research paper of indian economy

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1 Introduction

Chetan Ghate (Indian Statistical Institute, New Delhi)

• Published: 21 November 2012
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This article highlights India's growing economic importance on the world stage and focuses on the recent and future course of the Indian economy. India's remarkable economic growth in recent years has made it one of the fastest growing economies in the world. In 2011, India ranked as the 11th largest economy in the world in nominal US dollars. With respect to purchasing power parity, India has the fourth largest economy in the world after the United States, China, and Japan. The immense optimism surrounding the Indian economy is underscored in the 2010 Economic Survey , which alludes to the strong possibility of double-digit growth in the coming decade. While India's economic growth has been impressive, rapid growth has been accompanied by a slow decline in poverty, widening regional disparities, and continuing sociopolitical instability. Large sections of the population continue to be deprived of basic health and education.

India's remarkable economic growth in recent years has made it one of the fastest growing economies in the world. In 2011, India ranks as the 11th largest economy in the world in nominal US dollars. With respect to purchasing power parity, India has the fourth largest economy in the world after the United States, China, and Japan. 1 The immense optimism surrounding the Indian economy is underscored in the 2010 Economic Survey , which alludes to the strong possibility of double-digit growth in the coming decade. 2

Various chapters of this volume document that while India's economic growth has been impressive, rapid growth has been accompanied by a slow decline in poverty, widening regional disparities, and continuing sociopolitical instability. 3 The incidence of extreme poverty remains high. Large sections of the population continue to be deprived of basic health and education. The organized private sector has also not created enough jobs—which has led to a divergence between the growth and employment rates of the Indian economy. 4 High growth in recent years has also increasingly become associated with increased food inflation. 5 The growth experience across Indian states has been very disparate, with some of the largest states experiencing decelerations in growth in the 1990s. In effect, the low growth that characterized the pre-1980s has been replaced by a pattern of high but unbalanced growth in the post-1980s period.

Other obstacles have come to the fore as India moves toward transforming itself into a modern twenty-first-century economy. Land acquisition for industrialization has resulted in the displacement of people against their will and without proper compensation and adequate rehabilitation. This has led to deep social unrest in many parts of the country. There are other questions. Who should acquire land—the government or private parties? What constitutes an acceptable rehabilitation package? When are negotiations between private parties subject to a holdup problem? Will transforming agricultural land into industrial use reduce the food supply and raise food prices? 6 The issue of land acquisition has become politically very sensitive.

The caste system still affects the lives of a billion plus people in India. The caste system today is still an important determinant of people's economic choices, with government regulations at both the federal and local levels requiring caste-based job quotas in public sector jobs and caste-specific reservations at institutions of higher learning. There are also proposals for caste-based job quotas in the private sector. 7 The effect of the caste system on poverty reduction is an important issue. Scheduled castes and scheduled tribes have typically been two of the most disadvantaged sections of Indian society. 8 An important question is whether the speed of poverty reductionhas been faster for other segments of society than for scheduled castes and scheduled tribes households. 9 These issues find scholarly treatment in this volume.

An important cost of high growth in India has been deterioration in the quality of the environment. 10 This raises a host of questions. What are the environmental challenges of a rapid growth process in India? What is the role of economic instruments in reducing air pollution in India's rapidly growing cities? At the rural level, what is the role of community forestry—or more decentralized governance of forests—in arresting forest decline? Although the evidence in this volume suggests that there are several reasons to worry because of a deteriorating environmental quality of life in both rural and urban landscapes, some indicators suggest that India has been on an environmentally sustainable growth path.

With the aim of achieving rapid growth and eliminating poverty after independence in 1947, India adopted a statist planning model dictated by a philosophy of self-sufficiency. 11 This model—which only began to unravel after the mid-1980s—is referred to as the license-Raj system. The elements of the policy framework are well-known (see OECD Economic Surveys: India , 2007 ). Imports were strictly controlled by the government with purchases of most foreign capital goods banned. Foreign direct investment (FDI) was prohibited in many sectors of the economy. The state effectively controlled the expansion of the private sector with larger firms subjected to highly restrictive labor laws. And public sector enterprises proliferated. A predominant view is that the license-Raj system was ostensibly an activist, bottom-up, radical strategy for poverty elimination, but that because the policy framework was wrong, it failed to achieve the desired outcome of raising growth, which failed to reduce poverty. 12

Per capita real gross domestic product (GDP) growth in India from 1950 to 1980 (1.2% in per capita terms) 13 was less than the long-run average growth rates in the United States during this period 14 : There was minimal, if any, tendency to converge. 15 India's growth during this period was in marked contrast to the extremely rapid growth rates of Japan, South Korea, and Taiwan—later extending to Hong Kong and Singapore. The fast-growing Asian economies were quick to update their import substitution strategy of the 1950s to an export-led development policy in the 1960s. Educated labor forces in these economies helped transform primarily agricultural economies into manufacturing economies and then from economies that focused on low-skilled manufacturing to high-skilled manufacturing (Levin, 2010 ). This had the effect of removing millions from poverty.

In contrast, primary and secondary education in India floundered. This was a shortcoming of the Indian development model that was already noticed as early as the 1950s (see Nurkse, 1957 ). 16 The lack of emphasis on early education has had wider implications for India's long-run development and its future course. Without higher allocations to secondary education, for instance, India is not equipping its citizens to make a transition to a nonagriculture economy. The fast-growing sectors in India remain either capital intensive or skilled-labor intensive, meaning that drawing workers out of agriculture has been slow. This feeds into the overall problem of jobless growth. 17 The specter of massive urbanization also poses problems to come. A recent McKinsey Global Institute report predicted that India's urban population will increase from 340 million in 2008 to 590 million by 2030. 18 The puzzling—and somewhat tragic—aspect of India's sluggish growth in the first three and a half decades after independence was that all the signs for India to achieve rapid growth were propitious (Lal, 1999 ). For instance, modern industrialization, which began in the 1850s, gave India a head start in activities that promised to raise standards of living relatively easily. 19 India also had a relatively diversified natural base, a potentially large domestic market, no shortage of domestic entrepreneurship, and a political leadership that understood economics and was committed to development. 20

Much has been written about India's transformation starting in the 1980s (see Rodrik and Subramanian, 2005 ) when the country began to move from a dirigiste economy to a market-based economy. The excesses of the policies in the 1950s and 1960s began to show up in the 1970s. Minimal trade reforms instituted in the mid-1980s culminated in the big-bang reforms of 1991 (Panagariya, 2004 ). Ghate and Wright ( 2011 ) show that although trade reform was minimal and ad hoc in the mid-1980s, various indicators coincided with the growth turnaround of the Indian economy in the late 1980s. For instance, the effective tariff rate—proxied by duties as a percentage of total imports—sharply declined around 1987. India's real effective exchange rate—after adjusting for subsidies—exhibits a large real depreciation of 40% in the second half of the 1980s. One-third of three-digit industries were exempt from licensing in 1985 (Aghion et al., 2008 ). Other liberalization measures implemented in 1985 and 1986 involved allowing companies that had reached 80% capacity utilization to expand their capacity further. These and other nontrade reforms enacted in the mid- to late 1980s coincide with a shift up in India to a higher growth path in the late 1980s.

