Book Review by Dr. J.

Dennis Rajakumar, ICFAI Business School, Bangalore:

Book Reviewed: Nagaraj, R., Aspects of India’s Economic Growth and Reforms, New
Delhi: Academic Foundation, 2006.

The book under review is a compilation of the works done by the author at the
Mumbai-based Indira Gandhi Institute of Development Research (IGIDR) over a decade
or so, on the impact of economic reforms in India Statistics used and policy implications
drawn in these works make the volume particularly relevant to contemporary debates on
drivers of India’s economic growth and what can be done to take it forward.
Besides the introductory chapter, the volume is divided into three thematic
sections. the first, “Macroeconomic Performance”, has three articles , “Industrial
Growth” comprises of four papers, which discuss not only how industries in India have
grown over the years and their structural changes, but also problems associated with
industrial statistics. Part III “Some Aspects of Economic Policy” contains five papers. Of
these, two examine performance of public sector, one looks into capital and another one
on labor market related issues, and final one on FDI. Chapters are arranged in the
chronological order in which they were published and so the review is done chapter by
chapter.
Chapter One examines if India’s economic growth had taken an upturn in the
1980s, as opposed to the hitherto view of ‘Hindu rate of growth’ of 3.5 percent. Using
national income series (with base year 1980-81), it was found that the annual growth rate
during 1980-81 to 1987-88 was 4.9 percent. Since a significant trend break was observed
in 1979-80, it undermines the widely held proposition that Indian economy had constant
growth rate over four decades since the early 1950s. Industrial sector’s growth
accelerated at an unprecedented rate of 6.9 percent and similarly service sector grew at
6.3 percent in the 1980s. Though public spending increased since the late 1970s, overall
growth rate did not get altered even after deducting ‘administration and defense’ from
GDP. All these findings imply that the economy began to move into a higher growth
trajectory since 1980. In Chapter 2, the author examines further the upturn in the growth
rate and the effect of economic reforms ushered in 1991. The economy’s growth during
1991-92 to 1995-96 was 5.3 percent, which was lower than 5.9 percent recorded during
1985-86 to 1990-91. While the reform process did not affect public spending on health
and education, defense spending decelerated. The gross fixed capital formation (GFCF)
went down in public and household sectors; whereas that in private corporate sector
showed a rise. Under reform period, total corporate GFCF grew at about 18 percent,
whereas in registered manufacturing, its growth was in the order of 3 percent. Thus the
author asserts “.. contrary to a priori expectation, structural adjustment seems to have
propelled investment in non-traded goods sector” (p. 63). Financial sector reform had
facilitated corporate sector to raise capital without much policy hindrances. However,
according to the author, funds so raised were largely diverted to investment in real estate,
inter-corporate investment, mergers & acquisitions, or trading in existing capital stock.
As these assets could cause bubbles in the economy, the author says ”Such asset bubbles
certainly do not augur well for the economy’s real sector in the long run”. (p. 66).
Removal of anti-export policy bias would have brought more resources into tradable
goods sector, which should ideally give fillip to industrial sector. Contrary to such
expected outcome, industrial sector did not grow in the 1990s as much as they did in the
1980s, with growth of unregistered manufacturing sector declining sharply from 7.6
percent in 1986-91 to 5.7 percent in 1992-96. Though the ratio of public sector
expenditure to GDP had fallen during 1992-96, public sector’s contribution to the GDP
rose by about 1.3 percentage points to 24.8 percent in 1992-95; with increased
contribution from non-departmental enterprises.
In Chapter 3, the author synthesizes the existing wisdom on political implications
of a polarized society (that is, since 1991). It was found that the economy grew at about
5.7 percent throughout the 1980s and 1990s, with no significant trend break in the post
1991 period. In the 1990s, primary and tertiary (service) sector grew more or less at the
same rate of the 1980s; whereas, secondary sector witnessed a modest slow down in the
1990s. For this observed growth to be virtuous its benefits should have percolated down –
a phenomenon that economists often find difficult to capture. Given that poverty and
unemployment are chronic pitfalls of Indian economy, virtuous growth in this context
could be interpreted in terms of their reduction. Using head count ratio to capture the
incidence of poverty, it was found that the number of poor began to fall down way back
in 1973-74. The correlation between growth rate of per capita state incomes and change
in poverty in these respective states was negative but not statistically significant. Both at
the aggregate and state level, the virtuous relationship between growth and reduction in
poverty did not hold good. Further, employment elasticity of output was found declining
across major sectors over the years. There has been a rise in the casual wage employment.
