Good Research Paper On Economic Growth In India
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The economic growth of a country is extremely crucial for its overall development. Most countries often gear their policies to achieve this target with the hope that such growth would bring their citizens out of poverty. However, growth need not necessarily be the sole objective of economic policy since economic growth can be lopsided and uneven, thus depriving large sections of the population of the benefits of growth. Therefore, most economic policy makers also take into account factors such as income distribution and poverty. However, there are varied debates over the method of measuring poverty as well since every country has their own method of measuring poverty. Also, poverty being subjective can make it a very difficult factor for both economists as well policy makers to define and quantify.
This paper will consider some of these questions with regard to India. In doing so, the paper would primarily examine the manner in which growth is measured by Indian economists (GDP), as well as examining if the country has been able to meet its economic goals. Here, it would be apt to draw a brief comparison with other developing countries in the BRIC space. The paper would also examine the issues of poverty and income distribution in India and would also examine the effects of political reform on growth and development in the country. Lastly, the paper would examine the effects of wars (including internal strife) on economic growth.
GDP Growth and Comparison
It was only about thirty years ago that India was an economically weak country that had a closed economy that made it extremely difficult for foreign investors to enter and conduct business. However, all that changed with the liberalization that took place from 1991 onward. This wave of economic liberalization boosted investments, created employment, removed hundreds of thousands of people from poverty and boosted economic growth as well as development in India.
In India, the economic growth and development is measured in terms of GDP. However, the measurement of GDP in India has undergone a change very recently. The first change was the base year (revised from 2005 to 2012) and the second change was a more market-price based calculation using comprehensive data on corporate activity and newer surveys of spending by households and informal businesses. (Zhong & Kala 2015) As per previous calculations, therefore, the growth stood at 4.7% as compared to the 6.9% growth that was clocked as of March 2014.
Growth and development in a country is best understood when one compares it to peers. This paper would choose to perform a comparison within the BRIC peers rather than with other countries in the region. If one refers to Appendix 1, one can see the growth patterns of other countries in the peer group. The only nearly comparable country to India in terms of growth is its neighbor China. In terms of projections, China’s GDP growth for the next quarter is projected to be lower than that of India. (Trading Economics 2015) Based on the revised GDP calculations, the IMF projections show that growth would strengthen to 7.2 percent in 2014-15 and rise to about 7.5 percent in 2015-16, driven by significantly stronger investments and related improvements to the business climate. The other reason for this optimism is the new government’s absolute majority to rule and that the government is reform oriented as against the previous regime. The government further aims at strengthening growth in India by expansion of the manufacturing sector since growth in India has been traditionally driven by the service sector.
Clearly, one can see that India is overachieving goals, but one needs to see if this is short lived or whether it will be a sustained phenomena. As per the statement by Paul Cashin, IMF Chief for India, “The revised growth figures support our view that economic recovery in India is under way, albeit pointing to a somewhat faster pace than we, and others, previously believed.” (IMF Survey Magazine 2015) The IMF and most other peer observers, therefore, have seen a growth pattern in India that is clearly indicative of the country continuing to outperform most peer markets on the back of a strong domestic demand and boosted, in part, by strong services and manufacturing sector. While the IMF is of the view is that certain downside risks remain, the staff report of the IMF clearly puts India in the clear as far as risk of external vulnerabilities are concerned. (IMF, 2015, p. 21) This clearly shows that India is on the path to exceeding its targeted development goals if it continues on a similar growth trajectory.
Economic Theory and India’s Growth Rate
Many economists have tried applying economic theory to evaluate India’s growth and development rate over the last few years. Joseph Schumpeter’s theory revolves around commercial-technological innovations and their central role as the key impetus behind economic growth in capitalist economies. Schumpeter further proposes that competition among market participants leads to a desire to seek out new ways to improve technology, new ways to do business and other types of advantages that would increase profit margins and directly impact the entrepreneur's standard of living.
