234
Managing Openness
Figure 18.1. GDP Per Capita Growth in India, 1970–2009 9.0 5-year moving average change (%)
8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08
72
19
19
19
70
–1.0
year Source: Central Statistics Office database, http://www.mospi.gov.in/cso_test1.htm.
India’s Recent Growth Experience The recent growth spurt of the Indian economy is remarkable. Over three decades, India’s anemic economic growth rate had gained notoriety as the “Hindu rate of growth.” Changes began in the 1980s and accelerated after a balance-of-payments crisis in the early 1990s. Broad reforms aimed at dismantling the so-called license raj freed up the dynamism of India’s entrepreneurs, and economic growth accelerated significantly. At the same time, the rise in per capita incomes was also helped by declining population growth. Per capita growth averaged only 0.7 percent between the early 1950s and the end of the 1970s. It accelerated to 3.3 percent in the 1980s and 1990s. However, in the five years 2002–07 average real GDP grew at almost 9 percent, and per capita growth at more than 7 percent. At this rate, India’s economic growth was the second highest of any major economy in the world, behind only China’s. A sustained performance at this rate would double real incomes every 10 years. High growth was driven by a significant shift in domestic saving and investment, but the trade balance remained negative in almost all years. Private saving as a share of GDP languished below 20 percent until the beginning of the 1990s. From 24 percent in fiscal 1996–97, however, it increased steadily and reached 32 percent in fiscal 2009–10.1 Private investment oscillated around 18 percent of GDP until fiscal 2004–05, when it jumped to 24 percent and continued climbing to nearly 28 percent in fiscal 2007–08. The share of exports and imports in GDP crossed into double digits in the mid-1990s and nearly doubled by
fiscal 2004–05. Growth accounting, therefore, shows that accumulation of capital increased significantly starting in the late 1990s, but total factor productivity (TFP) also shifted into higher gear (see Bosworth, Collins, and Virmani 2007). In contrast to fast-growing emerging economies in East Asia, India’s manufacturing sector did not spearhead economic growth. As in other developing countries, the agriculture sector’s share in production declined. The share of industry remained relatively stable, however, while the services sector showed the most dynamism (figure 18.2). From a share of 38 percent of GDP in 1965, the services sector produced 55 percent of GDP in fiscal 2009–10. During the same period, the share of agriculture declined from 41 percent to 17 percent of GDP. The industrial sector increased its share only from 21 percent to 28 percent of GDP. The high share of the services sector in GDP means that the structure of India’s GDP resembles that of high-income countries more than that of countries at similar levels of per capita income.
India’s Resilience during the Global Crisis India was hit by the commodity price boom before the global financial crisis, which peaked in the summer of 2008. The terms-of-trade shock—mainly from rising oil prices—is estimated at 2.5 percent of GDP. Rising commodity prices led to higher inflation in India, although the government did not fully pass on higher oil prices to Indian consumers and increased fuel and fertilizer