NBER WORKING PAPER SERIESFROM “HINDU GROWTH” TO PRODUCTIVITY SURGE:
THE MYSTERY OF THE INDIAN GROWTH TRANSITION
Dani Rodrik
Arvind SubramanianWorking Paper 10376
http://www.nber.org/papers/w10376
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
March 2004

We thank Montek Ahluwalia, Swaminathan S. Aiyar, Aaditya Mattoo, Raghuram Rajan, Shakti
Sinha, T.N. Srinivasan, John Williamson, and seminar participants at Harvard and the IMF for
helpful feedback, Devesh Kapur for his insights and assistance, and Magali Junowicz and Bakar
Ould-Abdallah for research assistance. The views expressed herein are those of the authors andnot necessarily those of the National Bureau of Economic Research.
©2004 by Dani Rodrik and Arvind Subramanian. All rights reserved. Short sections of text, notto exceed two paragraphs, may be quoted without explicit permission provided that full credit,including © notice, is given to the source.

From “Hindu Growth”to Productivity Surge: The Mystery of the Indian Growth Transition
Dani Rodrik and Arvind Subramanian
NBER Working Paper No. 10376
March 2004
JEL No. O4, O5
ABSTRACT
Most conventional accounts of India’s recent economic performance associate the pick-up ineconomic growth with the liberalization of 1991. This paper demonstrates that the transition to highgrowth occured around 1980, a full decade before economic liberalization. We investigate a numberof hypotheses about the causes of this growth—favorable external environment, fiscal stimulus,
trade liberalization, internal liberalization, the green revolution, public investment—and find themwanting. We argue that growth was triggered by an attitudinal shift on the part of the national
government towards a pro-business (as opposed to pro-liberalization) approach. We provide someevidence that is consistent with this argument. We also find that registered manufacturing built up
in previous decades played an important role in influencing the pattern of growth across the Indianstates.

Dani Rodrik
JFK School of Government
Harvard University
79 Kennedy Street
Cambridge, MA 02138
and NBER
dani_rodrik@harvard.edu
Arvind SubramanianInternational Monetary Fund
700 19th Street, N.W.
Washington, DC 20433
asubramanian@imf.org

Introduction
India’s economic performance during the first three decades since independence waschristened the “Hindu” rate of growth, a term connoting a disappointing but not disastrous
outcome, and playing to the cliché of the acquiescence in the present that the religion
supposedly imbues, because of a greater emphasis on the hereafter.
That cliché, of course, is gradually lapsing into disuse thanks to the remarkabletransformation in India during the last two decades. Since 1980, its economic growth rate
has more than doubled, rising from 1.7 percent (in per-capita terms) in 1950-1980 to 3.8
percent in 1980-2000. Shackled by the socialist policies and the “license-permit-quota raj”
(to use Rajaji’s memorable phrase) of the past, India used to serve as the exemplar ofdevelopment strategies gone wrong. It has now become the latest poster child for how
economic growth can be unleashed with a turn towards free markets and open trade. India
has yet to catch up to China’s growth rates (or even to China’s level of income1), but thanks
to its solid democratic institutions and impressive performance in information technology,
the country is increasingly vying with, if not displacing, China as the country of the future in
the eyes of many knowledgeable observers.2
The improvement in India’s economic performance is obviously good news for its 1 billion
people. But equally important, this transformation also holds hope for other poor countries
around the world, insofar as it sends the message that rapid economic growth is attainable
under appropriate policies.
But what exactly are those “appropriate” policies that made the Indian miracle possible? The
conventional story about India, which can be glimpsed in any number of policy-oriented
papers and newspaper articles, goes like this. Until 1991, India’s policy makers followed
misguided policies that closed the economy to international trade, erected inefficientindustries under state guidance, riddled the private sector with extraordinarily cumbersomeand detailed regulations, and suffocated private economic activity with controls andbureaucratic impediments. Then in 1991, the big breakthrough happened. Spurred by abalance of payments crisis, Indian policy makers turned to technocrats such as Manmohan
Singh, who promptly began the process of liberalizing the economy. Trade barriers wereslashed, foreign investment was welcomed, the license raj was dismantled, and privatization
began. The economy started to boom, with software exports and call centers leading the way.

1

According to PWT 6.1, India’s purchasing-power adjusted per-capita GDP stood at $2479
in 2000, compared to $3747 for China. However, there are reasons to believe India’s PPPlevel of income is understated (see Deaton et. al., 2004)2

See Huang and Khanna (2003).

2

Like all caricatures, the above story has elements of truth in it. It is indeed the case that until
recently India had one of the most over-regulated and closed economies of the world. It isalso true that the economic liberalization of 1991 constitutes a watershed event for the Indian
economy. But the main difficulty with the standard account, as summarized above, is thatthe pick-up in India’s economic growth precedes the 1991 liberalization by a full decade.
Even a cursory glance at the growth record reveals that the more-than-doubling of India’s
growth rate takes place sometime around 1980, with very little discernible change in trend
after 1991. In fact, some indicators, such as economy-wide total factor productivity, even go
in the “wrong” direction, showing a deceleration after 1991. Therefore, the striking post1980 improvement in performance can not be attributed to the liberalization of 1991. The
latter may well have played a role in sustaining and deepening an ongoing process of growth,
but we need to look elsewhere than the reforms of 1991 to understand how India made thetransition to high growth. A related implication is that more recent phenomena such as theboom in IT and related services cannot have been the original source of India’s economic
growth.
We present in this paper a somewhat different interpretation of India’s experience. We argue
that the trigger for India’s economic growth was an attitudinal shift on the part of the national
government in 1980 in favor of private business. The rhetoric of the reigning Congress Party
until that time had been all about socialism and pro-poor policies. When Indira Gandhi
returned to power in 1980, she re-aligned herself politically with the organized private sector
and dropped her previous rhetoric. The national government’s attitude towards business wentfrom being outright hostile to supportive. Indira’s switch was further reinforced, in a more
explicit manner, by Rajiv Gandhi following his rise to power in 1984. This, in our view, was
the key change that unleashed the animal spirits of the Indian private sector in the early
1980s.
It is important to characterize appropriately this attitudinal change that took place in the early
1980s. We make a distinction here between a pro-market and a pro-business orientation. The
former focuses on removing impediments to markets, and aims to achieve this througheconomic liberalization. It favors entrants and consumers. A pro-business orientation, on theother hand, is one that focuses on raising the profitability of the established industrial andcommercial establishments. It tends to favor incumbents and producers. Easing restrictions
on capacity expansion for incumbents, removing price controls, and reducing corporate taxes(all of which took place during the 1980s) are examples of pro-business policies, while tradeliberalization (which did not take place in any significant form until the 1990s) is thearchetypal market-oriented policy. This distinction can be observed, for example, in thecontrasting approaches towards reform in East Asia and Latin America. South Korea’s
reforms in the 1960s and 1970s were primarily pro-business rather than pro-markets. Latin
America’s reforms in the 1990s were primarily pro-market.
The change in India in the early 1980s are accordingly best described as pro-business rather
than pro-market. True liberalization was by and large anathema to organized business at thetime. Indira Gandhi was far less interested in opening up the economy and removing
impediments to competition than in garnering political support from existing business3groups. Rajiv Gandhi, who was somewhat more prone to liberalize, had to step back when
he reached too far out of line and when the Bofors scandal undermined his effectiveness.
The primary beneficiaries of growth were therefore incumbents and pre-existing activities
rather than entrants and new activities. Nevertheless, we view this shift towards a probusiness orientation as the essential trigger that set off the boom of the 1980s. That this wasa powerful trigger can be deduced from the fact that the genuine liberalization after 1991
added very little to aggregate economic performance. Apparently, this attitudinal shift was initself a very powerful stimulant for economic growth, even in the presence of price and othermarket distortions.
That an attitudinal change on the part of the national leadership could have such a strong
impact on growth is in turn grounded in India’s initial conditions. India has very strong
political and economic institutions for a country at its income level. It is a democracy where
the rule of law generally prevails and property rights are protected adequately. Judged bycross-country norms, it ought to have a level of income that is several times higher. The
implication is that relatively minor changes in the policy environment can produce a large
growth impact. We interpret the suspension of the national government’s hostility to theprivate sector as one of these changes, something that left little paper trail in actual policies
but had an important impact on investors’ psychology.
We begin this paper by documenting India’s growth transition in the 1980s and placing thisexperience in comparative context. We show that this transition is grounded in an impressive
increase in productivity (rather than in factor accumulation). We also show that India has
moved from being a global underperformer before 1980 to a strong overperformer since then.
We next present a series of possible explanations for this shift and show that none of themcan satisfactorily account for the boom of the early 1980s. There was not much liberalizationin the 1980s, and the little that took place happened during the second half of the 1980s. The
Indian economy remained closed to world trade, and in some ways more protected than ever.
The Green Revolution is unlikely to have been the source of the boom in non-agriculturalactivity, because we do not observe the requisite changes in the internal terms of trade.
Demand-side explanations are inadequate to explain the rise in productivity. Public sector
investment is unlikely to have been the story either, unless we make demanding assumptions
on time lags.
We then lay out our own explanation, and provide some empirical evidence in support of it.
We show in particular that post-1980 growth was strongest in activities and states that weremost advantaged by the national government’s attitudinal shift—namely in the formal
manufacturing sector built up under the earlier policy regime. Hence to some extent, thelearning generated under the earlier policy regime and the modern manufacturing basecreated thereby provided a permissive environment for eventual takeoff once the policy
stance softened vis-à-vis the private sector. So, unlike what one may have otherwise expected(from accounts of how costly ISI was), growth occurred where the earlier investments had
been made.

