent annually in the 1995-2000 period (over 1 per cent above the global average), and 5.4 per cent annually in the 2000-05 period. The past 12 years have seen about 6 per cent annual growth in per capita income by my estimate.

The economic reforms of P V Narasimha Rao in 1991 had been truly transformative. (These scenes are beautifully evoked in Vinay Sitapati, Half Lion: How P.V. Narasimha Rao Transformed India). The entire panoply of industrial licensing that had shackled Indian industry was swept aside on one dramatic day (24 July 1991) by Rao himself, as he was his own industry minister. The rupee was gradually liberalised, tariff and quantitative barriers steadily declined and the external sector responded with aplomb.

Rao was a Congressman of course — but the Nehru-Gandhi family had nothing to do with his reforms. He kept the socialist Sonia at a safe distance, and she loathed him so much that she ensured he was ignored even in death: when Narasimha Rao died in December 2004, his mortal remains were dramatically debarred from entering the Congress headquarters at 24 Akbar Road. He was not Congress royalty!

Congress’ thinkers make much of the fact that India’s per capita income began growing faster than the world average in 1980. This is no great revelation: it is discussed in my book Asia Reborn and a previous book, India as a New Global Leader, I co-authored with Brahma Chellaney and Parag Khanna.

The $5 billion IMF loan Indira Gandhi took in 1980 helped. But just as Akbar was the inheritor of Sher Shah’s administrative reforms, Indira Gandhi was the beneficiary of Morarji Desai’s mild de-regulation. And the mild out-performance of 1975-76 and the 1980s failed to make up for the huge under-performance of India’s per capita income growth between 1950 and 1975.

1980 wasn’t the first time Indira Gandhi was able to rest on the laurels of a predecessor’s reforms. Rahul Gandhi insisted last week that the Green Revolution is part of his family’s contribution to the nation. Francine Frankel, my teacher at the University of Pennsylvania, wrote a seminal book on the political economy of the Green Revolution, which required a drastic overhaul of the failed agricultural policies of Jawaharlal Nehru. That policy overhaul was initiated by prime minister Lal Bahadur Shastriji in 1965 from his newly constituted Prime Minister’s Office headed by L K Jha.

When the Congress has brought in any genuinely positive overhaul or reform of policy, it has invariably been a non-member of the Nehru family who has initiated it. Rajiv Gandhi was a slight exception: relatively new to politics (only having plunged in upon brother Sanjay Gandhi’s death in mid-1980), he was not as committed to the socialist and re-distributional shibboleths of Indira, Sonia and Rahul Gandhi.

His first year was a breath of fresh air for the economy, including for information technology — and Rahul travels with Sam Pitroda to remind us of his father’s telecom reforms. Once Rajiv Gandhi and V P Singh parted ways in April 1987, however, Rajiv quickly closed ranks around the Congress old guard and returned to his family shibboleths. I recall that in 1994 (nearly a decade after Rajiv’s “reforms”) there were a meagre seven million telephones in the whole of India (This number sticks in my mind, as I was the macroeconomic speaker representing Wharton Econometrics at a conference on India’s telecoms future in New York in June 1994). The cellular revolution didn’t occur until prime minister Atal Behari Vajpayee intervened in 2001 to untangle the messy web of unviable licensing fees.

Rajiv Gandhi’s Punjab and Assam accords (aimed at undoing his mother’s toxic legacy) were similarly soon in tatters as well — and it was left to the wily Rao to fully implement them. (The Assam accord was later steadily undone by Congress state governments of the Sonia era).

During Manmohan Singh’s premiership, there were very few economic reforms, because Sonia Gandhi and her (unconstitutional) National Advisory Council (NAC) acted as a re-distributive pressure group pushing such initiatives as mass waivers of farm loans, National Rural Employment Guarantee Act or NREGA (without any focus on the quality of projects implemented or the leakage to political intermediaries), a generous award to government staffers from the Sixth Pay Commission and the fiscally-destructive Food Security Bill. The UIDAI (Aadhaar) Bill was Manmohan Singh’s sole economic reform, implemented in the face of stiff opposition from 10 Janpath and home minister P Chidambaram.

