The Hindu Business Line : Revisiting the 1980s and the vital groundwork

At a time when protagonists of "India Shining" are claiming credit for the country's statistics, and the initiators of the reforms of the 1990s are reluctant to claim the high ground, a study by two Harvard University economists shows that some of the credit for the later high growth legitimately belongs to the changes introduced by the policies of the 1980s.

FAILURE has few claimants to paternity. Success has many who claim authorship. This is true of economic progress no less than of other achievements. The protagonists of the "India Shining" campaign try to distance themselves from attributing even part of the credit to the originators — the Government led by Indira Gandhi, Rajiv Gandhi and Mr P. V. Narasimha Rao.

The fact is that much of the sheen derives from the infrastructure and such PSUs as ONGC and GAIL as well as the stock of well-trained manpower, thanks to the initiatives taken in the establishment of these organisations, as well as setting up of IITs and IIMs during the time of Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi. The outsourcing game itself depends on the tremendous pool of educated and skilled scientists and technicians that India has, thanks to the previous Governments' enlightened attitude to education, science and technology.

In this connection, an interesting debate has been initiated by two well-known economists, Mr Dani Rodrik of Harvard University and Dr Arvind Subramanian of IMF entitled "From Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition".

India's economic performance during the first three decades after Independence was christened the Hindu Rate of Growth, a term connoting a disappointing outcome and playing to the cliché of acquiescence in the present that the religion supposedly induces because of a greater emphasis on the hereafter. Protagonists of Hindutva note.

The paper addresses the commonly held view that the change in India's economic growth started from the economic reforms of 1991 under the admittedly brilliant leadership of Dr Manmohan Singh.

While they admit that these reforms played an important role in opening the economy and improving its rate of growth, they point out that the turnaround actually started a decade earlier. That turnaround resulted in India's rate of growth of per capita income rise from 1.7 per cent in 1950-80 to 3.8 per cent in the period 1980-2000. 1980 rather than 1991 marked the change.

The authors attribute the sharp turnaround to an attitudinal change that took place in the 1980s in favour of private business. They say that when Indira Gandhi came back to power in 1980, she realigned herself politically with the organised private sector and dropped her previous rhetoric about socialism.

"The national Government's attitude towards business went from outright hostile to supportive". This, in the authors' view, was what unleashed the animal spirits of the Indian private sector in the early 1980s.

They, however, drew a distinction between a pro-business orientation and a pro-market orientation — which latter had characterised the reforms of the 1990s. The pro-business stance was, indeed, a contributor to a stable higher level of expectations and induced further investments.

While one welcomes the new light thrown by the authors, one has to admit that the argument that the 1980s were noted only for a pro-business stance is too simplistic. That a Government changed its attitude to pro-business instead of being anti-business cannot by itself explain the sharp improvement in rates of economic growth and productivity.

There were also various appropriate policies in force, propelled by the Government's vision of an environment freed of too many restrictions. Primarily responsible was the vision of a higher rate of growth that Indira Gandhi and Rajiv Gandhi had. It involved higher investments in infrastructure and manufacture.

That these involved a change in attitude to business was more an effect than a cause. To explain the whole transformation as a kind of a political IOU being discharged to business by Indira Gandhi is misreading history. It ignores the fresh vision brought to bear on economic policy-making in the late 1980s by Indira Gandhi, Rajiv Gandhi and their advisers.

Rodrik and Subramanian take considerable pains to demolish various other possible explanations of how the 1980s proved such an effective turning point in India's economic history. They disagree with an explanation that seeks to connect India's sudden growth in the 1980s to the external environment. In their view, the terms of trade for India had, in fact, turned unfavourable in the 1980s, declining by 20 per cent compared to the previous period. All the more, the need to understand the causes of the economic turnaround in the 1980s. The authors tackle another explanation offered for the higher growth in the 1980s, an explanation that centres on the fiscal expansion of the 1980s. In their view, it was unsustainable and had leaked into the external account in the 1990s.

The authors dismiss the positive effects of increased public investment in the 1980s, although they admit that these might have had lagged effects as a result of increased efficiencies contributed by better infrastructure.

The authors, however, ignore the spread effects of higher public investment in sectors such as railways, power and irrigation, which led to an increased demand for capital goods, such as cement and steel, besides giving rise to widespread employment. In any event, the character of the deficit in the 1980s was skewed in favour of capital investment rather than revenue expenditure, which partly explains the effects on growth. Nor is it possible to buy the argument that it was the fiscal deficit that finally led to the BoP crisis of 1991. It was more the result of high short-term external debt far in excess of viable limits. It primarily reflected the combination of the Gulf crisis and the sudden withdrawal of NRI deposits. It is difficult to conceive of the fiscal deficit of 9 per cent of the 1980s leading to explosive external debt when the sovereign commercial borrowing was restricted and the total commercial borrowing of India itself was relatively small.

It was the peculiar combination of political instability in India and the sharp downgrading of India's credit rating that contributed to stickiness in the rollover of India's short-term debt. In ordinary times, this would not have been difficult. The story of fiscal deficit leaking into external account may be far-fetched so far as the 1991 crisis goes.

The distinction drawn by the authors between a pro-business and pro-market orientation is interesting, but not justified. They seem to argue that India scored in the 1980s by confining its reforms to a pro-business orientation. It created no losers. But they do not deny the logic of the reforms of the 1990s, which enabled the economy to be more open and create the opportunities for further growth. The authors have, however, done a signal service to students of economic development by pointing out that there is more to economic growth than the conventional view based on the Washington Consensus.

The progress of the 1990s was built on the foundation laid by the remarkable changes of the 1980s.

It is interesting to note that when protagonists of "India Shining" are arguing about the reasons for the sheen, and while the initiators of the reforms of the 1990s are reluctant to claim the high ground, Rodrik and Subramanian show that some of the credit for the higher later growth should legitimately belong to the changes introduced by Indira Gandhi and Rajiv Gandhi in the 1980s. This is an interesting finding.

Those who participated in the decision-making of the 1980s can vouch for the fact that the policy changes of the 1980s were based on a clearly argued vision of India's economic future and soundly-articulated expert advice.

Dr Manmohan Singh was himself an important part of the policy-making structure, either in his capacity as the Governor of the RBI or as Deputy Chairman, Planning Commission. To discuss the changes as superficial or as favourable to the incumbents in industry is unfair. Many new entrants made their debut during the period. It cannot be denied that the liberalisation of the 1980s amounted to a charter of freedom, albeit limited, for the Indian corporates.

But it was nuanced so as to prevent a sudden flooding of the Indian markets by imports at cheap prices. True, Dr Manmohan Singh did come up later with an integrated policy of economic reform, involving both industrial policy and trade.

The success of the 1990s should not blind us to the fact that it was the preparations of the 1980s, which built the structure that has become the launching platform for the later reforms. In this context, I cannot do better than quote from the report of the authors:

"Economic dynamism (of the 1980s) created a fertile environment not just for incumbents, but also for entrants and new activities. It is perhaps not a coincidence that some of the IT powerhouses that would begin to fuel India's growth a decade or so later got established in the early 1980s, just as the economic environment was turning more business-friendly.

"For example, Wipro first ventured into IT in 1980 and Infosys was founded in 1981. These firms eventually were able to reap handsome benefits from India's prior public investments in higher education (the IITs in particular) once the policy environment turned permissive. Their story is in many ways similar to the one we have laid out for the more traditional activities during the 1980s: pre-existing strengths unleashed by more pro-business policy attitudes".

An elegant confirmation of the seeds of growth sown in the 1980s, which truly paved the way for the 1990s and the "Shining India" of today and tomorrow!