4

Our analysis focuses on the transition to high growth in the 1980s, and we have little to say
about the 1991 reforms and the experience of the 1990s. We take the view that igniting
growth and sustaining it are distinct challenges, requiring different sets of policies andapproaches (Rodrik 2003, Hausmann et al. 2004). This paper is concerned exclusively withthe challenge of igniting growth and the story of how India seems to have overcome it.
I. THE FACTS
A key fact that we establish at the outset of this paper is that the turnaround in thisperformance—the decisive break with the Hindu past—occurred around 1980 and not in the
1990s as most accounts have it. We are not the first to make this point: De Long (2003) andWilliamson and Zagha (2002) have both emphasized that the approximate doubling ofIndia’s growth rate took place a full decade before the 1991 reforms. Nonetheless, it is
impossible to read the standard policy-oriented accounts and not leave with the impressionthat it is the reforms of the 1990s that have brought superlative economic performance to
India (Ahluwalia, 2002; Srinivasan and Tendulkar, 2003).
Chart 1 illustrates that three measures related to aggregate growth performance—real GDP
per capita, real GDP per worker, and total factor productivity—displayed a sharp upward
trend beginning 1980 after remaining virtually flat for the preceding two decades. Table 1
confirms that the pick-up in labor and total factor productivity between the 1970s and 1980s
amounted to about 3 percentage points. While the 1990s continued to see strong growth, theproductivity measures show a deceleration between the 1980s and 1990s of between 0.3 and0.6 percentage points.3 Regardless of whether the 1990s were slightly worse (or slightly
better) than the 1980s, it is abundantly clear that India’s economic performance improved
sharply sometime around 1980.4
More formal evidence that the break occurred around 1980 comes from a variety of sources.
First, using the procedure described in Bai and Perron (1998, 2003), we computed the
optimal one, two, and three break points for the growth rate of four series: per capita GDP
computed at constant dollars (World Bank) and at PPP prices (PWT), GDP per worker(PWT), and total factor productivity (Bosworth and Collins, 2003).5 In all four cases, we find3

Micro-level evidence is also consistent with the absence of any significant break associatedwith the reforms of 1991. Deaton and Dreze (2002) show that measures of poverty
reduction, real wage growth, health and education exhibit trends in the 1990s similar to thoseprior to the 1990s.
4

We note that this improvement is also evident when Indian GDP is expressed in PPP terms(i.e., using Penn World Tables data). So it cannot be argued that the pickup in growth isartificial due to the interaction of price distortions with differential sectoral expansion.
5

We thank Andy Berg and Marcos Souto for suggesting and estimating this procedure. For
the case of a single break, the Bai and Perron procedure minimizes the sum of squared(continued)

5that the single break occurs in 1979.6 Second, Hausmann et al. (forthcoming) have analyzed
transitions to high growth in a large cross-national sample, and date the Indian growthtransition in 1982.7 Finally, Wallack (2003) has analyzed GDP and its disaggregatedcomponents for structural breaks. She finds evidence for a break in the GDP growth rate in
the early to mid-1980s. The highest value of the F-statistic associated with the existence of abreak is reached in 1980 (Wallack 2003, p. 4314).8
Was this improved aggregate productivity performance since the 1980s simply aconsequence of re-allocation of resources from low-productivity (agriculture) to higher
productivity (manufacturing and services) or was there a trend improvement in theperformance of individual sectors? There has been a substantial structural change in thecomposition of the labor force employed in the three major sectors, with the mostpronounced one being the decline in agriculture’s share of about 10 percentage points
between 1975 and 1995, offset by an increase in the share of services (about 7.5 percentage
points) and industry (2.5 percentage points). But this shift explains a very small fraction (lessthan 10 percent) of the improvement in economy-wide productivity. For example, when theaggregate labor productivity growth is computed with fixed (base-period) employment
shares, the pick-up in the 1980s is between 2.6 and 2.9 percentage points, and thedeceleration in the 1990s about 0.4-0.6 percentage points (Table 1).
A number of studies have argued that manufacturing experienced a surge in productivity inthe 1980s (Ahluwalia, 1995, Unel, 2003) although some of these estimates have been
contested (Hulten and Srinivasan, 1999; and Balakrishnan and Pushpagandan, 1994).9 For
deviations of the growth rate around the means of the two resulting subsamples. For multiple
breaks, we use the method described in Bai and Perron (2003), which employs a dynamic
programming algorithm to compare all possible combinations, so that a minimum global sumof squared residuals is achieved. Details are available from the authors upon request.
6

The two breaks occurred in 1970 and 1979, and the three breaks occurred in 1970, 1979,
and 1994 (with the procedure suggesting that there was a trend decline after 1994).
7

The Hausmann et al. filter looks for a year such that the growth rate in the seven years
following it is at least 2 percentage points or more higher than the growth rate in the priorseven years.
8

She finds less evidence for a break in growth rates in specific sectors (such as
manufacturing and agriculture), attributing the post-1980 growth to the changing
composition of GDP. Note that Wallack's study focuses on value added and not productivity.
9

Hulten and Srinivasan (1999) make the point that conventional TFP measures understate
the true contribution of productivity performance by ignoring the additional capital formationinduced by an increase in productivity. Balakrishnan and Pushpagandan’s (1994) critique isbased on the failure of conventional measures to use separate deflators for gross output and(continued)

6

example, Ahluwalia’s (1995) figures suggest that the increase in TFP growth during 1981-89
over the previous two decades was 3.2 percentage points.
A break in growth performance is also suggested by the evidence on economic growth at thelevel of the Indian states. Chart 2 plots per capita GDP for all states for every ten years
beginning in 1960. Beginning in 1980, there is both an upward trend in the average as well
as a wider spread in the distribution of incomes. A more formal test of (unconditional)
convergence between states for the four decades confirms this break (Table 2). For the 1960s
and 1970s, the convergence coefficient is positive and insignificant. For the 1980s and1990s, this coefficient increases and becomes statistically significant. The magnitude of thecoefficient suggests that in the latter two decades, states are diverging at an annual rate ofabout 1.2 percent a year, very much a case of “Divergence, Big Time” (Pritchett 1997).
The surge in India’s performance since the 1980s is also confirmed by cross-national
evidence. Table 3 provides basic data on the average growth rates and their volatility for thefour decades since the 1960s for India, China, and the other regional groupings (BosworthCollins, 2003). For the period, 1960-80, India’s growth rate of output per worker, at 1.3
percent per year, is the lowest in the world except for sub-Saharan Africa. For the next two
decades, however, its average growth exceeds, by a substantial margin, all other regions,
except East Asia.
Table 4 presents simple Barro-type cross-country growth regressions for the periods 1960-80
and 1980-99, using the data in Bosworth and Collins (2003). Two measures of growth
performance—labor and total factor productivity—are regressed on a standard set ofcontrols, including the convergence term. We introduce an India dummy in all these
regressions to capture India’s performance relative to the average country in the sample. For
both productivity measures, the coefficient on the India dummy is negative and significant
for the 1960-80 regressions but turns positive and significant for the period 1980-99. The
TFP regressions suggest that, after controlling for policies, endowments, and initial income,India grew 0.7 percent per year slower than the average country in the 1960-80 period, butgrew 2.1 percent per year faster than the average country in the 1980-99 period. These results
indicate that India’s turnaround is not a consequence of merely catching-up. In the crosssection, the magnitude of over-performance in the latter period has been substantial andexceeds the magnitude of under-performance in the 1960-80 period.
Table 3 also sheds light on the variability of India’s growth in the various decades in absoluteand relative terms. India’s growth has not been more variable than other developing regionsin the period 1960-80: indeed, it has the lowest standard deviation amongst all regions
although the coefficient of variation is higher than for the Middle East, Latin America, andintermediates in arriving at TFP measures. Another study (RBI, 2004), using the double
deflation methodology, however, shows that manufacturing TFP grew at 3.9 percent in the
1980s and declined to 2.1 percent in the 1990s.