Madsen and others (2008) evaluated this problem using Schumpeterian Growth Theory by evaluating data for the last fifty years. In case of this study, the estimation results provide evidence of strong international spillover effects to the Indian economy. Firstly, the aggregate estimates point to considerable research intensity spillovers through the channel of imports. (p. 19) Secondly, growth is positively affected by India’s distance to the technology frontier, enabling the country to enjoy the advantage of technological backwardness. Lastly, India’s growth is significantly affected by the interaction between research intensity and the distance to the frontier, which provides further evidence in favor of the Schumpeterian growth. Thus, the higher the research concentration, opportunities for an economy to take advantage of the technology that is developed elsewhere get severely enhanced. (p. 20) Therefore, one can understand the importance of technology in the Indian growth story combined with the increasing transfer of patented research through the import mode that has been liberalized by the government in recent times. The study and the analysis, therefore, further lend credence to the financial liberalization processes initiated by governments in India since 1991.
Most importantly, the theory shows that India would continue to enjoy the fruits of liberalization if it keeps its innovative intensity at the present level or higher. In terms of forecasting, the growth rate would most likely be higher in the medium term because India will continue to enjoy its advantage of backwardness. In the process, it would be able to imitate and improve on the technology that has been developed in the frontier countries. However, with the passage of time this advantage might recede as India approaches the technology frontier, which will certainly take a long time. (Madsen et.al, 2008. p. 20)
Income Distribution in India
The skewed income distribution in India has been the bone of contention in India since the country became independent. Preetam Kaushik (2014) quotes Thomas Piketty who believes that while economic development and growth are inherently positive attributes, the same can lead to extreme income inequality within populations. As per the article, Piketty agrees that there are major problems with income measurement in India. The biggest problem of all is that India's income tax administration has nearly stopped collecting detailed income tax data. This was not always the case since detailed yearly reports called All-India Income Tax Statistics are available from 1922 to 2000. (Kaushik, 2014) This, in itself, causes an utterly opaque administration that is highly problematic since self-reported survey data on consumption and income is not satisfactory for the top part of the distribution and income tax data is a key additional source of information on every country. (Kaushik 2014) Further, as per Piketty, in India the top 1% owns nearly 8-9% of the national income – much lesser than that in the US. However, these statistics do not include those with inherited wealth. Therefore, one can understand that for any income distribution measurement to be successful the underlying data must be accurate. However, in the Indian context, the lack of recent data has made it very difficult to gauge the extent of income equality.
Further, the presence of a pro-business government and inflation will ensure that the rich and select Indian middle class will get richer, but nothing much will happen to the state of the poor. In a situation like this, the obvious effect will be that the rift between the economic classes will only widen with time until the entire economic power is concentrated in the hands of the few leading to a situation similar to the US. The result of such a skewed economic ratio is that poverty will ultimately end up increasing since the present government may be focused on the growth aspect of the economy.
If one examines the relationship between economic growth and income distribution one sees that the relationship across time periods have been unchanging. The Gini coefficient for the time periods between 1970 and 2010 has been relatively flat and fluctuating between 28 and 37. The reasons for this problem range from poor collection of data after the year 2000 to underreporting of income amongst the richer classes due to the practice of self reporting. One can surmise that the true nature of income inequality along time periods can only come to the fore once the government starts proper collection of data on the income tax side.
The true measure of income distribution and, consequently, that of poverty would be apparent only when one compares a country to comparable counterparts. A Gini coefficient measures the extent to which the distribution of household incomes in an economy deviate from a perfectly normal distribution. Therefore, a Gini coefficient close to zero denotes perfectly equal income distribution, while a coefficient close to hundred denotes a perfectly skewed income distribution. As done previously, we would compare India to other countries in the BRIC group. If one refers to Appendix 2, one can understand the income distribution patterns. A note of caution is that most countries in the group do not necessarily have accurate data collection or data reporting as per the respective government policy. This table indicates that the income distribution scenario is worst in Russia, while China and Brazil are quite similar in their income distribution pattern. The data set shows that India has an income distribution that is much better than its BRIC counterparts.
