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India shining brighter than it seems

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December 12, 2003 11:10 IST

There is no dearth of pessimists who would "sound a note of caution" regarding the feel-good sensations currently being experienced.

I, on the other hand, have for long held that India has always done better it gives itself credit for and certainly far better than the official figures suggest.

The reason is simple. The official figures are not just plain wrong, they are getting wronger. Most government officials privately admit this.

The figures are wrong because the organisations responsible for data simply cannot be islands of excellence in a sea of government sloth and inefficiency. It just doesn't work that way.

Further, I also believe that the gap between actual and official performance has increased and that we are grossly understating things.

This has, pari passu, meant that the better we have done, the worse we have felt and, in accordance with law enunciated above, the happier we have been.

So with the deepest apologies, I must post another bit of good news. Guy S Liu, Xiaming Liu and Yingqi Wei, all teaching in management institutes in the UK, have found* that "contrary to the conventional perception, India performed better than China in raising productivity until the mid-1990s."

Since 1995, however, China has done better simply by following more open trade and investment policies. Productivity increases there have been higher than in India, but not hugely so, I would surmise.

This is because getting a 6 per cent average growth rate on a 23 per cent savings rate and a 8.5 per cent growth rate on a 40 per cent savings rate suggest poor efficiency of capital use that is made up only by using large amounts of capital.

China, it would appear, has made the same mistake as the ones attributed to the east Asian tigers first by Alwyn Young** and later by Paul Krugman.

The authors have constructed a world production frontier using a sample covering 126 countries for 1978 to 1998. They have then estimated the economic efficiency of a country relative to the world's best possible practice. The impact of openness on efficiency has been estimated for two groups of samples, one large and one small.

For the former, only foreign direct investment and trade are examined to explain efficiency improvement. The results suggest that they were crucial.

But trade was significant only in the 1980s while FDI was always important and its level of significance substantially increased in the 1990s.

For the smaller sample, they used the black market premium as an additional measure of openness, that is, the higher the premium the less open the economy.

"The results show that FDI as an individual variable was still a significant determinant of efficiency improvement.... International trade still had a positive coefficient, but was no longer statistically significant when more explanatory variables were incorporated. Black market premium had the expected negative sign, but marginally insignificant."

When trade liberalisation started in 1991, peak tariffs in India were at 300 per cent. They were lowered to 150 per cent, to match China.

From then till 1997, India and China moved more-or-less in tandem. By the start of 1998, the two had competitively lowered their average tariffs to 20.1 and 20.3 per cent, respectively.

During the same period non-tariff barriers were also reduced in both the countries.

Then came Yashwant Sinha and pop went the weasel. When he was finance minister, Sinha adopted an uneven tariff policy with the result that India lost the momentum gained in the previous five years.

Even at the best of times, India's trade/GDP ratio was never more than 30 per cent compared to China's 40 per cent. Sinha widened the gap with his tariff policies.

Now that policies in the two countries are converging, say the authors, "over the next 10 years, which country will grow more and faster will largely depend on which is able to implement the openness policy more effectively."

* Openness and Efficiency of India and China Relative to the World Economy: A Comparative Study, research/papers/02-18.pdf

** The Tyranny of Numbers, Quarterly Journal of Economics, Vol. 110, August 1995

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T C A Srinivasa-Raghavan