7Asia. Between 1980 and 1999, however, India’s growth exhibits the lowest variation interms of both the standard deviation and the coefficient of variation. Thus, India
outperformed all regions, save East Asia, in terms of average growth, and outperformed all
regions, including East Asia, in terms of the stability of growth.10 Interestingly, and contrary
to some claims, Indian growth was more stable in the 1980s than in the 1990s.
A really striking feature about the Indian performance that emerges from the cross-national
comparison is the respective contributions of capital accumulation and total factor
productivity growth to overall labor productivity growth (Table 5). Prior to 1980, thecontribution of TFP growth to overall labor productivity growth, at 10 percent, was lower inIndia than in any other region, except the Middle East: even sub-Saharan Africa fared better.
Since 1980, however, India almost tops the list for TFP contribution to overall growth.
Nearly 60 percent of overall growth was accounted for by TFP, a feature matched only by
China. Amazingly, the Indian TFP performance in 1980-99 surpasses that of East Asia evenin the first twenty years of the East Asian miracle. Evidently, India has relied less ondeferred gratification and more on productivity to motor its growth even compared to thefast-growing countries of East Asia. If productivity-based growth is more sustainable thanaccumulation-based growth, it would appear that India’s future prospects appear quite
promising.
II. THE EXPLANATIONS THAT DON’T WORK
What explains the dramatic rise in India’s growth, and in particular its productivity,
performance since 1980? In this section, we discuss a number of explanations that could
explain this turnaround, including those that have been put forward by recent studies. For themost part, we argue that these explanations are inadequate or unsatisfactory in some way. In
the next section, we propose some alternative hypotheses for which we provide some direct
and indirect evidence.
India’s performance in the 1980s has elicited a number of distinct explanations. We consider
each in turn.
A. Was it a Favorable External Environment?
The first explanation that we need to consider is whether the improved productivity
performance was simply a consequence of a more favorable external environment. There isvery little to suggest that such a factor was at play. On the whole, the 1980s did not present a
hospitable environment for developing countries, something that can be readily gauged by

10

India’s superior performance on the variability of growth in the 1980-99 period is
confirmed in simple cross-section regressions (available from the authors upon request).

8

the slowdown in growth pretty much everywhere (with the notable exception of China).11
The long decline in industrial country productivity began with the oil shocks of the 1970s.
Chart 3 plots the temporal evolution of India’s terms of trade, which is a gauge of external
environmental conditions. It turns out that since 1960, the terms of trade were mostunfavorable for India in the 1980s, during which period they declined by about 20 percent
relative to the previous period. This, of course, only serves to deepen the mystery of the
1980s productivity performance because it appeared to have occurred at a time when
exogenous external conditions were most adverse.12
B. Aggregate Demand and the Unsustainability of 1980s Growth
A common argument used in downplaying the growth of the 1980s is that it was led by fiscal
expansion and hence unsustainable. This view is expressed clearly, for example, in
Ahluwalia (2002) and Srinivasan and Tendulkar (2003).13“This (the 1990s) growth record is only slightly better than the annual average of 5.7 percent
in the 1980s, but it can be argued that the 1980s growth was unsustainable, fuelled by abuildup of external debt that culminated in the crisis of 1991. In sharp contrast, growth in the
1990s was accompanied by remarkable external stability despite the east Asian crisis.”(Ahluwalia, 2002, p. 67).
“The fiscal expansionism of the 1980s, accompanied by some liberalization of controls on
economic activity, generated real GDP growth of more than 5.8 percent a year... This
expansionism, however, was not sustainable and led to the macroeconomic crisis of 1991.
(Srinivasan and Tendulkar, 2003, p. 9).
This Keynesian-run-amok explanation is, at first blush, supported by the data. During the1970s, the average consolidated government deficit averaged 5 percent of GDP. During the
1980s, this had soared to 9 percent, an annual increase of 4 percentage points. But the fiscal
expansion has two distinct consequences, relating respectively to its unsustainability and its
impact on productivity, which the quotes above fail to distinguish. Indeed, the twoconsequences work at cross-purposes with each other.

11

For example, the real price of oil was 15 percent higher in the 1980s than in the 1970s (andnearly 75 percent higher than in the 1990s); and industrial country growth averaged 3.5
percent in the 1970s versus 3.2 percent in the 1980s.
12

By the same token, the 1990s productivity performance looks less impressive.

13

See also Chopra et. al. (1995).

9

Fiscal expansion can lead to rising current account deficits, and hence to a build-up of
external debt which in the Indian case proved to be unsustainable, triggering the crisis of1991. But the more this happens, i.e., the more the fiscal expansion “leaks abroad” and leads
to a debt build-up, the less the demand that is generated for domestic goods and services, andthe less likely that measured productivity increases could have resulted. It is because thecurrent account deficit did not deteriorate one-for-one relative to the fiscal impulse (thecurrent account deficit was about 1.7 percentage points higher during the 1980s than the
1970s), that the demand explanation has potential traction for explaining productivity
growth.
The component of fiscal expansion that leads to increased demand for domestic goods andservices, can explain output growth over short periods, strictly speaking relative to trend, but
it is not clear how it can explain a large and sustained rise in trend productivity. The only
possible explanation would rely on sustained differences in capacity utilization across time.
A demand expansion can then increase output, which in the presence of idle capacity, would
also show up in the measured productivity aggregates. One way to control for such ademand-induced increase in productivity is to compute the productivity aggregatesincorporating changes in capacity utilization. In the Indian case, this argument would suggestthat the TFP measures for the 1970s and 1980s should be corrected for capacity utilization.
Data on capacity utilization in Indian manufacturing for the period under consideration are
produced by different sources and are difficult to reconcile. For example, for the 1970s, theWorld Bank (1995) reports an estimate of 72.7 percent while Ahluwalia’s (1990) numbers
yield an estimate of 77.6 percent. Estimates for the 1980s are similarly dispersed. One
consistent estimate for the 1970s and 1980s (World Bank, 1995) implies an increase incapacity utilization of about 2.7 percent, which would have the effect of reducing measured
TFP growth in the 1980s by about 1 percent per year.14 Even on the strong assumption that
all this change in capacity is demand-induced, the turnaround in TFP growth between the
1970s and 1980s would remain substantial (about 2-2.2 percent per year). Of course, theturnaround in labor productivity growth would remain unaffected by changes in capacity
utilization.
More broadly, however, the explanation of increased demand is likely to be unsatisfactory or
incomplete because the break in the 1980s that we have presented (i) related to a number of
productivity aggregates, and not just at aggregate but also at the level of the states; (ii)appeared to hold not just in a time series context for India but also in the cross-section; and(iii) even on the most favorable interpretation, cannot account for a large share of thetrunaround. A lot remains unexplained.
14

Effectively, the contribution of capital accumulation to labor productivity growth isincreased by an amount equal to the percentage increase in capacity utilization multiplied by
the share of capital in output (assumed to be 0.35).

10

C. External Liberalization
Was the pickup in India’s trend productivity growth in the 1980s caused by external
liberalization? We present below evidence--relating to trade policies and trade outcomes—
which paint a remarkably consistent picture of little, if any, liberalization taking place during
the 1980s, significant liberalization taking place in the 1990s, with its full effects being felt
in the late 1990s.
Table 6 below, based on Das (2003), presents data on the actual trade policy reform that was
carried out since the early 1980s. We can see that during the early 1990s, trade protection
declined unambiguously and markedly. However, during the 1980s, protection through tariffs(measured in terms of effective protection) increased, and protection through quantitative
restrictions (measured in terms of the coverage of these restrictions) declined only
marginally. This is true for manufacturing as a whole and for the different use-based sectors.
It is important to note here that these numbers likely understate the increase in effective
protection for final/consumer goods for much of the 1980s and 1990s stemming from theliberalization, albeit limited, of the capital goods sector.
This broad pattern of trade policy reform is confirmed by the data on tariff collections and bydata related to trade outcomes. Chart 4 illustrates that duties collected as a share of imports
and GDP rose substantially during the 1980s, peaking in the early 1990s. Duty collection as ashare of imports rose from over 30 percent in the early 1980s to nearly 45 percent in the late1980s. As a share of GDP, duty collections declined steadily only after the mid-1990s. The
chart also computes a broader measure of trade protection—the anti-export bias—which
incorporates the export subsidies granted to manufacturing under various schemes.
Incorporating export subsidies reduces the level of protection but confirms the pattern of
sharply rising protection during the 1980s. In 1991, the important export subsidies were
eliminated, which imparted a one-off increase to the level of overall protection.
The pattern of trade outcomes is also consistent with the pattern of trade protection (seeChart 5 and table below).
1970s

1980s

1990s

Annual growth of nonoil import volume

1.1%

2.8%

12.9%

Annual growth ofexport volume

4.6%

4.0%

10.7%

Openness ratio

9.8%

12.7%

19.3%

Crude outcome indicators such as the openness ratio tell a story of modest increases inopenness during the 1970s and 1980s of 1.5 and 2.2 percentage points, respectively over thepreceding decades followed by a more dramatic increase of 6.6 percentage points in the111990s. The same is true for import and export volumes: export volumes grew at a slower
pace in the 1980s than in the 1970s.
These indicators have the usual problem of leaving open the question of the causes of theincrease in openness. A more sophisticated way of assessing trade outcomes is to use agravity model, which controls for many of the possible determinants of trade. Table 7
presents the estimated coefficients for India and China dummies in gravity estimations forthe period 1980 to 2000 based on the dataset and methodology used in Subramanian and Wei(2003). The India dummy is negative and significant for all periods except in 2000, with thevalue of the dummy increasing in absolute value through the 1980s, and starting to decline
only in the mid-1990s, consistent with the timing of the trade policy reform. If the results areto be taken at face value, they suggest that India only become a normal trader in 2000. In
contrast, the China dummy is positive and significant for most of the 1980-2000 period.
External liberalization could also encompass exchange rate changes that could have an
impact on trade and productivity. Chart 6 depicts the movement in India’s real exchange ratesince 1970. After remaining broadly unchanged during the first half of the 1980s, the rupee
experienced a large real depreciation of over 40 percent in the second half of the 1980s.
Could this have caused the productivity spurt? In terms of timing, the real depreciation
followed the pick-up in productivity growth in the early 1980s. But could it have contributed
to sustaining this spurt in the late 1980s?
We would argue that exchange rate changes are an unlikely candidate. First, a realdepreciation boosts aggregate demand and while it could have increased output growth in the
short-term, its consequences for raising long-run productivity growth are less clear. Of
course, a real depreciation could have an effect on overall productivity through an importsubstitution-induced reallocation effect: if tradables are generally more productive than therest of the economy, raising the share of tradable goods in overall GDP can result in an
economy-wide productivity increase. In India, the share of manufacturing in GDP is small,and more importantly, the increase in this share in the aftermath of the real depreciation was
too small to help explain overall productivity growth.15
D. Was it the Green Revolution?
Another possible explanation for the growth pickup in the 1980s is agriculture, which
witnessed an increase in labor productivity growth from 0.1 percent in the 1970s to 2.6
percent in the 1980s. The difficulty with agriculture as the source of the improvement inoverall performance is fourfold. First, in quantitative terms, the turnaround in agriculture’s
performance was actually less impressive than that in manufacturing and services, where theacceleration in productivity growth was actually larger. Second, if rising agricultural
15

Between 1986 and 1992, the share of manufacturing in GDP remained unchanged at about
16 percent.