Following the Balance of Payments (BOP) Crisis of 1991, India embarked on market liberalization undergoing a host of reforms (see OECD Economic Surveys: India , 2007 ). Pervasive government licensing of industrial activity was almost eliminated and restrictions on investment by large companies were eased. This was at the heart of the New Industrial Policy. Direct tax rates were also reduced, inducing supply-side effects. In the financial sector, equity markets were transformed with new supervisory bodies introduced. Foreign suppliers were allowed to enter the market with a progressive lowering of tariffs. Rules governing FDI were also eased. These had the effect of opening the Indian economy up to competition and private entrepreneurship. An essential difference between the post-1991 Indian economy and the pre-1991 Indian economy is that for the first four decades after Indian independence—in which Indian economic planning was conducted under the framework of the Mahalanobis model—India's modern service and industrial sector lay predominantly in the public sector; only after 1991 did the private sector start coming into its own. Stimulating entrepreneurship, the reforms of 1991 moved India from being a mixed economy toward a private enterprise economy setting the stage for entrepreneurship to be the new engine of growth, with the role of the state slowly metamorphosing to that of an enabler.

The key issue looking forward is, having shifted to a higher-growth path, will it prove self-sustaining? India's savings and investment rates are above 35% and are rising. 21 Its current savings and investment rates are similar to those of the Asian Tigers during their take off years. The demographics of a young population offer a distinct growth advantage. 22 Trade has taken off with India's shift to a higher growth path. India has also significantly opened up to capital flows from 1991 onward—bestowing the attendant growth effects that come with such flows, such as through higher FDI. 23 Therefore, in terms of factor accumulation, sustaining India's higher growth path seems feasible. However, this volume suggests that the lack of appropriate policies to manage an unbalanced pattern of growth poses huge future problems for India, potentially jeopardizing India's growth story. It is, therefore, imperative to understand what has happened to the Indian economy and under what structural constraints before drawing policy lessons.

Why This Volume?

There are three reasons. First, the main goal of this handbook is to help readers acquire a deeper understanding of the issues that are germane to the growth pattern and development experience of India. This understanding is important for tackling the overall theme of the handbook: The nature and scope of government intervention matters for equitable and broad-based, long-run growth in India. The question becomes what combinations of policies (if any) can produce such a growth pattern, and what should be the role of the government in controlling and directing the development process. After all, development is not a formula in which the government identifies the optimal combination of resources for each industry that leads to rapid growth—if the conditions are right, entrepreneurs will discover those soon enough. Rather, government intervention should focus on making sure that “the conditions are right” by removing inefficiencies in ill-defined markets and reducing barriers to production. 24

Second, although policy research is important, it needs to be based on long-run considerations. Whether to enact certain public policies not only requires a long-run vision of future payoffs, but also diligence in implementation because they may produce few immediately recognizable effects on the welfare. Governments that are short-lived or that experience policy vacuums will not have the political will to implement development policies that will sustain long-run growth but may have unpopular short-run consequences. Democratically elected governments, in particular, are susceptible to the implementation of short-run policies while ignoring the long run (Ghate, 2003 ). By design, democracies are subject to changes in policies when new administrations take over. This has implications for long-run growth.

There is also a strong disconnect between research and economic policy design in India. Until recently, major government economic policy documents, such as the Economic Surveys , ministry reports, five-year plans, or the Monetary Policy Reviews , for instance, contained little theoretical foundation despite major methodological advances in the field of econometrics and economic theory. In comparison, other (i.e., advanced) countries tend to incorporate modern economic research into policy advocacy much more successfully. A hope of this handbook is to change policy discourse in India by bridging the analytical foundations of economic policy with long-run policy recommendations. It is to remind policy makers of the well-known aphorism that “either some dependable economic theory provides the necessary underpinning to economic policy, or economic policy does not have a dependable underpinning at all.” 25

Third, this volume is comprehensive. Several issues, such as a deteriorating environment, which is a severe cost of growth; higher education reform, which is a key mechanism for innovation; state-level policies and the political economy of center-state relations; and distributional conflict issues that threaten the Indian growth story find scholarly treatment in this book. In terms of presentation, while formal models are used in many chapters to explain a set of stylized facts or empirical regularities, the material should be accessible to the technically trained economist as well as the nontechnical (economist) reader. 26

The handbook reflects India's growing economic importance on the world stage. The focus is on the recent and future course of the Indian economy. The topics featured are firmly directed at development topics that are germane to India's experience. Care has been taken to pick both established scholars as well as younger scholars working on the frontier of their fields. Each section contains chapters that are both microeconomic and macroeconomic in nature. Therefore, consistency is with respect to section themes, not the modeling strategy choice of the chapter. In this respect, the handbook is unique. Finally, the important aspect of any handbook is permanence: The chosen chapters are core areas in which future research is required, as well as key elements of the overarching theme of the handbook. The chapters and section choices have been carefully chosen with this in mind. Hence, permanence and comprehensiveness are key features of the handbook. Finally, another important aspect is that it takes the theoretical and empirical foundations of economic policy seriously. To this end, it links discussions on the Indian economy and Indian development policy to growth and development research. The hope is that this handbook will set an academic standard for future research on the Indian economy.

Organization of the Handbook

The handbook is divided into eight sections, with a total of 31 chapters. The sections headings are “India's Historical Development,” “New Insights into Tackling Rural Poverty,” “Industrialization,” “Social Infrastructure and the Demographic Dividend,” “Politics and Policy,” “Macroeconomic Policy Reform,” “India and the World Economy,” and “Looking Ahead.” Each section contains chapters on specific areas that are consistent with the overall themes embodied in the section headings. I will briefly describe the objective of each chapter and how these fit the larger questions that characterize the choice of the broader sections of the handbook.