Poverty Measurements in India
The Planning Commission has been responsible for the measurement of poverty and income distribution in India as well as proposing necessary remedial measures to the government for possible execution. As per the new method of measurement, the Commission has revised the basic food requirements that a person needs to sustain oneself based on their occupation, age and other factors. In addition, the commission has proposed a non-food basket that would also be used to compute the poverty line. The data has been separately constituted for both urban and rural areas. (GoI PC, 2014, p. 60) As per these data sets, the government has computed the official poverty line at 816 rupees per person per month in rural areas and 1,000 rupees per person per month for urban areas. This works out to about 40 cents a day in the countryside and 50 cents a day in the city. (Fairclough, 2014)
However, critics of this technique of calculation argue that this methodology is dated and inaccurate. As per Fairclough (2014), India continues to rank extremely low in United Nations’ measures of well-being. India ranked 136 out of 186 countries in the 2012 U.N. Human Development Index and 94 out 119 in the U.N. World Food Programme’s Global Hunger Index. To raise the standard of living, the government must focus on bringing food, energy, housing, drinking water, sanitation, healthcare, schooling and social security under the ambit of basic needs. If one employs this method of calculation, one arrives at approximately 1336 per month, which McKinsey calls the empowerment line. The McKinsey empowerment line the level at which India’s citizens can supposedly get out of poverty and have the resources to build better lives for themselves, rather than scrape along at subsistence levels. (Fairclough, 2014) This new system of calculation is more comprehensive and can be applied across the world. However, most governments would prefer to deal with poverty only in terms of the three basic needs, namely food, clothing and shelter. Due to this very reason, the empowerment index may not see the light of the day in many countries, including India.
Political Reform and Economic Growth
Politics in India have been both a catalyst as well as a roadblock in India’s economic development history. In India, the political leaning of the government determines the policy making and economic reform initiative undertaken by that government. It would be apt at this point to capture the fact that China had an authoritarian government and yet surged far ahead of India which had a democratic system. For the last thirty years, China has consistently outperformed India, but the scenario is now changing. The very political system that was once a stumbling block for India has now been galvanized by the entry of a pro-reform nationalist government onto the political scene.
The political powers that liberalized the Indian economy in 1991 ensured that the economy would focus more on the services sector. As a result, India managed to build an impressive service oriented economy that has also been able to fare well in overseas markets as well. However, due to lack of political will, certain key reforms such as labor, economic reforms and social programs have been relegated to the back burner by the previous left leaning Congress government. This had led to an almost docile rate of growth in India compared to China that galloped through most of the last decade.
However, the left leaning Congress party was kicked out by the electorate in May 2014. This paved the way for the pro-reform BJP government, which immediately initiated the ‘Make in India’ campaign that aimed at converting India into a manufacturing powerhouse for better quality goods compared to China, but at competitive prices. (Schuman, 2015) In addition, the new government liberalized the insurance sector, changed crucial points in the land acquisition bill and streamlined the process for obtaining government approvals for developmental and manufacturing projects.
On the political front, a disadvantage that China has compared to India is the age of its citizens. Due to the one-child policy, the average Chinese citizen is more likely to be past retirement age than a comparable Indian citizen who might not have even crossed the age of 35. (Schuman 2015) This ratio will ensure that the fruits of liberalization and recent reforms will reach the younger populations and will also make India a much better long term market for new technologies, luxury goods and other products. The other problem is that India’s growth has not come at the cost of environmental degradation, like China. Due to a democratic system, citizen groups have prevented forests and natural resources from being degraded, unlike China where the breakneck expansion created excessive waste and unbridled environmental degradation However, despite all these numbers, economists still feel that the vagaries of politics will prevent sustained political and economic reforms in India. Due to this, India will have a real problem of creating sustainable growth rates comparable to those of China. Most economists feel that India’s per capita income may be lower than China even by 2030, even if it grows at a sustainable rate of growth. (Schuman, 2015)
War and Economic Growth
Although, India has not had a major war since 1971, it has been fighting minor battles along its Western borders with Pakistan. South Asia is the second most violent place on earth after Iraq. Conflicts in Afghanistan and Pakistan have attracted global attention. Parts of India, Sri Lanka, and Nepal have experienced long-running conflict. Conflicts result in death, misery, social trauma, destruction of infrastructure, and have huge spillover economic and social effects. (Ghani & Iyer, 2010, p. 1)
Internal Conflicts are classified as those against the state, for instance, in the case of India, the violent Marxist movement is an example of such a conflict. The other classification of conflict is when it occurs between two non-state members such as members of a sect, religion or caste. In India, while conflicts between non-state members have decreased, those against the state have increased over a ten year period. Ghani and Iyer (2010) examined the relationship between conflicts and growth in per capita incomes. Their studies concluded that there is no causal relationship between the two factors in South Asia, especially since these conflicts were only confined to certain pockets of the country. Most of the regions in India are relatively peaceful and, therefore, one could not effectively see a strong relationship between conflict and economic growth in these regions. (p. 3) However, those pockets that were experiencing conflicts were more likely to remain poor since economic development and reforms would likely never reach there or would reach in a very protracted form.
