Discussion of Indias Growth Story Dilip Mookherjee India Policy - - PowerPoint PPT Presentation

Discussion of India’s Growth Story

Dilip Mookherjee

India Policy Forum

July 10, 2018

Recap

• Part 1 of the paper provides interesting facts pertaining to

long term growth: acceleration, (reduction in growth volatility)

• Comparisons with EM7; sustained, uniform across states

Recap

• Part 1 of the paper provides interesting facts pertaining to

long term growth: acceleration, (reduction in growth volatility)

• Comparisons with EM7; sustained, uniform across states
• Accompanied by rising investment, role of service sector,

credit, trade, FDI, rising productivity growth

Recap

• Part 1 of the paper provides interesting facts pertaining to

long term growth: acceleration, (reduction in growth volatility)

• Comparisons with EM7; sustained, uniform across states
• Accompanied by rising investment, role of service sector,

credit, trade, FDI, rising productivity growth

• Traditional ‘structuralist’ factors (agricultural growth, domestic

demand, public investment) seem irrelevant

Recap

• Part 1 of the paper provides interesting facts pertaining to

long term growth: acceleration, (reduction in growth volatility)

• Comparisons with EM7; sustained, uniform across states
• Accompanied by rising investment, role of service sector,

credit, trade, FDI, rising productivity growth

• Traditional ‘structuralist’ factors (agricultural growth, domestic

demand, public investment) seem irrelevant

• Also irrelevant: agriculture-industry reallocation; human

capital growth

Recap, contd.

• Part 2: Granular short term perspective (since 2007 and GFC)

Recap, contd.

• Part 2: Granular short term perspective (since 2007 and GFC)
• Theme somewhat at odds with Part 1

Recap, contd.

• Part 2: Granular short term perspective (since 2007 and GFC)
• Theme somewhat at odds with Part 1
• Three phases, growth pickup since 1991, unusually high

growth 2004-08, slowdown with GFC and recovery thereafter

Recap, contd.

• Part 2: Granular short term perspective (since 2007 and GFC)
• Theme somewhat at odds with Part 1
• Three phases, growth pickup since 1991, unusually high

growth 2004-08, slowdown with GFC and recovery thereafter

• Slow down in investment, exports, credit quantity and quality;

‘structuralist’ factors more relevant

Recap, contd.

• Part 2: Granular short term perspective (since 2007 and GFC)
• Theme somewhat at odds with Part 1
• Three phases, growth pickup since 1991, unusually high

growth 2004-08, slowdown with GFC and recovery thereafter

• Slow down in investment, exports, credit quantity and quality;

‘structuralist’ factors more relevant

• Suggests acceleration was one-time phenomenon, difficult to

sustain in the years ahead

Initial Reactions/Questions

• Long-term acceleration: sustainable or not?

Initial Reactions/Questions

• Long-term acceleration: sustainable or not?
• Of course, acceleration cannot be indefinitely sustained

Initial Reactions/Questions

• Long-term acceleration: sustainable or not?
• Of course, acceleration cannot be indefinitely sustained
• Despite slowing down over the past decade, it has been

hovering around 7% the last few years, almost double the pre-1990 ‘Hindu’ rate of growth

Initial Reactions/Questions

• Long-term acceleration: sustainable or not?
• Of course, acceleration cannot be indefinitely sustained
• Despite slowing down over the past decade, it has been

hovering around 7% the last few years, almost double the pre-1990 ‘Hindu’ rate of growth

• Similar slowing down in China recently, tending to a similar

average of 7-8%

Initial Reactions/Questions

• Long-term acceleration: sustainable or not?
• Of course, acceleration cannot be indefinitely sustained
• Despite slowing down over the past decade, it has been

hovering around 7% the last few years, almost double the pre-1990 ‘Hindu’ rate of growth

• Similar slowing down in China recently, tending to a similar

average of 7-8%

• 7 percent growth rates maintained over a couple of decades is

quite extraordinary by historical standards

Initial Reactions/Questions

• Long-term acceleration: sustainable or not?
• Of course, acceleration cannot be indefinitely sustained
• Despite slowing down over the past decade, it has been

hovering around 7% the last few years, almost double the pre-1990 ‘Hindu’ rate of growth

• Similar slowing down in China recently, tending to a similar

average of 7-8%

• 7 percent growth rates maintained over a couple of decades is

quite extraordinary by historical standards

• Even as acceleration ceases, will growth rates stabilize for the

time being (ie over the next decade or two) at around 7%?

