GROWTH

AND DEVELOPMENT
Business, Government and Society
Session 5
Kuznet’s curve
 Questions
1. Is democracy necessary for economic development?
2. Growth led development or Development led growth?
3. Role of the State?
Q1. Economic growth and democracy
Economic Growth

Level of Democracy

Source, Rodrik, 1999.

 Uneven Growth and Inequality

• Growth will be uneven, simply because our

demands are uneven (non-homothetic).
• Transitions from Agriculture to Industry but this is
not smooth
• Factors of production may not transition easily
• Inter-sectoral connections maybe relatively sparse.
• Uneven growth and inequality
• The trickle-down and convergence may not occur
• If the new demand is for goods produced in the new
sector.
 Reactions to Uneven Growth

• Albert Hirschman’s Tunnel Parable:

• You are stuck in a tunnel with all lanes going in the same
direction.
• After a point you see the lane next to your starts moving
• What is your reaction?
• At first, you are happy as you think you will move soon.
• What if, five minutes later, the lane next you keeps
whizzing past and you are still in the same place?
• Frustration?
• Want to get into that lane?
• Uneven growth can only be tolerated without
redistribution as long as it raises expectations
 Reactions to Uneven Growth

• Occupational choice
• Increased English-medium schools, technical colleges,
management schools.
• However there are limits to what this can achieve
• Such transitions take a generations, and so there is
substantial uncertainty .
• Missing or imperfect capital markets may hinder growth
• Demand and a channel for spreading Incomes
• Only works when the new sector demands the
products of the old sectors.
• Political economy
 Sen-Baghwati Debate

• Can growth take care of inequality or do we

need to focus on development?
 Sen v/s Bhagwati

• Redistributive economic • Trickle-down effect of

policy economic growth
• Job-less growth • Need a tax base to do
• Human Development redistribution
– Education and health • Growth in
• Sustainable manufacturing will
Development move people away from
agriculture and increase
living standard
 India’s Choice

• Import substitution strategy: But why?

• Growth in exports would be limited, given an
agrarian economy
• Self-sufficiency
• Increased employment
• Large size of domestic market
Video: Chodo Kal Ki Baatein
 India’s Growth Trajectory

Kotwal, Ashok, Ramaswami, Bharat and Wadhwa, Wilima (2011) “Economic

Liberalization and Economic Growth: What’s the Evidence?” Journal of Economic
Literature, Vol. 49
 When Did It Start?

• Did it start in the 1990s post liberalization?

• Or did it start in the 1980s?
• Evidence suggests:
– The economy seemed to have a higher growth trajectory from mid to
late 70s to early 80s much before the reforms
– The average annual growth rate between 1981-1991 was not much
different from that between 1991-2005
– The savings in the 1970s jumped up substantially which closely
matched rise in investment rates.
 What Happened in the 1980s?

• The policies in the period since 1975 were marked by a slow withdrawal
from the closed economy license raj model.
• The period from 1984 to 1991 saw large fiscal deficits as government debt
ballooned.
• The 1980s minor reforms were important as they signaled an “attitudinal
change” on the part of the government in favour of private businesses.
• Banks were nationalised in 1969 and the number of branches doubled. The
branch expansion of the banks reduced poverty in rural areas.
• Green Revolution also played a major role in growth:
• By 1992-93 70% of wheat area and 90% of rice area were using HYVs.
• These varieties increased the productivity of inputs such as fertilizers.
• These HYVs led to higher yields
 After 1990s Facts
• In 2004-05 manufacturing accounted for :
– only 17% of value-added
– only 12% of employment
• There was not much creation of employment.

Kotwal, Ashok, Ramaswami, Bharat and Wadhwa, Wilima (2011) “Economic Liberalization and
Economic Growth: What’s the Evidence?” Journal of Economic Literature, Vol. 49
 What Grew?

Kotwal, Ashok, Ramaswami, Bharat and Wadhwa, Wilima (2011) “Economic Liberalization
and Economic Growth: What’s the Evidence?” Journal of Economic Literature, Vol. 49
 Why Did Manufacturing Not Grow?