However, their studies did find that conflicts were much more likely to happen in areas that had chronic poverty and unemployment. Further, their analysis highlighted the fact that there was a visibly higher incidence of conflict in poor and landlocked regions compared to the wealthier coastal regions of India. In addition, certain states in India are plagued with long standing conflicts for separation largely driven by terrorist groups that the state has been effectively able to combat thus far. In this part of the world, Iyer and Ghani (2010) conclude, conflicts have very little impact on economic growth and development. (p. 6)
In conclusion, one can understand that the recent changes in measuring GDP to market prices have greatly benefited Indian economists since the age old system may not have been an accurate reflection of the country’s growth potential, as compared to China. In the BRIC space, most economists concur that the medium term looks set for India’s growth given a demure Brazil and Russia and a subdued China. Also, given the fact that most of Europe and the US are looking at anywhere between 3% to negative growths, India would definitely tend to stand out in the crowd.
With regard to income distribution, one cannot accurately determine income inequality due to unavailability of relevant data at the government level since 2000. Thus, while instances of income inequality are existent and even glaring in some cases, one would not be able to determine the extent of this metric. The same can be said with regard to poverty since the Planning Commission’s method of calculation leaves a lot to be desired. The political will is the most important factor going ahead for the Indian economy and its sustained growth. An important factor would also be the manner in which the present government handles both internal conflicts as well as external attempts to destabilize peace. While one does not observe a causal relationship at present due to the localized nature of these conflicts, the government has a tough task at hand to ensure that these conflicts do not affect the momentum of the present economic growth in India.
Fairclough, G. (2014). A New way to measure poverty in India. Wall Street Journal Online. Retrieved from http://blogs.wsj.com/economics/2014/02/19/a-new-way-to-measure- poverty-in-india.
Ghani, E & Iyer, L. (2010). Conflict and Development—Lessons from South Asia. Economic Premise Journal. (31): 1 – 8.
Government of India Planning Commission. [GoI PC] (2014). Report of the expert group to review the methodology for measurement of poverty. New Delhi, India: Perspective Planning Division.
India GDP Annual Growth Rate. (2015). Trading Economics. Retrieved from http://www.tradingeconomics.com/india/gdp-growth-annual
International Moneraty Fund. [IMF] (2015). 2015 Article IV Consultation—Staff Report. Retrieved from http://www.imf.org/external/pubs/ft/scr/2015/cr1561.pdf
IMF Survey Magazine. (2015). India’s Economic Picture Brighter, but Investment, Structural Reforms Key. Retrieved from http://www.imf.org/external/pubs/ft/survey/so/2015/car031115a.htm
Kaushik, P. (2014). Income Inequality In India: A Ticking Bomb With A Short Fuse. Business Insider. Retrieved from http://www.businessinsider.in/Income-Inequality-In-India-A- Ticking-Bomb-With-A-ShortFuse/articleshow/35509796.cms
Madsen, J.B. et.al. (2008). The Indian Growth Miracle and Endogenous Growth. Department of Economics – Monash. Retrieved from http://www.buseco.monash.edu.au/eco/research/papers/2008/1708indianmadsensaxenaan g.pdf
Nayak, P.K. et.al. (2010). Inclusive Growth and its Regional Dimension. Mumbai, India: Reserve Bank of India Publications. Retrieved from http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2359#C5
Schuman, M. (2015). Enter India, Exit China. Bloomberg Business News. Retrieved from http://www.bloomberg.com/news/articles/2015-02-12/india-s-economy-surges-yet- politics-remain-obstacle
The World Bank. [WB] (2015). India – Data. Retrieved from http://data.worldbank.org/country/india
Zhong, R, & Kala, V.A. (2015). India Changes GDP Calculation Method. Wall Street Journal Online. Retrieved from http://www.wsj.com/articles/india-changes-gdp-calculation- method-1422622762
Appendix 1: Growth rates of the BRIC countries
(Source: Trading Economics, 2015)
Appendix 2: Gini Coefficient of the BRIC countries
Please remember that this paper is open-access and other students can use it too.
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