The Indian Economy Blog

February 2, 2006

IMF Paper on India’s Pattern of Development

Filed under: Basic Questions,Economic History — Reuben Abraham @ 7:50 am

The IMF has just published an excellent working paper authored among others by Raghuram Rajan, the chief economist of the Fund and Arvind Subramanian, also of the Fund. If you want a comprehensive overview of the idiosyncratic path of the Indian economy since 1947, there’s no better read than India’s Pattern of Development. In addition, Rajan, Subramanian et al use India’s fast growing states as a crystal ball of sorts to try and predict what path the economy as a whole will take in the future. For a taste of what to expect in this paper, here’s an excerpt from the introduction.

We argue that the nature of the policies India followed after independence in 1947 created unique specializations prior to the economic reforms that started in the 1980s. Relative to other comparable poor countries, India’s emphasis on tertiary education, combined with a variety of policy distortions, may have channeled the manufacturing sector into more skill-intensive industries. Furthermore, the government’s desire to create capital goods production capability, especially through public-sector involvement, implied that India had a greater presence in industries that required scale (and capital) than other developing countries. Regulatory penalties and constraints on large private enterprise implied, however, that within most industries, the average scale of enterprise was relatively small.

Finally, rigid labor laws as well as constraints on the scale of private enterprises may well have limited India’s presence in labor-intensive manufacture, the usual specialization in a populous developing country. Given these idiosyncratic policies, India had a far more diversified presence across manufacturing industries than the typical developing country. Interestingly, it had a lower-than-normal presence in services in the early 1980s, where the skill-intensive segments such as telecommunications were still dominated by the slow-moving public sector.


  1. The otherindia (, has a post upon an article that talks about a report by Council for Social Development upon indian social progress , published by Oxford University Press. To quote the article

    “The different chapters in the volume point towards an Indian society that is becoming increasingly polarised not just along class lines but also across regions and states “

    which is exactly what this paper says too, and prophecies that we will see much more of that in coming future, in the “Looking Ahead” section. However, while this paper cites the possible reason being the policies pre-liberalisation, the people connected with the CSD report seem to attribute it to flaws in development-reform policies

    “The policies of globalisation and economic liberalisation have undermined the role of larger societal norms as well as the state apparatus that could have countered exclusionary forcesàkeeping social tensions simmering”

    Comment by anshul — February 4, 2006 @ 4:23 am

  2. Anshul, don’t you think the strong premonition of CSD report seem kind of far fetched? Isn’t CSD looking at the issue in terms of the glass being half empty?

    Indian state (i.e. GOI) continues to be very strong economically, and otherwise, with respect to individual states. No major state population, by themselves, want to secede the nation nor are there social tensions between the states (if anything, there is more economic/development tensions – like raising the height of a dam or water sharing issues). That the states are freer to pursue their own economic strengths (as argued by IMF report) since early 80s, I would think, would create (if it already hasn’t) a positive competitive environment for states to grow and prosper.

    Social tensions are nothing new in India – they occurred even when there was no economic federalism. I think it is highly unlikely that the economic federalism will, by itself, create (or exacerbate) social tensions. If anything, the tensions may lessen with prosperity – although we may be long way away from that.

    Comment by Chandra — February 5, 2006 @ 10:25 am

  3. Chandra, to my limited understanding, I think what CSD is hinting at is that “reforms lacked a human face”, and that there is a need for more redistribution of wealth towards lagging regions, while IMF paper seems to be saying, that though it is not ideal, but if carried out as to incentivise reforms in the laggard regions, it will be helpful. Though I am not very sure of the correctness of my perception here. (I tried to read the IMF paper, it’s quite technical !)

    Comment by anshul — February 7, 2006 @ 10:13 am

  4. There is a general sense of exuberance that with the recent Nobel award going to a social welfare economist, the trend away from financial markets being primary has been validated by the economics profession. It is thus heartening that the Nobel Committee has finally discovered the People’s economy.

    We say finally because it has been the people’s economy for thousands of years that has nourished us, that has kept us alive. Whatever the historical era – worker/[laborer, warriors, priest/intellectual or capitalist – it is this level of the economy that has been most crucial, and it is this economy that those in power have been most concerned about dominating.

    When capitalists are in power, they want to ensure to monetize the informal dimensions of barter, of small markets, of localism. They want to ensure that the far reaches of corporatization expand to the most remote village so that there can be paying customers for their products; customers who can pay in cash and not in-kind through bartering.

    When priests/intellectuals are in power, they too want to ensure that there is surplus at the bottom level so their welfare can be taken care of. They want to ensure that every last segment of the market is appropriately taxed.

    Too, in the martial/military eras, warriors take from the poor to fulfill their dreams of conquering neighbors. Indeed, history can be understood from this dimension – who is taking from the peoples economy, what ways have been found to extract wealth upward. Is it through donations to priests and monks, is it through calls to globalize, is it through monetization? By analyzing in which ways the people are removed from direct economic activities we can gauge what level of exploitation exists.