India's Historical Development

The first section, “India's Historical Development,” comprises two chapters that provide a broad review of India's historical development from 1757 to 2010. The first of these, chapter 2 , “India and the World Economy: 1757–1947,” by Tirthankar Roy, discusses the pattern of economic growth and structural change in the South Asia region between the end of the Mughal empire in the early eighteenth century until the end of the British empire in the mid-twentieth century. An overarching theme of this chapter is that early institutions set patterns for India's postcolonial growth. Further, the transition of power to postcolonial Indian development was made easier by the preconditions created during colonial times. These assertions are part of a broader line of inquiry on “the great divergence”: Historically, why did the West grow rich, whereas the non-Western world stayed poor? One of the key arguments that the author makes is that low average growth rates in colonial India mask important economic gains, even though these were restricted to a few industries, a few cities, and a few districts endowed with water, good land, and market access. For instance, colonial rule induced agricultural transformation, which helped spawn urban industrial giants such as Bombay (now Mumbai) and Calcutta (now Kolkata). The author notes that the British administrative tradition, which loved paperwork, left India with a massive volume of documentation. This would greatly help in pursuing these questions as future lines of research.

chapter 3 , “Battles Half Won: Political Economy of India's Growth and Economic Policy since Independence,” by Sadiq Ahmed and Ashutosh Varshney, studies India's long-term growth and development experience since independence in 1947. The authors undertake a detailed review of the key developments surrounding the evolution of the Indian economy. Part of the focus of this discussion is on highlighting what is sui generis about India's growth pattern—and the policy challenges this pattern throws up. The authors remind us that the pledge that India's postindependence leadership had undertaken to abolish mass poverty remains only partially redeemed. Indeed, one of the puzzles that characterizes India's growth process is that despite high growth rates, poverty in India has declined slowly. In addition, human development indicators remain weak by international standards, including the quality of health and education outcomes.

The politics of economic policy making are discussed next. Institutional (both formal and informal) features of the Indian polity are shown to have a strong bearing on economic policy. The authors argue that the concept of master narratives can be used to understand why it is not the economy predominantly (apart from inflation) that determines electoral fortunes in India. An interesting observation made is that universal franchise democracy typically followed the industrial revolution in the West. Independent India, in contrast, was born poor and overwhelmingly agrarian and with no restrictions on franchise. This explains—to a large extent—why inclusiveness has played a significant role in policy making in India compared to other countries.

Even though India's low growth–poverty elasticity is taken up in more detail in other parts of the handbook, 27 by talking about it at the outset, it serves to remind readers that the greatest challenge for India's policy makers today is to balance the growth momentum with inclusionary policies. 28

New Insights into Tackling Rural Poverty

Rural India is home to 75% of India's population with roughly the same proportion characterizing the poor in the country (Himanshu et al., 2010 ). The gap between creation of new jobs in agriculture and the number of new jobs created outside agriculture is increasing. Although there is no doubt that the rural nonfarm economy will also have to be a vital source for new jobs, a radical strategy to create rural jobs to reduce rural poverty is of the highest priority.

The section “New Insights into Tackling Rural Poverty” contains four chapters on rural poverty. What characterizes the choice of chapters is that they represent advances in theoretical and empirical research on tackling rural poverty. This volume does not intend to reproduce the findings of a large literature on rural poverty: Several excellent accounts in other published volumes exist on agricultural policy and poverty reduction. Rather, the chapters in this section provide microeconomic advice on the design and evaluation of government policies that have the potential to create rapid growth and pull people out of rural poverty into gainful employment in a sustainable way. 29

In chapter 4 , “Estimating Rural Poverty: Distributional Outcomes, Evaluations, and Policy Responses,” M. H. Suryanarayana provides an outcome evaluation of India's agricultural growth strategy across three phases of agricultural policy in India: 1950–1965 (first phase), 1967–1990 (second phase), and 1991–2010 (third phase). A general perception is that India's agriculture growth strategy has been effective in reducing poverty. This poses a puzzle: If agricultural growth has been effective in reducing poverty, how does one reconcile this with the current policy thrust toward food security (i.e., a plea for a universal public distribution scheme and the right to food security to be enshrined in a new food security bill) on the grounds that a large percentage of the of the rural and urban population is food insecure and undernourished, or with a plea for rural employment guarantee schemes on a national scale? The author argues that a new approach is required to evaluate India's agricultural growth strategy. In essence, for any evaluation of development strategies, their outcomes, and policy imperatives, it is important to have a meaningful understanding of the concept, a norm, and estimate of deprivation. Nonmonotonic effects among growth, poverty and inequality, survey design, and understanding of specific institutional features of rural labor markets also play major roles in overstating the extent of rural poverty in India. One of the purposes of this chapter is to have researchers examine more disaggregated indices of various components of living standards during different phases of development with updated reference norms. Otherwise, policy makers will end up recommending polices that may not address the real issues. The chapter concludes with a brief summary and an evaluation of the national employment guarantee scheme—which has become a capstone welfare state program—and its effectiveness as a tool for poverty reduction. 30

chapter 5 , by Prabal Roy Chowdhury, examines the SHG (self-help group)-linkage approach, perhaps the fastest growing microfinance model in India. A broad idea that motivates this chapter is the role for microfinance in poverty reduction. A general consensus of researchers and practitioners in the field is that microfinance fails to reach the very poor. The author develops a theoretical model that focuses on what is a key aspect of the SHG-linkage program, the role of nongovernmental organizations (NGOs) in linking the banks with the SHG, thereby acting as a conduit for channeling public funds to the borrowers. This research allows policy makers to identify potential inefficiencies associated with the SHG-linkage program, as well as compare the efficiency properties of the SHG-linkage program with the Grameen model (the dominant model in microfinance). The effect of microfinance on poverty reduction depends on whether credit reaches the poor, and whether, when it does reach the poor, it helps households through capital formation, thereby helping them get out of poverty. The insight gained by the chapter suggests an institutional arrangement among the government, nongovernmental organizations, and borrowers whereby the potential for microfinance to reduce poverty is realized from the efficiency gains due to such an arrangement. 31

Why has microfinance succeeded in India while microinsurance has not? chapter 6 , by Xavier Gineé, Lev Menand, Robert Townsend, and James Vickery, titled “Microinsurance: A Case Study of the Indian Rainfall Index Insurance Market,” describes the basic features of rainfall insurance contracts. These products are relatively new and have been offered in India since 2003. The authors summarize results of their previous research on this market, which suggests that price, liquidity constraints, and trust all pose significant barriers to increased take-up of such products. Rainfall insurance contracts have the potential to offer a significant tool to tackle rural poverty and distress. What mitigates this potential is that small farmers are not buying policies that hedge against their exposure, and the payouts are too low to launch farmers out of poverty. 32 In effect, there are multiple barriers to take-up. To have a meaningful impact on poverty, such insurance would need to be scaled up so that purchasers would buy more than unitary policies. The government can also increase the density of rainfall gauges, which would help reduce basis risk. However—and somewhat crucially—the purchasers of insurance can also be lenders, or the government, especially vis-à-vis the latter, because relief aid, or multibillion dollar loan waivers, tends to be very expensive for governments.

Tackling rural poverty and inclusiveness cannot be done in the abstract. chapter 7 , by Vegard Iversen, “Caste and Upward Mobility,” examines the channels and extent to which caste and social identity may have curbed upward mobility and made rural poverty more persistent, and whether there are signs of these transmuting in the postreform era. The chapter identifies two empirical puzzles in the literature that remain unresolved: (1) why political empowerment has not led to economic empowerment of disadvantaged castes in India; and (2) in contrast to the Beckerian view, why market reforms have not led to less discrimination and lessened the economic disparities of the disadvantaged castes. The author notes that a careful reading of the evidence suggests that rural poverty is declining across the board, but at a slower pace than one could have hoped for. One major weakness with Indian data relating to caste is that there are few if any longitudinal data on households that allow researchers to tease out causal stories on caste and mobility from unobserved individual and household characteristics. The author surveys the literature on field experiments as a way out of tackling the causality problem. A primary focus of the chapter is on discussing research design, as methodology matters significantly for assessing the effect of caste on poverty alleviation.

