Market reforms in India and the quality of economic growth.

AuthorManish, G.P.
PositionReport

I believe, as a practical proposition, that it is better to have a second rate thing made in our country, than a first rate thing that one has to import.

--Jawaharlal Nehru (qtd. in Forbes and Wield 2002, 5)

India experienced a growth spurt during the 1980s. This decade witnessed an annual increase in real per capita gross domestic product (GDP) of 3.9 percent, a rate far higher than the rather placid rate of 1.7 percent recorded for the three previous decades between 1950 and 1980. This robust growth continued in the 1990s and increased further to nearly 6 percent during the 2000s.

The fact that the spurt in growth occurred during the 1980s, a full decade before the advent of liberalization in the early 1990s, has generated much debate among economists analyzing the Indian growth experience. Dani Rodrik and Arvind Subramaniam (2005), for instance, used this high rate of growth as proof of the success of large-scale import substitution. This assertion in turn elicited responses from T. N. Srinivasan (2005) and Arvind Panagariya (2004, 2008). The former argued that the growth in the 1980s, in contrast to that of the 1990s and beyond, was built on the sandy foundations of large-scale external debt, whereas the latter claimed that the growth of the 1980s was itself caused by a "liberalization by stealth" that took place through this decade--scattered and unsystematic moves toward the market in a few sectors that nevertheless explain the high growth rates recorded.

This "great Indian growth debate" revolves around finding the sources of high growth recorded during the 1980s and after liberalization. In doing so, the participants have focused their attention on the quantitative aspect of GDP growth and have implicitly assumed no important differences in the underlying nature of this growth across these two periods. However, differences in the quality of goods, especially consumer goods, produced during these two periods would imply very different improvements in living standards despite the quantitatively similar increases in output. This qualitative aspect has been ignored in the debate thus far.

Imagine two economies, A and B, both of which have recorded a high annual rate of increase in per capita real GDP over the past decade--say, 5 and 7 percent, respectively. More investigation, however, reveals that the consumer goods produced in A embody obsolete technology, are often defective, are more or less homogenous with minimal product differentiation, and are in perpetual shortage, with long waiting lists to acquire them. Those produced in B, in contrast, embody the latest technology, seldom break down, offer consumers variety, and are available off the shelf. It follows that despite the similar quantitative increase in per capita real GDP in A and B over the course of the decade, the improvement in economic well-being and living standards has been far greater in B. Yet this aspect of the growth process of an economy would be completely missed by an economist who ignores the qualitative differences and instead focuses attention solely on the rate of GDP growth.

This paper investigates whether significant qualitative differences exist in consumer goods produced pre- and postliberalization in India by focusing on the changes in the quality of three goods in particular--telephone services, televisions, and watches. It thus attempts to fill the gap in the literature on India's growth experience; that is, it investigates if differing improvements in economic well-being were hidden behind the high growth rates recorded during the two periods.

The paper focuses on several key characteristics of goods that together serve as a proxy for quality. Using primary as well as secondary data, I study the technology gap between goods in India and the world market at that time, the prevalence of defects or faults in the goods produced, the waiting time required to obtain a good, and the extent of product differentiation and variety. Similar work can be found in Balassa (1959), Nutter (1962), Krueger (1975), and Cox and Alto (1998, 1999).

Warren Nutter analyzes the high growth rates recorded under central planning in the erstwhile Soviet Union. He examines disaggregated primary data in government documents across several consumer and capital goods industries and finds a marked deterioration in the quality of goods under the planned regime. For example, he finds that "the spectacular growth of detergents in the United States ... has no counterpart in the Soviet Union," where almost all the soap was produced in bar form even after World War II; that the variety in cotton textiles in the Soviet Union was far below that found in America; and that the "dyeing and finishing of Soviet fabrics fall far below Western standards" as a result of the predominance of "cheap sulfur dyes" (1962, 80).