    But what specifically is the People’s economy? Shrii Sarkar defines it as such: “People’s economy deals with the essential needs of the people – the production, distribution, marketing … and all related activities of such essential needs. Most importantly, it is directly concerned with the guaranteed provision of minimum requirements such as food, clothing, housing, medical treatment, education, transportation, energy and irrigation water.”(i). At essence, it is about survival. With a vibrant peoples economy, people live, without it, as Sen has argued, famines can result. And yet, it is this economy that the state tries to regulate. Again, as Sen has shown, famines result partly due to state intervention, especially in immoral dictatorships where there is no opposition, where people have no way to express their frustrations, where information is kept secret. In contrast, a people’s economy is decentralized, local, and ideally based on the cooperative economic model, wherein individuals exist in community, in relationship with each other.

    This message of localism has been the most recent wave of economic thinking. Thinkers such as Hazel Henderson, James Robertson and representatives of indigenous communities have consistently argued that the opposite of capitalism is not communism but localism – that to survive we need to (1) focus on the environment – a concern for animals and plants, (2) focus on just distribution – on the ratio of wealth between the richest and poorest, (3) focus on local forms of exchange, including local money, (4) focus on the most vulnerable – often women and children, and (5) find ways to empower these groups not by “developing” them but by removing the barriers that priests/intellectuals, the police/military and the capitalists/corporations place in front of them. The goal is not to help these people become rich (as defined by those in power) but to ensure their dignity and their survival, to empower them. While emergency help though social relief organizations is important, far more crucial is removing the power of the landlords, of the courts, the police, and larger corporations. Doing both of course is what states find problematic.

    Feeding the poor is admired but asking why the poor are hungry, and then taking steps to eliminate the barriers of poverty is what threatens governments, for it exposes that those in power are unwilling to transform the structural basis of violence, of poverty. It is precisely this reason why Sarkar’s social-economic movement called PROUT was at the receiving end of brutality from state and national governments in India. Sen wins an award because he theorises poverty, Mother Teresa wins an award because she relieves human suffering – both are deserving winners – but Shrii Sarkar, who theorizes poverty, relieves human suffering and initiates powerful movements to expose and end poverty, was vilified during his lifetime by the Indian goverenment. Of course, we should not be surprised by this. As he says himself, whenever truth has been spoken to power, the response has been an attack on truth. This is the natural cycle transformative movements must endure if they are to create the conditions for a better life for future generations.

    Finally, and this is crucial, and again problematic from a reductionist modernist perspective, Shrii Sarkar has included inner, personal transformation as part of the solution to poverty and injustice. Unless humans begin the inner purification/ moral process themselves as well as the mental expansionary process – through meditation – they, over time, will also become part of the problem. The structures of exploitation – that is, the institutions, the values and persons who legitimise and validate them – have too deeply infected society. Only by enhancing one’s morality and expanding the inclusiveness of one’s mind is it possible to avoid the disease of an unjust system. It is this combination that makes Shrii Sarkar both utterly unique and fundamentally problematic to grasp. It might even have been enough, as mentioned above, to theorise, relieve and challenge poverty but then to investigate inner poverty, the lack of spiritual nourishment, immediately relocates poverty not only as a food issue for the poor but as well a global moral and spiritual issue. The solution thus becomes not just less authoritarian systems, and a better framework for distributive justice – Sen’s argumenmt – but inner and outer systemic and epistemic transformation. It is this grand sweep of self and society that Shrii Sarkar brings to economic thinking, and in the process fundamentally redefines the field.

    Other Systems
    Returning to the more specific issue of the people’s economy, it is important to note that communism as well spoke of the people’s economy. Iindeed, the entire philosophy was based on protecting the people, on ending wage labor exploitation. But there were two problems: (1) Politics, instead of being landlord-laborer based, became party apparatchik-laborer based. (2) Violence was systematically used against localism so that there could be massive industrialisation. (3) Dignity, in terms of local religions, customs and ways of knowing, was jettisoned for progress. While in some cases this can be justified, that is, where religion and other systems are conducive toward violence against the other, in many cases, localism was quickly replaced with allegiance to party, ideology and the great leader. Thus one dogma was replaced by another.

    Confucianism as well has attempted to end the people’s economy but in a far more benign way. The trade off for ending local systems has been the paternal state where father knows best. While this has had its merits – safety, security, survival, education, a concern for the family and future generations, transparent politics – the loss has been cultural pluralism, of the right to dissent. While certainly for a “well knit social order” – to use Shrii Sarkar’s language – dissent should only come with responsibility, it appears that in Confucian societies the spirit of difference, the sweetness of culture, has been lost.

    Globalism, while absolutely brilliant at the continuous movement of money, its rolling, has been less concerned about where the money is going, the ethical in and outputs. It has been excellent at economic growth but less with distribution. Moreover, the rolling of money has been based not on productive investment but on short-term speculation, thus leading to a delinking of the financial economy with the real economy of goods and services.

    It is this concern for inappropriate economic practices that Shrii Sarkar’s other branch of economics, the psycho-economy, attends to.