Similarly, the civil nuclear deal with the US in 2005 was a political triumph for Manmohan Singh almost solely. At the start, he was the only member of Congress who supported it, but he eventually obliged Sonia Gandhi to go along (by threatening to resign for several days), got it passed by both houses, and then managed to get it approved by the Nuclear Suppliers Group despite relentless Chinese opposition.

But on broader macroeconomic policy, Manmohan Singh’s government inherited a current account surplus and the lowest-ever interest rates in independent India (because Vajpayee’s National Democratic Alliance had lowered inflation sharply). Profligate policies pushed by the NAC caused the current account deficit to shoot up to 6 per cent of GDP by 2009 (a negative swing of 8 percentage points of GDP) and inflation stayed in double digits almost right through the United Progressive Alliance 2 term. This meant that India had negative real rates across the yield curve, and a perpetually weak currency — including two crises (depreciations of more than 15 per cent within a few months) in 2011 and 2013.

Looking at the trajectory of India’s economic performance over time, one of the key differences between the Nehru-family era and the post-1991 era is that the latter has had no full-blown balance of payments crisis (which, for emerging economies are usually accompanied by recessions). India had such crises in 1958, 1966, 1979 and 1991 (the last surely a consequence of Rajiv Gandhi’s profligacy in the second half of the 1980s). Decadal growth rates were invariably dragged down by such crisis years in which the economy shrank. The 1991 crisis was slightly better because real GDP still managed to eke about 1 per cent growth that year.

But India came perilously close to a full-blown crisis in 2011 and, especially, 2013 — when there were hints that then finance minister Chidambaram was about to hand out full banking licences to several large industrial houses. The perilous moments of the “taper tantrum” seem a distant memory now, but India was on the macroeconomic precipice then — despite the fact that Sonia Gandhi (with the itinerant Rahul occasionally by her side) merely had the NAC as a pressure group and mouthpiece. A demographic dividend is too precious a one-time gift to waste on another balance of payments crisis, which will become inevitable if Congress royalty reoccupies Race Course Road after a 30-year hiatus.

Some Info on the Economic History of India

Before we get into the details, let’s get a macro-view of the Indian economy over the past 2000 years, as per Angus Maddison – a mainstream British economist.

Here’s a chart that sums up Maddison’s PPP-adjusted PCI estimates for India in 1990 international $

https://theunbrokenwindow.com/Development/MADDISON%20The%20World%20Economy–A%20Millennial.pdf

history indian economy

Here’s an examination of Maddison’s chart in more concrete terms using precise numbers, in a table (which I have updated till 2017). It is one little excel table that is more provocative than most tables on India –

maddison table 1

So we know that Maddison’s view corresponds to the “Mainstream” view we outlined at the start- India was not much richer than a subsistence economy from 1AD right up to 1973. Its share of world GDP was merely a reflection of its population share.

But Maddison is not stating this about India per se. His view that right up to the Industrial Revolution, GDP shares merely reflected the Population share, is held across all geographies. It is in line with the orthodox Malthusian perspective. Let’s examine more…

Here’s Maddison on the Per-capita GDPs across many parts of the world in 1AD and 1000AD. It is a problematic chart – as we will discuss soon

