SageMSElecture5 - The First Sage-Madras School of Economics...

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January 22, 2008 The First Sage-Madras School of Economics Endowment Lecture, 2007 Delivered in Chennai, December 14, 2007 India’s Dilemmas: The Political Economy of Policy-Making in a Globalized World Kaushik Basu Professor of Economics and C. Marks Professor of International Studies Department of Economics and Director, Center for Analytical Economics Cornell University Uris Hall Ithaca, New York 14853 Email: [email protected] Abstract The performance of the Indian economy, as measured by the growth rate of aggregate income, has been remarkable, both in terms of past performance and in comparison to other nations. Among the several factors behind this, two which stand out are the economic reforms of the early 1990s and the sharp increase in the savings rate following the bank nationalization of 1969. This outstanding aggregate growth however comes with growing inequality and (declining but still) unacceptably high poverty. It is argued that this is partly a consequence of globalization and gives rise to novel policy dilemmas. The need is for multi-country coordination of policies of a kind that has little precedence. India should use its improving global standing to initiate such an international effort.
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India’s Dilemmas: The Political Economy of Policy-Making in a Globalized World 1. Present Continuous to Simple Past The Indian economy is in an age of the present continuous. This is evident from a spate of recent titles: India Arriving (Rafiq Dossani), Propelling India (2 volumes, Arvind Virmani), India: Emerging Power (Stephen Cohen), India Globalizing (paper, present author). If India does not arrive, emerge or get propelled, there will evidently be a lot of disappointed authors. What are the chances that these same verbs will apply to India in the not too distant a future, but in the past tense? This is a convenient question with which to begin this enquiry. And to get to that we must start with the facts. That the aggregate Indian economy is growing very rapidly is now beyond question. Having grown at around 1% per annum from 1900 to 1950, and at a sluggish 3.5% through the 1950s and 1960s, India’s growth rate suddenly picked up in the late seventies. From 1993 the economy was growing even faster. Powered by the services sector (Chanda, 2007; Basu and Maertens, 2007), it seemed to be on a growth path of 6% per annum; and, over the last four years, the growth has been an astonishing 9%. This is clearly remarkable performance compared to India’s past, but how does it compare with other nations of the world? The answer is, very well; and this can be illustrated by creating a league table of nations in terms of per capita incomes. For this let us go back to 1975, the time when purchasing power parity (ppp)- corrected international data became widely available. If we take the 109 nations for which consistent data are available and track India’s movement through this chart, one can immediately see how the Indian economy has performed vis-à-vis other
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SageMSElecture5 - The First Sage-Madras School of Economics...

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