Industrialization

The third section, “Industrialization,” examines the problems facing the manufacturing sector in India. Historically, economic development has been synonymous with the advent of industrialization. In labor-surplus economies such as India, opportunities in labor-intensive manufacturing are vital for job creation and the rural-urban migration at the core of development and poverty reduction. In India, employment growth has not improved in spite of an increase in GDP (see chapter 3 ). For instance, during the period 1993–1994 to 2004–2005, while GDP growth accelerated to 6.5%, employment growth was 1.9% per annum. 33 In 2007–2008, the share of industry was 27% of GDP, just one percentage point higher than for 1987–1988. Although the research on employment elasticities is inconclusive (an issue that is discussed in chapter 8 ), some papers have shown that employment elasticities have not only been low in services, but also lower than industry (Papola, 2009 ). This would suggest that a rate of growth without an accelerated rate of growth in industry is not likely to lead to a higher rate of employment growth. There is also concern with the process through which agrarian land is acquired to build up infrastructure, industries, and various services, as well as with the recent strife in India over such acquisition.

For a labor-surplus economy, an important and relevant question becomes whether a liberalized trade regime in India has favored labor-intensive exports? Is India gaining from its labor advantage? In chapter 8 , “Performance of Indian Manufacturing in the Postreform Period,” Poonam Gupta and Utsav Kumar note that many developing countries have been successful in promoting the manufacturing sector and its exports. However, an acceleration of growth in manufacturing, and a concomitant increase in employment, has eluded India. Limited structural change in India has taken place in industry despite India's growth acceleration. Their chapter analyzes the reasons behind the lackluster performance of manufacturing in India (e.g., labor laws, poor infrastructure, financing constraints). The authors argue that states with relatively inflexible labor regulations have experienced slower growth of labor-intensive industries and slower employment growth. Using the data for growth in services and manufacturing across Indian states, they also show that labor market regulations and infrastructural variables can also explain the relative performance of these sectors across Indian states. Services sector growth is relatively higher in states that have inflexible labor regulations and poorer infrastructure. The implication is that sectoral policies matter in explaining the rise of the service sector as an engine of growth in India.

The informal economy has emerged as one of the most dynamic and active segments of the entire developing world. The informal sector is also a recurring theme in this handbook. Contemporary studies show that markets and competition both play dominant roles in determining wages in the informal sector. In chapter 9 , “Informal Sector and the Developing World: Relating Theory and Evidence to India,” Sugata Marjit and Saibal Kar look at how wage and employment in the informal sector respond to the shocks to which formal or organized/unionized segments of an industry are subjected (e.g., reduction in tariff rates, greater liberalization). The natural experiments the authors have in mind are the liberalization reforms of India in 1991: The economy was opened up to competition from an import competing sector. This led to the closure of many formal sector units, with the unleashing of unskilled labor from the formal sector that moved to the informal sector. What is surprising is that despite the release of unskilled labor after liberalization, informal wages increased. The authors create a simple general equilibrium model to explain this. Among other things, they argue that without capital accumulation in this sector—partly an outcome of capital mobility between the formal and informal sectors—the observed upward wage movement or productivity growth would not have been possible. The authors also find preliminary empirical support for their model: Growth in informal fixed assets used as an explanatory variable has a positive and significant impact on the unorganized (informal) wage in India. Future work could test the model with a variety of controls, and more empirical work needs to be done. By focusing on the urban informal wage (and therefore urban poverty) this chapter complements the discussion on rural poverty in chapters 4 – 7 .

In chapter 10 , “Structural Transformation and Jobless Growth in the Indian Economy,” Rubina Verma develops a three-sector general equilibrium model to account for India's unique pattern of structural transformation. Although this chapter also documents the rise of India's service sector discussed in chapter 8 , it constructs a theoretical growth model to understand India's pattern of growth vis-à-vis other Organization for Economic Cooperation and Development (OECD) and emerging economies to highlight what is sui generis about the Indian case.

The uniqueness of India's pattern of structural transformation is well known to growth and development economists. The preeminence of services in recent years meant that there has been a shift from agriculture to services, bypassing industry. Further, changes in GDP structure in India are asymmetrical to the workforce (employment in agriculture continues to persist at 58% of the population). The author's model—one of the first general equilibrium growth models calibrated to address these questions in the Indian context—shows that sector-specific total factor productivity (TFP) growth rates were important drivers of resource reallocation across the three principal sectors of Indian economy from 1970 to 2007. Although the model cannot match the levels of sectoral employment in the three sectors (it does a better job capturing the trend), it suggests ways in which this can be done (a modified version of the model in which wages in services are higher than in agriculture and industry does a little better in its ability to track the level of sectoral employment shares). Clearly, future work is needed in this area, in particular, looking at models that incorporate specific (exogenous) sectoral policies to help explain India's pattern of unbalanced growth. 34

In chapter 11 , “Development, Displacement, and Food Security: Land Acquisition in India,” Abhirup Sarkar is concerned with the process by which agrarian land is acquired to build up infrastructure, industries, and various services, as well as that process's relation to the project of economic development. Recent strife in India over land acquisition for the purpose of industrialization is relevant to structural transformation in many developing countries. When trickle down is minimal, the question of compensation for those who lose out in the process of economic transformation becomes vital. The author suggests that most of India's large food production is the result of high net sown area, not productivity per acre. Therefore, allocating a small fraction of this land to industrialization would forego some food production, although this can easily be picked up by higher productivity in the remaining area. Fragmented land-holding patterns, however, prevent such productivity increases, which poses an important challenge. Fragmented land holdings can also lead to a speculative holdout. Divergence between the market price and shadow price of land would also induce farmers not to sell their land. Another problem is displacement (which also happens with dams) with the related issue of credible compensation.

The questions then become whether the government should acquire land for private enterprises if the purchase of land involves significant transaction costs, and what an appropriate compensation model should be.

Social Infrastructure and the Demographic Dividend

The fourth section, “Social Infrastructure and the Demographic Dividend,” features chapters relating to primary and secondary education reform, higher education reform, health reform, and the demographic transition in India.