12

productivity were the underlying cause for improved productivity performance elsewhere in
the economy, a necessary condition that would have to be met is a deterioration in the
agricultural terms of trade. This classic “Preobrazhensky effect” relies on improved
productivity driving down agricultural prices and releasing resources for use in
manufacturing. But as Chart 7 illustrates, quite the converse happened. During the 1980s,
the terms of trade of agriculture with respect to industry and manufacturing actually
improved. Moreover, as we showed above, the sectoral reallocation brought about by
improved agricultural productivity performance would be too small to explain improvementsin overall productivity. Third, recent work by Burgess and Venables (2003) and Foster andRosenzweig (2003) shows that agricultural productivity plays a comparatively small role inexplaining the inter-state variation in total, urban, and surprisingly, even rural poverty.16 It is
non-farm productivity that appears to be the driver of aggregate outcomes. Finally, in our
econometric analysis described below, we too found no evidence of a role for agriculture in
explaining the overall productivity improvement.
E. Was it Public Investment?
The period between the late 1970s and the late-1980s witnessed a marked rise in public
investment of about 4 percentage points of GDP (Chart 8). Could this have played a role inaccounting for the 1980s productivity performance? It should be emphasized that the impactof public investment via its demand-creating effects cannot be an explanation for reasons
outlined in section A above. But public investment could have augmented the supply
capacity of the economy through its spillover effects.
A useful framework for analyzing the growth or productivity-enhancing role of public
investment is provided by Barro (1990). Conceptually, certain government services (notably
those related to infrastructure) have a productive role if they are inputs in private production.
This can be incorporated in a standard Cobb-Douglas production function to yield:
Y/K = A (G/K)

α

where Y and K are expressed in per worker terms. G is the flow of government services ininfrastructure (i.e., excluding output of government enterprises). The parameter α is the
productivity of public services relative to private services (which should theoretically beclose to the average tax rate, about 15 percent in the case of India.). In turn, this yields thegrowth accounting decomposition:y – k – a = α/(1- α) (g/y)
where the lower case variables are the proportional rate of growth analogues of theunderlying variables. This equation makes clear that the standard growth accounting
16

At the level of the states, agricultural growth and overall growth are negatively correlated.

13

decomposition could overestimate total factor productivity growth if the spillover effects ofgovernment investment are ignored. Given data on government investment, we can computethe possible contribution of government services to overall growth for given values of α. The
results of this exercise are illustrated in Tables 8A and 8B. Under the assumption that theeffects of public investment are contemporaneous or that only the infrastructure componentof public investment is productivity enhancing, we estimate that the contribution of public
investment to overall growth is quite small (0.2%-0.3%). If, on the other hand, the effects arelagged (by say 5 years), public infrastructure investment, and especially total public
spending, could explain a substantial part of overall growth (1.5%-2.9%). The bottom line isthat the surge in public investment could in principle explain India’s growth in the 1980s, but
only if we make an appropriate assumption about the nature of the lags between public
investment and its productivity-enhancing effects.
F. Was it “Internal” Liberalization?
A promising candidate for explaining the 1980s turnaround is what in India is called “internal
liberalization.” This relates to the dismantling of the vast controls on domestic investment
and competition implemented through a Kafka-esque array of licences, regulations and otherforms of control.
We discuss these in greater detail below, but for the purposes of our narrative it is enough tonote at this stage that the timing and magnitude of internal liberalization are not quite
compatible with a productivity take-off in the early 1980s. Indeed, contemporaneous
accounts of these internal reforms make clear the limited range of liberalization that was
attempted. In what is probably the best account of this period, Joshi and Little (1994, pp. 7172) express this sentiment as follows:“In summary, liberalization in our period (1964/65-1990/91) consisted of little more than thepiecemeal deregulation of industrial licensing and the introduction of a measure of exchange
rate flexibility. These changes were not trivial and did improve economic performance. But
ideology and vested interests prevented any significant action in the more difficult areas suchas trade liberalization, financial liberalization, and reform of the labor market and public
sector enterprises.”Srinivasan and Tendulkar (2003, p2) imply the same when they talk of the ”shift in 1991
from an inward-oriented, state-led development strategy to a policy of active reintegration
with the world economy” (our italics).
Others have, however, drawn attention to the important steps taken between 1985 and 1988,
under Rajiv Gandhi, to dismantle the industrial licensing system in India. We shall describe
these in greater detail below but a rough magnitude of the importance of these steps can begauged by the assessment that in 1991, prior to the sweeping deregulatory effort, between 60

14percent and 80 percent of industry was still subject to licensing and controls.17 Thus, themagnitude of the reform effort not only seems modest, but it also lags behind the turnaroundin the productivity surge.
III. POSSIBLE EXPLANATION
So what explains the Indian growth take-off in the early 1980s? In this section, we propose
an alternative explanation and offer some econometric evidence in support. First, a few
points on our data set and approach, which rely largely on exploiting variations in
performance between the 21 states for which we have data. Accordingly, we use state-level
data for the period 1960-2000 which is disaggregated by 17 sectors in the national income
accounts. For one of these sectors—manufacturing—data are also available for the output of
the registered and unregistered sectors. These data have been compiled and recently releasedby the Economic and Political Weekly Research Foundation. We created a panel datasetwith variables defined for four decades—1960s, 1970s, 1980s and 1990s. Since we areinterested in changes in impact across these decades, particularly in the 1980s, we interacted
the explanatory variables with the appropriate decadal dummies. Data on the politicalvariables were gathered from the website of the Election Commission of India(http://www.eci.gov.in/infoeci/key_stat/keystat_fs.htm) and supplemented by state-levelsources.
Our explanation comprises four elements. First, that there was an attitudinal change on thepart of the government in the 1980s, signalling a shift in favor of the private sector, with thisshift validated in a very haphazard and gradual manner through actual policy changes.
Second, this shift and the limited policy changes were pro-business rather than procompetition, aimed primarily at benefiting incumbents in the formal industrial andcommercial sectors. Third, these small shifts elicited a large productivity response because
India was far away from its income possibility frontier. Finally, manufacturing, which wasbuilt up through previous efforts, played a key role in determining the responses to the shifts.
We posit that sometime in the early 1980s there was a significant attitudinal change towards
the private sector on the part of the national government, led by Indira Gandhi’s Congress
Party. Congress went from being hostile to private business18 to mildly supportive, and17

The 60 percent estimate is due to Chopra et. al. (1995, Table 7.6, p. 60), while the 80
percent estimate is due to Hasan (1997, p. 27). Also, data compiled by Balakrishnan andBabu (2003) suggest that gross margins in industry did not decline in the 1980s relative to the1970s.
18

Basu (2003) describes the general attitude of mistrust towards business in post-colonial
India, tracing it back to India’s experience with the East India Company and the trader
mentality of the colonial rulers.

15

eventually quite supportive. This change was inaugurated with the return of a muchchastened Indira Gandhi to political power in the 1980s after a three-year rule by the Janata
party. It gathered momentum (after her assassination) under Rajiv Gandhi. The
transformation has some antecedents in the 1970s, as reflected for example in theappointment of a high-level committees to propose changes to the trade regime and toindustrial licensing. One important manifestation of this change, noted by Joshi and Little(1994), was the fact that import controls were not tightened in the wake of the balance of
payments crisis in 1979/80.
But the attitudinal change was grounded primarily in political calculation, and not in a desire
to enhance the efficiency of the economic regime. As Kohli (1989) notes, 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. Her political rhetoric consequently
became less secular and populist and more communal and private-sector oriented. In Kohli’s
words, “in India’s political culture … the two packages of secularism and socialism and
Hindu chauvinism and pro-business have tended to offer two alternative legitimacy formulae
for mobilizing political support” (1989, 308). After 1980, Indira dropped the first package infavor of the second. From our perspective, what is particularly important is that Indira now
actively sought to woo the business and industrial establishment.
As we have already noted, there were few significant policy changes in the early 1980s, andthe changes later on (beginning in 1985) were restricted largely to some internal
liberalization relating to the relaxation of industrial licensing. The limited nature of thesechanges, as well as the form that they took, is best understood by appreciating the political
logic of Indira’s (and later Rajiv’s) efforts. These were aimed to gather support from thebusiness establishment rather than to alienate them. Hence there was more action wherebusiness support existed—for example, in reducing taxes, easing access to imported capital
inputs, or liberalizing capacity restrictions—than where it did not—for example, in external
liberalization.
As we have noted, most observers agree that the actual policy framework did not change
significantly until 1991. That is why we describe the shift as an “attitudinal” one, having to
do with the government’s attitude towards business and the private sector, rather than aspolicy reform per se. This shift had more to do with currying favor with existing businessinterests (essentially large, politically influential firms in the formal manufacturing sector)
than with liberalizing the system as a whole.
We explore the implications of the first two elements of our explanation: if the causal
mechanism is a shift in the attitudes of the national government, we should see differences ingrowth rates depending on the nature of the political alliance between state governments andthe national government. In particular, growth post-1980 should be more pronounced instates where the ruling government was in alliance with the national government (mostly
Congress in this period) than where it was not. To test for this, we coded state governments
according to the party in power and constructed variables for each of the decades depending