Puzzles of India’s growth

• Comparison with China raises to my mind one of the big

mysteries regarding growth in India:

Puzzles of India’s growth

• Comparison with China raises to my mind one of the big

mysteries regarding growth in India:

• In terms of the typical catalogue of determinants of growth,

India seems to fall far short of China:

• frictions/regulations in land and labor markets
• weak governance (esp urban local government — grabbing

hand rather than helping hand)

• poor infrastructure
• lower human development
• lower rates of R&D (e.g., patent rates), spending on higher

education/research

Puzzles of India’s growth

• Comparison with China raises to my mind one of the big

mysteries regarding growth in India:

• In terms of the typical catalogue of determinants of growth,

India seems to fall far short of China:

• frictions/regulations in land and labor markets
• weak governance (esp urban local government — grabbing

hand rather than helping hand)

• poor infrastructure
• lower human development
• lower rates of R&D (e.g., patent rates), spending on higher

education/research

• Both have weak judicial contract enforcement mechanisms

Puzzles of India’s growth

• Comparison with China raises to my mind one of the big

mysteries regarding growth in India:

• In terms of the typical catalogue of determinants of growth,

India seems to fall far short of China:

• frictions/regulations in land and labor markets
• weak governance (esp urban local government — grabbing

hand rather than helping hand)

• poor infrastructure
• lower human development
• lower rates of R&D (e.g., patent rates), spending on higher

education/research

• Both have weak judicial contract enforcement mechanisms
• Yet, India achieves and continues to achieve growth rates not

far behind China’s, and significantly higher than most emerging markets

Data Issues?

• How credible is the growth data?

Data Issues?

• How credible is the growth data?
• Others have more expertise in this issue

Data Issues?

• How credible is the growth data?
• Others have more expertise in this issue
• Some questions/remarks:
• Changes in national income accounts since 2014: shouldn’t

matter for the long run perspective, for growth rates or their acceleration

Data Issues?

• How credible is the growth data?
• Others have more expertise in this issue
• Some questions/remarks:
• Changes in national income accounts since 2014: shouldn’t

matter for the long run perspective, for growth rates or their acceleration

• Savings/investment data may be less reliable (residual in NI

accounts, price deflation/aggregation issues)

Data Issues?

• How credible is the growth data?
• Others have more expertise in this issue
• Some questions/remarks:
• Changes in national income accounts since 2014: shouldn’t

matter for the long run perspective, for growth rates or their acceleration

• Savings/investment data may be less reliable (residual in NI

accounts, price deflation/aggregation issues)

• measurement problems in unorganized sector and services

Data Issues?

• How credible is the growth data?
• Others have more expertise in this issue
• Some questions/remarks:
• Changes in national income accounts since 2014: shouldn’t

matter for the long run perspective, for growth rates or their acceleration

• Savings/investment data may be less reliable (residual in NI

accounts, price deflation/aggregation issues)

• measurement problems in unorganized sector and services
• increased transition from unorganized to organized sector may

account for some of the acceleration?

Explanations for Acceleration?

• The authors make no attempt made to fit any growth model

to the data, nor do they provide any conceptual framework

Explanations for Acceleration?

• The authors make no attempt made to fit any growth model

to the data, nor do they provide any conceptual framework

• Note that the key facts in Part 1 pertain to second derivatives

(growth acceleration) and second moments (growth volatility)

• f GDP

Explanations for Acceleration?

• The authors make no attempt made to fit any growth model

to the data, nor do they provide any conceptual framework

• Note that the key facts in Part 1 pertain to second derivatives

(growth acceleration) and second moments (growth volatility)

• f GDP
• Most growth theories deal with the first derivative — growth

rates (mostly long run/steady state)

Possible Frameworks:Neoclassical Growth Models

• Neoclassical growth models seem quite irrelevant, apart from

pointing to importance of investment rates and productivity growth (Solow style growth accounting)

Possible Frameworks:Neoclassical Growth Models

• Neoclassical growth models seem quite irrelevant, apart from

pointing to importance of investment rates and productivity growth (Solow style growth accounting)