It is widely agreed by development economists and practitioners that primary and secondary education has been grossly neglected in the course of Indian economic planning. India has one of the highest rates of teacher absenteeism in the world (Kremer, 2005 ). Related to this, approximately 58% of school-going children in rural India in class 5 (roughly 10–11 years old) cannot read material meant for 7- to 8-year-olds in class 2 (ASER, 2008). According to recent education statistics of the Human Resource Development Ministry, the dropout rate up to the fifth class was 25.43%; up to the eighth class (ages 13–14), it was 46%; and up to the 10th class (ages 15–16), 59.87%. These are All-India averages, with large variations across regions, gender, and socioeconomic groups. The rate of growth induced by higher human capital accumulation might have vastly changed the growth pattern of India. 35 In chapter 12 , “Reforming Primary and Secondary Schooling,” Anjini Kochar provides a summary of the state of primary and secondary education in India. Her chapter notes the achievements of the sector: increased enrollment, particularly in the primary stage, and a narrowing of many traditional gaps. The supply-side impetus to schooling—which occurred through a host of programs, from independence up the 1990s, and thereafter consolidated through the Sarva Shiksha Abhiyan in 2002—has led to significant increase in access to schools throughout India. Indeed, one finding in the literature is that the probability of a school being located within a given distance of a child's habitation of residence does increase enrollment. However, school location policy also affects other characteristics of schools that are known to have important effects on learning. For instance, small school size, which tends to be the norm in India because of sparsely distributed and low populated habitations, means that the total numbers of teachers per school are small. This leads to multigrade teaching, which can significantly affect language and mathematics test scores. Schools with two or fewer teachers are less likely to attract students, with the negative effects of small school size being particularly strong among scheduled tribe and scheduled caste communities. Importantly, school location does affect school enrollment, but also determines other inputs—such as the caste composition of students plus the numbers of teachers—that need to be incorporated for any purposeful impact evaluation. The chapter also discusses how policy formulation to combat large teacher shortages is made difficult by the nature of the labor market for teachers; a related discussion looks at the effectiveness of performance pay on tackling high teacher absenteeism. What is novel about the chapter is the critical evaluation of the evidence from field experiments and randomized evaluations in formulating education policy—a discussion that is missing in recent surveys—and a methodological approach that is increasingly being used to evaluate schooling policies in India.

In chapter 13 , “Higher Education Reforms in India,” Shyam Sunder takes a critical look at the higher education sector in India. The author notes that even though the number of institutions and enrollment in higher education continue their rapid growth (in excess of population growth), the quality of this education outside of a handful of institutions is questionable. The number of such graduates remains small relative to the population and demands of India's economy. In general, graduate education continues to remain in an alarming state with respect to both quality and quantity. India's impressive economic performance has made the problem in higher education seem less urgent than it actually is. The chapter discusses several of the challenges facing higher education: the system's inability to attract the best of the best to lives of teaching and scholarship, separation of education and research, and a short-term profit motive by private education providers, among others. An issue that is discussed somewhat at length is that the privatization of higher education in India—the current norm—through investor-owned universities will only exacerbate the shortage of teachers and scholars in India. This is because it will be impossible to persuade investor-operators of private universities to invest in advanced training of their faculty without compensating revenues. The author notes that there is little theoretical or empirical evidence in the world that supports prospects of success of the for-profit model in building higher education. 36 Thus, higher education provides an opportunity for more significant reform. The author discusses several reform proposals for this sector.

In chapter 14 , “Health and Health Care Policy in India: The Case for Quality of Care,” Jishnu Das and Jeffrey Hammer argue that despite high private expenditures on health in India, policy discourse reflects a constant preoccupation with the public sector. Even historically, envisioning a universal system of health care, the main focus of public health policy—like schooling policy—has been better “access” to public primary health care centers. This focus has been unduly narrow with little attention paid to understanding the behavior of health providers, or conducting a serious outcome evaluation of any of the components of the link from which health services can be availed, be they primary care centers or superspecialty hospitals. The authors argue that “access” is not the binding constraint in the provision of primary health care in India. The problem is the quality of care provided both in the public and private sector. The authors also suggest how standard measures of “quality” can be directly counterproductive. The key focus should be on how health policy affects the quality of services and how to make this a starting point for future policy formulations. Going forward, the authors suggest the absence of a good theory of equilibrium in the medical market place in India. This suggests a rich ground for future research.

In chapter 15 , “Population Dynamics in India and Implications for Economic Growth,” David E. Bloom looks at the consequences of India's demographic transition—higher population growth and transforming age structure—and its impact on growth. The importance of this question cannot be overstated. In a comparison group comprising select East Asian economies, approximately 2% of their growth in income per capita (over 1975–2005)—roughly one-third of the supposed miracle—can be attributed to demographic change. Counterfactual experiments based on low and medium fertility rates for India imply a sizeable demographic dividend—roughly to the order of an additional percentage point or more annually to per capita income growth (projecting forward to 2050). The key policy question is whether health and education allocations (at all levels) by the government—issues discussed in the other chapters in this section—will grow in tandem to transform India's youth advantage into productive employment. The author notes that the absorptive capacity of India's economy to absorb workers into productive employment will depend on a host of complementary factors ranging from good governance to efficient infrastructure. Therefore, policy complementarities will be critical in the way that both mortality and fertility changes make India's population change in a way that is favorable to growth.

Politics and Policy

One cannot ignore the crucial role played by politics in economic policy or the impact of political economy forces on the quality of governance and the emergence of rent-seeking. The fifth section of this volume, “Politics and Policy,” contains chapters that deal with the political economy of reform, the political economy of infrastructure spending, bureaucratic corruption, distributional conflict, and the political economy of environmental policy in India. Together, they seek to explain the political economy of public policy formation in relation to economic growth and poverty alleviation in India, and the implications this has for better governance and reduced rent-seeking.

In chapter 16 , “The Dynamics and Status of India's Economic Reforms,” Nirvikar Singh examines the political economy of pending economic reforms in India, with an emphasis on domestic reforms. Some of the specific issues addressed include a discussion of governance structures, implementation of the value added tax (VAT), the introduction of delivery mechanisms for public services, civil service reform, labor laws, corporate governance, bankruptcy laws, land markets, and agriculture reform. One of the main insights of the chapter is that discussions of reform in India usually list an ideal set of reforms, but do not analyze how such changes may be operationalized in a politically feasible manner. Specific areas such as agriculture, land markets, labor, education, and infrastructure all have special characteristics, either in terms of numbers, positions in the income hierarchy, complexity, expertise, or diversity of interests, which make progress more difficult. Recognizing such factors and incorporating them into policy design might be a better way to proceed rather than articulating ideal end points without any pathway for reaching them. Therefore, a crucial question this chapter addresses has to do with understanding when and how economic reform happens.

In chapter 17 , “The Political Economy of Infrastructure Spending in India,” Stuti Khemani attempts to understand a significant puzzle in the political economy of infrastructure spending in India: the coexistence of low public spending on infrastructure (as a proportion of the total budget) in Indian states, and low efforts to secure private participation for greater investments, despite large demand from citizens for infrastructure services. A broader attempt of the chapter is to identify the key political constraints to effective infrastructure policies.

