Comment on “Rapid Economic Growth: Contributing Factors and Challenges Ahead”1

Abstract

India's economic growth performance can be better understood relative to other economies, such as those in East Asia. Over the 1970–2005 period, the purchasing power parity-adjusted gross domestic product (GDP) data from the Penn-World Tables 6.2 show that the average per capita GDP growth rate for nine emerging East Asian economies2 was 4.6%, and that per capita real income increased fivefold. China's performance was most remarkable, with per capita GDP increasing 7.0% per annum and per capita real income rising nearly 12-fold. In contrast, the average per capita GDP growth rate for India was 3.1% over the same period, and its per capita real income only rising by a factor of three. However, India has shown remarkable growth acceleration in the last decade. The average per capita GDP growth rate for India was 4.9% over the 1995–2005 period, close to the long-term average growth rate for the nine East Asian economies. The successful performance of the Indian economy over the past 10 years is attributed to the same favorable growth factors that contributed to East Asia's success. The standard growth model – such as an extended version of the neoclassical growth model – predicts “conditional convergence” of income, implying that an economy with a lower initial income relative to its own long-run (or steady-state) potential level of income grows faster than a higher-income economy over time. The convergence model implies that economies with more favorable factors influencing the long-run level of per capita income would grow faster than those with less favorable factors, when controlling for the level of initial income. The literature identifies a number of important growth factors: (i) investment, (ii) fertility, (iii) human capital (schooling and health), (iv) institutions and policy variables (quality of institutions and price stability), (v) openness (trade and direct investment), and (vi) the external environment (terms-of-trade shocks). A comparison of these growth factors between India and the average of nine East Asian economies or China indicates that, by and large, India had less favorable conditions for rapid growth in 1970s – based on relatively lower levels of investment, human capital, quality of institutions, and openness. For instance, the average schooling for the Indian adult population was only 1.9 years compared to 4.0 years for East Asia (Barro & Lee, 2001). But the Indian economy, nonetheless, has significantly advanced its human capital, quality of institutions, and trade and foreign direct investment (FDI) openness over the past decades, which in turn contributed to the remarkable growth acceleration. While India's growth acceleration is broadly explained by the improvement in the growth factors, there must be additional factors that are more specific to India. Ahluwalia (2008) addresses several important factors, such as reform of trade and FDI policies, government support for information technology development, and the role of services. Nevertheless, the author needs further elaboration in defining unique features of India's development strategy, perhaps by providing more detailed empirical evidence or international comparisons. For instance, further discussion of how India differed from other economies in policy reform, the globalization process, and service sector development would be helpful. While Ahluwalia emphasizes the role played by changes in policies and institutions in accelerating India's economic growth, it is not clear how deep or broad India's market reform and trade liberalization were in the 1980s and 1990s, and how much they have contributed to improving the growth in productivity. The role of services can be further elaborated by using growth accounting-type analysis of the source of growth in the Indian service sector, compared with that in East Asian economies. In terms of challenges ahead, the author rightly points out four major challenges: (i) the lack of infrastructure, (ii) a scarcity of skilled labor, (iii) a lagging agricultural sector, and (iv) the difficulties of macroeconomic management. The lack of infrastructure investment is often emphasized as a major impediment to sustaining India's high growth rate. Discussions of the economic, political, and institutional factors that have hindered long-term infrastructure investment in the Indian economy would be of interest. One can assume that there are other important challenges. The current levels of institutional quality and openness for India are still lower than those in East Asian economies. In order to sustain high growth, India must accelerate its efforts at reform and trade and investment liberalization. In addition, India needs to stimulate investment for upgrading technology and human capital. According to data from the United Nations Educational, Scientific and Cultural Organization, the number of patents granted per millions over the 2000–2005 period was only 1 for India, compared with 16 for China, and 1113 for South Korea. The secondary school enrollment ratio in 2005 was 54% for India, far below the 75% in China and Vietnam.