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Deals and DevelopmentThe Political Dynamics of Growth Episodes$

Lant Pritchett, Kunal Sen, and Eric Werker

Print publication date: 2017

Print ISBN-13: 9780198801641

Published to Oxford Scholarship Online: December 2017

DOI: 10.1093/oso/9780198801641.001.0001

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The Stroll, the Trot, and the Sprint of the Elephant

The Stroll, the Trot, and the Sprint of the Elephant

Understanding Indian Growth Episodes

Chapter:
(p.250) 9 The Stroll, the Trot, and the Sprint of the Elephant
Source:
Deals and Development
Author(s):

Kunal Sen

Sabyasachi Kar

Jagadish Prasad Sahu

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198801641.003.0009

Abstract and Keywords

This chapter shows three distinctive growth episodes in India’s recent history. First, a period of slow growth from 1950 to 1992, due to the presence of a dominant political party, a prevalence of powerbrokers, and a disordered closed deal environment which slowly changed in the 1980s. The second period of growth from 1993 to 2002 was spurred by a move to a competitive political settlement, a growing trust between economic and political elites which opened up the deal space, and a move towards more magicians within the economy. The third period of mixed growth was caused by the rise of regional parties, the increased influence of the magicians and powerbrokers within the economy, and a shift to a more closed deals space. This analysis highlights the influence of feedback effects in India, both positive and negative, and how each distinctive period helped shape the next stage of growth.

Keywords:   economic growth, political settlements, deals environment, India, rent space

9.1 Introduction

After a prolonged period of low economic growth since independence (famously known as the ‘Hindu rate of growth’), India has transitioned to a high growth trajectory since the early 1990s. This trajectory became even steeper during the first decade of the new millennium. Currently, with a slowdown in the Chinese economy, the Indian economy is arguably the fastest growing major economy in the world. This long history of changing growth rates represents a series of growth episodes, rather than deviations from a single steady-state growth path. In this chapter, we identify the distinct ‘episodes’ of growth for the Indian economy. We analyse the transitions of the economy from each of these growth episodes to the next. We show that these transitions are defined by the interaction of the political settlement, the rents space, and the deals environment in each of these episodes.

It is useful to start by establishing the ‘stylized facts’ of India’s economic growth and structural transformation since its independence. Table 9.1 shows the decadal average of aggregate as well as sectoral GDP per capita growth rates. It clearly shows that economic growth accelerated during the 1990s and 2000s (although there were a few instances of high growth in the 1980s, the momentum did not last for long).

Table 9.1. Average sectoral GDP per capita growth rates in India (% per annum)

1951–60

1961–70

1971–80

1981–90

1991–2000

2001–10

Agriculture, forestry, and fishing

1.18

0.31

−0.45

1.35

0.86

1.70

Mining and quarrying

3.70

1.74

2.60

6.26

2.05

3.06

Manufacturing

4.07

3.00

1.76

4.01

4.05

6.66

Electricity, gas, and water supply

8.36

8.81

4.46

6.32

4.75

4.38

Construction

4.75

3.29

0.97

2.51

3.04

8.07

Trade, hotels, and restaurants

3.30

2.52

1.95

3.72

5.40

7.62

Transport, storage, and communication

3.70

3.20

3.78

3.65

6.96

10.38

Financing, insurance, real estate, and business services

1.04

1.17

1.74

6.81

6.08

8.02

Community, social, and personal services

1.70

3.00

1.74

3.71

4.49

4.92

Agriculture

1.18

0.31

−0.45

1.35

0.86

1.70

Industry

4.14

2.97

1.69

3.86

3.53

6.50

Services

2.18

2.43

2.03

4.44

5.49

7.46

Total GDP

1.99

1.49

0.84

3.19

3.69

6.11

Source: National Accounts Statistics, Central Statistical Organization (CSO).

This growth has changed the structure of the economy significantly. Figure 9.1 illustrates the sectoral distribution of total output of the Indian (p.251) economy. The share of agriculture in total GDP has been consistently declining, from 37.2 per cent in 1980–1 to 14.54 per cent in 2010–11. On the other hand, both the industry and services sectors’ share of total output have been continuously rising during the same period. While the share of industry has gone up at a relatively slow rate, from 16.9 per cent in 1980–1 to 18.4 per cent in (p.252) 2010–11, the services sector has undergone a rapid expansion over the years, from 45.8 per cent in 1980–1 to 67.1 per cent in 2010–11.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.1. Sectoral distribution of GDP in India (% of GDP)

Source: National Accounts Statistics, Central Statistics Office.

Several arguments have been put forward that explain India’s economic growth in its post-independence era and these have now become the conventional narrative on this issue. The sluggish economic growth from the 1950s to the early 1990s is attributed to a number of factors, such as low productivity growth, low rate of investment, and the dominance of the public sector. The restrictive regime (during this period a large number of industries were reserved for the public sector) and the inward-looking policies (import-substitution strategy) contributed to the inefficiency and poor performance of Indian industries, which resulted in low productivity growth. Moreover, a low level of capital formation, owing to inadequate domestic savings, along with high population growth led to slow growth of income per capita during this period. As discussed earlier, economic growth started accelerating in the early 1990s. The conventional narrative explains this phenomenon as the consequence of the comprehensive economic reforms which India adopted in 1991 (see Bhagwati, 1993; Panagariya, 2008). The economy was liberalized and opened up for the domestic private sector as well as for foreign investors. Liberalized industrial policies, combined with increased openness of the economy, induced domestic firms to become globally competitive. The so-called pro-market strategy led to a rapid increase in investment rate, and raised economy-wide productivity growth, which in turn accelerated economic growth.

The conventional literature on the Indian growth experience does throw some light on the factors underlying this phenomenon. However, the scope of this narrative is limited in two important ways. First, these studies focus on explaining one growth episode (for example, the low growth rate up to the 1970s) or one growth transition (for example, the acceleration in the 1990s), rather than providing a framework that explains all growth episodes and transitions between them. Second, they focus on the proximate determinants of growth, including savings, investments, trade policy, or industrial policy, and ignore the continuously changing face of the deep determinants of growth, namely political factors, institutional factors (deals environment), and the rents space that characterizes the Indian experience from the early years of independence to the current period. As we shall see, it is these changes that have played very significant roles in bringing about the transitions in the Indian economy, moving from one growth episode to the next. In this chapter, we highlight the changes in these three spheres—political space, institutional arrangements, and rents space—and relate them to the three growth episodes in India. To do this, we start by identifying the growth episodes in the Indian economy post-independence. (p.253)

9.2 Growth Episodes

In order to study the growth episodes in the Indian economy, we first need to periodize these episodes, i.e. establish when the growth accelerations and decelerations occurred. As explained in Chapter 1, we follow Kar et al. (2013a, 2013b), which differs from previous approaches that have attempted to identify the timing of India’s growth acceleration. Earlier approaches on periodizing India’s economic growth have either been ad hoc, in that they have simply eyeballed the data to establish the timing of the break (such as Sen, 2007), or used a statistical method (Bai and Perron, 1998) mechanistically (such as Balakrishnan and Parameswaran, 2007). Our approach combines the statistical approach with an economic filter to provide a more unified way of establishing breaks in GDP per capita data.1

Our procedure identifies 1993 as the beginning of the first growth acceleration episode, and 2002 as the beginning of a second growth acceleration episode. In India, GDP per capita growth accelerated in 1993 to 4.23 per cent per annum (ppa) versus a predicted rate of 2.34 ppa and then accelerated again in 2002 to 6.29 ppa versus a predicted rate of 2.91 ppa. The net present value (NPV) (at a 5 per cent discount rate) of the additional output from the 2002 growth acceleration was US$2.65 trillion in purchasing power parity (PPP) (see Pritchett et al. (2016)). The NPV of output gained from the 1993 acceleration was US$1.05 trillion. Therefore, the total NPV gained from growth accelerations since 1993 was US$3.7 trillion. Taken together, India’s two growth accelerations added about US$4,000 in PPP terms to the average Indian’s income, as compared with the counterfactual of what the income would have been without the two growth accelerations.

