The Indian Economy Blog

September 16, 2005

From “Nehru Growth” to Productivity Surge

Filed under: Growth — Atanu Dey @ 2:24 am

It is common knowledge that the Indian economy which was securely imprisoned since independence in 1947 has undergone a radical transformation and has seen a departure from its dismal 3 percent “Nehru Growth” to a more respectable 6 percent and more since the 1980s. There is little room for debate on that fact. What observers appear to disagree on is what were the factors that led to the transition from the “Nehru Growth” to the present.

Very broadly speaking, here is a thumb-rule I use to figure out what factors led to the Indian economic growth 1980s onwards. List every policy—domestic, international, industrial, education, health, banking, etc—that Nehru and his descendents imposed on the economy. Systematically reverse the policy and as you do so, you see the economy accelerating. In other words, if your goal is to create a set of policies that would ensure economic stagnation and deepening poverty of a large economy, the shortest route for you would be wholesale adoption of all the Nehruvian policies. Conversely, the quickest method of figuring out what to do to for economic growth, is to take any component of the Nehruvian policy prescription and apply the reverse.

To the extent that Nehruvian policies have been reversed, India’s economy is prospering. If the economy has not attained its potential growth rate yet, it is because not all of the mindless Nehruvian (but I repeat myself) policies have been discarded yet. I have no doubt that the nation will become slowly wise eventually. How many hundreds of millions will suffer poverty in the meanwhile is a question that is best not contemplated.

What got me thinking about the “Nehru Growth” rate is a recent paper in “IMFstaffpapers: A journal of the IMF” by Rodrik and Subramanian “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition.”

Before anything else, let me address a point about nomenclature. As far as I can tell, Nehru was vehemently anti-Hindu. He was by no stretch of the imagination a Hindu nationalist. So why is the growth rate arising from his policies labeled “Hindu growth” is somewhat of a mystery. After all, Hindus suffered as a result of Nehruvian policies seeing as that they comprise about 80 percent of India’s population. So labeling the Nehru growth rate as “Hindu” is adding insult to injury.

Also, what does it mean that a growth rate is “Hindu”? Does economic growth rate have a religion? We have never heard of the growth rate of the Indian economy in the first half of the 20th century as the “Christian growth” rate, have we? You may ask what was that Christian growth rate: it was negative 2 percent per year on average.

As a Hindu I am offended at the attempt by the Nehruvian apologists at transferring the blame to Hindus for Nehru’s failures. And it is not just Hindus that are the target of the defamation; the religion is at fault. Here is the opening paragraph of the IMF article:

India’s economic performance during the first three decades after independence in 1947 was christened the “Hindu” rate of growth, a term connoting a disappointing but not disastrous outcome and the acquiescence in the present that the religion supposedly imbues, because of its greater emphasis on the hereafter.

I am sure that the authors’ grasp of economics is much better than their feeble grasp on what Hinduism is.

Hindu bashing continues on pg 196 when they write:

A key fact that we establish at the outset of this paper is that the turnaround in this performance—the decisive break with the Hindu past—occurred around 1980 and not in the 1990s as most accounts have it.

I sympathize with the authors’ apparent desire for India to discard its Hindu past. The earlier Pope was much more direct in his condemnation of Hinduism when he publicly declared in India that the area of darkness that is India has to be illuminated by the cross.

The paper does have something of substance once the gratuitous insulting of Hindus and Hinduism is out of the way. The paper is about India’s growth transition which they claim began early in the 1980s rather than in the years following the macroeconomic crisis of 1991. They claim that there was a perception change in the private sector that the government’s attitude towards industrial licensing had changed. This shift resulted in large productivity gains because the economy was far below its income-possibility frontier.

To Rodrik and Subramanian, what is important is not whether the reforms started in the 1980s or not but how it happened. The reforms, they contend, was “probusiness in the sense that they boosted the profits of existing businesses without threatening them with real competition because external barriers remained largely in place” and not “proliberalization.” They make a distinction between probusiness and promarket/procompetition and they claim that the latter has a greater focus on internal reforms and was the approach adopted in the 1990s.

About the reforms of the 1990s, they argue that “[it] may well be that the performance of the 1980s would have run out of steam and that the “true” reforms of the 1990s were essential to keep productivity growth alive.” The conclude:

The reforms of the 1990s were, of course, triggered by the crisis of 1991. The quick rebound fro the crisis has been almost entirely attributed to the decisive break from the dirigiste past. But if the 1980s experience was as successful as we think it might have been in creating a strong base of manufacturing and productivity growth, it is hard not to draw the conclusion that the quick rebound was also rendered possible by the strength of the 1980s performance. In some ways, although India was reforming in response to a macroeconomic crisis, it was reforming from a position of strength in the real sector of the economy.”

