Session 6
J Bradford Delong, “India since Independence” in Dani Rodrick, ed, In
Search of Prosperity, pp. 184-204.
Delong uses simple (yeah right…) growth theory to analyze the growth of 85 countries
from 1960 to 1990. He concludes that pre-1990 growth in India was “average” and post1990 growth was remarkable. He explains why growth was only average at first. He also
proposes that the pre-1990 leadership had more of an impact on the growth boom than we
think…even more of an impact (statistically speaking) than the post-1990 leadership.
History of India
 India’s first prime minister, Nehru (1947-1964), moved toward central planning
and red-tape bureaucracy, which cultivated rampant corruption and massive
inefficiency.
o He promoted inefficient projects
o Defended public sector enterprises
 Rajiv Gandhi’s (1984-1989) Congress party won 77% of the seats in the Lok
Sabha. His mother had been Prime Minister from 1966-1977 and 1980-1984.
o Encouraged capital imports and commodity exports
o Modest degree of industrial deregulation
o Modest degree of tax system rationalization
o In general, “tip-toed reform”
 The currency crisis of 1991 occurred, and bold economic reforms ensued.
 Rao (1991-1996) unleashed policies that triggered a remarkable wave of
economic growth.
o Opened the economy
o Dismantled import controls
o Devalued the currency
o Broke public sector monopolies
o In general, “walked rapidly down the path of reform”
o It felt like a “second independence had arrived”
 Vajpayee if the BJP becomes prime minister (1996-present)
“Simple” Growth Theory tells us that the determinants of growth are:
1. The share of investment (into the capital stock) in GDP
2. The rate of population growth (more population makes the economy less capital
intensive and spreads resources more thinly)
3. The gap between output per worker and the world’s best practice (how far the
economy is from its steady-state growth path).
 Delong calculates these three determinants for 85 economies from 1960 to 1992
and does some regression analysis. He concludes from this analysis that India had
“normal” growth pre-1991. It’s results were smack in the middle of the results for
the whole sample. In fact, all three of India’s growth determinants were
“average”.

There are some rather complex equations on pages 187 and 188. Basically, real
GDP per worker depends on the average capital-labor ratio, total factor
productivity, and diminishing returns to investment.
India between independence and 1990 was neither an East Asian superstar nor an African
failure. It was simply “normal”. There are three possible explanations.
1. Nehru’s constraints on growth via inefficiencies were par for the coarse around
the world. Only exceptional countries avoided this.
2. The failure was offset by successes in mobilizing resources (a high savings rate of
23% average by the 1980’s).
3. The failure was offset by India’s inherent advantages. In fact, India could have
been a superstar had Nehru not slowed it down. Advantages were:
o Cultural—a society that valued education and literacy.
o Experience with colonialism—knowledge of English from British
o History of democracy—accountability and focus on consumer welfare.
After 1990, India began to grow remarkably. The economic growth was not fueled by
the further impoverishment of India’s poor. The poverty gap is 54% of what it was in
1983.
When/why/how did this structural reform occur? Exactly what separates the “normal”
growth from the extraordinary growth?
 Gandhi imposed the first wave of reform. Structural change occurred that had an
enormous effect on India’s long-run economic destiny.
 Rao imposed the second wave. According to Delong’s statistical calculations, the
growth impact of this wave is between 2/3 and 5/6 as large as the impact of
Gandhi’s wave.
 But comparing the two prime ministers, it seems obvious that Rao had in fact led
a much stronger wave and was the main cause of the boom in the growth-rate.
Everyone assumes that the policies born out of the currency crisis caused the
structural shift. Delong says either:
o Growth theory is not explaining well what everyone observed/perceived
o Reform under Gandhi was strategic and had a uniquely high social product
and had more of an impact than was realized.
 A shift toward integration with the world economy
 A shift in entrepreneurial attitudes
 A perception that the old Nehru dynasty had finally come to an end
and the rules of the economic game had changed
 Vajpayee imposed a third wave of reform.
o Removed restrictions on industry
o Promoted private industry/competition in utilities