We plot India’s real GDP per capita and its growth rate in Figure 9.2. It clearly shows that economic growth has increased steadily since 1993, and at a higher rate since 2002. Based on our periodization, the economic growth experience of India since independence can best be viewed as three distinct growth episodes. These are: (i) a period of low growth from 1950 to 1992 (though there were growth spurts in the late 1980s, they did not last long enough to be considered as a genuine break in trend growth); (ii) a growth acceleration since 1993; and (iii) a period of high growth since 2002. We follow this periodization throughout the subsequent analysis. (p.254)

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.2. GDP per capita and its growth rate in India

Source: Penn World Tables 7.1 <http://pwt.econ.upenn.edu/>.

9.3 Explaining the Growth Episodes

In this section, we analyse the nature of the three growth episodes in India, as well as the deep determinants that drove the economy from one episode to the next. In order to understand the defining characteristics of each episode, we start by looking at the sources of growth in these three episodes. Next, we take up each episode and discuss the political settlement, the rents space, and the deals environment that defined each of them, as well as the critical role they played in the transition of the economy to the next episode.

What are the sources of growth across the three different growth episodes? We find that agriculture has shown a lack of dynamism across all three growth regimes (Table 9.2). The primary sector (agriculture and allied activities, plus mining and quarrying) as a whole has experienced a similar trend. In general, the primary sector has witnessed stagnation over the entire period. However, the mining sector data during the last episode have been grossly underreported (see Shah Commission, 2012). The manufacturing sector has experienced growth acceleration during both the second and the third episodes, although within this sector, registered manufacturing grew faster than unregistered manufacturing. The construction sector grew rapidly during the third episode, with an average growth rate of 8.57 per cent in 2002–10, as compared with 5.61 per cent in 1993–2001. The trade, hotels, and restaurants sector showed strong growth in both the second and third episodes. The communication sector witnessed a surge in growth in 1993–2001, with an average growth rate of (p.255) 15.73 per cent during this period, compared with an average growth of 4.44 per cent in 1951–92 (this growth momentum was maintained in 2002–10). The finance, insurance, real estate, and business services sectors also witnessed strong growth in 1993–2001 and 2002–10, driven mostly by growth in the banking and insurance sector and in business services (mostly ICT). Overall, the growth accelerations of 1993–2001 and 2002–10 were mostly due to growth in tradeable sectors, such as manufacturing and business services, and non-tradeable sectors, such as trade, hotels and restaurants, communication, and finance.

Table 9.2. Regime-wise average sectoral GDP per capita growth rates in India (% per annum)

Sl. No.

Sector name

1951–92

1993–2001

2002–10

1

Agriculture, forestry, and fishing

0.59

1.30

1.46

1.1

Agriculture, incl. livestock

0.75

1.30

1.59

1.2

Forestry and logging

−1.42

−0.07

0.20

1.3

Fishing

2.33

2.88

2.42

2

Mining and quarrying

3.41

2.21

3.42

3

Manufacturing

2.98

4.87

7.38

3.1

Registered

3.95

5.61

8.57

3.2

Unregistered

1.86

3.52

5.07

4

Electricity, gas, and water supply

6.95

3.87

4.89

5

Construction

2.78

3.41

8.75

6

Trade, hotels, and restaurants

2.80

6.54

7.64

6.1

Trade

2.78

6.36

7.69

6.2

Hotels and restaurants

2.94

8.66

7.30

7

Transport, storage, and communication

3.58

7.42

11.05

7.1

Railways

1.95

2.02

6.17

7.2

Transport by other means

4.17

5.32

7.52

7.3

Storage

2.40

0.39

5.82

7.4

Communication

4.44

15.73

23.07

8

Financing, insurance, real estate, and business services

2.85

5.86

8.46

8.1

Banking and insurance

5.69

7.37

11.17

8.2

Real estate, ownership of dwellings, and business services

2.10

4.89

6.48

9

Community, social, and personal services

2.53

4.68

5.25

9.1

Public administration and defence

3.83

4.35

5.30

9.2

Other services

1.68

4.95

5.31

10

Primary (1 + 2)

0.75

1.38

1.68

11

Tertiary (6 + 8)

2.81

6.18

8.04

12

Infrastructure (4 + 7)

4.17

6.46

9.85

13

Agriculture (1)

0.59

1.30

1.46

14

Industry (2 + 3 + 4 + 5)

3.00

4.02

7.17

15

Services (6 + 7 + 8 + 9)

2.79

5.88

7.79

16

Total GDP (13 + 14 + 15)

1.86

4.15

6.42

Source: National Accounts Statistics, CSO.

Table 9.3 depicts the industrial structure of the economy over the period 1981–2007. It is evident that the average shares of food, beverages, tobacco, textiles and apparel, and machinery in total manufacturing real gross value added have declined over the period. The share of food, beverages, and tobacco has declined from an average value of 15.3 per cent in 1981–92 to (p.256) 13.8 per cent in 1993–2001 and to 11.1 per cent in 2002–7. Machinery share has declined from 8.62 per cent to 7.93 per cent and further declined to 7.62 per cent over the corresponding period. The share of textiles and apparel has witnessed a similar trend and reached 9.96 per cent during 2002–7, from 12.12 per cent during 1981–92. On the other hand, the shares of refined petroleum products, chemicals, and metals have increased over the period. Although the refined petroleum products share declined from 6.2 per cent during 1981–92 to 5.6 per cent during 1993–2001, thereafter it has shown a rapid increase during 2002–7.

Table 9.3. Average share in real gross value added of total manufacturing in India

Average

Food, beverages, and tobacco

Textiles and apparel

Refined petroleum products

Chemicals

Metals

Non- metallic minerals

Machinery

Motor vehicles and accessories

Others

1981–92

15.33

12.12

6.19

17.68

15.72

4.43

8.62

3.42

16.49

1993–2001

13.80

11.28

5.60

20.59

16.18

4.82

7.93

3.63

16.18

2002–7

11.09

9.96

13.03

17.83

17.27

4.80

7.62

3.50

14.90

Source: Authors’ calculations based on data from Annual Survey of Industries.

The subgroup, namely ‘metals’, has experienced a relatively slow but continuous increase in the share in total manufacturing gross valued added over the entire period. Sectors such as non-metallic minerals, and motor vehicles and accessories, have maintained a roughly constant share during the period.

