The Hindu Business Line : India’s growth story: ‘Precocious’ and ‘unusual’

Chennai, Aug. 23 The Indian economy’s turnaround should be attributed to a period at least a decade prior to 1990, argues Mr Arvind Subramanian, Senior Fellow, Peterson Institute for International Economics, Washington DC, and the author of India’s Turn: Understanding the Economic Transformation.

Sharing his views on the economic development and some excerpts from the book with journalists from The Hindu Group of Publications, Mr Subramanian said the common perception that the Indian economy’s turnaround could be attributed to the reforms post 1991 and is all about liberalisation is “discontinuous” with the earlier trends.

The numbers show that the process of turnaround has been continuous and can be linked to a decade prior to major reforms post 1991. The economy had demonstrated a sharper growth curve from 1979-1980 when the Government became “pro-business” as distinct from the reform period when it was “pro-competition”, he said.

Another feature of the Indian growth phenomenon — something he describes as “precocious” and “unusual” — is its pattern of development; “unusual” in that it has grown ignoring its comparative advantage, the huge labour pool.

India has grown with its skilled workforce and not the labour force. In other countries the skill came into play when they were much richer, he said.

Another such instance is its FDI exports, which is among the highest in terms of ratio of FDI exports to GDP. This is an indicator of its export of the managerial skills and capital, and it exports these to richer countries defying gravity.

This is surprising considering that even China, which is a manufacturing giant, is not as big an exporter of managerial skills as India, he said.

This may be considered “premature” for India but arguments present themselves on the positive and negative aspects — it could be argued that this is an indication of its competitiveness and is a response to the constraints here.

But, on the other hand, the downside is that it is not using its unskilled labour enough. The shortage of skilled labour would be one constraint, he said.

Sharing another broad theme from the book, Mr Subramanian said the country is witnessing a “third trajectory of growth” — from 3 per cent it went to 6 per cent and in the last four years around 9 per cent.

The question is whether this can continue. Yes, around this range, he said.

There could possibly be a dip for the next one year because the US economy will continue to be weak for sometime and also because the domestic monetary policy squeezing liquidity is aimed at toning down growth. But, fundamentally, the growth may be expected to sustain at 8-plus per cent for some more time.

One area of concern is the State’s capacity in delivering services to the public is weakening. India’s private sector has better capability when compared with China — China is strong in creating State institutions that deliver better. In the long term, China’s combination of private and State capability is better because it is easier to create a market than to create a public institution and State capacity, he said.

In the context of the weak State capacity, there could be a “shock down the road” which will also impact the private sector, Mr Subramanian said.

India’s Turn: Understanding the Economic Transformation is a collection of articles and policy pieces by Mr Subramanian that is being brought out by Oxford University Press.