maddison table 2
What is remarkable about the above chart is that Maddison doesn’t explicitly discuss (atleast in the paper) on why he places India or the current “US” at $450 in 1AD There appears to be an implicit Malthusian assumption But these numbers contradict our historical understanding
We all know that back in the year 1AD – North America was a wilderness, and a hunter gatherer society India was a society with large empires, considerable urbanization, copious literature, among other things Western Europe : Was a part of the massive Roman Empire!
Yet as per Maddison, Western Europe, India and China (three very advanced societies in many ways) were only marginally richer than the hunter gatherers in North America! It seems incredible, yet nobody has challenged Maddison sufficiently on this yet.
Will a society close to subsistence have the surpluses necessary to produce – Mahabharata Ramayana Manu Smriti Arthashastra Aeneid Homeric epics  and numerous other Latin / Greek works? Question worth asking…
Back in 200CE, the Population of the city of Rome was estimated to be 1MM inhabitants. The population of Pataliputra at the height of the Gupta period circa 400CE is also estimated to be several hundred thousands… These were very very large cities
Yet Maddison regards India, China and Western Europe to be not much richer than the hunter-gatherers of America 2000 years ago! This suggests a somewhat slavish adherence to the Malthusian maxim, that appears to be in defiance of historical records and memory
While Maddison may have good reasons for his numbers, they do need to be challenged more by economists, and it probably doesn’t deserve to become the mainstream unchallenged orthodoxy that it has become in our times
So we have discussed how the mainstream Maddison view is clearly at odds with the understanding of the past that many Indians have. Now let’s turn to more recent history…or to be more specific the past 500 years. Here Maddison has infact been challenged by other historians
Let’s compare the estimates of Braoadberry, Bishnupriya and Custodis (2014) with those of Maddison. Their paper can be accessed here –
Here’s the comparison. As you can see the narratives of the two papers are vastly different. This is a major challenge to the Maddisonian narrative on medieval / modern Indian history (published in 2014)
comparison table
As per Broadberry / Bishnupriya, there was quite a significant decline in Per-capita GDP between 1600 and 1800. And this was the period of Mughal zenith! So clearly the numbers here don’t speak too well for Mughal India.
1600 PCI : $682 (this was when Akbar ruled over North India, but not the South) 1700 PCI : $622 (clearly a decline….a period when Mughal empire covered all of India) 1800 PCI : $569 (after a century of anarchy and Mughal decline, but still preceding pan Indian British rule)
So clearly the decline of the Indian economy started long before the establishment of British Raj, and coincides with the heyday of the Mughal Empire. In fact it is striking that PCI in India in 1600 (at the start of the decline) at $682 was higher than the PCI in 1950 of $619!
Also when we discuss India as a whole – the regional variation is something to be borne in mind. Circa 1800 while Indian PCI is estiamated to be close to $500, the PCI of Mysore was estimated to be well in excess of $1500 and close to $2000 (by Sashi Sivaramakrishna)
So what this means is – Mysore at the beginning of 19th century was almost on par with UK and Netherlands whose PCI was circa $1800, in contrast to India as a whole that languished at $500
There has also been another view from economic historians like Parthasarathi Prasannan, that the Indian per-capita GDP is most likely underestimated by both Maddison and Broadberry / Bishnupriya.. Let’s discuss some numbers from Parthasarathi
Here’s a comparison of Britain, South India and Bengal (two commercially advanced regions of India) circa 1750
food grains a week
The source for Parthasarathi’s numbers comes from this book linked to below (for those interested) – Why Europe Grew Rich and Asia Did Not
This is a huge riposte to both Maddison and Broadberry! As it suggests that wages in two very large parts of India (the South and East) were on par if not higher than the wages in Britain at the middle of the 18th century
Parthasarathi’s numbers are at odds with Maddison’s estimates that British PCI in 1800 were at $1707 and hence over 3 times the Indian PCI of $533.
Parthasarathi’s views are backed by the research of another historian – Sashi Sivaramakrishna who has studied the travel writings of Francis Buchanan in South India circa 1800, and estimated that Mysore incomes in that period were 5 times the subsistence level – i,e close to $2K
So while this research is specific to a part of India, it does suggest that even if Maddison and Broadberry may be right about the general squalor of late Mughal India, there does appear to be considerable regional variation Mysore was probably on par with Britain circa 1800
