The Indian economy grew at over nine percent per annum between 2004 and 2007. That was its fastest run since independence. This was aided by fast export growth in a global economy that was expanding rapidly. Growth slowed sharply during the months of 2008. The American financial crisis was a major cause, but so was India’s own effort to reduce inflation.


In recent months, the Indian economy has shown signs of renewed growth. Exports of both software and merchandise remain subdued but the internal economy is picking up. The Indian government has been acting to make loans easier and has been spending more money on roads and other infrastructure, but the proportion of such government stimulus has been much less than in China or the United States. The Indian economic recovery has relied more on market forces. This suggests that India has a good chance of keeping up its momentum for the next few years.

In the decades since independence, Indian economic growth accelerated gradually. It got off to a very slow start during the first three decades, with per capita income growing at under 1.5% per year. Between 1975 and the liberalization in 1991, per capita income averaged a growth of 3.5%. From 1991 to 2004, the average person’s income grew over 4% richer each year. In the period of explosive growth between 2004 and 2007, that person gained 7.5% annually. By contrast, South Korea and Taiwan got off to very fast starts in the 1960s, rose to near developed country levels by 2000, then leveled off. China grew slowly for three decades after the 1949 revolution, and has enjoyed steady high growth since.

Indian economic growth has never proceeded evenly across different sectors of the economy. Even during the first three decades, there was rapid growth in parts of the economy with stagnation in the rest. The period of 1956-66 witnessed a boom in government-owned heavy industry and the neglect of agriculture. It ended in an agricultural crisis and was followed by the “Green Revolution” in which a modest portion of farmers adopted modern techniques, spurring growth in only a few sectors of industry. In each period, there have been a cluster of interdependent sectors of the economy that have grown rapidly until they faced shortages. Over the decades, these leading clusters have been getting larger in relation to the whole economy. This is due to the comparatively slow but steady development of human capital and physical infrastructure in the country. A greater proportion of the people are in a position to recognize the new opportunities, prepare themselves, and take advantage of these opportunities. For example, families from previously poor and undereducated segments of society have sacrificed to send their sons, and increasingly their daughters, to private engineering colleges to create the new large pool of software engineers and other technical professionals.

For the last three decades the world has seen the emergence of an integrated global economy and the rising profitability of finance at the expense of manufacturing. The latter trend has occurred mainly within the United States, but it has influenced the whole world. The American financial services sector gained its enormous profits mainly through speculation, and provided no direct benefit to anyone else. It is within that framework that China was able to run vast trade surpluses and then lend its extra dollars to the U.S. government and private borrowers. Even the Indian IT boom focused on customers in the American financial services sector. These trends are not likely to resume after the current crisis.

The Indian recovery in the last few months has focused on the domestic economy. Indian industrial production has been growing faster than exports. The Indian economy has begun a process of deglobalization. The challenge will be to sustain growth with a domestic foundation. The new leading cluster for growth is in service industries like retail and banking (non-speculative). Construction is driving demand for cars and other consumer durables. The boom in construction and infrastructure is also promoting steel and cement industries. This is revitalizing employment at construction sites, factories, and offices.

Revenues from taxes on corporate profits, which have become the primary channel of taxation for the government, are recovering to feed continued government hiring and infrastructure investment. It remains to be seen whether the feedback loops for sustained domestic growth will form, and whether export strength in software and merchandise will be adequate to pay for required imports.

There is no reason to believe that the gradual acceleration of Indian economic growth over six decades has ended. India’s income distribution has not worsened in recent months. Growth has shifted to small towns. The food price inflation in the last year reflects both the monsoon failure and rising incomes of the poor who are using their new money to buy more food, bidding up the price. In fact, food prices were rising even before the drought. Government employment programs and the rising need for construction workers are pushing up the wages of unskilled labor.

Any process of economic growth encounters obstacles and imbalances that require government action against the wishes of vested interests. That is where India has been and remains weak. Remarkably small coalitions can derail the most vital reforms. Until a large segment of voters can recognize and oppose such obstruction, growth will remain halting.

Sanjoy Banerjee teaches International Relations at San Francisco State University.

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