The ratio of rural to urban per capita incomes had come down in 1993-94 and the ratio of
unorganized to organized domestic product also went down. In the corporate sector, share
of wage income had dwindled with a simultaneous rise in the share of profit income.
Thus, growth was not accompanied by any perceptible reduction in poverty or in
unemployment. In other words, the economically better off section in the society
benefited more under economic reforms. Given these evidences, the author concludes “If
such an iniquitous growth process is not corrected – and corrected quickly – Indian
society may have to pay a huge political price for it” (p. 106).
Chapter 4 was written at a time when there was a serious concern amongst both
the academia and the policy makers over industrial sector in India. The author used new
series of NAS with base year 1980-81 and found that the growth rate of registered
manufacturing was 7.6 percent during 1959-60 to 1965-66, which declined to 5.5 percent
during 1966-67 to 1979-80. However, this sector regained its growth momentum in the
1980s recording growth of 10.4 percent. But unregistered manufacturing sector grew only
at 5.3 percent. As unregistered sector had a share of about 2/5 of the total manufacturing
sector, its performance dragged the overall growth of manufacturing to 8.3 percent.
Contrary to the belief, Index of Industrial Production (IIP) did not result in the
overestimation of growth rate. In Chapter 5, the author explains the phenomenal growth
of manufacturing in the 1980s in terms of several hypotheses, which were earlier adduced
to explain ‘industrial stagnation’ of the preceding decade. Those factors, found having a a
positive impact on industrial growth, included the rate and composition of overall GFCF
and public investment, developments in infrastructure industries, and inter-sectoral terms
of trade favoring non-agriculture since mid 1970s – can you rewrite this sentence? these
variables responded favorably to several industrial and trade-related policy changes
initiated in the 1980s. Agriculture linkage, seen in terms of a relationship between lagged
agriculture growth and industrial growth, could not explain the growth. The disquieting
trend in respect of growth of capital goods, along with basic goods like ‘iron and steel’,
and the lackluster growth performance of non-food crops had, however, undermined the
sustainability of industrial growth in the long run.
Whether industrial sector retained its growth momentum on to the 1990s, when a
series of policy reforms were carried out, is the central theme of Chapter 6. Of total
manufacturing employment, registered sector had a share of one-fifth and one-third in
terms of valued added, The remaining was accounted by unregistered sector. While
registered sector was found to be a net importer, its unregistered counterpart accounted
for the bulk of merchandise exports. As regards growth, manufacturing sector as a whole
grew at a rate of 7.4 percent during1980-81 to 1990-91, and at 7.6 percent from 1991-92
to 1998-99; but the dummy test showed statistically significant slowdown during the
latter period. Registered sector recorded a growth of 7.6 percent and 11.0 percent
respectively during these two periods with no statistically significant change in the
growth rate under reform period. It suggests that the slowdown in growth of
manufacturing since 1991-92 had occurred in the unregistered sector. Further, regional
disparity was observed in the industrial growth with low income groups like Bihar and
UP not performing well, and erstwhile fast growing states like Punjab and Haryana
witnessing significant slowdown. While fixed investment in registered sector grew, that
in unregistered sector declined. Improvement in the investment of registered sector was
seen as a direct consequence of improved business expectation under economic reforms,
complimented by stock market boom in the mid 1990s, which eventually reduced cost of
funds. As unregistered sector underlined India’s comparative advantage, given their labor
intensive production and export orientation, the decline in its investment was ‘puzzling’
and attributed to financial sector reforms that reduced flow of credit to small scale
industries. As opposed to the jobless growth of registered manufacturing in the 1980s,
employment in the 1990s had indeed revived. However, unregistered sector recorded a
steady fall in employment. In all, the poor performance of unregistered manufacturing in
comparison with the registered sector, can be attributed to the adjustment process. It
implied that unregistered manufacturing, seen as the vital segment of the economy, bore
“the real brunt of adjustment in the organized sector – considering the close inter-firm
linkages between the organized and unorganized sectors in the product and labor
markets” (p. 190).
