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This paper has reviewed the growth performance of India since 1950-51. It is widely believed
that the Indian economy has become less dependent on the weather over the last half century of
independence. This paper shows that there is a statistically insignificant reduction of the impact of
rainfall on Indian agriculture and of rainfall on the Indian economy (as a whole). agriculture is as
dependent on rainfall in the fourth quarter of the century as it was in the third. On the overall impact of
rainfall on GDP the expected decline in the supply side effect (share of agriculture in GDP) seems to
have been offset by demand side effects.

The paper also shows that Indian economic growth has been remarkably stable. We are
statistically able to distinguish only two phases of growth during its post-colonial history. The first
phase characterised as the µIndian version of socialism¶ starts after independence and lasts to the end of
the seventies. The second phase, which starts thereafter (1980±81) is still going on and is characterised
by µExperiments in Market Reform.¶ There was a sharp and statistically significant acceleration in the
growth rate during the market reform phase. During the first socialist phase the economy averaged a
growth of 3.5% per annum with per capita growth averaging 1.3% per annum. Growth accelerated to
an average of 5.7% per annum during the market reform phase with per capita income growing at an
average rate of 3.6% per annum.

We also find a (statistically) significant acceleration in the rate o f growth of services during the
market reform phase. In the case of manufacturing the higher growth rate during the eighties was more
in the nature of a recovery from the oppressive hand of socialist controls & public monopolies and
aclosing of the gap between actual and potential output that had opened as a consequence. As a
consequence the share of GDP from services does not show any abrupt change (discontinuity) and has
been rising slowly but steadily over the past half century. With a change in orientation of the
government from socialism to market there was a change in the rhetoric of the government and of
intellectuals and consequently in the atmosphere/environment in which private agents and investors
operate. This change in orientation started in the late seventies when the still µsocialist¶ oriented Mrs
Gandhi broke the railway strike in 1976. The change continued with the coming to power of so called
µright-wing¶ political parties such as the Congress (O) and the BJP (though some of the coalition
partners were Indian socialists). acceleration of GDP growth from 2.6% per annum during 1965-6 to
1979-80 to 5.6% annum during 1980-81 to 1991-92.

One µpuzzle¶ is how such a significant growth impulse resulted from what appear prima facie to
be modest changes in the control regime relative to what happened in 1991-92. The paper has argue
that the economic reforms introduced during the 1980s had a great deal of credibility. As a result the
rate of growth of private investment accelerated and the structure of investment moved towards
machinery & equipment and the quality of machinery and equipment improved because of greater
access to imported capital goods. This played an important role in the growth acceleration. In addition,
the output gap had opened up during the Socialist Growth sub-phase due to the (policy resultant)
suppression of economic growth below its potential was closed during the µmodest reform¶ sub-phase.
This gap was eliminated during the first half of the market reform phase, partly because of the supply
side stimulus provided by slower growth of oil prices and the demand side stimulus provided by the
rising fiscal deficit. Thus the acceleration of growth in the market reform phase had a substantial
element of temporary acceleration above its potential, a catch-up process that bridged the output gap by
round 1990-91. There was also a small increase in the growth rate during 1992-93 to 2003-4 (over and
above this µgap closing¶ acceleration) following the introduction of broader reforms.

The paper showed that these reforms gave rise to a statistically significant spurt in the growth
rate of manufacturing, which was reflected in a spurt in overall growth. Among the likely reasons for
«

(a) The economy¶s inability to sustain this growth spurt are the large gaps in policy reforms
relating to agriculture, mining, (private good) infrastructure (e.g. electricity, railway) and labour-
intensive manufacturing.

(b) The failure of public monopolies to provide critical infrastructure services like electricity
and rail transport.

(c) The deterioration of government supply (quantity & quality) of public and quasi-public
goods (security & safety, roads).

(d) The dissension within the ruling coalition / party / organisation that undermine credibility of
reform.

We seem currently to be stuck at the µBharatiya¶ rate of growth of around 5.8% per annum.26
In fact the trend rate in 2002-3 appeared to be about 1% point lower than this because of the very sharp
cyclical decline in growth that occurred in 2002-3. With the cyclical recovery of the economy to over
8% in 2003-4 and a forecast of 6% to 6.5% growth rate in 2004-5, the economy is returning to the
µBharatiya¶ rate of growth trend of 5.8% per annum. If the pace of reforms is maintained at the average
rate seen since 1991-2, there is a good possibility of the trend growth rate creeping up to 6 to 6.5%
range. Shift to a sustained growth rate of 7% to 7.5% will require faster reforms. This includes, (a) a
much deeper and more dedicated effort to hack away the jungle of controls than has been seen so far.
(b) A reversal of the deteriorating trend in the quality of governance with respect to the supply of public
(de-criminalization of politics, a police force that implements the law) & quasi-public goods and
services.