To sum up, Table 9.3 demonstrates that the resource-based sectors (except chemicals) have seen an increase at the expense of labour-intensive and human capital-intensive sectors. In other words, while the share of high-rent sectors (natural resource-based sectors), such as petroleum refinery and metals, has seen an increase during the third growth episode, the share of labour-intensive sectors—such as food, beverages, and textiles and apparel—has decreased during the same period.

9.3.1 Fixed Capital Formation and Its Components

For more than half a century, fixed investment rates have steadily gone up in India (Table 9.4). This has been driven mostly by fixed investment by the private sector (both the corporate and household sectors), and also shows an upward trend over the entire period. It recorded high growth in the second period and even higher in the third. However, public sector fixed investment has fallen after a peak in the mid-1980s. There was a sharp fall in private corporate fixed investment in the latter half of the 2002–10 growth episode.

Table 9.4. Fixed investment rates in India (period averages)

Period

Gross fixed investment

Public fixed investment

Private corporate fixed investment

Household fixed investment

1950–1 to 1992–3

17.07

8.17

2.46

6.44

1993–4 to 2001–2

25.35

8.42

7.50

9.43

2002–3 to 2010–11

32.05

8.18

10.85

13.02

Source: Authors’ calculations, from the National Accounts Statistics, CSO.

(p.257)

9.3.2 The First Growth Episode (1950–1 to 1992–3)

Political Settlement

India became an independent nation on 15 August 1947 and a sovereign, democratic republic after its constitution came into effect on 26 January 1950. A federal parliamentary system was adopted and the first elections were held in 1952. The Indian National Congress (INC) won 364 out of 489 seats in the national parliament, and Jawaharlal Nehru became the first prime minister of independent India, an office that he held continuously till his death in 1964. During much of his lifetime, the INC was overwhelmingly the dominant political party (Joshi and Little, 1994). National elections were held in 1967, and though the INC won the elections again, for the fourth time in succession, its share in total seats fell from 73.1 per cent in 1962 to 53.4 per cent. Following her election as prime minister, Indira Gandhi turned towards more populist policies, with the nationalization of domestically owned commercial banks in 1969, and the adoption of the Monopolies and Restrictive Trade Practices Act, regulating closely the activities of Indian business houses.

In the general elections in 1971, Indira Gandhi and the Congress won a landslide victory, and secured a clear two-thirds majority in parliament. This strong political position of the Congress Party was, however, weakened in the next few years as the economy was hit by a macroeconomic crisis in 1973 and 1974, with a sharp increase in oil prices and worsening inflation. There was increasing unrest in the country, with food riots, student unrest, and industrial disputes, culminating in 1974 in a threatened strike by two million railway employees in the public sector, which was the first political challenge to the national government by a trade union since independence. In 1975, Indira Gandhi declared a national emergency, suspending some democratic rights for two years. In 1977, for reasons which remain murky (Kohli, 2012), she rescinded the emergency and called for new elections. This time, the Congress Party was comprehensively beaten, and a new anti-Indira coalition, led by the Janata Party, came to power. However, this new government was riven with factionalism and power struggles between individuals, leading to its collapse in 1979. Fresh elections were called, and Indira Gandhi returned to power in 1980.

(p.258) In the early 1980s, there was growing centre–state conflict and communal problems, particularly the separatist (and terrorist) problem among a section of Sikhs in Punjab (Joshi and Little, 1994). In order to quell the separatist problem, Indira Gandhi launched an assault on the Golden Temple, the religious centre of the Sikh religion, which had been taken over by terrorists. In revenge, she was assassinated by her bodyguards in 1984, and her son Rajiv Gandhi became the prime minister and called for new elections. The Congress Party won the 1984 elections with an overwhelming majority, riding on a huge wave of sympathy among the electorate for Rajiv Gandhi. However, the earlier support for the Congress dissipated over time, with growing regional and ethnic assertiveness, and allegations of corruption. An anti-Congress political front began to emerge, and in the 1989 general elections the Congress suffered an embarrassing defeat. A coalition of parties, led by the Janata Dal, formed a minority government with outside support from the Hindu nationalist party, the Bharatiya Janata Party (BJP). This government did not last for very long, however, as the BJP withdrew its support and new elections were held in 1991, and the Congress came back to power.

In the political space, this long episode represents a period when Indian democracy really established its roots. It underwent a transition from its infancy after the country’s independence, when the polity was defined by a single party, to a multiparty system. In other words, India’s political settlement decisively moved away from a dominant party settlement, when the Congress Party was hegemonic for the first four decades after independence, towards a more competitive political settlement.

Rents Space

In Chapter 1, the rents space was characterized by four kinds of economic sector, i.e. the rentiers, powerbrokers, magicians, and workhorses. The defining characteristics of these sectors are their capacity to generate rents through discretionary regulation or other government actions (as opposed to leaving the firms open to market competition) and whether the main market is international (i.e. exports, as opposed to a domestic market). Thus the export-oriented discretionary rent-driven sectors are rentiers, while the internationally competitive exporting sectors are magicians. Likewise, we define the monopolistic or oligopolistic domestic market-oriented or non-tradeable sectors that generate high rents as powerbrokers, while the competitive, domestic market-oriented sectors are workhorses. It may be noted that corresponding to the framework in Chapter 1, all sectors of production that are in the public sector are considered to be generating policy-induced rent. Following this assumption, we characterize these sectors as either rentiers or powerbrokers, depending on whether they cater mostly to international or domestic markets. Also, while most sectors fall under the same classification in all three (p.259) episodes, a few of them do shift from one classification to another over the episodes, because their defining characteristics change significantly. For example, we categorize the mining sector output for the first two episodes as powerbrokers, since they focus mainly on domestic markets during this period. However, in the third episode, public- and private-sector output from mining etc. is categorized as rentier, since they are mainly concerned with exports of these commodities.2

Since the rentiers are mainly the natural resource sectors when they are exporting these commodities, we have no rentiers during the first episode. Similarly, the absence of any significant competitive export sector implies the absence of the magician sector. During this episode, (i) mining, (ii) railways, (iii) banking and insurance, and (iv) public administration are considered to be fully in the public sector and hence categorized as powerbrokers. In fact, the public sector in all other sectors is also included in the powerbroker sector. In the private sector, registered manufacturing (which is non-competitive and non-exporting during this period), electricity, gas, and water supply (which are monopolies), and communication (again monopolies during this period) are also considered to be powerbrokers. The rest of the sectors (including agriculture and unregistered manufacturing) are considered to be workhorses.

The rents space is usefully represented in terms of a diamond (see Chapter 1). In order to capture the rents space over the significantly long first growth episode, we have studied it at two points of time, 1960–1 and 1980–1. These are represented graphically in Figures 9.3 and 9.4. These figures show that, while there were no rentiers and magicians during this episode, the share of workhorses was very large, followed by a significant powerbroker sector that was made up mostly by the public sector. Over the episode, the share of the workhorse sector showed a significantly declining trend, from 83.53 per cent in 1960–1 to 73.06 per cent in 1980–1. Correspondingly, the powerbroker sector’s share witnessed a sharp increase, from 16.47 per cent in 1960–1 to 26.94 per cent in 1980–1.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.3. India’s rents space, 1960–1 (% share)

Source: Authors’ calculations based on data from National Accounts Statistics, CSO.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.4. India’s rents space, 1980–1 (% share)

Source: Authors’ calculations based on data from National Accounts Statistics, CSO.