In Chapter 7, the author notes that industrial growth momentum had tapered off
since 1996-97 and attributes it to the lackluster agriculture performance and decline in
public investment during the same period. While surge in industrial growth during 1992-
93 to 1995-96 had provided convincing support to the proponents of economic reforms,
the slowdown since then proved them wrong. It is not just policy changes per se, rather
aggregate demand that mattered to lubricate industrial growth. Given the fact that nearly
3/5 of India’s workforce depended upon agriculture, a strong linkage between agriculture
performance and industrial growth was postulated to exist. Moreover, citing evidences on
“crowd in” effect of public investment, the author goes on to argue that, as a policy
option, stepping up of public investment would not only provide stimulus for private
investment but also relieve infrastructure constraints. To quote, “.. it would perhaps not
be incorrect to argue that in a poor and iniquitous, agrarian economy like ours public
infrastructure investment contributes towards efficiency as well as equity” (p. 215).
Motivated by the criticisms leveled against the role of public sector in India, in
Chapter 8 and 9, the author analyzes performance of public sector enterprises. In
particular, both officials and few pro-reform academic economists took a position that
public sector drained the exchequer. As a panacea to reduce fiscal imbalances, they
advocated a sharp reduction in the role of public sector. Based on analyses presented in
these two chapters, the author convincingly proves these critics to be wrong. Not only
non-departmental non-financial enterprises (mostly in manufacturing) did well in
generating internal surplus to finance their investment activities, but they also increased
their share in gross domestic savings. Their capacity utilization had also improved over
the years. Of course, performance of administrative departments tells a different story.
Share of wage income in the value added of non-department enterprises has gone down
over the year, thus refuting the claim that “…workers and employees in public sector
enterprises have been appropriating an ever increasing share of their output.” (p. 230). As
the internal savings of these enterprises showed a rise, it was argued that better financial
returns can be secured even “…within the framework of public ownership and control” –
an argument which belies the stance of many on diluting of the public ownership.
Findings of these chapters rekindle possibilities of hinging growth around the public
sector.
Chapter 10 deals with labor market rigidities. Earlier few studies observed a
decline in the growth of employment in manufacturing sector and attributed it to labor
market rigidities reflected in rising wage rate, unionization of the labor class, and
inflexibility in hiring and firing of the labor. Contrary to these widely held propositions, it
was found that earnings per worker and earnings per man-days had grown by about 3.2
percent and 1.6 percent respectively during the decade beginning from 1979-80. During
the same period, the real per capita GDP increased by about 2.7 percent. The growth of
earning per worker was observed to be “....above average increase in the number of days
worked per worker” (p. 259), implying that industries just paid extra for the extra work
and effort put in by workers. As increase in earnings per man-days was lower than the
growth rate of real per capita income, the author contests the view that rise in wage rate
caused decline in employment. Gleaning more evidences on unionization of workers such
as man-days lost, union density, number of strikes, workers involved in industrial dispute
and employment by factory size, it was shown that labor union did not gain any further
strength, and so the author contests the view that policy-induced rigidities featured labor
market. Decline in employment was found to be caused by a fast growth of less labor
intensive industries, attempt by firms to intensively use existing labor, rising cost of
capital that induced firms to shift production to unregistered sector and adjustment
process reflecting in tendencies towards reorganization of the shop-floor workers,
farming out production, using contract / part time labor for labor intensive services.