Michael Cox and Richard Alm (1998, 1999) conduct a similar exercise for the United States during the 1980s and 1990s and find marked qualitative improvements in consumer goods over the two decades. In particular, they find that there was a sharp increase in product differentiation and in the variety of goods such as cars, houses, computers, and televisions as well as significant advance in the technology embodied in these goods.

This paper explains why I chose telephones, televisions, and wristwatches for further analysis; gives a brief overview of the changes that have occurred in the policy frameworks for the three goods; provides details on the qualitative changes that have taken place; and, finally, draws conclusions from these findings.

Why Telephone Service, Televisions, and Wristwatches Are Worth Examining

In this paper, I examine the qualitative changes over a thirty-year period (1980-2010) spanning the pre- and postmarket reform eras for three goods: telephone service, televisions, and wristwatches. The focus on these three goods is justified because each was heavily influenced by regulation in the 1980s as well as by the market reforms beginning in the late 1980s and early 1990s. For most of the 1980s, the production of all three goods and their components was subject to the industrial and foreign-exchange licensing system. The 1990s, in contrast, witnessed the delicensing and opening up of these sectors to the forces of competition. Thus, one is able to compare various characteristics of these goods across the structural break in policy. If it can be shown that there are significant differences in these characteristics across the policy regimes, studying these sectors has great relevance to the "great Indian growth debate."

Second, all three goods witnessed high rates of growth in both the pre- and postliberalization years; they all grew at rates equal to or greater than the real GDP growth rates for these periods. (1) Thus, the number of telephone connections (fixed and wireless) grew at an annual rate of 9 percent in the 1980s before increasing to 19 percent in the 1990s and 40 percent during the 2000s. (2) The production of televisions rose by 29 percent per year between 1980 and 1990 and by 8 percent during each of the following two decades." (3) Meanwhile, the watch and clock sector grew at a rate of 12 percent between 1981 and 1988, and the manufacture of wristwatches increased at a rate of 10 percent during the following ten years from 1988 to 1998. (4) The fact that these goods experienced high and quantitatively significant growth rates makes them pertinent to the question at hand.

Also, these three goods have higher average ownership rates when compared to some of the other consumer goods that were also affected by liberalization. Higher ownership means that these consumer goods were owned by a greater percentage of households, thus making them relatively better predictors of standards of living. In the case of televisions and wristwatches, this is true for both the pre- and postreform periods, whereas for telephones it holds true only for the latter period. (5) Thus, the average penetration rate of televisions was 17 percent as of 1990 and 64 percent in 2005, whereas that of wristwatches was 75 percent (mechanical) and 22 percent (quartz) in 1990 and 82 percent in 2005 (Rao and Natarajan 1996; Shukla 2010). The corresponding figure for telephones was less than 1 percent in 1990, 9 percent in 2005, and 66 percent in 2010 (Mani 2011). These figures stand in contrast, for example, to the average penetration rates of cars, air conditioners, and microwaves--among the other goods that were deregulated beginning in the 1990s. (6)

Overview of India's Policy Framework

Telecommunications

Under the Industry Policy Resolutions of 1948 and 1956, the production of telecommunications equipment was deemed to be of national importance and was reserved for state enterprises. (7) Indian Telephone Industries (ITI) was established in 1948 to manufacture telephone switches, transmission cables, and telephone instruments; Hindustan Cables Limited was set up in 1952 to manufacture a range of transmission cables; and Hindustan Tele-printers Limited was established in 1956 to produce terminal equipment such as modems and teleprinters. All three of these public-sector enterprises sold their produce to the Department of Post and Telegraph (P&T), the sole provider of telecommunications services in postindependence India.

Both the telecom equipment manufacturers as well as the P&T were shielded from competition--both domestic and foreign. The Industry Policy Resolutions of 1948 and 1956 barred Indian private firms from entry into equipment production or service provision. Meanwhile, imports of telecom equipment were subject to import licensing as well as to high tariff barriers.

This arrangement remained in place until 1984, when the New Telecom Policy allowed domestic private firms to manufacture selected terminal equipment meant for subscriber premises, such as electronic push-button phones, cordless phones, pay phones, and electronic...

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