• Liberalization alone will not work, it needs to be coupled with:

– Labour laws
– Capital Markets
• Employment fell-- substituted by contract labour
• Surveys of managers in manufacturing firms show obstacles to
growth are:
– Taxation
– Lack of infrastructure
– Access to finance
– labour regulations
 Why Did the Services Grow?
• Services share of GDP 60%, share in employment 30%
• Between 1995-2000, India’s services exports grew nearly six time
faster than world exports of services.
• In 2001-02, software accounted for about a third of all service exports.
• Why?
• We had a pool of skilled, educated (English speaking) labour force.
– Because of the emphasis on tertiary education. Ex: IIMs, IITs, DU
• Concurrent to this technological revolution, a lot of call centers or
BPOs started to emerge.

Video: Outsourced Trailer

Infrastructure or not.. The call center functions!
 What About Unskilled Labour?

• Reallocating labour from the agricultural sector (characterized

by low productivity) to industry and services (characterized
by high productivity) is extremely low compared to other
Asian countries:
– China 68.7% 46.95%
– Thailand 70.8% 48.8%
– India 68.1% 59.3%
• The main reason for this is that the fast growing non-farm
sectors are all skill-intensive sectors while most of the labour
in agriculture is unskilled.
• This has obvious implications for the decline in poverty.
 Role of Government and Redistribution

• Taxes and subsidies

• Poverty alleviation programs.

• Social protection schemes for children, elderly

and the working age population.
BACKGROUND
Additional slides to aid with context, for the preparation for exam
 Growth Strategy

• Export Promotion: Production for export markets

• Goal: Prepare industry for competing with foreign
rivals
• Needs protection initially
• Competition pushes faster technology adoption and R&D
investments are higher
• Increase foreign exchange flow
• Problems?
• Sensitive to international shocks
• May lead to increased import expenditures to meet domestic
demand.
 Planning in India

• India adopted the five-year plans following the

example of the Soviet Union.
• The aim was to chalk out a growth strategy for the
economy that could incorporate the two aspects
Nehru emphasized in his speech
– A new nation and ushering in social transformation
• First Five-year plan in 1951.
 Plans, Targets and Achievements
• 1st Five year plan (1951-56): Focused on primary sector
• Targeted growth: 2.1% p.a.
• Achieved: 3.5% Irrigation projects: Bhakra Dam, Hirakud dam. IITs and
UGC set up for higher education.
• 2nd Five year plan(1956-61): Focus on public sector.
Mahalanobis Model.
• Target growth; 4.5%
• Achieved: 4.27%. Hydro-electrical and steel plans set up
• 3rd five year plan(1961-66): Focus on agriculture and
defense industry
• Target growth: 5.6%
• Achieved: 2.4%. Drought, war
• Plan Holiday for 3 years!
 Plans, Targets and Achievements
• 4th five year plan (1969-1974): Industrial policy is launched.
• What is the industrial policy?
– Import substitution strategy
– Emphasis on basic industry. Focus on capital goods
– Foreign exchange flow is controlled since industry does not have to buy
inputs
– Less reliance on external markets
– Bring in savings and investment
– Targetted growth rate: 5.6%
• Achieved: 3.3%
• Nationalized the banks, Green revolution
• 5th Five year plan (1974-1979): Garibi hatoa
– Growth target: 4.4%
• Achieved: 5%
• Highways
 What Grew?

Kotwal, Ashok, Ramaswami, Bharat and Wadhwa, Wilima (2011) “Economic Liberalization
and Economic Growth: What’s the Evidence?” Journal of Economic Literature, Vol. 49
 How is Poor? How are They Counted?

• Here is a video that talks about poverty

measurement.
• The poverty line and the percentage of
population that are poor.
• https://www.youtube.com/watch?v=mFHctW3
zQgg
 At the Basic Minimum : Fighting Hunger

90

80

70

60
Percentage of Population

52.62
50.29
50 46.06

40
38.4

31.43
30
21.25
20

10

0
1983 1987 1993 2004 2009 2011
Poverty headcount ratio at $1.90 a day (2011 PPP)
 What if We Increase the Poverty Line?
90

83.02 82.06
80 79.68

73.36
70
67.92

60
58.01
Percentage of Population

52.62
50.29
50 46.06

40
38.4

31.43
30

21.25
20

10

0
1983 1987 1993 2004 2009 2011

Poverty headcount ratio at $1.90 a day (2011 PPP) Poverty headcount ratio at $3.10 a day (2011 PPP)
 The Modi Effect or Not?

Source: Ghatak and Roy, 2014

 The Modi Effect or Not?

Source: Ghatak and Roy, 2014