India’s Growth Analysis

Abstract

In this paper, economic scenario of India has been discussed. The study made the analysis about the growth of this country and applied it on the basis of Solow growth model. Institutional impacts on the growth of this country have also taken into account. A comparison has been made with the current scenario of Canada. It is observed that India is in the correct direction of growth in terms of capital accumulation and productivity. In contrast, Canada did not show much improvement in its technological progress. However, in some research it is found that total factor productivity is improving.

Table of Contents

Analysis of the Indian Economy. 4

Solow Growth. 4

Solow Growth in context of India. 4

Institutional impact on India’s Growth. 5

Impact of social welfare on India’s growth. 5

Brief Comparison with Canada. 6

Conclusion. 6

References. 7

In this paper, growth process of India over the years will be discussed. This report will focus on the economic history of this country; its past performances and a possible prediction regarding future of the country will be made. It has been discussed whether India’s growth has followed Solow’s growth model. The paper included the institutional strength and weaknesses of India, and discussed how it has changed over the years. The paper will compare the Indian result with that of Canada. In this assignment, analysis was based on the the current knowledge condition of Canada. It has been also checked how the technological progress of this country changed over time.

Analysis of the Indian Economy

From 1950 to 1980, Gross domestic product (GDP) of India grew at an annual average rate of 3.6% (Sen, 1982). The growth rate of India averaged 6.4% during the year 1990-2007. Annual GDP growth rate in India averaged 6.02% from 1951 until 2015. The movement to the higher growth path during the 1980s is known as the growth turnaround of India. The rapid growth in this country since the early 1980s has put the country amongst some of the rapidly growing economies in the world. Aggregate data analysis suggests that a pickup in growth took place during the initial years of 1980s, way before most of the major policy changes. In the recent past, India’s annual GDP growth rate recorded high at 11.40% in the first quarter of 2010.

The low growth prior to 1980s is referred as Hindu rate of growth. This period is significant because during this time, India had imposed high import duties, foreign investments were not allowed in many sectors of the economy and India followed inward oriented trade with import-substitution. India’s per capita GDP growth was similar with the average growth rates of most of the rich nations. However, the performance of India was better than some African countries, but lagged behind as compared with East Asian Tigers with rapid rates of convergence (Ahluwalia, 2002).

The upward trend in India’s growth during 1980s was significant because the turnaround took place well before the BOP crisis of 1991 and the macroeconomic reforms that took place later. India’s growth turnaround during the aforesaid period was not driven by manufactured exports and hence it is unlike the growth process of East Asian economics. There was no industrial policy targeted towards developing some specific industries. Overall growth rate in the early 1980s was a service-sector led growth (Sachs et al., 2010).

Solow Growth

According to the model, when countries accumulate capital the growth will be very steady in the beginning, and the growth will slow down as the process of accumulation continues. This model also states that countries will tend to converge in output per capita and in standard of living.

This states that as they accumulate capital, their standard of living will merge with the initially more developed countries. All the countries will have a similar kind of standard of livimg after reaching the steady state. (Barossi-Filho et al.,2005).

 Solow Growth in context of India

Looking at basic or endogenous growth model it can be said that India has paced for gradual growth. Real GDP growth of this country was steady at approx 7% per year for last ten years. The Solow model throws light on the direction of  economy. Solow model requires insight on depreciation and savings, apart from the economics overview discussed above. Depreciation in the 1990s was stable, around 7% of GDP. During that period, World Bank assumed a 4% depreciation rate for all countries. At 2007, countries gross domestic savings was 34%. However, Gross Domestic savings rate has held steady over 20% in the 2000s. The savings rate was around 19% during 1980’s, which is better than 15% in the 1970s. Over the same period, India’s public saving declined steadily, but, private savings has compensated.

Growth is generated only through capital accumulation and capital can be accumulated through savings. In India, savings rate outweighs depreciation and population growth. India should continue to grow in accordance to the growth model. Now, the savings rate is higher than depreciation as per capita GDP has been growing (Remolina, 2014). However, this does not mean that the economy is at the Golden rule savings rate. The data indicates that savings need to increase in order to increase future consumption. If India’s saving were below depreciation, then per capita GDP would have been decreasing. Whereas, per capita GDP of India is steadily increasing and it will continue to grow according to this model.

It is required to know what technological changes took place in India. In Solow model technological factor (A) is exogenous. Change in population can be a technological factor, since this model consists of labour-augmented technology. While population growth rate in India had decreased, large under-fifteen population will increase the labour force, which will lead to a reduction in the capital-labour and income-labour ratio. If the literacy rate is one of the indicators of capital, then the growth is a good and has a desirable trend (Gupta, 2008). At present, with growing investment in higher education, knowledge of the labourers is increasing and hence it is improving the value of the factor A, as knowledge is considered as human capital. Over the years, India possess human resource in terms of high-skilled labourers and thus have high labour-augmented technological factor A. This helped India to sustain in its growth path with moderate rate of growth in GDP. Some economists have argued that hike in the economic growth after 1980s was mainly due to the factor accumulation rather than productivity growth (Das et al., 2010). On the contrary, several scholars and have found that output growth in India till 1980s is related with factor accumulation, while the acceleration in the economic growth in the post 1980s was caused by the rise in the productivity growth (Bosworth et al., 2007). According to the Solow model, if policy is capable of influencing the rate of technological progress then only it has effects on economic growth in the long-run (Mankiw et al., 1990).