The argument is based on two separate assumptions—one, on the division of voters between organized interest groups that seek rents, and unorganized swing voters who seek general benefits from public goods; and two, on the degree to which different kinds of public spending programs can be used for rent-seeking versus vote-buying, with infrastructure projects more suited to the former and broader poverty alleviation programs to the latter. The optimal strategy for politicians may be derived to show that they use poverty alleviation programs such as price subsidies, workfare (employment through public works), and other direct transfers to win electoral support from swing voters, and infrastructure programs to gain rents and target benefits to organized core constituents. The author provides empirical evidence for the theoretical model, which has interesting policy implications. If there are weak political incentives to provide broad public goods, deliberate governance interventions by civic society organizations may help swing voters to solve their coordination problems. These interventions could be in the form of compiling and disseminating data on public good performance at the level of electoral constituencies (as seen on the Member of Parliament Local Area Development Scheme [MPLADS]). The media could have a crucial role here. Another area of institutional reform would be to decentralize urban infrastructure and its financing to urban local governments.

What are the effects of the size and scope of government on the incidence of corruption? In chapter 18 , “Aspects of Bureaucratic Corruption,” Gautam Bose attempts to identify treatments of corruption that draw on characteristics of underdevelopment either as causes or as consequences. There is a very small amount of literature (both empirical and theoretical) on corruption in the Indian context. A primary reason for the lack of empirical work is the unavailability of data: Both parties typically benefit from corruption, and, therefore, neither has an incentive to report it. The author looks at three aspects of government corruption in developing countries, and in India in particular: red tape, rent-seeking, and the abundance of intermediaries (such as middlemen). The author argues that if wasteful red tape is specifically a characteristic of public provision (not private), then provision should be privatized, as suggested by the “efficient corruption” literature.

The author emphasizes that there is very little work on intermediation (and the role of intermediaries) in corruption, an analysis of which is necessary to understand the structure of corruption markets, especially in the Indian context. A conceptual framework to understand the role of intermediaries in corruption activities is developed. Finally, the chapter could be used to understand other features or developments in the Indian economy. For instance, informational issues are central to the role of corruption. The theoretical framework developed in the chapter can be used to understand how the Right to Information Act (2005) would affect the extent or nature of corruption. This is an interesting issue and deserves greater attention in future research.

Why do some democratic societies manage to reach a constructive policy compromise, but others do not? Or by necessity, do democracies undertake politically difficult decisions in stages? Such questions remain important research challenges. In chapter 19 , “Distributive Conflict and Indian Economic Policy: Some Notes on Political Economy,” Pranab Bardhan discusses political economy issues that arise from distributive conflicts and that govern economic policy in India. The author notes that contrary to popular perception, India may be one of the most unequal societies in the world when land and education inequality are so considered. Further, because the Gini coefficient in India is based on consumption expenditure, it tends to understate inequality because the rich tend to save more than the poor. It is also well known that the National Sample Survey data underrepresent the rich. These corrections would put inequality not only past China, but in the Latin American range. The author then asks whether inequality matters for economic growth and argues that it clearly does, implying that equity and efficiency often go together, contrary to the opposite presumption of much of mainstream economics. The chapter essentially gives a qualitative and broad account of the different types of distributive conflicts that have become prominent in the process of economic development in India and how their influence will shape the nature of problems that afflict economic policy making and implementation. 37

While the benefits of economic growth are widely touted in the literature, what about its costs? In chapter 20 , “Economic Growth and Ecological Sustainability in India,” Pranab Mukhopadhyay and Priya Shyamsunder look at issues concerning environmental sustainability and economic growth in India using both micro- and macrolevel evidence. The authors highlight two environmental challenges of India's rapid growth: urbanization and forest cover change. With respect to urbanization, the authors suggest that there is a role for economic instruments in reducing air pollution related to increasing urbanization. With respect to forest cover, the authors note that whereas overall forest cover has marginally increased in India, in the bulk of forests, which are moderately dense, there is a decline. The authors then ask if it is reasonable to expect forest dependence to decrease as India grows and rural wealth increases. From a broader perspective, they argue that there exist crucial environmental thresholds to India's growth strategy. The chapter ends with a discussion about governance issues surrounding Indian environment policy to make growth more environmentally sustainable.

Macroeconomic Policy Reform

The sixth section, “Macroeconomic Policy Reform,” examines domestic macroeconomic reform, with an emphasis on the postreform period (i.e., after 1991). Both long- and short-run macroeconomic issues are discussed. 38 This section covers chapters on the effectiveness of fiscal rules within the Indian context, the monetary policy transmission mechanism in India, implications for monetary policy and exchange rate policy in recent episodes of large capital flows, domestic financial sector reform, using the BOP crisis of 1991 as a natural experiment to think about India's trade and exchange rate reform, and the convergence-divergence debate in the context of Indian states. 39

Fiscal rules, or fiscal responsibility acts, around the world are rendered ineffective when emerging markets or developed economies tend to default when their economic conditions worsen. An important research question remains: How can policy makers address weaknesses inherent in fiscal rules that try to bind the sovereign? The Fiscal Responsibility and Budget Management Act (FRBMA) of 2003, with the rules framed in July 2004, was India's first formal attempt to “bind” the central government's fiscal conduct. The FRBMA's operational targets pertaining to deficit and debt were extended up to March 31, 2009. In chapter 21 , “Fiscal Rules in India: Are They Effective?” Willem H. Buiter and Urjit R. Patel consider India's experience with fiscal (responsibility) rules during the past decade. The authors first provide an analytical foundation on how to think about debt sustainability in the Indian context. They argue that the fiscal space “vacated” in recent years by states has been usurped by the central government. The recommendations of the 13th Finance Commission regarding a roadmap for fiscal consolidation are also examined numerically—something that would be useful to policy makers. Some of the dimensions along which the assessment of fiscal rules takes place—for fiscal policy in Indian going forward—include scope for eliciting time-consistent behavior, features that encourage countercyclical behavior and safeguards against political opportunism.

Recently, the analysis of monetary transmission mechanisms in emerging economies has gained substantial importance due to structural and economic reforms and subsequent transitions to new policy regimes. However, these economies have specific characteristics that differ from those of industrialized countries. In India, the paradox of monetary policy is that when the Reserve Bank of India (RBI) changes its policy rate, this generally does not lead to a corresponding change in bank lending interest rates. In chapter 22 , “Financial Frictions and Monetary Policy Transmission in India,” Kenneth Kletzer focuses on how the institutional structure of the financial sector and the role of financial intermediation in the Indian economy affect the transmission of monetary policy to the real economy. The author reviews a large amount of empirical literature on monetary transmission within the Indian context (with bank lending and the credit channel being more prevalent). One aspect that emerges from this discussion is that the effect of monetary disturbances on market interest rates, output and prices, depends on the response of such disturbances to the yield curve. However, recent research on emerging markets shows that long-term rates are not responsive to changes in short-term rates. Thus, monetary policy has smaller effects on output and prices in emerging markets. In the Indian context, the shortcomings of the transmission mechanism further arise because of an underdeveloped financial system and the problem of credit rationing by formal sector banks. Financial activity is segmented between a formal sector that primarily serves large enterprises and an informal sector that provides the majority of financing to small and medium enterprises. In addition, both imperfect information and imperfect enforcement characterize informal finance in India.