• Long run growth rate driven by productivity growth, entirely

exogenous in neoclassical model

Possible Frameworks:Neoclassical Growth Models

• Neoclassical growth models seem quite irrelevant, apart from

pointing to importance of investment rates and productivity growth (Solow style growth accounting)

• Long run growth rate driven by productivity growth, entirely

exogenous in neoclassical model

• Short run: predicts growth deceleration rather than

acceleration (given constant investment rate and productivity growth)

Possible Frameworks:Neoclassical Growth Models

• Neoclassical growth models seem quite irrelevant, apart from

pointing to importance of investment rates and productivity growth (Solow style growth accounting)

• Long run growth rate driven by productivity growth, entirely

exogenous in neoclassical model

• Short run: predicts growth deceleration rather than

acceleration (given constant investment rate and productivity growth)

• Acceleration is consistent with neoclassical model, combined

with fast enough increases in investment rate and productivity growth

Possible Frameworks:Neoclassical Growth Models

• Neoclassical growth models seem quite irrelevant, apart from

pointing to importance of investment rates and productivity growth (Solow style growth accounting)

• Long run growth rate driven by productivity growth, entirely

exogenous in neoclassical model

• Short run: predicts growth deceleration rather than

acceleration (given constant investment rate and productivity growth)

• Acceleration is consistent with neoclassical model, combined

with fast enough increases in investment rate and productivity growth

• But causes of the latter need to be understood

Endogenous Growth Models

• These seem more relevant — based on spillovers that

generate dynamic increasing returns in the aggregate production function

Endogenous Growth Models

• These seem more relevant — based on spillovers that

generate dynamic increasing returns in the aggregate production function

• Spillovers of what? R&D? Human Capital? Neither seem

relevant so far in the Indian context

Endogenous Growth Models

• These seem more relevant — based on spillovers that

generate dynamic increasing returns in the aggregate production function

• Spillovers of what? R&D? Human Capital? Neither seem

relevant so far in the Indian context

• Perhaps spillovers in adoption and diffusion of technology

(international frontier more accessible owing to trade/FDI

• penness Goldberg et al (2010))

Endogenous Growth Models

• These seem more relevant — based on spillovers that

generate dynamic increasing returns in the aggregate production function

• Spillovers of what? R&D? Human Capital? Neither seem

relevant so far in the Indian context

• Perhaps spillovers in adoption and diffusion of technology

(international frontier more accessible owing to trade/FDI

• penness Goldberg et al (2010))
• Agglomeration externalities, emphasized in economic

geography models: sharing of key inputs, market access, diffusion of knowhow

Endogenous Growth Models

• These seem more relevant — based on spillovers that

generate dynamic increasing returns in the aggregate production function

• Spillovers of what? R&D? Human Capital? Neither seem

relevant so far in the Indian context

• Perhaps spillovers in adoption and diffusion of technology

(international frontier more accessible owing to trade/FDI

• penness Goldberg et al (2010))
• Agglomeration externalities, emphasized in economic

geography models: sharing of key inputs, market access, diffusion of knowhow

• Not aware of many empirical studies of such agglomeration in

the Indian context (mention recent work of Hyun and Ravi (2018) estimating effects of SEZ policies)

Spillovers; Community Networks

• Relevance of community-based networks through which

spillovers occur

Spillovers; Community Networks

• Relevance of community-based networks through which

spillovers occur

• Production clusters are important in both China and India in

specific industries (Long and Zhang (2011, 2012) , Banerjee and Munshi (2004))

Spillovers; Community Networks

• Relevance of community-based networks through which

spillovers occur

• Production clusters are important in both China and India in

specific industries (Long and Zhang (2011, 2012) , Banerjee and Munshi (2004))

• Involve collection of small firms with high degree of

specialization, extensive subcontracting, pooling of capital and risks

Spillovers; Community Networks

• Relevance of community-based networks through which

spillovers occur

• Production clusters are important in both China and India in

specific industries (Long and Zhang (2011, 2012) , Banerjee and Munshi (2004))

• Involve collection of small firms with high degree of

specialization, extensive subcontracting, pooling of capital and risks

• Have achieved extraordinary high rates of growth; overcome

market/institutional weaknesses in finance, contract enforcement, access to knowhow