But what’s undeniable however is that all data points to a decline starting 1600 and continuing unabated till 1870s… And we must be careful to note that the first part of this long period of decline actually corresponds to Mughal heyday and precedes the Empire’s decline!
But the Indian economy did arrest this decline and it started growing again. That happened circa 1870. That’s when growth resumed after 3 long centuries.. So let’s study the period post 1870
So here’s the table. We are on firmer ground here, as there is less contention on PCI estimates post 1800. As you can see growth resumes circa 1870. But then this is also the period of the Industrial Revolution, when the gap between the West and the rest massively widened –
gdp table
The numbers above are partly drawn from Maddison and partly from the Worldbank site linked below –
Clearly what we see is that while growth did resume circa 1870 – it was much too slow relative to the West, In fact the gap between India and the West was way bigger circa 1998 and even marginally bigger in 2017 than in 1870 – the heyday of the British Raj.
In fact the gap between US and Indian per-capita incomes was much wider in 1998 than in 1950! And it is almost twice as wide in 2017 as it was in 1870!
THis helps us understand why there is so much rage against the era of Nehru-Gandhi rule from 1950 till 1990. Sure, the “Nehruvian” growth rates were higher than growth rates at any point in Indian history Yet they were awful relative to the growth rates in the rest of the world
So while India did start growing post 1870, we have only regressed in a relative sense, because we have been totally out of step with the pace being set in much of the developed world.
Now why was this the case. It has a lot to do with the economic policies pursued, and the arbitrary restrictions placed on economic activity. But here again we need to make the distinction between the Nehruvian era and the Indira Gandhi era – two distinct periods
The Nehruvian period is best described as “License Raj” – a planned economy set-up where companies needed as many as 80 licenses often to produce something. While the activity remained in private hands to a significant extent, those hands were chained and hobbled by the state.
The term License Raj was actually coined by the great statesmen C Rajagopalachari in his magazine. In the late 50s, he wrote this
“I want the corruptions of the Permit/Licence Raj to go. I want the officials appointed to administer laws and policies to be free from pressures of the bosses of the ruling party..I want real equal opportunities for all & no private monopolies created by the Permit/Licence Raj”
But this was different nevertheless from the Indira Gandhi era, when state control went beyond the granting of licenses. Instead the state got into running business. A period when large parts of the economy, including the banks were nationalized, arbitrarily.
So let’s study how the three major sectors of the economy have fared in the 70 years since independence across 3 eras… Nehruvian period Indira’s period Post Indira period
Here is a sectoral view of the growth rates –
sectoral growth
What is important to note here is the massive decline in the growth rates of the Industrial sector during Indira’s long reign – a much lower CAGR for the sector than what was achieved in the Nehruvian years.
Now why do we harp on the Industrial sector? This is because the Indira era growth rates look slightly better than the Nehruvian period due to the impressive performance of the Agricultural sector – which had everything to do with a black swan event – The “Green revolution”
So the overall growth rates can be misleading. It is the industrial sector’s growth which tells you how bad the Indira years were.
Also there was a big recession during 1965-66 (Lal Bahadur’s premiership) in the immediate aftermath of the Indo-Pak war, which makes the Indira years look a little better relative to the 50s-early 60s than they would otherwise be
The growth rates have been relatively impressive post 1980s, but yet high growth rates in excess of 6-7% have been achieved only in a few select years, and not consistently for 20-30 years as was the case with China Even the process of economic reform has been in fits and starts
The first major round of reforms was in 1991 under Narasimha Rao when India did away with much of the old License Raj, reduced tariffs on many goods, liberalized trade, and also allowed FDI in many sectors.
The second round was during the early 2000s under Atal Vajpayee, when the focus was more on reducing state control of businesses – Disinvestment and privatization were high on the agenda in these years.
But since then the reform process has stalled for the most part under UPA rule, with lukewarm efforts by the Modi govt that succeeded it.
The growth rates of India are much more impressive than in the 50s-70s, but the fact remains that they seldom cross 8%. Growth has averaged between 5 to 7% for most of the past 30 years
As we look ahead into the rest of the 21st century, we are humbled by the thought that India today is still poorer relative to the rest of the world in 2017 than it was in 1820 In fact the gap vis-a-vis US is wider today than it was in 1913! Let’s conclude on that sobering note