    Psycho-economy has two branches, the first of which, will never deliver a Nobel in our modern world, but the second in the coming generations should be fundamental. The first branch consists of exposing and eradicating “unjust economic practices, behaviors and structures.”(ii) This is generally well represented in the Marxist literature, and more or less consistent with the intentions of radical political-economy. Current thinkers such as Immanuel Wallerstein and Johan Galtung have both excelled in this approach.

    The second branch is concerned with a post-scarcity society, that is, with mundane economic problems solved, how to deal with pressing issues such as the relationship between technology and work or the office environment. These post-industrial issues include as well: how employees feel about their lives, about their job, and about what is important to them.

    Psycho-economy is not an attempt to create a theory of information, since Shrii Sarkar is not a reductionist, but to ask what are the values behind an economy, what are our aspirations? It acknowledges that life is not about economics and economistic (reducing life to materialistic principles) thinking. As Shrii Sarkar writes: “the psycho-economy is to develop and enhance the psychic pabula of the individual and collective minds.” (iii). What does this mean? At heart this is about inclusion, about reframing our identity not as consumers (I shop therefore I am) or as competitors (I have to increase my wealth by eliminating other firms) but as spiritual human beings. This means seeing the exchange of goods, services and ideas as a process wherein others are not harmed, stolen from or maligned but creating an economic process that allows each participant to prosper. At heart, this is about spiritual cooperative economics, about including others in how we do business, how we produce, how we consume, how we live. It is understanding our desires and their relationship to the physical world. Capitalist economics, however, ignores social costs such as the drudgery of much work or the social problems caused by unemployment. Capitalist economics does not ask the crucial question: is what is being produced that which should be produced for the health and happiness of all?

    Conventional economics thus defines values, impact on the environment, impact on future generations, as external to the economic process. Indeed, critics of globalization have called for full pricing, where externals are internalized by economic actions. The goal thus is to increase access to information for buyers and sellers and to determine the impact of specific economic activity on society. While this is important, it does not nearly go far enough for Sarkar.

    Information Economics and Other parts of the Economy
    Information economic theory has made the mistake of further dividing reality into tiny bits with the goal of quantifying each further subdivision, while Sarkar argues that the opposite is needed, an expansion of what we allow in our minds, or how we construct our minds. With Sarkar, information theory thus moves to communication theory with reality being a co-evolutionary process between self, others, the transcendental and the natural world. This synthetic approach will not win Nobel or other awards since it does not give any specific additive knowledge (what science excels at). Instead it creates a new framework in which to understand current knowledge – that is, it is transformative knowledge.

    But Sarkar’s redefinition of economics does not avoid current commercial issues. Indeed, he also writes on the Commercial Economy. This branch is generally similar to our present understanding of economics, which is concerned with issues of how to develop scientific productive and efficient processes that “will not incur loss,”(iv) and ensure that “output will exceed input.”(v) While an idealist, Sarkar never ignored the reality of the physical world. Indeed, he asserted that we are not properly using our current resources, either misusing them or mal-appropriating them. The majority of problems in the world have come about because the Commercial Economy has been seen as the totality of economics instead of just as one dimension of economics. While Sen brings in values to economics, he still does this largely in the context of the commercial economy. It is left to others to point out that the general tools of economic theory cannot deal with the household, village or indigenous economy.

    Finally, Sarkar adds the General Economy to his model. This last part is his ideal vision of the economy. In this case, a three-tiered economic structure (state run, cooperatives and individual/family run). Thus, while earlier parts of the economy focused on the minimum requirements of life (that is, the needs of the South); on the structural problems of exploitation (the global problematique); on a post-scarcity inclusive economy (the concerns of a post-industrial economy); on issues of production and the international monetary system (the world-economy), the last section of his theory of economics, focuses on what an ideal economic structure should look like.

    These categories he gives us – the four parts of the economy – are not only descriptions of the economy, but as well analytic tools; that is, they serve to describe and reveal the world in front of us.

    For economic students, much of this is not economics, as economics as currently defined is only concerned with production, and not with the values behind the system. Issues of inflation and depression, while the concern of conventional economics are not Sarkar’s direct concern except in so far as they lead to system transformation – the end of capitalism – or they increase human suffering.

    Sarkar’s Proutist Economics is then not about debating economic trends or pinpointing depressions but rather about using the analytic tools Shrii Sarkar has given us to better understand the world, to change the world, to relieve human suffering, to transform self, to create a moral economy; and ultimately to create a spiritual cooperative society.

    Will Sarkar ever win a Nobel prize? Most likely never, and of course, this was never his aim. His prize will be the creation of a new planetary society, a prize no committee can ever give, only the hard work of women and working collectively, and the grace of the Supreme can afford that.

    Comment by naciketa — March 20, 2006 @ 7:12 pm

  5. Social tensions are nothing new in India – they occurred even when there was no economic federalism. I think it is highly unlikely that the economic federalism will, by itself, create (or exacerbate) social tensions. If anything, the tensions may lessen with prosperity – although we may be long way away from that.

    Comment by realestateglendaleca — May 9, 2007 @ 5:56 am

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