16

on the number of years the party ruling in a state was either the same as, or had an alliancewith, the party in power at the centre. Table 9 displays the results.
As column 1 shows, states that were allied with the national government had growth rates in
the 1960s and 1970s that were indistinguishable from others’. This changes dramatically inthe 1980s and 1990s—when states allied with the national government had dramaticallyhigher growth rates.19 We would expect the change in policy attitudes to have a particularlymarked effect on the formal sectors of the economy because as explained above both theattitudinal and policy shifts were in their favor. So in column 3 we look more narrowly at thegrowth of registered manufacturing. As expected, states that were allied with the national
government had significantly higher growth rates in registered manufacturing in the 1980s.20
Column 4 analyzes the difference between growth rates in registered and unregistered
manufacturing, on the theory that an attitudinal shift towards business should have a larger
impact on registered than unregistered businesses.21 Once again, we find this intuition
confirmed: states that were allied with the national government experienced differentiallyhigher growth rates in registered manufacturing.22
In addition to the differential impact on formal manufacturing, another suggestive piece ofevidence in support of the proposition that the shift was pro-business comes from investment
behavior. While aggregate private investment does not increase greatly in the 1980s, there isa striking shift in the early 1980s in private investment towards corporate sector investment(and away from the household sector, comprising largely unincorporated enterprises). Figure
8 shows the corporate-sector investment rate rising by about 2-3 percentage points in the
1980s. It looks like the corporate form of investment became considerably safer sometime inthe early 1980s.
We turn next to the third element. Why did this apparently small trigger elicit such large
productivity responses? It is worth noting at the outset that India was very far from its long
19

This result holds whether the political variable is defined as parties being allied to that in
the centre or as being the same as that in the centre.
20

Column 2 reports results when this political variable is interacted with the share ofregistered manufacturing. Again the coefficients for the 1980s and 1990s are positive andsignificant.
21

The differential between the growth of the registered and unregistered sectors in aggregate
was 4.3 percent in the 1980s compared with 1.7 percent in the 1970s.
22Interestingly, in the equation for registered manufacturing and for the difference in growth
between registered and unregistered manufacturing, the political variable for the 1990s
ceases to be significant. This suggests that the impact of the 1990s liberalization was broader
than that in the 1980s.

17

run or steady-state level of income given the level of its domestic institutions. If the recent
literature’s emphasis on the importance of institutions on development is correct, India
appears to be far inside the possibility frontier. Table 10 illustrates this under-achievement.
It reports regressions of income on the deep determinants of income (based on Acemoglu et.
al., 2001, and Rodrik et. al., 2002) with an India dummy.
The first four columns report results where the institutional variable is economic while thelast four columns contain political institutions as the relevant determinant of long run
income. The estimated coefficient on the India dummy in both sets of regressions is negativeand significant, suggesting that India is an outlier. The magnitude of the dummy coefficientis large: for example, column 1 suggests that in 1980, India’s level of income was about aquarter of what it should be given the strength of its economic institutions. On the other hand,
if political institutions are the true long-run determinant of income, India’s income is about
15 percent of what it should be. India has thus been a significant under-achiever in the sensethat it has not exploited the potential created by having done the really hard work of building
institutions.
Next we turn to the role of manufacturing, and in particular registered (or formal)
manufacturing, in mediating the changes. We begin by noting a very strong regularity in thedata: starting in the 1980s, it is states with the largest formal manufacturing base (“registered
manufacturing”) that take off. Figure 9 shows how the simple correlation between growth
and the share of registered manufacturing in total output, which is weakly negative in the
1970s (rho=-.08), turns significantly positive in the 1980s (rho = 0.42). Table 11 tests thismore formally. When we introduce state-level registered manufacturing shares in the growth
regression and allow the coefficients to vary by decade, not only are the shares for 1980s and1990s highly positive and significant, but also these variables can “knock out” the pure
period dummies (see columns 1-2).23 In other words, whatever it is that happened in theearly 1980s, it stimulated growth primarily in states with high level of formal manufacturing
activities.
We note also that this is not simply an artifact of the fact that it is the richer states that takeoff after 1980 (the richer ones also having in general larger manufactures shares). Column 4shows that manufacturing shares are still significant for the 1980s, when period-specificconvergence terms are added to the regression (while the latter are insignificant).
The importance of the registered manufacturing sector in the productivity surge is confirmedin the robustness checks that we report in Table 12. In columns 1-4, we check whether
agriculture or infrastructure, which account for a larger share of output than registered
manufacturing, play a similarly important role. Not only are these variables insignificant on
their own, they are also unable to “knock down” the significance of the decadal dummies. In
23

To minimize endogeneity-related problems, the beginning-period value of the share ofregistered manufacturing is used as the regressor.

18columns 5-7, we undertake a different kind of check on the role of manufacturing. If themechanism by which manufacturing was affecting overall GDP growth was spillovers, forexample, in the form of human and managerial capital built up in industry and being appliedelsewhere in the economy, it seems plausible that these spillovers should occur more in
relation to services than agriculture. To test this, we change the dependent variable incolumns 5-7 to per capita non-agricultural GDP growth. In all these specifications, theregistered manufacturing variable for the 1980s is highly significant. Interestingly, themagnitude of this coefficient is more than twice its value in the specification with overall
GDP as the dependent variable (Table 12, col. 3), suggesting that any spillover benefits frommanufacturing are greater in the non-agricultural than in the agricultural sector.
So these registered manufacturing shares are capturing something about the nature of thechange that occurred. The question is what. We interpret these findings in the following
way. It is reasonable to suppose that an anti-business attitude on the part of top politicalleaders entails a disproportionate “tax” on formally registered entities. That is because thesefirms’ operations are intensive in transactions with the government (paying taxes, complying
with regulations, seeking licenses, etc.) When political attitudes become more pro-business,
it is formal firms that should receive a particularly strong boost. That is exactly how we readthe results with respect to the registered manufacturing.
We also show evidence that the labor regulation data recently compiled by Besley andBurgess (2002) has some traction for the turnaround in the 1980s. We interpret this index asa measure of how pro-labor (and anti-business) the environment in different states was. We
find that the nature of these regulations in different states plays a role in explaining
differential performance in the crucial decade of the 1980s (whether manufacturing sharesare controlled or not—see columns 5 and 6 of Table 11). This once again is consistent with
our hypothesis that what made the difference in the 1980s is a shift towards a more probusiness stance.
To sum up, the evidence points to an unleashing of the organized and incumbent private
sector sometime in the early 1980s. While it is impossible to pinpoint exactly the source for
this, there is circumstantial evidence that the trigger was a shift in the national government’s
attitude towards the private sector. This evidence also indicates that the beneficiary of thisattitudinal shift was the formal sector built up under the earlier policy regime. Hence tosome extent, the learning generated under the earlier policy regime and the modern
manufacturing base created thereby provided a permissive environment for eventual takeoff
once the policy stance softened vis-à-vis the private sector. So, unlike what one may haveotherwise expected (from accounts of how costly ISI was), growth occurred where the earlier
investments had been made. This is in contrast to the experience of the former socialist
economies where post-transition growth was greatest where the drag exerted by the previous
state sector was smallest.24
24

Sachs and Woo (1997) argue that this drag was important in explaining the differential
performance of China and the East European countries in the wake of liberalization.