Figures 9.5 and 9.6 shed light on the rents space by depicting the export structure during this period. During the first growth episode, India’s export (p.260) structure was dominated by primary products, which are characterized as less complex products, as measured by the Economic Complexity Index (Hidalgo et al., 2007). Agriculture and allied products, and ready-made garments, were the major export earners. Also, ores and minerals were among the largest exporting sectors in this period in the early 1960s. By the 1980s, there were (p.261) (p.262) (p.263) a few changes, with diamonds, iron ore, and textiles becoming the major export items.3

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.5. India’s export structure, 1962

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.6. India’s export structure, 1980

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Deals Environment

India created one of the most comprehensively controlled and regulated economies in the developing world after independence. As a consequence:

the Indian elite developed a highly sophisticated mode of discrete lobbying designed to achieve particularistic benefits from the new permit, licence, quota raj. Each major business house established the equivalent of an industrial embassy designed to act as a listening post, liaison office and lobbying agency to deal with political and bureaucratic decision makers.

(Kochanek, 1996: 157)

With an almost non-existent magician sector, there was very little mutual confidence between the government and business sector, leading to a lack of trust in any deal that the state might offer. In addition, the nature of the command and control system meant that most of the energies and time of the private sector (including business associations) went into preparing representations to the government demanding changes and modifications in regulatory policies. As Bhagwati (1993: 50) points out:

the industrial-cum-licensing system … had degenerated into a series of arbitrary, indeed inherently arbitrary, decisions where, for instance, one activity would be chosen over another simply because the administering bureaucrats were so empowered, and indeed obligated, to choose.

This led to a disordered deals environment that contributed significantly to low rates of private investment and slow economic growth all through the 1960s and 1970s.

The nature of state–business relations started changing very gradually from the early 1980s. As De Long (2003), Rodrik and Subramanian (2004), and Kohli (2006) have argued, there was a change in the attitudes of the national government under the prime ministership of Indira Gandhi towards the private sector, from being anti-business to being pro-business when she returned to power in 1980. Rodrik and Subramanian (2004: 3) argue that this attitudinal shift ‘left little paper trail in actual policies but had an important impact on investors’ psychology’. De Long (2003: 203) argues that ‘the most important factor that changed in India over the 1980s had more to do with entrepreneurial attitudes and a belief that the rules of the game had changed than with individual policy moves’. Similarly, Kohli (2006: 1255) states that ‘Indira Gandhi shifted India’s political economy around 1980 in (p.264) the direction of a state and business alliance for economic growth’. Further, Kohli (2012: 30–1) notes:

just after coming to power in January 1980, … Indira Gandhi let it be known that improving production was now her top priority. In meeting after meeting with private industrialists, she clarified that what the government was most interested in was production.

By the late 1980s, the macro-level deals environment had already become distinctly ‘ordered’ and more open, with the emergence of new economic elites in both modern sectors and in regions outside the industrial heartlands of Gujarat and Maharashtra. This was reflected in changes in economic policies, such as the half-hearted reforms of industrial and trade policies, especially from the mid-1980s. The shift in the deals environment from disordered in the 1960s to early 1980s, to a relatively ordered one in the late 1980s, was the crucial enabling factor behind the increase in private investment in equipment in the same period, and the subsequent recovery in economic growth.

Interestingly, the disordered deals environment during the first growth episode coincided with a period of India’s political history when the Congress Party was dominant. With the dominance that the Congress Party enjoyed, it should have been possible for the ruling political elites to offer deals to the private sector that were ordered. Why did a disordered deals environment result from a dominant party political system such as the one that characterized the Indian polity for much of the first growth episode?

There are two reasons why a disordered deals environment occurred, even with the strong dominance that the Congress Party enjoyed for much of the 1950s to 1980s. First, the nature of the licence raj system and the high levels of discretion accorded to bureaucrats led to a great deal of ad hoc activity in the nature of deals offered. Second, the Soviet inspiration of state-led industrialization played an important role in the development thinking of the day, especially under Nehruvian socialism (Mehta and Walton, 2014; Mukherji, 2014). As a consequence, the ruling political elites believed that the public sector was the key to economic development, and did not have faith in the private corporate sector’s ability to play an equal role to the public sector in driving economic growth.4 This led to a lack of credible commitment on the part of the Congress Party to the deals that might have been offered to the private sector, especially large business houses (in contrast to the manner in which the South Korean political elite offered ordered deals to chaebols for much of South Korea’s early growth phase).

(p.265) Rodrik and Subramanian (2004) note that Indira Gandhi’s attitudinal change was primarily grounded in political calculation. As they state, ‘Indira’s main objective was to counter the perceived threat posed by the Janata Party, which had trounced Congress in the Hindi heartland in the 1977 elections’ (2004: 13). Using the terminology introduced in Chapter 1, the vertical distribution of political power became less concentrated in the Congress Party in the early 1980s, with increasing challenge from other political elites (comprising the non-Congress political parties). For Indira Gandhi, a shift from a populist strategy to a more private sector- and growth-oriented strategy became a mechanism of political survival.

Therefore, the shift in the political space that occurred in the early 1980s led to a growing alliance between the political and economic elites (Corbridge and Harriss, 2000; Kohli, 2012; Mehta and Walton, 2014). With the shift in state–business relations from being collusive to being more collaborative, the Indian state clearly signalled to domestic capitalists its intention to commit credibly to an environment where private enterprise would be supported and growth-enhancing policies followed. With the change in the attitude of the state towards the private sector in the 1980s, there was an active encouragement of the state towards peak business associations, such as the Federation of Indian Chambers of Commerce and Industry and the Confederation of Indian Industries, to transform themselves into developmental business associations (Sinha, 2005).

The shift in the relationship between political and economic elites, from one of mutual distrust to a more collaborative and synergistic relationship, was further accentuated with the coming to power of Rajiv Gandhi in 1985. Gandhi took particular interest in modern sectors, such as ICT and engineering, and tried to bring in new economic elites from these emerging sectors into the relationship that the political elite had with the business sector. In addition, with the rise of non-traditional business groups in southern and western India, there was a growing diversification of business ownership, leading to a broadening of the political connectivity of the business elite (Mehta and Walton, 2014).5

9.3.3 The Second Growth Episode (1993–4 to 2001–2)

Political Settlement

We have seen that India’s political settlement has decisively moved away from a dominant party settlement during which the Congress Party was hegemonic for the first four decades after independence (except for a brief period in the (p.266) 1970s, when they were in opposition, mostly as a backlash among the electorate due to the emergency). In the 1990s, there was a variety of national-level political experiments to find a substitute for old Congress Party rule, with the decline in hegemony of the Congress, especially by the emergence of the BJP (Kohli, 2001). As a consequence, the country moved to a competitive political settlement, with two or more political groups jockeying for power, and where no political party (and its allies) was assured of victory in the national elections.