Spillovers; Community Networks

• Relevance of community-based networks through which

spillovers occur

• Production clusters are important in both China and India in

specific industries (Long and Zhang (2011, 2012) , Banerjee and Munshi (2004))

• Involve collection of small firms with high degree of

specialization, extensive subcontracting, pooling of capital and risks

• Have achieved extraordinary high rates of growth; overcome

market/institutional weaknesses in finance, contract enforcement, access to knowhow

• Organized on the basis of social community origins —

clan-hometown in China (Peng (2004), Greif and Tabellini (2017), Dai et al (2018)), caste in India (Munshi (2014))

Community Networks

• Empirical analyses of community network based

agglomeration are limited by data availability (small firms, social origins of entrepreneurs)

Community Networks

• Empirical analyses of community network based

agglomeration are limited by data availability (small firms, social origins of entrepreneurs)

• Spillovers hard to estimate, have to be inferred via indirect

means; quantitative studies typically limited to specific industries and locations (eg garments, diamonds)

Community Networks

• Empirical analyses of community network based

agglomeration are limited by data availability (small firms, social origins of entrepreneurs)

• Spillovers hard to estimate, have to be inferred via indirect

means; quantitative studies typically limited to specific industries and locations (eg garments, diamonds)

• Some recent work (Dai et al (2018)) in context of China

pertains to the entire economy — rural county-based community networks estimated to have contributed approximately 40% of entry and capital investment between 1990-2009

Community Networks

• Empirical analyses of community network based

agglomeration are limited by data availability (small firms, social origins of entrepreneurs)

• Spillovers hard to estimate, have to be inferred via indirect

means; quantitative studies typically limited to specific industries and locations (eg garments, diamonds)

• Some recent work (Dai et al (2018)) in context of China

pertains to the entire economy — rural county-based community networks estimated to have contributed approximately 40% of entry and capital investment between 1990-2009

• Analogous studies in the Indian context would be valuable

(ongoing efforts to organize data from Ministry of Company Affairs for all registered companies)

Limits to Growth Acceleration via Community Networks

• Growth spurts limited to specific community networks

Limits to Growth Acceleration via Community Networks

• Growth spurts limited to specific community networks
• Chinese production clusters were oriented towards domestic

market; export oriented production tends to be vertically integrated

Limits to Growth Acceleration via Community Networks

• Growth spurts limited to specific community networks
• Chinese production clusters were oriented towards domestic

market; export oriented production tends to be vertically integrated

• Were oriented towards low end manufacturing, with low

requirements for knowhow, education and capital per entrepreneur

Limits to Growth Acceleration via Community Networks

• Growth spurts limited to specific community networks
• Chinese production clusters were oriented towards domestic

market; export oriented production tends to be vertically integrated

• Were oriented towards low end manufacturing, with low

requirements for knowhow, education and capital per entrepreneur

• Limits to growth of domestic market, rising demand for

product quality

• Need to upgrade quality to sustain growth

Limits to Growth Acceleration via Community Networks

• Growth spurts limited to specific community networks
• Chinese production clusters were oriented towards domestic

market; export oriented production tends to be vertically integrated

• Were oriented towards low end manufacturing, with low

requirements for knowhow, education and capital per entrepreneur

• Limits to growth of domestic market, rising demand for

product quality

• Need to upgrade quality to sustain growth
• Similar problems likely to confront Indian IT sector (even

though it has been export oriented from the very beginning)

Challenge in Maintaining 7% Growth

• Part 2 of the paper narrate problems with sustaining high

investment rates, exports, improving credit quality

Challenge in Maintaining 7% Growth

• Part 2 of the paper narrate problems with sustaining high

investment rates, exports, improving credit quality

• Add other structural constraints:
• resources (land, energy, water)
• pollution
• limits to IT export growth
• low quality urbanization/urban governance
• rising inequality/political pressure to redistribute/loan bailouts

Challenge in Maintaining 7% Growth

• Part 2 of the paper narrate problems with sustaining high

investment rates, exports, improving credit quality

• Add other structural constraints:
• resources (land, energy, water)
• pollution
• limits to IT export growth
• low quality urbanization/urban governance
• rising inequality/political pressure to redistribute/loan bailouts
• Agree it will not be easy...
• But we economists tend to be pessimistic by nature, and

don’t really understand spillovers or what drives high growth