The political economy of economic growth in India, 1993-2013

Kunal Sen, Sabyasachi Kar, Jagadish Sahu
2014

Summary

What are the causes of India’s economic growth? This paper from the Effective States and Inclusive Development Research Centre examines the political economy causes of India’s growth. It reviews the acceleration in the early 1990s, the periods of high growth in the 1990s and early 2000s, and the subsequent slowdown since 2011. It argues that India’s post-reform growth experience can be separated into three distinct growth episodes. The first growth episode, from 1993 to 2002, was characterised by a set of predictable informal (and relatively open) relationships (which we call ‘ordered deals’) between political and economic elites.

The second episode was from 2002 to 2010; deals in this period became increasingly closed, leading to negative feedback effects from accountability institutions, the middle class and non-elites, along with structural retrogression of the economy. The third episode, beginning in 2011, was one of an incipient growth deceleration, and was characterised by increasingly disordered deals. The wider implication of the analysis is that economic growth in most developing country contexts remains episodic and prone to collapse, as institutions do not evolve over the growth process, and in many instances, deteriorate.

In this paper, the authors first provide a summary of the conceptual framework that they have developed elsewhere on why we see what we call ‘boom and bust’ growth in developing countries. They then identify India’s growth episodes, using standard statistical methods to identify structural breaks in India’s GDP per capita time-series, again drawing from previous work. They then set out the stylised facts of India’s growth experience, followed by a description of India’s political history. They then apply our framework of ‘boom and bust’ growth to India’s growth experience, arguing that the institutional causes of India’s growth in the 1993–2002 growth episode were different from those observed for the 2002–2010 growth episode. Using our framework, we also provide an argument for why India’s economic growth slowed down in the post-2011 period.

The slowdown of growth is attributed to: 1. increasing political de-legitimation of the growth process that was seen as highly predatory and corruption-intensive; and 2. pushback from accountability institutions in the post-2010 period, leading to greater uncertainty in the deals environment in 2011-2014. The analysis suggests that the move from limited access to open access orders, or from growth processes that rely on informal institutions to growth processes that rely on formal institutions, is not pre-determined or linear. Shifts back and forth from good transitions in growth to bad transitions in growth are common in developing countries with weak formal institutions; sustained rapid economic growth that can take a country from low-income to middle-income status still remains a distant possibility in many country contexts. The Indian case study illustrates the point that, even for a so-called miracle growth country such as India, growth reversals are very much possible, if institutions do not improve in the growth process.

Source

Sen, K., Kar, S. & Sahu, J. (2014). The political economy of economic growth in India, 1993-2013. ESID Working Paper No. 44. Manchester, UK: University of Manchester.