During this episode, along with a move to a more competitive political system, another very important political change took place in the realm of political thought. This was a shift in the ideas and beliefs of Indian political elites, from a deep suspicion of the market and the private sector to a more pro-business orientation. This shift occurred across the political divide. Among the two dominant political parties, the right-of-centre BJP was more pro-market than the Congress, but with its nationalist leanings, was suspicious of foreign investors and, therefore, resistant to the easing of restrictions on foreign direct and portfolio investment. The left-of-centre Congress had been historically anti-business, but had become markedly pro-market under the leadership of Narasimha Rao (who was prime minister during 1991–6). Therefore, while the crisis of 1991 (triggered by the Gulf War) was the immediate reason for the economic reforms that were initiated in the same year, there were clear signs of gradual changes in the ideas and beliefs of political elites towards market-oriented economic policies since the early 1980s. As Mehta and Walton (2014: 30) note, ‘the policy changes on de-licensing and trade liberalization can be seen as a product of the confluence of a changing cognitive map of state elites, and an evolving, rather than a radical, shift in the relationship with business interests’.6

One important implication of the shift in the ideas and beliefs of political elites towards a widely held view that market-oriented economic policies are essential for India’s rapid economic development was that economic reforms were not rolled back whenever a new government took power, whether at the central or state levels. This meant that deals that were struck with the business elite by the previous political party, when it was in power, were mostly not overturned when a new government was elected. Thus, deals remained ordered, even with the rapid turnover of political parties, both at the central and state levels in the 1990s and 2000s, and there has been a move to a competitive political settlement since the early 1990s.

(p.267) The shift in the ideas and beliefs of political elites (and hence, in the political space) towards a more pro-business orientation led to a growing diversification of business ownership, along with a widening of the political connectivity that Indian economic elites had with political elites. There were new patterns of entry into business, often from traditionally non-business castes or groups, especially in southern and western India (Damodaran, 2008). There were also examples of new entrepreneurs, who were not from the traditional economic elite, emerging in industries such as pharmaceuticals and ICT, and service sectors such as telecommunications, mutual funds, and banking. For example, ‘Sunil Mittal secured licenses for mobile operations in 1992 when cash-rich government companies, the Tata group and Reliance, had not seen much potential in the sector’ (Mukherji, 2014: 23). Similar stories of entrepreneurs who were not born into wealth becoming quickly successful in the 1993–2001 growth episode are observed with Sun Pharma and Dr Reddy’s Laboratories in pharmaceuticals, and Infosys and Hindustan Computers Ltd in ICT. Thus, in the 1990s, state–business relations became more inclusive, as both new state actors and economic elites came into the fray for the first time.

Rents Space

Since there are no major natural resources exporting sectors during this episode, there are no rentiers during the second episode. Parts of the business services sector (mainly ICT) become an internationally competitive exports sector and hence are characterized as magicians during this episode. Together with business services, the registered manufacturing sector (which becomes increasingly competitive and exporting following the reforms in 1991) is also considered to comprise magicians during this episode. On the other hand, (i) mining, (ii) railways, and (iii) public administration are deemed to be fully in the public sector and hence considered powerbrokers. Banking was in the public and private sectors during this episode. However, even in the private sector, banking is assumed to be a powerbroker sector, due to the oligopolistic nature of this sector. In the private sector (apart from banking), electricity, gas and water supply (monopolies), and communication (again monopolies) are considered to be powerbrokers. The rest of the sectors (including agriculture and unregistered manufacturing) are considered workhorses.

Since this episode is relatively short, we analyse the rents space using a diamond figure for one year, i.e. 1996–7, roughly the mid-term of the episode. As in the first growth episode, there are no rentiers in the second growth episode. The share of magicians goes up considerably (Figure 9.7) compared with the first episode. More specifically, this sector’s share in total GDP increased from 0 per cent in 1980–1 to 7.88 per cent in 1996–7. The share of (p.268) powerbrokers does not change significantly during this period, decreasing very slightly to 25.43 per cent. In contrast, the workhorse sector’s share declines (from 73.06 per cent in 1980–1) to 66.68 per cent in 1996–7.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.7. India’s rents space, 1996–7

Source: Authors’ calculations based on data from National Accounts Statistics, CSO.

India’s export structure changed significantly by the beginning of the second growth episode. Labour-intensive manufactured products, like ready-made garments and footwear, became increasingly important in India’s export mix. Over time, agriculture and allied products have become less important, while diamonds and lubricating petroleum have become major sectors for exports during this episode (see Figure 9.8).

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.8. India’s export structure, 1996

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Hidalgo et al. (2007) view structural transformation as the upgrading of products in a country’s economic structure such that firms in that country move over time to more complex products. They also view high-rent extractive sectors as less complex on the product space. Following this view, and using data on product complexity from the Atlas of Economic Complexity,7 we plot the five-year moving average of product complexity for India between 1993–4 and 2007–8 in Figure 9.9. We find that structural transformation (as captured by increasing product complexity) mostly increased during the 1993–2002 growth episode.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.9. Measure of structural transformation (Hausmann–Hidalgo measure of product complexity), five-year moving average for India

Source: Authors’ calculations, from Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

(p.269) (p.270) Deals Environment

As we discussed in Section 9.3.2, there was already a shift to ordered deals by the late 1980s, and a more collaborative relationship between the state and business, with an attitudinal change from anti-business to pro-business on the part of the Indian ruling elite. Two further developments in the early 1990s led to a strengthening of the ordered nature of the deals environment, particularly at the micro level.

First, the dismantling of the industrial licensing system in 1991 removed an important source of ‘disorder’ in the deals environment at the micro level. This development ensured that the approval of applications that firms made for their expansion, or that new firms made to enter the industrial sector during the previous licensing regime, no longer depended on the whims and fancies of individual bureaucrats in the government.

Second, the removal of the import licensing system in the early 1990s for most commodities also meant that the highly discretionary and case-by-case nature of goods that were allowed to be imported was done away with. The growth acceleration of 1993 was in great part due to the ‘ordered deals’ environment that had already taken shape in the 1980s and was enhanced by the dismantling of the industrial-cum-trade licensing system in 1991. These deals were largely open, as barriers to entry to many industries were removed. This was reflected in the entry of new firms in manufacturing and services, and especially in pharmaceuticals and ICT (Alfaro and Chari, 2009). (p.271) At the same time, the Indian state’s collusive relationship with certain sections of the business elite in the pre-reform period remained, and may have been accentuated by the rise of increasingly powerful regional business groups that were closely connected with regional political elites. Thus, during the 1990s, closed deals existed side by side with open deals and, consequently, many traditional industries (such as consumer durables) were still dominated by entrenched business groups that had emerged in the licence raj (Alfaro and Chari, 2009).

Our argument on the role of the ordering of deals in contributing to India’s growth acceleration differs from conventional accounts of the rise in India’s economic growth, such as Bhagwati (1993) and Panagariya (2008). In their account of India’s economic growth, Bhagwati and Panagariya give primacy to the change in the rules environment as reflected in the economic reforms of 1991. Thus, in their argument, changes in rules (or formal institutions) made it easier for firms to invest and expand their production. While formal institutional change would certainly have contributed to the increase in economic growth, in our view what was more important was the change in the deals environment, which is essentially due to informal institutional change—that is, the informal interactions between economic actors and the political and bureaucratic elite. Therefore, among the gamut of economic reforms that occurred in the early 1990s, the ones that mattered for the first growth acceleration were the delicensing reforms (since they cut down drastically on bureaucratic arbitrariness, making deals much less disordered), along with the changes to the manner in which political elites interacted with the business sector. This led to an ordering of the deals environment that contributed to the greater confidence that the private sector had in the credibility of these deals, leading to an upsurge in corporate investment and, consequently, economic growth.