I liked the paper by Rodrik and Subramanium. I generally agree with their conclusions. But TN Srinivasan, as a discussant of the paper opens his comments thus:

This is a disappointing paper. It sees a mystery and fails to convince through analysis why it does. Had the authors been familiar with Indian economic literature, they might have note written it! The literature has not only noted the growth acceleration in the 1980s but has also questioned its sustainability on the grounds of its possibly being debt-led and fueled by employment and real wage expansion in the public sector.

TN is always very incisive and rarely minces his words. The comment is worth reading, as is the original paper and the response to the comments by Rodrik and Subramanium. Here is TN at his most generous:

The only new idea in the paper is the anecdotal hypothesis that around 1980 there was an “attitudinal shift” toward private business on the part of the national government,9 which triggered a permanent change in the growth process.

But then he quickly trashes one of the important points that R&S make by writing:

The distinction between promarket and probusiness orientation is overdrawn and incoherent. The authors consider trade liberalization an archetypal market-oriented policy without considering the implication of the facts that trade liberalization covered only imports of intermediate goods and equipment, and that industrial licensing remained in place. Clearly, such liberalization, by allowing greater flexibility in the use of their licensed capacity, favored incumbent producers but not consumers and potential entrants. By the same token, any policy (for example, reduction of corporate taxes) that raises the profits of incumbents also raises those of potential entrants, if they are allowed to enter. In short, the distinction made by the authors has no economic logic behind it.

I think TN is just being contrary for the record. The most surprising line I have recently read belongs to TN when he says that “[a]t independence on August 15, 1947, India had an incorruptible political leadership committed to development and an efficient, independent civil service.” Incorruptible? Possibly. Incompetent? Absolutely. I cannot agree more with his last statement—

By sticking to a dysfunctional development strategy for far too long, India’s policymakers ensured that the Indian economy performed far below its potential and that India’s poor remained poor for an avoidably long time.

Well, that is not the end of that debate, as I said earlier. R&S respond to the comments by TN.

They first note the areas of agreement between TN and them:


(1) India’s economic growth rate rose significantly around 1980, and the pace of economic expansion and productivity increase during the 1980s was on the whole indistinguishable from that experienced during the 1990s. (This may have been well known to economists in India, but it certainly has not been common knowledge among reasonably well informed analysts of economic growth and economic reform elsewhere.)
(2) India’s major liberalizing reforms came after 1991. Before that date, India was a practically closed economy.
(3) While there was some liberalization during the latter part of the 1980s, it was not significant enough to have been the driving force behind the higher growth of the 1980s.
(4) Manufacturing played a key role in the increase in growth in the 1980s.
(5) The quality of India’s institutions can support a much higher level of income than what the country had until recently.

They address TN’s objections of course. I’d like to quote them on the distinction between promarket and probusiness policy orientation:


We are puzzled by the discussant’s claim that the distinction between promarket and probusiness policy orientations is incoherent. It seems to us that the distinction is analytically quite clear, and in practice quite useful. Suharto’s economic policies were probusiness, but hardly promarket. We made clear that policies that would help incumbents without allowing newcomers to share in the increased profitability would count as probusiness rather than promarket. We do not disagree with the discussant’s point that “any policy … which raises the profits of incumbents also raises that of potential entrants, if allowed to enter” (our emphasis), but we maintain that it is possible to enhance incumbents’ profits without allowing entry (a possibility that the discussant himself allows with his qualifier).

One can learn a lot from an academic paper. But for real learning, it is good to follow the debate among serious academics. It is not only instructive, but it is also entertaining.

Just as a followup, I would recommend Brad DeLong’s post on the subject and the comments following it.

22 Comments »

  1. Atanu,

    This is really a fun post. I had read R and S in an earlier form, and I too thought their analysis to be spot on. T.N has a long standing anti-Rodrik platform, I believe beginning with Rodrik’s challenging of Bhagwati and Srinivasan with the cross country piece in 1988 and this is more of the same.

    BTW, I’m not sure who coined the phrase ‘hindu rate of growth’, but you seem to imply its a Nehruvian phrase. Is it?