19

IV. CONCLUDING REMARKS
We believe that our findings raise a number of issues related to growth and, in particular,
growth transitions. We would summarize them as follows.
India’s growth transition began in the early 1980s rather than after the crisis of 1991. The
performance of the 1980s cannot be explained by Keynesian pump priming because there is avariety of time-series and cross-section evidence pointing to trend improvements in
productivity indicators. Equally, this transition was not triggered by implementing theconventional litany of Washington Consensus reforms because the transition occurred a full
decade before such reforms were initiated. They appeared to have been triggered by aperception on the part of the private sector that the government’s attitude toward it hadchanged, a perception that was subsequently (in the mid-to-late 1980s), mildly validated bypiecemeal reforms of the industrial licensing system. The attitudinal shift signaled by theCongress governments in the 1980s elicited a large productivity response, a phenomenon
facilitated by the fact that India was far away from its income possibility frontier.
Manufacturing, and in particular registered manufacturing, which had been built up in theprevious decades, appears to have played an important role in determining which states took
advantage of the changed attitude of the private sector. Thus, while the contemporaneous
costs associated with these investments may have been high, they appear to have generated
some spillover benefits in the post-1980 period.
Most observers, focusing on the 1990s, and to some extent the 1980s have emphasized
gradualism as the hallmark of the Indian approach to reforms in contrast with the shock
therapy in some of the transition countries and the ambitious liberalization in Latin America
since the mid-1980s (Ahluwalia, 2002). Equally important but somewhat neglected has been
the approach to reforms adopted by India in the 1980s, where the distinctiveness has had
arguably less to do with pace than with the manner and sequencing.
We would stress that our characterization of the 1980s reform is not about whether“liberalization” took place but about how it happened. Some accounts of the 1980s point to
the easing of access to foreign technology, to foreign capital goods, and to foreign direct
investment (with the entry of Suzuki into the domestic car market as the most tellingexample) as examples of “liberalization.” To us, these reforms in the 1980s, were not proliberalization but pro-business in the important sense that they served to boost the profits ofexisting businesses without threatening them with real competition. Allowing a single foreign
firm, Suzuki, to enter the domestic car market under existing conditions of limited external
liberalization (and subject to local content requirements) is very different from opening thedomestic car market to all foreign producers, which is the normal liberalization strategy and20

the approach adopted in the 1990s.25 This pro-business rather than pro-market/procompetition orientation manifested itself in the greater focus on “internal” rather than“external” reforms. In addition, even the internal reforms which favored business wereslanted more toward favoring pre-existing activities rather than facilitating new businesses(i.e., through entry by domestic firms).26 This approach had the political economy merit of
avoiding the creation of losers. And it appears that the economic impact of favoring existing
activities, which must have entailed some inefficiency, was not only not negative but actually
positive. This is reflected in the fact that the growth of the 1990s also appears to have takenplace in states with a large initial share of registered manufacturing, some of it built up
during the 1980s. Thus, India’s “reforms” in the 1980s, which essentially amounted to more
import substitution, were attractive from a political economy perspective because theycreated virtually no losers. This is reminiscent of China’s reforms as well, although the latterobviously took on a very different form.
But as in China, economic dynamism created a fertile environment not just for incumbents,
but also for entrants and new activities. It is perhaps not a coincidence that some of the IT
powerhouses that would begin to fuel India’s growth a decade or so later got established in
the early 1980s, just as the economic environment was turning more business-friendly. For
example, Wipro first ventured into IT in 1980, and Infosys was founded in 1981. Thesefirms eventually were able to reap handsome benefits from India’s prior public investments
in higher education (the IITs in particular) once the policy environment turned permissive.
Their story is in many ways similar to the one we have laid out for the more traditional
activities during the 1980s: pre-existing strengths unleashed by more pro-business policy
attitudes.
What about the reforms of the 1990s? It may well be the case that the performance of the
1980s would have run out of steam and that the “true” reforms of the 1990s were essential to25

Guaranteed profits were arguably why Suzuki accepted the onerous conditions--jointventure with the public sector, requirement to fulfill local content requirements—associatedwith its entry.
26

The four major internal liberalization measures that were implemented in 1985 and 1986
involved: (i) Eliminating the licensing of 25 categories of industries subject to certain fairly
onerous conditions; (ii) extending delicensing to large companies in 22 industries which werepreviously restricted by the Monopolies and Trade Restrictive Practices Act (MRTP) andForeign Exchange Regulation Act (FERA); (iii) allowing companies in 28 industries toexpand the scope of their operations into related activities; and (iv) allowing companies that
had reached 80 percent capacity utilization to expand their capacity upto 133 percent of thatreached in any of the previous years. Apart from the first, all the remaining measuresessentially allowed incumbents to operate more freely rather than facilitate the entry of newdomestic firms and promote competition. Even the limited reduction in protection of capital
goods industries served to increase the effective protection of incumbents in final goods
industries.

21

keep the productivity growth alive. The reforms of the 1990s were, of course, triggered by
the crisis of 1991. The quick rebound from the crisis has been almost entirely attributed tothe decisive break from the dirigiste past. But if the 1980s experience was as successful as
we think it might have been in creating a strong base of manufacturing and productivity
growth, it is hard not to draw the conclusion that the quick rebound was also rendered
possible by the strength of the 1980s performance.27 In some ways, although India wasreforming in response to a macroeconomic crisis, it was reforming from a position ofstrength in the real sector of the economy. That might explain why the response to thereforms in India in the 1990s was so different from that in Latin America (or in sub-SaharanAfrica).
Finally, one consequence of the conventional story that we sketched out at the beginning—that the 1990s marked the watershed for India—has been the unfortunate neglect of researchon policies and performance in the 1980s. We hope that this paper will kindle researchinterest in a number of very interesting issues relating to the 1980s, which could be importantin deriving broader lessons for growth transitions across the world.

27

This is supported by cross-industry studies, which show that the positive impact ofliberalization on productivity in the 1990s is small in magnitude (Topalova 2004).

2000

1999

1998

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1961

1960

22

Chart 1. Economic Performance in India 1960-2000(log scale, 1960=1)

2.5
GDP/capita

GDP/worker

TFP

2

1.5

1

0.5

23

5.5

Chart 2: Real Per Capita Net State Domestic Product, 1960-2000(at 1993-94 prices)

DL

3.5

lnpcgdp2
4
4.5

5

DL
DL

PJ
HY

PJ
HY

GJ
NG
TN
HP
AP
KL
RJ
KK
JK
WB
AS
MN
TP
UP
MP
OR

DL
DL

TN
GJ
PJ
JK
KL
HY
WB
RJ
AS
KK
AP
MP
UP
TP
MN

PJ
HY
GJ
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KL
HP
TN
RJ
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WB
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OR
UP
MP
MN
TP

GJ
JK
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HP
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TN
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WB
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AP
MN
RJ
OR
TP
UP
MP

3

BH

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60

BH

70

PJ
MP
HY
GJ
TN
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HP
KL
AP
WB
TP
MN
RJ
JK
AS
UP
MP
OR

BH

BH

80
period

90

100

24

Chart 3. India's External Terms of Trade, 1960-2000
180
160
140
120
100
80
60
40
20
0
1960

1963

1966

1969

1972

1975

1978

1981

1984

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1999

25

Chart 4. India: Customs Duties Collections and Anti-Export Bias, 1974-2001
4

50
45

duties as % of GDP, right scaleduties as % of imports, left scale

3.5

3

35
30

2.5

25

anti-export bias inpercent, left scale

2

20
15

19 74 A1

19 76 A1

19 78 A1

19 8 0 A1

19 8 2 A1

19 8 4 A1

19 8 6 A1

19 8 8 A1

19 9 0 A1

19 9 2 A1

19 9 4 A1

19 9 6 A1

19 9 8 A1

Source: Duties (WB, World Development Indicators); Imports (IMF, World Economic Outlook), Export subsidies (Joshi and Little)

2 0 0 0 A1

1.5

% of GDP

percent

40

26

Chart 5. India: Evolution in Merchandise Trade, 1960-2000

4.5

25%
23%

4

21%

3.5

volume of non-oil imports,
left scale

Log scale

3

19%
17%

volume of exports, left
scale

2.5

15%

2
13%
1.5

11%
" openness ratio" (exports plus

1

9%

imports/GDP, right scale

Source: IMF’s World Economic Outlook.

19
99

19
97

19
95

19
93

19
91

19
89

19
87

19
85

19
83

19
81

19
79

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77

19
75

19
73

19
71

5%
19
69

0
19
67

7%

19
65

0.5

27

Chart 6. India: Real Effective Exchange Rate, 1968-2000
5.4
with export subsidy

Log scale

5.2
5.0
without export subsidy

4.8
4.6
4.4

Source: IMF’s Information Notice System.

20
00

19
98

19
96

19
94

19
92

19
90

19
88

19
86

19
84

19
82

19
80

19
78

19
76

19
74

19
72

19
70

19
68

4.2

28

Chart 7. India: Agriculture's Terms of Trade, 1960-2001
140
120

ratio of agriculture and industry
GDP price deflators

100
80
60

ratio of agriculture and manufacturing
GDP price deflators

40
20

19
60
A
1
19
62
A
1
19
64
A
1
19
66
A
1
19
68
A
1
19
70
A
1
19
72
A
1
19
74
A
1
19
76
A
1
19
78
A
1
19
80
A
1
19
82
A
1
19
84
A
1
19
86
A
1
19
88
A
1
19
90
A
1
19
92
A
1
19
94
A
1
19
96
A
1
19
98
A
1
20
00
A
1

0

Source: World Bank’s World Development Indicators.

19
70
19 71
71
-7
19 2
72
19 73
73
19 74
74
19 75
75
-7
19 6
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19 77
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-7
19 8
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-8
19 1
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-8
19 4
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-8
19 6
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-8
19 8
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19 89
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-9
19 0
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19 91
91
-9
19 2
92
19 93
93
19 94
94
19 95
95
19 96
96
19 97
97
-9
19 8
98
19 99
99
-0
20 0
00
-0
1

29

Chart 8. India: Investment rates, by sector (% of GDP)

0.14

0.12

Household Sector

Private Corporate Sector

Public Sector

0.1

0.08

0.06

0.04

0.02

0

Source: Reserve Bank of India.

