India’s Growth in the 1990s and beyond:

An International ComparisonLant PritchettWorld BankFeb 10,2005

Loyola Chennai

Outline of the presentation

• Whirlwind tour of the 1990s

• India’s growth, compared

• Will India’s growth stall? Why?

• Will India’s growth accelerate? How?

Whirlwind tour of the 1990s--outside of India

• Deep and long, bit variable, transformational recession in the FSU

• Reform but with little growth payoff in Latin America

• Severe financial crises—with mixed aftermath

• Bright spot for reform: rapid growth in reforming socialist economies

Deep, long, and variable transitional depression in FSU/EE

Pre-crisis level

Growth came, but did not stay in Latin America, despite steady

reform progress

Financial Crises

• Korea, Thailand, Indonesia—shock as the best performers suffer…then

• Brazil

• Russia

• Turkey

• Argentina—the deepest commitment to convertibility at a fixed parity collapses

Reforming socialist star: China

Reforming Socialist Star II: Vietnam

60

80

100

120

140

160

180

200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Per

cap

ita

GD

P (

1990

=10

0)

EAP ECA LAC MNA SAR AFR OECD

AFR

ECA

OECDLACMNA

SAR

EAP

Regional divergence in the 1990s: East Asia, followed by South Asia

India’ growth, compared

• India accelerated sometime in late 1970s/early 1980s and has been (roughly) steady since

• Growth in the rest of the world (outside of East Asia) has decelerated

• India’s growth is now rapid

• India’s growth has been very steady

Sometime in the late 70s/early 80s growth accelerated

India went from sputter to sparkle

90th percentile

Median

China, has outperformed India…and everyone else

But compared to Brazil…

…even superstar Korea came to earth in the 1990s—slower than India

…and is substantially ahead of the slower but steady USA

India is growing faster—but from a very low base…

At current rates India reaches USA 1950 level in 34 years—not my lifetime…and USA’s current level in 61 years—

not your lifetime

India reaches USA 1950 level

One big assertion--with two problems for policy

Assertion: India is a rich country struggling to free itself of the trappings of poverty—it should not think of itself as a poor country striving to be modestly less poor

An aside: Why worry about economic growth?

Economic growth is good, good, good as it makes things possible

Most socio-economic indicators are explained overwhelmingly by income (and education, which is itself driven by income)

Why settle for less? Who wants to be a modestly less deprived poor country?

Can India Avoid a Stall?

Avoiding the pitfalls

Many countries have seen an episode of rapid growth,then poof! It’s gone:

Brazil

After a great run of rapid growth Japan grew at 1% in the 1990s

Philippines never recovers momentum…

India’s many strengths: Bullish on the elephant

• It is behind—playing catch-up creates potential for super fast growth

• Democracy and political continuity• Elite education (see below)• Open ideology• Large (population and area) integrated market• Adequate, but not abundant resources• English as one (of many) languages

Common causes of “stall”: So far not India’s problems

• Macro-economic imbalance caused by public sector borrowing and debt crisis (e.g. Brazil, Mexico 1982)

• Economic overheating without adequate means of adjusting to shocks in the financial sector (e.g. Japan real estate vs. USA)

• Exogenous shocks to terms of trade, neighbor competitiveness (Argentina 2002).

• Political shifts causing large amounts of investor uncertainty about the “rules of the game” (e.g. FSU, Indonesia, coming for China?)

How might India stall?

• Fiscal space to meet infrastructure needs

• Regions are lagging—eventually the dog has to walk, not just the tail wag.

• Education is highly stratified—will the “services” sector absorb all “qualified” labor and sputter out

• Not able to sustain reforms to spur the growth process socially and politically

Infrastructure is bad, might get worse, choke off innovation

Some regions are suffering from infrastructure bottlenecks worse than

othersFigure 3.17. Percent of respondents identifying

infrastructure as major or severe obstacle

4.76

11.67

17.26

19.80

24.36

30.69

31.60

31.68

40.91

49.29

51.72

61.21

-10 10 30 50 70

Delhi

Punjab

Andra Pradesh

Kerala

Gujarat

Haryana

Maharashtra

West Bengal

Tamil Nadu

Madhya Pradesh

Uttar Pradesh

Karnataka

India is not well places in many indicators of “governance”

Rank in: Control of corruption

Regulatory quality

Growth

China 63 94 3

Vietnam 105 135 4

India 86 101 14

Out of N: 151 180 136

Regional growth: what is the dog, what is the tail

• Growth is concentrated in a few cities, mainly in the South and West

• Huge parts of India—some complete states (e.g. Bihar) and many rural areas are left behind

• Will regional laggards draw the overall down?

Educational inequalities in India were (are?) worst in the world

Median attainment of richest 20%

Median attainment ofBottom 40%

India, top 20=10

India, bottom 40%=0

Gaps in education by wealth and sex: TN and UP compared

Social and Political Pressures of Rapid Growth

• Huge social tensions inherent in the transition called “development”

• Productive and unproductive ways to cope with those tensions (e.g. expanding opportunity versus extensive subsidies to well-off but adversely affected)

India is low inequality in income (despite social stratification)

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

Legend: Solid bars - by incomeStripes - by consumption

Regions:High IncomeMENASSAECALACEAPSA

Note: Latest data for each country for the 1995-2002 period. Source: SIMA

India

OECD

FSU/EE

Vietnam

China

Income inequality has increased dramatically in China

Growth has, and does, reduce income poverty—even with inequality increasing if it

is fast enough…

0

10

20

30

40

50

60

70

1980 1985 1990 1995 2000

% population living below $1 a day

China

India

How to accelerate growth?

• Increased accumulation versus improved productivity—do you want to?

• Accelerations from high to higher are relatively rare

• Firm signals of committed future direction are as important as dramatic actions

Acceleration of growth

• Raising the magnitude of private investment—– More favorable investment climate

• Continuing strong growth in productivity

• Continuing stream of innovations/introduction of new sectors

Is there a key binding constraint?

• Financial sector?

• Labor market reforms?

• Infrastructure?

Conclusions:

• India is a rich country in waiting

• India moved in the right direction in the 1990s

• Steady as she goes is good--stall must be avoided

• Acceleration is possible—the ride will be bumpy the faster it goes