    Arjun

    Comment by Arjun — September 16, 2005 @ 9:20 am

  2. Interesting observation on the change in policies.

    I admire the role played by Nehru for India’s independence. The Swadeshi Movement …need for non violent society..employment of semi employed and unemployed of rural India…brought about a lot of freedom for India. At the same time unfortunately we moved from British Raj to Licensed Raj.

    It is also interesting to observe the generation gap in the outlook of Nehru and Rajiv in their policies. I think these policies change have more to do with the time and situation under which they were implemented.

    Today Indias largest asset in the global economy is its people who can work at a lower wage than the developed nations. So we will continue to prosper until this balance changes or we find other ways to generate more income.

    Keep it up and keep us all thinking for the need for change and above all uplifting the needs of the poor who are undoubtedly the ones who suffer the most!!

    Comment by Mani Pulimood — September 16, 2005 @ 10:58 am

  3. Nehru set up the IIT’s right? Among other things, one has to give Nehru his due in laying much of the foundation for the current growth in the IT sector. Just a thought.

    Comment by Walker — September 16, 2005 @ 2:20 pm

  4. “become slowly wise eventually”

    Hopefully a little faster than the past 50 years

    Comment by epoch — September 16, 2005 @ 3:43 pm

  5. Walker

    A few comments

    1) I think you’re overplaying the role of the IITs in India’s IT growth. One could argue that even if we only had the RECs (Regional Engineering Colleges), India’s IT sector would have taken off.

    2) Much of the benefit from the IITs’ has accrued to the US — most the toppers from the IITs have found their way here.

    3) Actually, the huge subsidies given to the IITs have been detrimental to India. The country would have been much better off if the government had invested that money in primary education and let the private sector take care of higher education — whether it be the IITs/ the IIMs or such like.

    Comment by Prashant Kothari — September 16, 2005 @ 5:32 pm

  6. wasn’t it galbraith who coined the phrase’ hindu rate of growth’ ?

    Comment by kuffir — September 18, 2005 @ 11:49 pm

  7. i totally agree with prashanth on the iits… even today the iits are supported by government upto 750 crores a year.. and we see very few iitians among india’s top businessmen. if you ignore i.t., even where i believe, the iitians had a very marginal role to play, and look at sectors such as pharma almost all the leaders have come from very second-rung colleges.

    Comment by kuffir — September 18, 2005 @ 11:57 pm

  8. i disagre with the view nehru didn’t follow a hindu economic model : his interest in building elitist institutions such as the iits (wouldn’t a more secular/liberal solution have been concentrating on universal primary education and on building hundreds of smaller ‘technical’ institutions’with less elitist admission and curricular requirements ?) and in huge state funded, pampered, spoiled public entreprises ? these elitist institutions were supposed to ‘produce’ high-skilled ‘workers’ and to ‘create’ work(doesn’t that sound like the logic espoused by the votaries of the employment assurance bill ?). except the skills already existed, in some rudimentary form or the other and needed to be upgraded, among the artisan classes of india. and they had work too, only they were underemployed and needed to adapt themselves to new ways of working and new technologies. naipaul had, in one of his books, illustrated how irrelevant these institutions were in the context of the real needs of india, when he related his encounters with nid students ‘designing’ farm implements.
    by focussing on these institutions nehru was only following the earlier hindu rulers’ practice of ‘donating’ a sixth of all taxes collecting to hindu ashrams and gurukuls. and of alloting productive assets such as land, cattle etc., to the elite.
    akbar followed a more egalitarian model than nehru : he empowered the intermediate castes with the right to own land. the revolutionary changes this had brought about in the life of these ‘shudras’ can be gauged from their rise to power-wielding positions in many states in india, today.
    maybe, nehru should have followed this ‘muslim’ model of growth. this would have led to less heart-burn among the non-reserved classes of india restricted from total access to admissions and employment in these elitist institutions, and the reserved classes wouldn’t have needed any meaningless crumbs from the state. in fact, nehru’s ‘socialism’ has disempowered the reserved classes of india by making obselete their special skills faster.

    Comment by kuffir — September 19, 2005 @ 1:14 am

  9. Rain Vs. Brain

    It is good to see that Indian Economy and Economic Growth today is not largely based on rainfall but has begun to depend on the Brains of the people as well.

    Hooray for all institutions and dedicated faculty that develop the brain power of our Indians.

    Comment by Mani Pulimood — September 19, 2005 @ 9:43 am

  10. Brain Drain

    I agree with you guys, it is time the government came down hard on professionals who study in institutions funded by the public and then move out of the country. They should all sign a bond or a money value of the amount expended on them during their studies in the institution.

