ABSTRACT
India’s rapid economic progress over the past two decades has attracted a lot of attention from academic economists, development practitioners and policymakers. Indeed, the Indian economy has been growing at a steady pace since the 1980s (see Figure 3.1). Not surprisingly, much of the emphasis of the academic as well as the policy debates are on the causes of this turnaround. However, the vast gap between the living standards in India and in the developed world goes relatively unnoticed. Figure 3.1 illustrates that, even though there has been a steady increase in per capita GDP in India, it has had little effect on the gap between India and the United States or the United Kingdom. It also shows that the gap between countries is persistent and that there is very little change in relative positions since 1950.1
The origin of this gap, therefore, is certainly not the post-war period of 1950 to 2004. To locate the origin, we need to look further back. Indeed, Figure 3.2, using data from Maddison (2004),2 suggests that the origin of the divergence goes back to the 1500s. During the first half of the sixteenth century there appears to have been very little difference in living standards between India and the rest of the world. In fact some argue that, during this time, Indian living standards were superior to the rest of the world (Acemoglu et al., 2002). Why, in spite of this early advantage, did the Indian economy stagnate for the following four centuries while UK and US economies surged ahead? Is deindustrialization a factor? What are the root causes behind two centuries of deindustrialization? Is the mediocre economic performance during the first three decades after independence a consequence of poor institutions or simply bad luck? What changed after 1991 to cause fortunes to reverse? Answers to these questions are critical in improving our understanding of the process of economic growth not just in India but also in other developing countries. It is also extremely important as economic growth has the potential to pull millions out of poverty. In this chapter, I make an attempt to address these questions using an analytical framework. I
argue that these events are not isolated but, in fact, interconnected, and institutional change may help us understand why the Indian economy took such a course. This is a significant
departure from the existing literature which does look at these events in isolation and puts very little emphasis on institutions. I make an attempt to present a unified view of the Indian growth process by bringing institutions back into the debate. I present my account of the Indian growth experience as follows. In the next section, I explain how root causes (institutions and geography) of development affect proximate causes (factor accumulation and productivity
growth). I also review a smallselection of literature on the impact of root causes other than institutions (in particular, geography) on economic development in India. The following section presents an account of institutions and economic performance during the pre-modern period. Subsequent sections deal with deindustrialisation and how institutions affected that process, the post independence ‘Hindu rate of growth’ and the post-1980 turnaround. This is followed by my conclusion.