Furthermore, there is evidence from detailed firm-level analysis of the 1990s of significant opening up of the deals environment, particularly in the corporate sector in this period. Harrison et al. (2012) find a large allocation of market share from less productive firms to more productive firms in the first half of the 1990s, but not in subsequent years. Mody et al. (2011) find significant entry of new firms in virtually all industrial sectors in the early-to-mid-1990s, which stops in the late 1990s, with very little new firm entry in the 2000s.8 Kathuria et al. (2010) show that improvement in productivity performance in the manufacturing sector in the 1990s was not confined to the formal sector, but encompassed the informal sector as well.

(p.272) The opening up of the deals space that one observes in the private sector in the 1990s is also reflected in indicators of growth, as we noted in Sections 9.1 and 9.2. Thus, in the 1993–2002 growth acceleration phase, economic growth was mostly driven by magicians (ICT and chemicals) and workhorses (hotels and restaurants). Such a growth strategy, driven by magicians and workhorses, should have led to a further opening up of the deals space. As we will see in the Section 9.3.4, this did not occur in the next growth episode, due to changes in the rents space and in the political space.

9.3.4 The Third Growth Episode (2002–3 to 2010–11)

Political Settlement

We have already observed that India’s political system became increasingly fragmented in the 1990s. The level of political fractionalization increased sharply in the 1990s, and continued at this high level in the 2000s (Figure 9.10).9 Along with this, there was a decreasing share of seats of the majority party (no matter which party won the elections). This is because of the rise of regional parties, such as the Dravida Munnetra Kazhagam and All India Anna Dravida Munnetra Kazhagam in Tamil Nadu, Shiv Sena in (p.273) Maharashtra, the Janata Dal-U in Bihar, the Biju Janata Dal in Odisha, and Trinamul Congress in West Bengal (Table 9.5). No ruling party had more than 40 per cent of the seats in the Lok Sabha in the first decade of the 2000s. At the same time, there was a frequent change of the ruling party at the centre, with the BJP and the Congress both being in power in the period 2002–10 (Table 9.5).

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.10. Measures of total fractionalization and proportion of seats won by the majority party, national elections in India, 1975–2009

Source: The Quality of Government Data <http://qog.pol.gu.se/data>.

Table 9.5. Seats held by political parties in national elections in India, 1952–2009

Year

INC

BJP

Left

JD + BLD

Others

Share of ruling party in total seats (%)

Share of others (%)

Ruling party

1952

364

0

16

0

21

90.8

5.2

INC

1957

371

0

27

0

5

92.1

1.2

INC

1962

361

0

29

0

104

73.1

21.1

INC

1967

283

0

42

0

215

52.4

39.8

INC

1971

352

0

48

0

118

68.0

22.8

INC

1977

154

0

29

295

65

54.3

12.0

JP

1980

353

0

47

72

71

65.0

13.1

INC

1984

415

2

28

10

88

76.4

16.2

INC

1989

197

85

45

143

73

26.3

13.4

JD-led coalition

1991

244

120

49

59

71

44.9

13.1

INC, minority govt

1996

140

161

44

46

152

8.5

28.0

JD-led coalition

1998

141

182

41

0

179

29.7

33.0

BJP +

1999

114

182

37

0

210

33.5

38.7

BJP +

2004

145

138

53

0

207

26.7

38.1

INC +

2009

206

116

20

0

201

37.9

37.0

INC +

Source: Election Commission of India.

Notes: INC: Indian National Congress; BJP: Bharatiya Janata Party; JP: Janata Party; BLD: Bharatiya Lok Dal; JD: Janata Dal. Party name followed by + indicates alliances centred around that party.

The regional parties became important components of the ruling coalition in the 2000s, and exerted a significant influence on what the main ruling party (whether the Congress or the BJP) could or could not do. Thus, unlike the classic competitive political settlements that characterize political systems in many parts of the world (such as Bangladesh and Ghana), India’s political system became multipolar, rather than bipolar (Varshney, 1999). As a consequence, the number of regional parties officially recognized in the national elections increased from 11 in 1957 to 30 in 2009, and the total number of recognized parties increased from fifteen in 1957 to 230 in 2009.

These changes in the political space had two specific effects on the deals environment. First, given the veto power exerted by numerically small but powerful groups of politicians in regional parties that comprised ruling coalitions in the 2000s, the deals that economic elites had to strike with political elites increasingly accommodated the interests of these parties, with implications for the open nature of these deals. With the increased fractionalization of the political system at the national level, and the growing importance of regional political elites in the coalition governments of the 2000s, ‘closed deals’ between these elites and powerful economic interests, both at the (p.274) national and regional levels, become more prevalent in the post-2002 period. This was accentuated by the rapid turnover of governments and closely contested elections, both at the national and regional levels, which led to a shortening of the time horizon of political elites, who were more interested in finding ways to extract rents to finance elections that they would have to fight in the immediate future. Second, again due to the increased fractionalization, election campaigns became increasingly expensive, as political parties in the competitive Indian political system tried to outspend each other to attract voters with various inducements. Reforms in Indian election expenditure laws in 1975 and 2003 put the expenditures of parties and supporters of individual candidates outside the purview of the expenditure limits on these candidates and banned corporate donations. This led to increased informal financing of election campaigns, and a greater reliance on informal deals to finance costly election campaigns. This was also reflected in the increasing participation of criminals in electoral politics, as political parties preferred wealthy candidates with ‘deep pockets’ to finance their own campaigns. The growing reliance of informal private funding in the absence of state funding also meant that parties and politicians raised funds from businesses informally in return for discretionary contracts and regulatory favours (Gowda and Sridharan, 2012).

Rents Space

In the third episode, natural resources become an exporting sector and hence, this is considered to be a rentier sector. Business services (mainly ICT) and the registered manufacturing sector continue to be considered as magicians. Railways and public administration are still fully in the public sector and hence considered to be powerbrokers. Mining and banking are both in private and public sectors during this episode. As mentioned earlier, in the private sector, mining is considered to be a rentier sector, while banking is assumed to be a powerbroker sector. In the private sector, apart from banking, electricity, gas and water supply, and communication, the construction and real estate sectors enter the powerbroker sector due to the entry of large established firms that get significant incentives from the government (which are rent-generating) in order to develop these sectors. The remaining sectors are workhorses.

Like the second episode, the third episode is also relatively short, and hence we analyse the rents space using a diamond figure for one year, i.e. 2005–6—roughly the mid-term of this episode (Figure 9.11). In the third growth episode, the rentier sector makes an entry in the rents space of the Indian economy, although its share in GDP is quite modest, at 2.64 per cent. During this episode, both magicians and powerbrokers increase their share at the cost of the workhorse sector. In particular, the magician sector increases its (p.275) share from 7.88 per cent in 1996–7 (the second episode) to 10.61 in 2005–6. During that same period, the powerbroker sector increases its share from 25.43 per cent to 36.13 per cent. Conversely, by 2005–6, the workhorse sector’s share has declined to 50.59 per cent.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.11. India’s rents space, 2005–6 (%)

Source: Authors’ calculations, based on data from National Accounts Statistics, CSO.