    These institutions typically attract the middle class and therefore the poor are ignored. Larger quotas must be allocated to the poor so that in the long run the country will benefit.

    Personally I do not agree that the vision of Nehru which was to build a country self reliant in science and technology through the IITs all over India has been fulfilled. Let us not bash Nehru for what we as Indians have not been able to realize.

    Comment by Mani Pulimood — September 19, 2005 @ 10:34 am

  11. Global Perspective

    The IIT graduates have over time become a force to be reckoned with in terms of the global economy. We are talking not just about those who have only contributed to science and technology but also in dollars and cents. IIT could easily be ranked among the top institutions in the world.

    I wonder if a study has been done on IIT graduates living abroad. I am sure they must be worth billions of dollars.

    What has India done to attract contributions from these top performers?

    Harvard, Yale, Princeton is able to raise millions from their alumini. Why cant IIT do the same?

    Comment by Mani Pulimood — September 19, 2005 @ 11:15 am

  12. Mani Pulimood writes “IIT could easily be ranked among the top institutions in the world.”

    That is one of the most persistent illusions that Indians suffer from — that IITs rank. One of these days I will have to write at length about it, explaining the difference between the success of a few from an institute as opposed to the success of the institute. IITs don’t rank in the first 100 of world class academic institutes; they don’t rank the first 200; they don’t rank in the first 300; they rank somewhere around the 400s. In India, only IISc ranks in the 200s.

    “IITs are world class” belongs to the category I call Friedmanism from the original Friedmanism “The world is Flat.”

    Comment by Atanu Dey — September 19, 2005 @ 11:12 pm

  13. “IITs are world class belongs to the category I call Friedmanism”

    I disagree. I believe that IITs excel specifically as an undergraduate technical institution. Yes, you cannot favorably compare an IIT with a world-class undergraduate school. But compare IITs to engineering institutes and they, in my opinion, rank very high. I’ve interacted with a large number of undergraduates from top American schools and the IITs. As far as technical knowledge and proficiency go, I find most IITians to be better than their American counterparts.* This is purely subjective, of course, and a generalization. Individual results may differ, YMMV, and all that.

    * I don’t think this is success “of a few” from the institute. I have observed that IIT graduates have a reasonably consistent level of competency.

    Comment by iu — September 20, 2005 @ 2:50 am

  14. IU, given a sufficiently narrow definition of the area of excellence, IIT can be argued to be the best. Let’s say that if one defines a university to be one where not only engineering but science and the humanities are taught and which awards a large number of very high quality PhDs and which does fundamental research and publishes ground-breaking work, then of course IITs cannot compete. So we don’t appear to disagree on the point that in a global ranking of universities, IITs rank in the 300 or 400s depending on who is doing the ranking.

    My contention is that India is the largest democracy, soon to be the country with the largest population, an IT superpower grabbing food out of the mouths of programmers in the Silicon Valley, a developed country (according to the president of the country), and none of our universities make it to the top of global rankings. IITs don’t of course for reasons that they are just undergrad technical colleges.

    What explains the extraordinary success of IIT grads, especially in the US? One word: competition. If out of 200,000, you get to select the top 2 percent, you already have an advantage. Then put the selected few under immense pressure to compete amongst themselves. Then of that bunch, take the top half and ship them to the US. Then of that, the top 10 percent get on the fast track and of that we have the 50 which includes names such as Vinod and Victor and Rajat and so on.

    Comparing the average graduate from US universities with the average IIT graduate in the US is not fair because of sample selection bais.

    Having said that, I know a lot of IIT grads. Some of my best friends are IIT grads. I lived and worked with them in the US. I found them to be hardworking intelligent narrowly-focused self-absorbed money-grubbing bores. Of course, this is a random sample with its own baises. But there you have it.

    Comment by Atanu Dey — September 20, 2005 @ 4:35 am

  15. Check this out:

    http://www.asiaweek.com/asiaweek/features/universities2000/scitech/sci.overall.html

    These are the Asian university rankings for science and tech schools.

    Comment by Mani Pulimood — September 20, 2005 @ 8:23 am

  16. The IITs are only 50 years old…lets give them some credit for the progress made…what do you see their ranking to be 100 years from now??

    Comment by Mani Pulimood — September 20, 2005 @ 8:40 am

  17. Best and Brainiest….American Companies love them

    Interesting perspective on IIT Graduates….Kids who dont get their choice in IIT go to Ivy League Schools

    http://www.cbsnews.com/stories/2003/06/19/60minutes/main559476.shtml

    Comment by Mani Pulimood — September 20, 2005 @ 9:00 am

  18. Nobel Prize and Research Publications

    It will take a while before our boys get there to be ranked in the world….I wonder if it has a correlation to our performance in the Olympics as well??