30

.03

Figure 9: Correlation between Growth and Share of Registered Manufacturing, 1970s and 1980s
MN
PJ

.02

TP

DL

HY

.01

JK
HP
BH

AS

AP
MP UP

WB

GJ

KK
KL

TN

-.02

-.01

0

OR

RJ

0

.05

regmanshare70.15

Fitted values.05

pcgdp210gr

.1

.04

RJ
AP

TN

HY

.03

PJ
DL
HP
BH

UP
MP
WB

KL AS

.01

.02

TP
MN

GJ

KK

OR

0

JK

0

.05

.1
regmanshare80

pcgdp210gr.15

Fitted values

.2

31

Table 1. India: Aggregated and Sectoral Growth Accounting(annual average growth rates, unless otherwise specified)
1960-70
Bosworth-Collins (B-C)
OutputOutput per worker (Q/L)
Capital per worker
Education
Total factor productivity (TFP)
IMF
OutputOutput per worker
Total factor productivity 1/
Total factor productivity 2/

1970-80

1980-90

1990-99

3.84
1.87
0.83
0.29
0.74

2.98
0.69
0.61
0.58
-0.50

5.85
3.90
1.06
0.32
2.49

5.59
3.27
1.32
0.34
1.57

3.75
1.77
1.17
-0.94

3.16
0.86
0.47
-2.07

5.64
3.69
2.89
1.28

5.61
3.30
2.44
0.94

0.13
2.00
2.12
3.14

2.57
6.30
6.32
5.30

1.29
6.00
6.57
6.69

Growth rate of Aggregate Q/L with base-period employment shares as weights
Aggregate (Bosworth-Collins)
0.69
Aggregate (IMF)
0.86

3.66
3.49

3.08
3.11

Contribution of labor-shifts to aggregate Q/L growth
Aggregate (Bosworth-Collins)
Aggregate (IMF)

0.24
0.20

0.19
0.19

Disaggregated growth of Q/L based on current employment shares
Agriculture 3/
1.20
Manufacturing 4/
Services (B-C) 5/
Services (IMF) 6/

n.a.
n.a.

1975
1985
1995
Employment Share 7/
Agriculture
70.8
64.4
60.8
Industry
12.4
15.2
15.8
Services
16.8
20.4
23.4
Sources: Bosworth and Collins (2003); Ghose (1999); and authors' estimates
1/ Based on labor force
2/ Based on average years of schooling in population above 15 years of age
3/ From World Bank's World Development Indicators
4/ For 1980s and 1990s, data from IMF Working paper; for 1970s, estimate based on Ahulwahlia (1995)
5/ Calculated as a residual by deducting weighted average sectoral productivity growth rates from B-C agg. Q/L growth rate
6/ Calculated as a residual by deducting weighted average sectoral productivity growth rates from IMF agg. Q/L growth rate
7/ Obtained from Ghose (1999). His number for 1977/78 is extrapolated backward to 1975 by applying trend between
1977/78 and 1983 and his number for 1993-94 is extrapolated forward to 1995 by applying the trend from 1987/88-1993-94.

32

Table 2. India: Unconditional State-Level Convergence

Period60s and 70s

Initial Income

0.006
1.15

70s and 80s
0.008
1.34

80s and 90s
0.011
2.04

1960s Convergence dummy

0.008
1.75
0.007
1.65
0.011
2.71
0.011
2.88

1970s Convergence dummy
1980s Convergence dummy
1990s Convergence dummy

R-squareNo. of observationss

60s, 70s, 80s, and 90s

0.04
38

0.04
41

0.09
42

0.38
80

33

Table 3. India in the Cross-Section: Mean and Volatility of Growth Rate of Output per Worker, 1960-2000 1/
60-70

70-80

80-90

90-00

60-80

80-00

Industrial Countries
Mean
Standard Deviation
Coefficient of Variation

4.12
2.26
0.55

2.12
2.61
1.23

1.54
1.98
1.29

1.47
2.06
1.41

3.12
2.71
0.87

1.51
2.08
1.38

2.34
2.63
1.13

East Asia (incl. China)
MeanStandard Deviation
Coefficient of Variation

4.19
3.99
0.95

4.11
2.80
0.68

4.15
3.24
0.78

3.98
3.91
0.98

4.15
3.69
0.89

4.07
3.74
0.92

4.11
3.98
0.97

China
Mean
Standard Deviation
Coefficient of Variation

1.66
12.45
7.50

2.82
3.40
1.20

6.86
3.59
0.52

8.85
2.37
0.27

2.24
8.90
3.97

7.85
3.13
0.40

5.05
7.17
1.42

Latin America
MeanStandard Deviation
Coefficient of Variation

2.38
3.47
1.46

1.69
4.00
2.36

(1.65)
4.40(2.66)

0.83
3.03
3.66

2.03
4.07
2.00

(0.48)
4.17(8.70)

0.81
4.43
5.47

India
Mean
Standard Deviation
Coefficient of Variation

1.91
3.24
1.69

0.77
4.16
5.40

3.91
1.87
0.48

3.22
2.05
0.64

1.34
3.68
2.74

3.57
1.94
0.54

2.45
3.11
1.27

AfricaMeanStandard Deviation
Coefficient of Variation

1.87
5.41
2.90

0.69
5.25
7.56

(0.47)
4.48(9.53)(0.03)
4.48(170.29)

1.28
5.54
4.33

(0.26)
4.89(18.85)

0.53
5.55
10.47

1.81
3.42
1.89

1.19
2.77
2.33

4.04
6.55
1.62

1.51
3.21
2.12

2.81
5.44
1.94

Middle East 2/
Mean
4.61
3.47
Standard Deviation
5.83
6.64
Coefficient of Variation
1.26
1.91
Source: Bosworth and Collins (2003) and authors' calculations.
1/ All regional aggregates are unweighted averages.
2/ Excludes Jordan.

60-00

34

Table 4. India's Growth in Comparative Perspective
Dependent variable
PeriodInitial income
Life expectancy
Terms of trade
Instability in terms of trade
Budget balance
Inflation
Openness
Geography
Institutions
India dummy

Labor productivity
1960-80 1980-99
-7.24
-7.25
0.06
2.84
0.13
2.13
-0.12
-3.23
0.05
0.79
-0.01
-0.44
0.53
1.83
0.34
2.08
2.94
2.07
-1.72
-5.35

Total factor productivity
1960-80
1980-99

-5.92
-5.28
0.04
1.27
-0.01
-0.12
0.00
0.04
0.03
0.56
-0.01
-2.53
2.03
2.72
0.33
1.11
5.19
2.94
2.99
4.74

R-square0.65
0.61
No. of observations
73
73
For description of variables, see Bosworth and Collins (2003).

-3.28
-4.76
0.05
2.56
0.11
2.13
-0.08
-2.38
0.02
0.36
0.01
0.60
0.12
0.33
0.03
0.15
0.93
0.70
-0.71
-2.08

-3.60
-4.59
0.03
1.22
-0.13
-1.67
-0.01
-0.48
0.01
0.38
-0.01
-2.29
0.82
1.59
0.20
0.98
4.41
3.33
2.11
4.63

0.36
73

0.57
73

35

Table 5. Contributions to Growth: India in the Cross-Section, 1960-1999

OutputOutput per
Region/Period
WorkerIndustrial Countries
1960-80
4.42
3.05
1980-99
2.68
1.60
1960-99
3.57
2.34
East Asia (incl. China)
1960-80
5.64
2.98
1980-99
8.03
6.02
1960-99
6.80
4.45
China
1960-80
4.04
1.83
1980-99
9.75
7.85
1960-99
6.78
4.72
Latin America
1960-80
6.10
2.90
1980-992.20-0.54
1960-99
4.18
1.21
India
1960-80
3.41
1.28
1980-99
5.73
3.60
1960-99
4.53
2.40
Africa1960-80
4.36
1.78
1980-992.02-0.70
1960-99
3.21
0.57
Middle East
1960-80
5.71
3.14
1980-99
3.68
0.85
1960-99
4.71
2.02
Source: Bosworth and Collins (2003)

Contribution of:in percentage points
in % of total
Physical
Factor
FactorPhysicalCapital Education Productivity Productivity
Capital
1.22
0.78
1.01

1.61
0.98
1.30

1.30
0.64
0.98

43%
40%
42%

40%
49%
43%

1.45
2.44
1.93

1.93
2.85
2.38

0.96
3.25
2.07

32%
54%
46%

49%
41%
43%

0.76
2.63
1.66

0.43
0.36
0.39

0.64
4.71
2.60

35%
60%
55%

41%
33%
35%

1.08
0.09
0.60

1.42
0.48
0.96

1.45
-1.02
0.24

50%
189%
20%

37%
-17%
49%

0.72
1.18
0.95

0.43
0.33
0.38

0.12
2.05
1.06

9%
57%
44%

56%
33%
39%

1.06
-0.12
0.48

1.21
0.25
0.74

0.66
-0.93
-0.12

37%
134%
-21%

59%
18%
85%

2.74
0.20
1.50

3.25
0.81
2.06

0.28
-0.08
0.11

9%
-9%
5%

87%
23%
74%

36

Table 6. India. Measures of Trade Protection, 1980-2000(in percent)1980-85

1986-90

1991-95

1996-00

All Industries
Average effective rate of protection
Import coverage ratio
Import penetration rate

115.1
97.6
10.0

125.9
91.6
11.0

80.2
38.0
12.0

40.4
24.8
16.0

Intermediate Goods
Average effective rate of protection
Import coverage ratio
Import penetration rate

147.0
98.3
11.0

149.2
98.3
13.0

87.6
41.8
15.0

40.1
27.6
18.0

Capital Goods
Average effective rate of protection
Import coverage ratio
Import penetration rate

62.8
95.1
12.0

78.5
77.2
12.0

54.2
20.5
12.0

33.3
8.2
19.0

101.5
98.7
4.0

111.6
87.9
4.0

80.6
45.7
4.0

48.3
33.4
10.0

Consumer goods
Average effective rate of protection
Import coverage ratio
Import penetration rate
Source: Das (2003)

37

Table 7. Gravity Model Results of Trade Outcome for India and China
1980

1995

2000

-0.39
-0.49
-0.82
-0.68
0.13
0.13
0.15
0.12
China
0.52
0.39
0.39
-0.30
0.15
0.12
0.14
0.13
Standard errors below coefficients. Coefficient estimates for the
standard covariates not reported.
Source: Based on data in Subramanian and Wei (2003).