As evident from Figure 9.12, in the third regime, engineering goods (cars, etc.) have become a larger export earner, while diamonds (cutting), chemicals, and related products have also remained important. However, the share of petroleum products in total merchandise exports increased significantly in this period. There was a sharp increase in the share of exports from the rentier sector, such as iron ore, and a decrease in the share of exports from magician sectors, such as textiles and garments.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.12. India’s export structure, 2005

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

To sum up, the share of workhorses has declined, whereas magicians’ share has increased consistently in all the growth episodes. Furthermore, the share of powerbrokers has gone up considerably. Unlike the previous growth regimes, rentiers are present in the third episode, though their share is small.

What happened to structural transformation during this period? Figure 9.9 shows that it fell during the 2002–10 episode, indicating a move away from complex products. The move away from more complex products in the 2002–10 period was also obvious in India’s export structure. In the early 1990s, before the reforms, agriculture and allied products, gems and jewellery, and ready-made garments were the biggest merchandise export earners (Table 9.6). Over time, agriculture and allied products and ready-made garments have become less important for the exports sector, while gems and (p.276) (p.277) jewellery have remained a major sector. During the same period, engineering goods have become a major export earner, while chemicals and related products have also remained important. However, since 2000–1, the share of petroleum products in total merchandise exports has increased significantly. As Figure 9.12 makes clear, there was a sharp increase in the share of exports from the rentier sector, such as refined petroleum, and a decrease in the share of exports from magician sectors, such as pharmaceuticals.

Table 9.6. India’s merchandise exports, 1990–2010 (% of total exports in commodities)

1990–1

2000–1

2010–11

Agricultural products

14.57

9.66

6.36

Ores and minerals

4.21

1.87

2.27

Petroleum products

2.27

3.02

10.89

Leather

6.29

3.15

1.03

Chemicals

7.50

9.52

7.59

Engineering goods

9.77

11.03

15.29

Machinery and instruments

3.02

2.56

3.11

Transport equipment

3.02

2.56

3.11

Textiles

5.08

5.60

1.52

Garments

9.71

9.01

3.05

Gems and jewellery

12.70

11.94

10.64

Other commodities

21.85

30.09

35.13

Natural resource exports

21.04

14.55

19.53

Non-natural resource exports

78.96

85.45

80.47

Source: Reserve Bank of India, authors’ calculations.

Note: Natural resource exports = agricultural products + ores and minerals + petroleum products.

Deals Environment

There was a shift in the deals environment in this period, from relatively open to much more closed deals. This was most evident in the increasing level of ‘crony capitalist’ deals that political elites struck with economic elites in ‘high-rent’ natural resource sectors, such as bauxite, coal, iron ore, manganese ore, and natural gas, at both national and regional levels. In various ore-rich states, such as Jharkhand, Karnataka, Goa, and Odisha, influential, politically connected business elites systematically underpaid mining royalties to state agencies (along with extracting iron and bauxite in excess of the amounts stipulated by the leases that the private mining firms held with the state governments). There was a succession of such scams, highlighted by the media. In 2010, the central government constituted a commission to investigate irregularities in the extraction, trade, and transportation of iron ore and manganese ore across the country. It was headed by Justice M. B. Shah of the Supreme Court of India. The Shah Commission found evidence of ‘enormous and large-scale multi-stage illegal mining of iron ore and manganese ore running into thousands of crores of rupees every year’ (Shah Commission, (p.278) 2012: 1). The commission also found clear evidence of collusion between ruling politicians at the state and national level and private mining firms, stating that ‘the State has “gifted” property of thousands of crores in the hands of private companies/firms/individuals’ (Shah Commission, 2012: 604). There were similar concerns over the allocation of licences for coal deposit blocks to private firms by central government in the period 2004–11, which was done preferentially at lower than market rates, instead of via a competitive bidding process, according to investigations on the nature of the allocation process by the Comptroller and Auditor General (CAG).

The existence of ‘closed deals’ was not confined only to natural resource sectors; it was also evident in an infrastructural sector such as telecommunications. The latter witnessed impressive growth in the 1993–2002 growth episode, driven by high demand for mobile phones among a rapidly expanding middle class. In 2008, the Department of Telecommunications (DoT) decided to allocate second-generation (2G) spectrum licences to mobile phone operators on a first-come, first-served basis at a price significantly below the market price. Later investigation by the CAG found clear evidence of insider information being passed to selected private firms on the timing of the first-come, first-served announcement, as well as the very short time given to submit the applications (Guha Thakurta and Kaushal, 2010). The CAG (2011) also found irregularities in the selective interpretation by the DoT of the recommendation of the telecommunications regulator, the Telecom Regulatory Authority of India, which led it not to conduct a competitive bidding process for the award of the 2G licences. The CAG estimated the loss to the Indian exchequer due to the under-pricing of 2G licences at over US$26 billion.

There were two economic factors behind the emergence of a closed deals environment in the post-2002 growth episode, as compared with a more open deals environment in the earlier growth episode. First, with increased Chinese demand for minerals, there was a sharp increase in commodity prices in the early-to-mid-2000s. Consequently, increasing rents could be extracted in natural resource sectors, where the state had the power to allocate licences for production to private firms. In contrast, after the 1991 economic reforms, licences were no longer required to start operations in manufacturing or services sectors such as ICT. Therefore, there were clear incentives for political elites to allocate these licences preferentially to selected economic elites on terms that were not transparent, or the most economically competitive, in return for extra-legal monetary rewards. Second, as rapid economic growth in the previous growth episode spurred an increase in demand for the services of infrastructural sectors such as telecommunications (naturally oligopolistic and characteristically high rent), political elites entered into rent-sharing arrangements with business groups that were awarded contracts to operate in these sectors. Strong private-sector growth fuelled a similar surge in demand (p.279) for commercial real estate, and there were increasing signs of ‘closed deals’ between political elites and real estate developers in the allocation of land for commercial real estate (Nagaraj, 2013).

The evidence for closed deals is clear from Figure 9.13, where one observes a clear increase in the proportion of wealth of Indian billionaires originating in rentier and powerbroker sectors (primarily real estate, construction, mining, and infrastructure), as compared with the magician sector (manufacturing, ICT), from 2002.

The Stroll, the Trot, and the Sprint of the ElephantUnderstanding Indian Growth Episodes

Figure 9.13. Distribution of wealth of billionaires by sources of wealth, India, 1996–2012 (%)

Source: Gandhi and Walton (2012).

9.4 Conclusion

After decades of slow growth, when India achieved its first growth acceleration in 1993, analysts dubbed it the ‘elephant economy’. The idea was that, like the elephant, the Indian economy had been taking a slow stroll for some time, but when it chose to move faster, others had to sit up and take notice. Stretching that imagery for the three growth episodes that we have described in this chapter, it is insightful to see them as the stroll, the trot, and finally the sprint of the elephant.

The characterization of the last episode as a sprint is also appropriate for another reason, namely that it describes running at full speed, but only over a short distance. In a sense, this is what happened during the third episode, (p.280) which gave rise to very high growth rates for a time, but which, by 2010, started slowing down. The figures for growth corresponding to this period are available partly from sources based on an old definition of GDP and partly from a new definition of GDP. According to the old definition, which is available till 2014–15, there was a significant slowdown post-2010–11, with the GDP growth rates falling from close to 9 per cent in that year to a low of less than 5 per cent in 2013–14. The figures based on the new definition are available from 2012–13 onwards, and these seem to suggest that there has been a partial recovery from 2014–15 onwards. Irrespective of the definition chosen, there is a clear slowdown in the growth rates after 2010–11.

