Some Explorations into India’s Post-Independence Growth Process, 1950/51-2002/3

Abstract

This paper is an attempt to understand better the characteristics of growth of the Indian economy over the period 1950/51 to 2002/3 from the standpoint of aggregate demand and aggregate supply. In so doing, it also seeks to compare the period 1980/81-2002/3 with the period1950/51-1980/81, given that it has been widely argued that 1980/81 marked a break in the trend rate of growth of the economy, with the economy settling at a higher trend rate of around 5-6% p.a. It is hoped that this paper will provide a more nuanced understanding of this so-called higher-growth phase and what might be necessary to do to increase and sustain the rate of growth of per capita incomes. The demand growth analysis in the paper is located within two related though distinct strands in the growth literature: the argument that the composition of aggregate demand, particularly in developing countries attempting to catch-up, is as important as its growth for sustained increases in per capita income, or what is called the inducement to invest question; and the other being the literature on investment-constrained growth models. To analyse aggregate demand and supply responses, growth equations with respect to time are estimated for GDP, consumption, investment as well as sectoral outputs and ratios of sectoral outputs to GDP. The paper reaches two broad sets of conclusions. First, between 1950/51 to 2002/03, both in the low and higher growth phase of the India’s economy, aggregate demand, is at the margin, consumption driven and only weakly investment driven over some of that period. Moreover, at the margin, aggregate demand is more consumption driven in the higher growth phase than in an earlier high investment phase. Particularly, in the post- reform period, unlike any other period (including the 1980s), not only is aggregate demand consumption driven but is not even weakly investment driven. This is because, in the higher growth phase, consumption exhibits significant acceleration in trend rate of growth. This acceleration in consumption growth and its impact on the growth process has not been discussed in the literature and is a particular contribution of this paper. Demand growth is consumption driven because of the changing composition of government expenditure as a source of autonomous demand. But this very shift towards increased government consumption expenditure also adversely affects the inducement to invest and therefore output growth. Second, at the margin, the aggregate supply response, over the entire period 1950/51 to 2002/03, except for a couple of years in the early 1950s, is dominated by the relative contribution of the Services sector. In the low growth phase, for the most part, the relative contribution of Industry lags behind that of the Services and Agriculture. In the higher growth phase the relative contribution of industry improves but still lags behind that of the Service sector. The relative contribution of the Agriculture lags behind that of Services and Industry in the higher growth phase.