Wednesday, August 22, 2012

Administrative reforms – the need of hour

India’s economic journey from the times of the measly Hindu rate of growth is indeed incredible. Economic reform coupled with administrative reform is the way forward

India was a leading manufacturing country in the world in the early 18th century. It had 22.6% share in the world’s GDP, which came down to around 16% by 1820, closer to its share of world population. It had a developed banking system and vigorous merchant capital, with a network of agents, brokers and middlemen. Given the enormous financial surplus, a skilled artisan class, large exports, plenty of arable land and reasonable productivity, the question is why didn’t a modern industrial economy emerge in India? Instead, why did India become impoverished?

Nationalists claimed that Lancashire’s new textile mills crushed India’s handloom textile industry and threw millions of weavers out of work. India’s textile exports plunged from a leadership position before the start of Britain’s Industrial Revolution to a fraction. In recent years some historians have challenged this nationalist picture. They have argued that Indian industry’s decline in the 19th century was caused by technology. The machines of Britain’s Industrial Revolution wiped out Indian textiles, in the same way that traditional handmade textiles disappeared in Europe and the rest of the world. Indian weavers were, thus, the victims of technological obsolescence. Since India consistently exported more then she imported in the second half of the 19th century and early 20th century, Britain used India’s trade surplus to finance her own trade deficit with the rest of the world, to pay for her exports to India, and for capital repayments in London. This represented a massive drain of India’s wealth.

Consider the following hundred year trend: between 1900 and 1950, the Indian economy grew on the average 0.8% a year; but the population also grew at about the same rate; thus, net growth in income per capita was nil and we rightly called our colonial economy stagnant. After Independence, economic growth picked up to 3.5% between 1950 and 1980, and population grew by 2.2%; hence the net affect on income was 1.3% per capita, and this is what we mournfully referred to as “the Hindu rate of growth.” Nehru’s socialism had shackled the economy with fierce controls on the private sector, pejoratively called ‘Licence Raj’; hence its annual GDP growth was 1.5% points below even the Third World average between 1950 and 1980.

As a benchmark, recall that the West’s industrial revolution took place at a 3% GDP growth and 1.1% per capita income growth after 1820. To appreciate the magnitude of the Indian change after 1980, let me illustrate: If India’s per capita GDP had continued growing at the pre-1980 level, then its income would have reached present American capita income levels only by 2250; but if it continues to grow at the post-1980 rate then it will reach those levels by 2066: a gain of 184 years!


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