An analysis of this growth slowdown shows how ‘feedback effects’ that are generated as a part of the growth process lead to changes in the deals environment, and this in turn can affect the growth process itself. We described in Section 9.3.4 how the nature of exogenous growth stimuli and the effects of the growth in the second episode led to a ‘closing up’ of the deals space during the third episode. This led to ‘crony capitalistic’ outcomes and cases of corruption involving the political and the business elites during this episode.

The negative political feedback from this on the deals space was immediate. As media accounts of corruption became widespread, and there was growing popular discontent at the flagrantly excessive levels of rents that were shared between political and economic elites in these deals, state legitimacy was being gradually eroded towards the end of the 2002–10 growth episode. There was also strong social and political mobilization of the masses against attempts by the political elite in states such as Odisha and West Bengal to obtain land through extra-legal and often coercive means for mining or for providing land to large business groups to set up manufacturing plants. In addition, there was strong pushback from accountability institutions, such as a ban on iron ore exports by the Indian Supreme Court, and the investigations of corruption in the allocation of 2G and coal block licences by the CAG of India. All these developments made the ‘closed deals’ environment unsustainable towards the end of the first decade of the 2000s. In addition, with the increasing uncertainty on the nature of deals, and where the ruling party at the centre lacked the authority to commit credibly to new deals in the face of both popular and legal challenges, deals became increasingly disordered as well. The result of all these was the slowdown of investment and growth rates.10 (p.281) The gradual loss of credibility of the United Progressive Alliance (led by the Congress), the paralysis in the institutional arrangements, and the slowdown in growth all prepared the background for a historical election in 2014. After an intense electoral battle, Indian voters gave a decisive mandate for a new government under the National Democratic Alliance (led by the BJP).

With this new beginning, the pertinent question is whether the growth rates of the economy will revive and be sustained in the medium run. The answer will lie in the interactions between future political settlements and rents spaces and their effect on the deals environment. We have seen that, over time, the political settlement in India has moved increasingly towards fragmentation and competitive clientelism. This usually interacts with a rising and dominant powerbroker sector, as we find in India, to give rise to closed and ‘crony capitalistic’ deals spaces. This might lead to growth accelerations for a short period, but these will definitely not be sustainable over the long term. The positive development in this context is that in the last elections, the emergence of a single party with a majority in parliament implies a weakening of both fragmentation and competitive clientelism. This has the potential to interact with the rising magicians sector in India that can lead to an ‘open and ordered’ deals space, resulting in growth acceleration that is also sustainable. If this indeed happens, then the elephant will trot again.

Three implications can be drawn from the Indian experience with growth episodes for the overall framework presented in Chapter 1. First, the shifting ideas and beliefs of elites played a key causal role in explaining why India was stuck in a low-growth trap till 1992, and then witnessed rapid growth acceleration subsequently. In spite of a dominant political settlement for much of the first growth episode, which according to our framework should have been conducive to growth by providing a long-enough time horizon for political elites, the socialist ideology of political elites and their mistrust of the private sector was a major constraint on growth. On the other hand, the shift to a pro-business ideology that was shared by the two main political parties—the INC and BJP—was key to the ordered deals that occurred in the 1990s and 2000s, leading to high rates of growth in these two decades. Second, as the framework of Chapter 1 suggests, it was interaction of the political settlement with the rents space that can explain the movements from one episode to another. While the political settlement had turned decisively competitive by the 1990s, the difference in the deals environment in the second growth episode (which was open ordered) and the third growth episode (which was closed ordered) was the growth of the rentier and powerbroker sectors in the third growth episode that led to the creation of high rents in the economy. Thus, in the third growth episode, the twin forces of high rent creation and political compulsions to raise funds to finance costly elections combined to bring about an increasingly crony capitalist tendency in the Indian economy in (p.282) the first decade of the 2000s, which had not been evident in the 1990s. The final implication of the Indian experience is that political feedback loops from growth to institutions can turn negative in a fairly short period of time in established democracies such as India, with high deconcentration of vertical power and strong political mobilization by non-elites, as occurred from 2010 onwards. This had the consequence of creating a disordered deals environment, with negative consequences for economic growth. The Indian experience suggests that while a closed ordered deals environment may bring about rapid growth for some time, sustaining such a deals environment in societies with a strong civil society presence and powerful rule-of-law institutions (such as the Indian Supreme Court) can be politically difficult and prone to reversal.

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Notes:

(1) The question of timing of turning points in India’s economic growth is a controversial issue (see Ghate and Wright, 2012). Most previous studies on structural breaks in growth rates in India find evidence of breaks in the late 1970s. Our procedure shows a possible growth break in 1979, but this break is not significant enough statistically.

(2) It should be noted that the categorization we use to classify sectors as rentiers, powerbrokers, magicians, and workhorses are indicative rather than precise. For example, we classify an entire sector as either export-oriented or producing for the domestic market when there may be a mix of export-oriented and domestically oriented activity in the same sector. We do not have sufficiently disaggregated data on the economic sector to allow us to ascertain with any level of confidence which proportion of the sector is export-oriented and which proportion is domestically oriented (some sectoral exports data are available, but they are the total value of exports of these sectors, while the output data are value-added). The only exception is the business services sector, where data are available (for the ICT sector, which is its main component) that has made this disaggregation possible.

(3) It should be kept in mind that India was a closed economy all through the 1950s to the mid-1980s, with the export to output ratio being less than 15 per cent in this period.

(4) The lack of faith in the private sector was a legacy of the fight against British imperialism during the fight for independence (Mehta and Walton, 2014). In addition, the high growth rates of the Soviet empire during the 1940s and 1950s also led to faith in the model of public sector-driven growth.

(5) A more detailed account of the first growth episode is in Kar and Sen (2016). They argue that the deals environment was gradually becoming ordered in the second half of the 1980s. However, as they show, while the increasingly ordered deals environment played a facilitating role in the nascent growth recovery in the 1980s, it is only after 1992 that the average growth rate changes (upward) sufficiently to fulfil the condition for a growth transition.

(6) A similar point is made by Mukherji (2014), who argues that challenges to old ideas (around state-driven industrialization) evolved gradually, as these ideas did not deliver desired benefits, till they reached a tipping point with the 1991 economic reforms.

(7) Online resource: <http://atlas.cid.harvard.edu/>.

(8) However, as Goldberg et al. (2010) show, much of the product churning in the 1990s was due to product additions rather than product shedding. In this sense, India’s experience of the 1990s with ‘creative destruction’ was more ‘creative’ and less ‘destruction’.

(9) We measure fractionalization by the probability that two randomly drawn members of parliament are from the same political party.

(10) The slowdown in India’s economic growth coincided with an overall slowdown in economic activity globally. However, while the global slowdown and the resultant recessionary expectations are definitely important factors behind India’s growth slowdown since 2010, the IMF (2014) found that two-thirds of India’s slowdown was due to internal problems, and not to a worsening external environment. As Kar and Sen (2016) argue, the slowdown in growth in India was mostly due to a shift from ordered to disordered deals, and the resultant decrease in private investment with the increased uncertainty among investors, as the government lacked the authority to commit credibly to new deals in the face of both popular and legal challenges.