    Comment by Mani Pulimood — September 20, 2005 @ 9:19 am

  19. Atanu,

    I agree with almost all the points you make. I don’t, however, agree with your conclusion:

    “Comparing the average graduate from US universities with the average IIT graduate in the US is not fair because of sample selection bais.”

    Two points: I was comparing graduates from elite US universities to IITians. Second, I don’t think we should normalize for selection bias while comparing universities or their graduates. If we did that, then most rankings would become meaningless. Compare a top-tier school to a middle-of-the-range school. The criteria used in any academic ranking directly reflect that selection bias (as it should) since the top-tier school is more choosy about its professors and students.

    “I found [IIT grads] to be hardworking intelligent narrowly-focused self-absorbed money-grubbing bores.”

    You almost say that as if it’s a bad thing :)

    Comment by iu — September 20, 2005 @ 12:35 pm

  20. Atanu,

    On re-reading your previous comment, I realize that you mention two kinds of selection biases. The university’s bias (“If out of 200,000, you get to select the top 2 percent, you already have an advantage”) to which I responded to.

    And, my selection bias that may skew my conclusions since I am looking at the top strata of IIT graduates. That could very well be the case. Most students I have encountered, however, are from the top of their respective (IIT or top-tier American school) classes. So, I am not sure if my selection bias would be much of a factor. I’d, of course, be interested to see the results of a scientific comparison.

    Comment by iu — September 20, 2005 @ 2:22 pm

  21. I dislike the term hindu rate of growth, but it wasnt as bad as things were preceding it. Like Atanu himself points out that the christian rate of growth was negative and this was a positive development.
    Even the like of Manmohan, Stephen Cohen etc concede that a central planning and the nehruvian efforts of the era were needed in late 1940′s till the 60′s.
    Manmohan credits that era as having created a class of people who can work on bigger challenge.
    Cohen agues that starting the 1965 India should have shifted resouces into education and public infrastructure and let private sector take over industries.
    Most economist of the era adviced given to India follow the path that it was following. Yep Even the official American advice was to continue with the model. Milton Friedman was probably the only one who had voiced concern over the excessive licensing and production quotas created with this issue.
    But that was another America in terms of economic policy.
    The mistake it appears in retrospect was not made in nehru era but the time period following it. The policy had served its usefulness by then and India needed indeed missed the boat by not changing.
    Honestly its too noisy to see what direction india will take at present. I am hoping that the government shifts all the infrastructure development relating to K-12 education, health (urban sanitation), transportation etc and not get into crap like employment gaurentee etc.

    Comment by GGK — September 20, 2005 @ 5:44 pm

  22. Regarding IIT I have the following 2 points to make.

    The Hype:
    Most IIT graduates move to the US and get higher education.
    A big chunk of the respect should also go to those institutions of higher learning from which they obtained their Phds and MBAs also.

    The Government subsidy:
    I dont see why the government should subsidize technical eduction to those who come from middle class background and under normal market condition will be able to get a loan.
    A lot of kids from Bhilai, Chattisgarh attended IIT
    I lived there till I left for US when i was 15 year old. I was a middle class indian’. We had a TV. I had used a computer a few times. Our school was one of the few schools in the state of Madhya pradesh(before chattisgarh) which had computers. I went to a Delhi Public School. Which was in reality a private school.. which got subsidies from public sector Bhilai Steel Plant. I know of about 40 kids who got admitted to IIT/RECs who went to school with me. All these kids were not the indians who were in dire poverty. Their parents invested in them. They manipulated a public sector entity Bhilai Steel Plant to provide subsidies to a private school so that their children can get better education.

    Well what about those from the state of chattisgarh who went to the government schools or poorer private schools?
    Is the system fair?
    There is a class of indians who have milked the Indian public sector for themselves and their kids… Its the kids of these parents who make up the largest %age of IIT/REC attendees.

    IMNHO the government should NOT provide subsidies for undergraduate education at IIT/REC but should focus on providing a solid K-12 education all accross India.
    The market forces will make sure India will have enough people being able to afford IIT and REC education in the short run.
    In the long run IIT and other institutions can be even more picky because the pool of qualified entrants will be larger.

    Comment by GGK — September 20, 2005 @ 6:11 pm

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