Though India’s average income (GDP per capita) is increasing over time, there is few evidence that inequality of the country is decreasing. Rather it can be stated that the growth of India does not have trickle-down effect, hence the economics performance is not complemented by parallel reduction in inequality. Economics growth of India did not led to poverty reduction, rather increased the income-gap implying that the situation worsened.

Institutional impact on India’s Growth

            Institutions create markets, regulate and/or substitute for markets and it ensures stabilization in the economy (Henisz, 2000). In India, it is a popular perception that all degradation in the economy is due to the institutional decline. But it is not true always. Total factor productivity increased to 2% per annum during 1980s, even with limited policy reforms. This sudden growth during this decade can be explained by quality of a country’s public institutions, which were the key fundamentals of long-run growth. Hence, a small trigger of policy reform resulted into enlarged economic growth of the nation. Indian economy started decentralizing. State-institutions had no role in the growth of 1980s, but have significant role in the country’s growth during 1990s (Subramanian, 2007).

Impact of social welfare on India’s growth

            India spends  approximately 8% of GDP only, on social sector (Mander, 2013). There is considerable variation in the government budget for social sector and its actual expenditure. India was among the better economic performers in 2009 in terms of GDP per capita (PPP). Even India was performing well in terms of GDP growth, many lagged-behind countries outperformed India in terms of social indicators. Even if the GDP per capita increased significantly, India faced disadvantages in the areas like health; nutrition and education. Female literacy rate is lower than the male counterpart. Percentage of people who can access sanitation facilities increased from 18% in 1990 to 34% in 2010. In spite of having robust economic growth, India is still lagging behind in the social aspects.

Brief Comparison with Canada

        According to the Solow growth model, the technological progress is the outcome of continuous innovation process, the imposition of tax incentive for the R&D process, provision of grant to encourage research in the university level and the imposition of supportive industrial policy to encourage the industries for the technological progress(Sector, 2015).  This technological progress in turns improves the labour productivity of the country. The business innovation scenario in the Canadian economy is not satisfactory. For this reason, the total factor productivity in this country is at a very low level. This leads the government of this country to act as first user of pre commercial innovation through the Canadian Innovation commercialization Program (CICP). The government is playing a supportive role in order to improve the existing production technology and therefore the work productivity (Sector, 2015). The growth rate of the labour productivity in Canada was very low during 1961-2008. However, at present, the labour productivity is at a satisfactory level.  The amount of the business expenditure on the R& D process is moderate. However, the R&D processes that are supported by government are declining for 10 years. The percentage of this amount relative to GDP at present is 0.19% which is well below the OECD rate. Another important in this context is most of the business expenditure on R& D process in this country has been spent on very few numbers of firms of some limited sectors of this economy. The federal and provincial corporate tax incentive is at moderate level. This government also provides some tax credit to the key industries (Sector, 2015). The amount of this tax credit is ranging from 4.5% and 37.5% depending on the intensity of R&D in these industrial sectors (2014 Global Survey of R&D Tax Incentives, 2015).   All these imply that, the total factor productivity is improving over time. In a Canadian economy, different measures are used to calculate the institutional strength and weakness. The government of this country is using bibliometric measure in order to determine the institution’s “academic capital”. This measure is used to calculate both overall productivity band impacts. In this measure, H- index is used. Moreover, in order to measure, “current strength” the Canadian government uses the amount of grant provided by federal government. All these measures use field-normalized data. Over the past 40 years, federal and provincial governments have been focused on controlling the social expenditure. Canada’s social welfare decision is mainly based on unemployment reduction, as the country already has proper sanitation, education and health care services. Whereas India’s main problem was regarding the basic needs of the people. Therefore, policies regarding social welfare differs in both the country.

Conclusion

The growth of the Indian economy has been described in terms of Solow growth model. It has taken into account the institutional factors that may affect the growth. From the discussion we can conclude that the India is in the right path of growth. It can also be expected with the savings rate of last few years it can accumulate more capital and may converge with the initial developed countries. Whereas, countries like Canada who have reached the high growth rate a way earlier, but faced lack of growth in the recent past due to the weakened institution of the country. However, currently some measures show an increase in total factor productivity, with some proper government measures.

References

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Barossi-Filho, M., Silva, R. G., & Diniz, E. M. (2005). The empirics of the Solow growth model: long-term evidence. Journal of Applied Economics, 8(1), 31-51.

Bosworth, B., Collins, S. & Virmani, A. (2007). Sources of growth in Indian Economy. NBER Working Paper No. 12901

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Gupta, A. (2008). Indian Economy-TFP or Factor Accumulation: A Comprehensive Growth Accounting Exercise. Available at SSRN 1264547.

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Sachs, J.D., Varshney, A. & Bajpai, N.(2010). India in the era of economic reforms. Oxford University Press.

Sector, S. (2015). 5. How Well Is Canada Positioned to Compete to Win? – Competition Policy Review Panel. Ic.gc.ca. Retrieved 8 December 2015, from https://www.ic.gc.ca/eic/site/cprp-gepmc.nsf/eng/00057.html

Sector, S. (2015). Innovation Canada: A Call to Action – Review of Federal Support to Research and Development. Rd-review.ca. Retrieved 8 December 2015, from http://rd-review.ca/eic/site/033.nsf/eng/00289.html

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Subramanian, A. (2007). The Evolution of Institutions in India and its Relationship with Economic Growth. Research Paper. Johns Hopkins University.

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