0.04
0.10
0.71
0.12

India

1985

1990

38

Table 8A. India: Growth of Public Investment Ratio

TFP
growth1961-70
1971-80
1981-90
1991-2000

0.7%
-0.5%
2.5%
1.6%

Rate of Growth of G/YContemperaneous
Lagged 5-years
Infrastruct
Total
Infrastruct
Total
ure
Publicure
Public
3.2%
3.9%
-1.0%

-1.5%
5.1%
0.9%
-3.7%

-0.5%
1.3%

-5.7%
8.6%
-2.2%

Table 8B. Estimates of Contribution of Public Capital to TFP Growth, 1960-2000
Contribution of Public Capital to TFP GrowthContemporaneous
Lagged 5-years
TFP growth Infr. 1/
Bosworth-

Total Pub. 2/alpha=.25

Infr. 1/

Total Pub. 2/alpha=.15

Infr. 1/

Total Pub. 2/alpha=.25

Infr. 1/

Total Pub. 2/alpha=.15

Collins

1961-70
0.7%
1.1%
-0.5%
0.6%
-0.3%
1971-80
-0.5%
1.3%
1.7%
0.7%
0.9%
-0.2%
-1.9%
-0.1%
1981-90
2.5% -0.3%
0.3%
-0.2%
0.2%
0.4%
2.9%
0.2%
1991-2000
1.6%
-1.2%
-0.7%
-0.7%
Sources: Authors' calculations. Infrastructure spending data are from (Joshi and Little, 1994, Table 13.7)
Data on total public investment are from Joshi and Little (1994) for 1961-70 and WEO for 1971-2000
1/ Government spending on infrastructure
2/ Total public spending

-1.0%
1.5%
-0.4%

39

Table 9: India: Attitudinal Shift 1/

Initial income

Growth rate of per
Growth rate ofcapita domestic
reg. manuf.
product
0.011
0.009

State party allied with Centre 60

0.000

0.029

0.01

1.51

1.40

State party allied with Centre 70-0.0060.015-0.002

-0.85

0.57

-0.08

State party allied with Centre 80

0.021

0.097

0.058

2.68

3.07

2.09

State party allied with Centre 90

0.027

0.004

-0.035

Dependent variable

2.53

Difference in growth
between reg. andunreg. manuf.

1.92

2.48

Initial level of registered manufacturing
Party*share of registered manufacturing 60-0.077

Party*share of registered manufacturing 70-0.151

Party*share of registered manufacturing 80

0.266

Party*share of registered manufacturing 90

0.241

0.027

0.10

-1.17

-0.005-0.008

-1.28

-1.98

-0.94
-1.73
2.48
3.04

R square
0.41
0.40
0.23
No. of observations
58
58
59
Sources: Unless otherwise specified, data are from the Economic and Political Weekly Research Foundation.
Data on political parties compiled from xxxx. T-statistics reported below coefficient estimate.
1/ Suffixes indicate that the underlying variable has been interacted with the appropriate decadal dummy.

0.29
59

40

PeriodGeography

Table 10. How Far Below is India from Its Steady State Level of Income?
1980
1999
1980
1999
1980
1999

1980

1999
0.03

0.04

-0.07

0.03

-0.01

0.02

0.00

0.01

5.19

-1.51

2.74

-0.93

1.72

0.21

1.23

4.55

Openness

0.27

-0.89

0.43

-0.54

-0.10

-0.54

-0.04

0.01

1.07

-1.18

0.66

-2.03

-0.28

-0.71

-0.17

0.03

Economic institutions

0.51

2.60

1.53

1.47

4.32

3.05

1.36

6.80

0.38

0.65

0.46

0.45

3.24

2.90

5.39

5.92

Political institutions

India dummy

-1.36

-1.40

-1.06

-1.33

-2.61

-2.34

-2.61

-1.69

-4.61

-2.36

-1.28

-4.92

-4.59

-3.27

-6.82

-5.95

Settler mortality EURFRAC, ENGFRAC
Settler mortality EURFRAC, ENGFRAC
Instrument for institutions
No. of observations
48
66
76
114
58
58
91
91
For description of geography and openness variables and the instruments for institutions, see Rodrik et. al. (2002)
For 1980, economic institutions measured as the protection against expropriation in 1982 from ICRGE.
For 1999, economic institutions measured as in Rodrik et. al. (2002).
Political institutions are measures as the constraint on the executive.
T-statistics reported below coefficient estimates

41

Table 11: Role of Manufacturing in Productivity Surge 1/(dependent variable is annual per capita growth of state net domestic product)
Initial income

0.010

0.008

0.009

0.007

0.019

0.007

2.64

1.84

2.27

1.54

3.86

1.27

70s dummy-0.003-0.002

-0.78

-0.30

80s dummy

0.014

0.007

3.85

1.14

90s dummy

0.013

0.005

2.61

0.51

Initial income 70-0.001

Initial income 80

0.002

Initial income90

0.001

-0.37
0.94
0.51

Share of registered manufacturing 60-0.046-0.079-0.050

-0.73

-1.70

-0.73

-0.030-0.45

Share of registered manufacturing 70-0.050-0.104-0.044-0.046

-0.94

-2.43

-0.81

-1.01

Share of registered manufacturing 80

0.076

0.119

0.080

0.170

1.79

3.37

1.78

3.76

Share of registered manufacturing 90

0.100

0.113

0.096

0.157

1.44

2.64

1.31

2.81

Labor regulation 60

0.004
0.73

-0.23

Labor regulation 70

0.012

0.008

2.14

1.45

Labor regulation 80-0.008-0.008

-2.21

-3.56

Labor regulation 90

0.000

0.000

0.05

R square
0.38
0.42
0.40
0.42
0.34
No. of observations
80
78
78
78
59
Sources: Unless otherwise specified, data are from the Economic and Political Weekly Research Foundation.
Data on labor regulation from Besley and Burgess (2002). T-statistics reported below coefficient estimate.
1/ Suffixes indicate that the underlying variable has been interacted with the appropriate decadal dummy.

-0.001

0.11

0.55
59

42

Table 12: Role of Manufacturing in Productivity Surge: Robustness Checks 1/
Dependent variable
Initial income

0.012
2.39

per capita growth
0.009
0.011
2.22

2.43

0.010
2.13

70s dummy

0.005
0.59

0.39

80s dummy

0.020

0.016

2.06

2.22

90s dummy

0.044

0.014

3.26

1.03

per capita non-agri. Growth-0.003-0.003
0.018
-0.21

-0.19

1.50

0.003

Initial income 70-0.003

Initial income 80

0.002

Initial income90-0.001

-0.78
0.55
-0.24

Share of registered manufacturing 60-0.096-0.122

-0.75

-0.70

-0.06

Share of registered manufacturing 70-0.157-0.032-0.124

-1.31

-0.20

-0.99

Share of registered manufacturing 80

0.301

0.194

0.294

3.40

2.18

3.01

Share of registered manufacturing 90

0.150

0.180

0.128

1.28

1.01

0.80

Share of agriculture 60-0.008-0.62

1.14

Share of agriculture 70-0.016

0.006

-1.12

0.54

Share of agriculture 80

0.019

0.010

1.27

0.58

Share of agriculture 90

0.013-0.061

0.81

-2.06

Share of infrastructure 60 2/-0.0100.020-0.332

0.083

-1.44

0.27

Share of infrastructure 70 2/-0.518-0.244

-2.26

-0.97

Share of infrastructure 80 2/

0.288

0.110

1.75

0.73

Share of infrastructure 90 2/

0.193

0.106

1.23

0.35

Labor regulation 60-0.006

Labor regulation 70

0.020

Labor regulation 80-0.015

Labor regulation 90-0.001

-0.29
1.70
-2.65
-0.07

R square
0.33
0.43
0.45
0.48
0.19
0.21
No. of observations
80
80
63
63
77
77
Sources: Except as otherwise specified, all data are from the Economic and Political Weekly Research Foundation.
Data on labor regulation from Besley and Burgess (2002). T-statistics reported below coefficient estimate.
1/ Suffixes indicate that the underlying variable has been interacted with the appropriate decadal dummy.
2/ Infrastructure includes railways, electricity, gas and water supply, and communication.

0.37
59

43

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