Building on recent papers in the literature on informal credit relationships, and models of firm investment and growth in the presence of financial frictions based on enforcement problems, the author introduces a new conceptual framework to understand the allocational effects of interest rate shocks and how linkages between formal and informal finance influence monetary policy effects. These insights offer a new direction for the analysis of monetary policy in the context of emerging markets (see also chapter 29 ). It also sheds light on how monetary policy can be made more effective as a policy tool.

Chapters 23 and 24 deal with exchange rate policy. In chapter 23 , “Monetary Policy, Capital Flows, and the Exchange Rate,” Partha Sen notes that the use of monetary policy has been constrained by a loose fiscal policy and capital flows. The problem of capital flows is a self-inflicted pain. The RBI could have kept a lid on capital flows, allowing only the most urgent inflows from a growth standpoint. This would have given India a competitive edge in manufacturing and would have allowed it to expand labor-intensive industry and help facilitate rapid reductions in poverty. However, the RBI has carried out sterilized intervention with large quasi-fiscal costs. The trade balance and, more often than not, the current account continue to be in deficit. A major cause of this is a misaligned exchange rate—the trigger of this being the capital account of the balance of payments. As a strategy for development, the author notes that India is not following East Asia. The author offers numerous research ideas, especially for growth theorists, on how to think about India's (non-labor-intensive) growth pattern vis-à-vis its current exchange rate policy, what implications current exchange rate policy has for external imbalances, and how the magnitude and composition of capital flows will detract from India's objective of labor-intensive growth. Capital flows also have the potential to cause a “Dutch disease”—an aspect of capital flows that has not been discussed in the Indian context in the academic literature sufficiently.

In chapter 24 , “India's Trade and Exchange Rate Policies: Understanding the BOP Crisis and the Reforms Thereafter,” Rajat Achaarya provides an analytical discussion of the sources of the 1991 BOP crisis and the trade and exchange rate reforms that followed thereafter. The BOP crisis offers a natural experiment to study policy complementarities in the Indian context. This chapter hopes to encourage more formal modern macrowork in this area—something that is missing in the literature. The author argues that exchange controls (along with the pegged regime), implemented partly through import quotas, lead to a black market for foreign exchange and encouraged underinvoicing of exports, thereby, aggravating the BOP crisis. The author discusses what exchange rate reforms were intended to come out of the crisis, and to what extent these have been effective in lowering the black market premium on foreign exchange and improving India's trade balance. An important change in the policy setup is that because in the postreform era trade policies no longer need to complement (or be constrained by) exchange rate policies, these policies can be designed to promote growth and generate employment. Such “decoupling”—and the future course of trade and exchange rate policy with somewhat new objectives—can be understood more clearly by understanding trade and exchange rate policy prior to the BOP crisis.

Financial markets play a vital role in sending information signals to the private sector, shaping resource allocation, and processing information. However, prior to 1991, Indian financial markets were a highly controlled sector. For instance, bank deposit and lending were controlled by the government. The government tried to channel investment into certain sectors—in effect, planning the real economy. India also had an interest rate regime that did not reflect market realities. In essence, the real and financial sectors worked in tandem to prevent any market-led investment and growth. In chapter 25 , “Domestic Financial Sector Reforms,” Shubhashis Gangopadhyay and S. K. Shanthi discuss domestic financial sector reforms in India since 1991. The authors discuss banking sector reforms at length and argue that although Indian financial markets have increased their efficiency in the postreform phase, India still needs to develop an active and more dynamic bond market and make the bankruptcy market more efficient. This chapter also discusses the global financial crisis of 2007–2009 and how Indian financial markets behaved during that time. This crisis was especially significant because this was the first time that a liberalized Indian financial market was facing an external shock. The authors suggest that the chain of causation during the crisis was more from the real sector to the financial sector rather than the other way round (as in the United States). The chapter discusses what form financial regulation will take going into the future. The chapter also voices a growing acceptance among policy makers around the world—that the macroeconomic effects of financial regulations will be important in rethinking macroeconomic policy. 40

A fundamental question that confronts policy setters is whether there is a tendency for the poorer regions of a country to grow faster than the richer regions, which leads to a convergence in living standards. Such “balanced” growth is of central concern as it enables regions to share more broadly the benefits of economic growth. A massive amount of literature, building on the initial impetus of Barro and Sala-i-Martin ( 1992 ) and Mankiw, Romer, and Weil ( 1992 ) and others, has continued to examine the determinants of international growth and convergence (or the lack of it) and differences in GDP per capita. Within the Indian context, a virtual industry exists (see the references in Basu, 2008 , and Ghate and Wright, 2011 ). In chapter 26 , “The Convergence Debate and Econometric Approaches: Evidence from India,” Samarjit Das notes that the econometric literature on convergence has been critical of traditional growth regressions for studying economic convergence across countries and regions, based on the popular notions of β and s convergences. This is because these methods fail to allow for unobserved (and persistent) differences across countries, and they are susceptible to measurement errors, endogeneity biases, and spatial autocorrelation. These problems plague many of the papers written (and some published in good journals) in the Indian context as well. The chapter does two things: First, it investigates the convergence hypothesis among Indian states by using panel unit root tests that explicitly incorporate cross-sectional dependence (various socioeconomic variables in different regions in India are expected to be contemporaneously correlated). Second, two measures of well-being are used: per capita consumption—both rural and urban—and per capita state-level GDP (SGDP). Most of the studies on India are based on SGDP, which is a questionable indicator of welfare. The author also incorporates possible structural breaks that may occur and may lead to completely different outcomes of the convergence hypothesis test. The author finds that per capita rural consumption as well as per capita SGDP is diverging across states, although there is evidence that the urban per capita consumption is converging. Whereas the divergence result is also found in other studies, this chapter suggests a robustness benchmark for the econometric techniques required to address such issues.

India and the World Economy

The seventh section, “India and the World Economy,” looks at India's interaction with the world economy. There has been a big transformation in the Indian economy after 1991, with trade having taken off with India's shift to a higher growth path. For instance, world trade in 2008 was 5 times that in 2002, and nearly 20 times what it was in 1980. 41 India has also significantly opened up to capital flows from 1991 onward. The four chapters in this section deal with the globalization debate in India, India's engagement with the World Trade Organization (WTO), an estimated dynamic stochastic general equilibrium (DSGE) model of the Indian economy, and a growth theoretic framework to understand India-China growth patterns.