Sixty years ago, the people of India made a tryst with destiny. Until sixteen years ago, that
destiny seemed a distant dream. Today ± thanks to economic reforms and globalisation ± we are
confident that we can achieve our goals and redeem, substantially, the pledge that we made to our
people that we shall wipe out poverty. Every day we add a new line to our growth story.
Mr. P. Chidambaram, Finance Minister India
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The Indian diamond trade has good cause to worry: over ´ |

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half of India¶s 5500 diamond manufacturers depend on this business for their livelihood. They
fear that oversupply of diamonds in the market could kill their business and they are waiting
for a positive signal from De Beers.

That has not yet come and the Indian diamond trade, which| |
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| , is getting increasingly restive at De Beers¶ attitude. While senior
officials of Argyle rushed to India earlier this month to reassure their key clients, De Beers has
not done the same, preferring to wait till the next annual meeting with the Indian
manufacturers scheduled in October. This is in contrast to a previous occasion last year when
De Beers officials rushed to India when it appeared that Indian traders were planning to visit
Russia to establish direct links with sellers.

Argyle¶s attempts to soothe their Indian clients reflect the importance the company attaches to
this country. Argyle roughs are difficult to cut and require a lot of|
| 
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something that is|
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|--Trade sources say that if it was not for
Indian cutters, these diamonds would be fit only for industrial use and a whole new market has
cropped up over the past decade in small diamonds. If the Australian company plans to sell
directly into India, it has to keep the trade here on the right side. Indeed,  | |
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Argyle broke off its contract with De Beers, to whom it sells 40 million carats a year, with
effect from July 1 and declared its intentions to sell directly to clients. India figures
prominently in the company¶s plans and its Bombay office has been overactive in recent
weeks, holding meetings with clients to ensure that the relationship is not jeopardized.
However, at the same time, there are  || 
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presumably coming from the     !and it is only a matter of
time before prices crash. This, say traders, will be bad for the industry in the short and the long
term, because Indian manufacturers are already sitting on huge amounts of inventory.

There was talk of an import ban, but in the end the trade bodies decided that the matter would
be left to the individual manufacturers. But considering that many traders and manufacturers
have been|

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|there is little chance of a steady
inflow of cheap Argyle diamonds slowing down. This could spell doom for the smaller traders
who rely on thin margins.

The Indian diamond trade is also worried that the international diamond trade is in for a shake-
up which could change the way the business is run.|"# |
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$"|traders have begun to ask and are waiting for answers.

The diamond trade in India has already been suffering due to| 
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|which come mainly from Russia and fall outside the highly controlled De Beers
cartel which releases stocks into the market carefully in order to manage prices. Large amounts
of floating small diamonds, bought mainly by small traders, threaten to jeopardize the diamond
business which is based on the notion that a diamond is a very rare object. De Beers has not
managed to plug supplies of these smuggled diamonds.

The bigger players and sightholders have long standing relationships with De Beers and the
CSO and they have offices all over the world. But in recent years, Argyle has, through its own
office in India, built strong contacts with Indian manufacturers, which it intends to consolidate.
It has given tremendous support to small and medium sized manufacturers and helped them
export. With the ^ |
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|, both sides need
each other. De Beers too cannot afford to annoy its Indian clients but unless it takes urgent
steps to restore the eroding confidence, it may find that it does not have too many supporters
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conomic re orms initiated in 1990s have trans ormed the Indian economy rom an
in ard-looking economy ith moderate gro th to an internationally competitive, ast
gro ing economy. The average annual gro th rate o the economy increased rom
5.7 per cent in 1991/92-1996/97 to 8.7 per cent in 2003/04-2006/07.

à  
&||„uring the decade o 1990s, declining trend in public sector investment that set
in year 1979-80 continued or most part o the decade. o ever, terms o trade ere kept
avourable to agriculture sector during 1990s by hiking level o cereal prices t h ro u g h go v e r n
me n t s u p p o rt , t ra de liberalization and exchange rate devaluation.

The period o 1997/98 to 2002/03 sa the orst per ormance o the agriculture sector on
account o the continuing decline in public investments, slo adoption o ne methods
and technology, large scale imports o some commodities also triggered the slo do n in the
sector.

 &| With the abolition o T ct and reducing the public sector monopoly in many
sectors, the industrial sectors itnessed a sharp rise rom 5.7 per cent in 1990-91 to 7.0 per
cent in the period 1991/92-1996/97.

'

&| With opening up o the orld economy and increased investments, the
services sectors gre rom 6.3 per cent in 3..8-09
|
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griculture 2.7 2.5 1.3 4.4 4.0 3.7 0.9 4.9 2.6

and llied

Industry 5.8 6.2 4.4 6.4 5.7 7.0 4.1 8.3 8.6
anuacturing 5.8 5.9 4.3 5.8 4.8 7.5 3.9 9.1 9.4

ervices 4.2 5.2 4.0 6.3 5.9 6.4 7.8 10.2 10.6


* verage or the gro th rates o various indicators or 1950s is the average o nine year, i.e. rom 1951-52 to 1959-60.
- dvanced estimates
ource : I


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