Independence Day 2018: Fair growth but no fairytale

Independence was good for India. We have good data from our economic historians. It shows that from 1900 to 1950, India’s GDP has been growing roughly at 1.5 per cent per annum. Population growth that time used to be quite rapid, and later, it grew even faster. But population growing at 1.5- 2 per cent meant per capita income is holding steady or falling a little. There was no growth per capita income wise.

GDP story
Growth picked up from 1950s and was at 3.5 per cent roughly. Up to 1975, growth is more or less holding steady at 3.5 per cent— it goes up and down slightly. The first sharp growth in India takes place in a year which for all Indians was a hard year— 1975. India’s growth jumps to 9 per cent in 1975-1976 (in real terms), which had never happened before. Emergency was a dramatic year for India, and there are some people who would correlate and it is possible that there is a correlation in the first year.

The Emergency was a sort of psychologically traumatic moment. After that, it was a dreadful period. Then growth started tumbling and India’s worst recorded year for India was 1979-1980, when India’s economy grew by (-) 5.2 per cent. So the GDP shrank and it had begun falling. There was one big spike and then all the bad effects begin to set in. The year 1978 is the only other year when there was some demonetisation in India. But one cannot point at demonetisation as the reason for the drop in growth, mainly because demonetisation that time was of exotic tiny fraction of Rs.1,000 and Rs.10,000 notes. But it is an interesting correlation.

But the ’70s have been a bad year barring that one year (1975). In 1973, there was the opaque raising of oil prices. There was Bangladesh war that did put a bit of a toll on us. So it went through a very bad year then ’80s onwards it picks-up.

In the ’80s, there was roughly 5.1- 5.2 per cent growth. Then there is a crisis in 1991 and that crisis triggers reform. The big reform took place between 1991 and 1993. Before that I was a complete abstract theoretical economist who did not take much interest in what was happening. But the reform period is when I got interested.

China is an interesting comparison. Up to about 1980-’81 China’s average growth is roughly similar to India and is a bit higher at 4-4.5 per cent. But in case of China there were years when growth was bouncing upwards and some years growth was crashing down.

One reason for that also is democracy gives you less space for policy experimentation. There can be risk and mistakes when you experiment. Such things can make people angry. India was not a very experimental economy.

Of course, there are ups and downs in India’s growth chart. But 2003 to 2011 is really quite a remarkable year for India. The economy was growing at roughly 8.5 per cent per annum and the global stature of India started to change. So 2003 to 2011 is a growth of 8.5 per cent; within that 2005 to 2008 is an average growth of 9.5 per cent. Then in 2008, there is a crash. It comes down to around 6.1 per cent, picks up again for two years over 8 per cent. After 2011, it begins to slow down.

Job sector woes
When I went to the World Bank, I got to see a lot of data including data from India. India is very weak in some sectors. In case of employment, it is very poorly measured but in some areas India is doing well. Jobs are a matter of concern and I am saying this, but with a question mark. Data on jobs is very poor in India. One reason for poor job data is our adoption of Western method of data collection. A lot of categories in the data collection do not fit India and we are not good at collecting jobs data. We are very good at collecting consumption data and prices data, but not jobs data.

The jobs sector is doing badly in manufacturing and agriculture. The informal sector is actually floundering in India and even the growth is not too bad. It was 6.7 per cent in 2017-2018.

I think demonetisation was a mistaken policy which had a negative effect. Growth slowed down and it also affected the employment sector in India. The job sector which was doing poorly, has now become worse. This is because a lot of the informal sector got hit the worst by demonetisation.

Lessons learnt
If I look at the last couple of years, I have written about one mistaken policy move that is demonetisation. It was uncalled for and was not befitting India. Then there was the bankruptcy code which was a good move. GST (Goods and Services Tax), I actually worked on and was trying to get that through. GST was good but there were lots of implementation problems. Coupled with demonetisation, it has done harm and brought growth down.

(Indian economist Kaushik Basu was former Chief Economist of the World Bank and former Chief Economic Advisor to the Indian government. This is an edited excerpt from his speech at JSW Literature Live! on August 6, 2018.)

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