Productivity in manufacturing as a determinant of growth: The Indian case

India was probably the first developing country professing political democracy to launch an economic development program. It developed planning models suited to its economic landscape and political environment and for a while India was held as a model for other developing countries. Yet India’s secular growth rate has been modest at best. and disappointing at worst, when seen in relation to growth rates in some of the other developing countries which followed India. The GDP growth rate, which was around 3.5% during 19X&51 and 1983-84, rising to about 5.0% during 1985-92 fell short of that achieved by countries such as Korea, Taiwan, Brazil, Mexico, Malaysia, Yugoslavia and Thailand. In per capita terms, their rates of growth over the last two decades have been at least twice that of India and in some cases, even four or five times. In regard to income distribution, India’s performance may not have been worse than that of some of these countries, but certainly it was not better than that of Taiwan, Korea. or Yugoslavia. Considering that India set a specific goal of poverty alleviation through its planning process and devised a policy framework with that goal in view, this achievement should be deemed a distinct failure. There have been various explanations offered for India’s dismal economic performance despite the headstart it had over many other developing countries but three among them gained wide currency. They suggested that the Indian economic policy would engender change only marginally unless there was a more thorough overhaul of the political power structure and process. The first of these explanations advocated by the liberal economists stresses that economic efficiency has been eroded by the instruments chosen for investment allocation (Bhagwati and Desai, 1970; Bhagwati and Srinivasan, 1975; Bhagwati, 1987 and 198X). At the beginning of its planning process, India introduced a series of instruments, such as industrial licensing, for the purpose of investment allocation thought to be sensible on economic grounds. These instruments, were transformed, as time went on, into a straightjacket of regulations and restrictive practices stifling production efficiency and competition, thereby proliferating rent-seeking activities. Somewhat with the same intent, but with a different and wider perspective, Bardhan (1984) focuses on the political constraints on the efficiency of the public sector and agricultural and industrial investments. He traces these consctraints to the existence of a proprietary coalition of the industrial-capitalist class, white-collar bureaucrats and rich farmers, all of whom belong to the top two percentile of the population. There are continuing conflicts among these proprietary classes between urban industrial and professional classes and rural classes of rich farmers, between the professional class in the public sector and the other proprietary classes in industry and trade; and so on. The consequences of these conflicts are reflected in the deceleration of public investment and the rise in the capitaloutput ratio in the economy, both of which accounted for the slowdown of economic growth in India. The third explanation of a political economy nature attributes paralysis of economic policy formulation and execution to the innerworking of the political system, which makes economic policy punitive, at one extreme, but without any sanctions for enforcing it, and at the other, contains incentives but without any built-in mechanism to ensure reward for success (Khatkhate, 1977). While all these explanations for India’s faltering economic growth are relevant in varying degrees, only the Bhagwati-Desai-Srinivasan’s inference about India’s low growth could be empirically tested. The instruments used by the Indian policy makers were industrial licensing,