As capital market received an overwhelming policy focus, the author explores in
Chapter 11 if this market could contribute to the economy’s long-term development. A
sharp rise in the resource mobilization through primary market was noticed – while debt
instrument was used more in the 1980s, it was equity in the 1990s. Promoters’ stake also
went up. Spurt in the market activities went hand in hand with relaxation or changes in
policies. A shift away from internal sources to external sources of funds was noticed; and
within external sources the role of fresh issue of capital assumed significance since the
early 1980s. For this market to contribute to economic growth, primary issues should be
highly correlated with capital formation. Rate of growth of capital issues and corporate
capital formation was found to be positively correlated only till 1980, since when the
correlation became negative. Surprisingly, corporate profitability had gone down in the
1980s. And so, the author concludes “..with capital market growth, an increasing share of
loanable funds have accrued to a sector that contributed relatively les to output growth
and that did not improve its investment rate either” (p. 297)
The last Chapter 12 examines various interesting issues associated with the much
debated role of FDI in India and its oft-repeated comparison with China. Inflow of FDI
had increased over the years during 1992-2000, the United States accounted for the larger
share (about 20%) followed by Mauritius (about 12%), the sector ‘power and fuel’
attracted nearly 1/4 of the total approved FDI, nearly 70 percent of FDI were
concentrated in investments exceeding Rs. 100 crore, Maharashtra attracted bulk of
inflow (about 17%) followed by Delhi (about 13%), and the actual-to-approval ratio went
up over the years. Route wise, the proportion through FIPB route (meant for larger
projects) declined over the years, via RBI (meant for medium and smaller projects)
retained ‘modest flow’, via NRI declined sharply, and via ‘share acquisition and
ADR/GDR’ went up prominently in the second half of the 1990s. In particular, there have
been more mergers and acquisitions by FDI firms and many of them got de-listed from
Indian bourses. On an average, India received about 2.2 percent of world FDI in 1997, up
from 0.5 percent in 1992. India faired poorly in comparison with China in respect of
attracting FDI. The possibility of underestimating inflow of FDI into India was
highlighted due to the definitional inconsistencies in Indian case. Around 40 to 50 percent
of inward FDI into China was ‘recycled domestic savings’ (round tripping), and bulk of
them landed in those areas, like real estate, and so represented speculative capital. On the
beneficial impact on India, FDI firms were able to bring about ‘greater choice and quality
improvement – a desirable outcome for customers’ (p. 322), and indirectly created
competition in domestic market. Arguing that India has a labor-based advantage and so
had greater potential to attract more FDI, the author, as a policy option, calls for allowing
FDI “..mainly in manufacturing to acquire technology, and to establish international
trading channels for promoting labor-intensive exports.” (p. 332). That is, he sees merit in
encouraging FDI the China way - to ‘augment domestic capability’ and to gain foreign
market access for ‘labor intensive manufactures’.
As a coda, it is customary for reviewers to pinpoint certain flaws in the work
reviewed; these flaws are generally observed at the level of problem formulation, in the
data and techniques used, and in the inferences drawn. While measuring profitability of
PSEs (p.232), the author used the ratio of gross profit to capital employed. Such measure
is far from satisfactory because gross profit is expressed in current price whereas a major
portion of capital employed is expressed as per their book values. Thus, one is likely to
notice tendencies of rising profitability. However, other evidences on PSEs performance
go a long way in supporting the authors’ conclusion drawn otherwise. Notwithstanding
this, every article included in the volume are highly worth reading, to come to grips with
various aspects of problems confronting the Indian economy.
 Perhaps, soundness of the analysis can be viewed against the objective of the
volume. As the author notes in ‘Introduction’, the prime motivation to write these papers
was his “.. desire to carefully examine some of the widely held propositions on the
aggregate and sectoral economic performance, premises of a few reform measures and
the outcome of some aspects of the economic reforms initiated in the 1990s.” (p. 19)
Viewed against this, content of the volume can provide appropriate guideposts to policy
makers to take Indian economy forward. While presenting the volume, the author asks a
fundamental question: “Can India hope to catch up with East Asia ..China, with more
thoroughgoing (or deepening of) economic reforms, as many have advocated? Or do we
need to alter the course of the economic policy?” (p. 26). After reading it, one is inclined
to believe that, if statistics are used effectively in the way the author does and
implications are drawn keeping in view long term objective, India could pursue
economic policies of its own and forge ahead of others not only in this region but
globally.