In chapter 27 , “The Globalization Debate and India,” Devashish Mitra and Priya Ranjan argue that one of the key questions in the globalization debate in India is whether to allow unfettered movement of foreign capital or whether to make the rupee fully convertible on the capital account. 42 The effects of financial flows can be considerable. Many innovations take place in the financial sector, but economists tend to overlook the downside risks of these innovations. Even though there is a broad consensus among economists on the benefits of trade liberalization, the jury is still out on the issue of free mobility of capital. On balance, the authors come out in favor of a gradual removal of restrictions on capital flows, evaluating the relative costs and benefits of capital account openness. With respect to trade liberalization, the authors note that free trade creates both winners and losers. Since the gains to the winners tend to outweigh the losses to the losers, in principle, everyone can be made better off. However, appropriate policies for redistributing the gains from trade may not be in place. In this context, it becomes important to analyze the impact of trade liberalization on direct outcomes of interest such as poverty, inequality, unemployment, and child labor, on which the political support for trade reforms crucially depends. One hopes that this chapter will lead to more theoretical research on globalization and its implications for uneven growth in India and other developing economies.

In chapter 28 , “India at the WTO: From Uruguay to Doha and Beyond,” Kamal Saggi looks at the impact of this bargain on India's position at the WTO going forward, especially during the latest round of WTO negotiations launched in Doha, Qatar, in 2001. The author notes that although trade in India has exploded—especially after 2002—India has the dubious distinction of being the world's leading user of antidumping duties. This suggests that trade liberalization since 1991 has been partly undone with the increase use of antidumping measures. With respect to Agreement on Trade Related Aspects of Intellectual Property Rights, several issues are addressed such as whether the WTO is the right organization to implement an international agreement on intellectual property rights, and what—if any—is the relationship between intellectual property rights and international trade through channels such as technology transfers and increased FDI. The chapter examines India's stance on agriculture, one of the key issues surrounding the Doha round. The author notes that developing countries need not necessarily benefit from the elimination of agricultural subsidies by the United States and the European Union because developing countries tend to be net importers of agricultural goods. There are also ongoing negotiations—that pose a potential roadblock to the successful completion of the Doha round—over the form that special safeguard mechanisms will take with respect to agricultural goods. These will allow developing countries to increase tariffs to temporarily deal with import or surge price declines. In any case, India's overall position in agriculture has been defensive—especially in light of its relatively high tariffs and its willingness to bind its tariff rates to a level above which it cannot raise them. India's demand for more trade liberalization in services, which directly affects software and BPO services, and which is natural given its comparative advantage in these areas, is also unlikely to be fulfilled in the current round of negotiations.

chapter 29 , “An Estimated DSGE Model of the Indian Economy,” by Vasco Gabriel, Paul Levine, Joseph Pearlman, and Bo Yang studies business cycle dynamics in the Indian economy using a new Keynesian DSGE framework. This is one of the first attempts to estimate a DSGE model for the Indian economy. The policy relevance of conducting such an exercise is without question: High growth in India since 1991 has been accompanied by significant trade and financial liberalization. Policy makers face significant tradeoffs in ensuring price and financial stability in devising monetary conditions in response to external shocks. Therefore, understanding the mechanisms that contribute to the amplification and propagation of shocks requires careful investigation.

The authors develop a closed-economy DSGE model of the Indian economy and estimate it by Bayesian maximum likelihood methods using Dynare software. The model is built up in stages to a model with a number of features important for emerging economies in general and the Indian economy in particular: a large proportion of credit-constrained consumers, a financial accelerator facing domestic firms seeking to finance their investment, and an informal sector. What is novel about the framework is that it is the first study that estimates a model with a formal-informal sector distinction. The chapter also adds newer features to the model sequentially, giving a clear indication of how such models may be built and ultimately used by researchers. The simulation properties of the estimated model are examined under a generalized inflation targeting Taylor-type interest rate rule with forward- and backward-looking components. The estimation results suggest that RBI's policy stance appears to aggressively target expected inflation. The authors also find that, in terms of model posterior probabilities and standard moments criteria, inclusion of these financial frictions and an informal sector significantly improves the model fit. The hope would be for the RBI to take note of this research and use it in the formulation of monetary policy.

chapter 30 , “Development Patterns in India and China: A Perspective with CES Production Function,” by Kamhon Kan and Yong Wang, builds on the voluminous India-China literature, which still lacks a theoretical framework to understand India's and China's growth patterns. This paper builds a simple theoretical model to understand India's and China's different growth patterns. An interesting stylized fact motivates this exercise: from 1985 to 2004—compared with India—China has had (1) considerably higher rates of physical capital formation; (2) much higher ratios of measured physical to human capital; and (3) a more physical capital friendly public policy (a greater ratio of physical capital–enhancing investment to human capital–enhancing investment). To explain these facts, the authors use a one-sector growth model with two accumulating factors (physical capital [K] and human capital [H]). The output technology is assumed to be CES. Along the optimal path, the physical capital–human capital ratio—and optimal government policy in both inputs—is shown to depend on the magnitude of two key model parameters of the model: a distribution parameter, and the elasticity of substitution between K and H. In other words, the different growth patterns across both countries could be attributed to having different parameter values for these key parameters. The authors then estimate the key parameters for both China and India. Their estimation results suggest that their model implications match well with the previously mentioned stylized growth patterns regarding China and India.

Looking Ahead

The final chapter, chapter 31 , “What More Do We Want To Know about the Indian Economy?” by Ashok Kotwal, reflects on an agenda for economic research going forward. This chapter first takes stock of what we know about the patterns observed in Indian development and speculates on the likely scenarios over the next few decades. The main question that the chapter is concerned with—and probably the biggest economic policy challenge today—is why has poverty in India declined so slowly? The author suggests that a proximate cause is the size and productivity levels of the informal sector—a bulk of India's labor force is engaged in low-productivity cottage-type activities with little physical or human capital. This hinders productivity. What then is responsible for the existence and continuation of constraints in the informal sector? If the poor incidence of entrepreneurship in the informal sector is because of poor infrastructure and weak financial inclusion, why have governance structures failed to alleviate these constraints? In addition, the formal sector has not expanded at the expense of the informal sector to absorb a greater part of the labor force. The author discusses a host of factors that could explain obstacles to productivity improvements in the informal sector, and hence the low growth–poverty elasticity: caste, collective action, the political economy of Indian democracy, the role of credit markets, and rural urban migration, among others. The chapter has several suggestions for future course of research to shed light on the process of trickle down and the changes therein.

Concluding Remarks

The importance of sustaining India's newfound economic growth cannot be understated, with the potential to raise millions out of poverty, and to increase regional economic and political stability. However, a narrow focus on achieving high economic growth sometimes obfuscates a vision of how the Indian economy should be growing. Producing broad-based and equitable growth is the overarching theme of this handbook. How should we think about such government intervention to produce such a growth pattern? What is the right welfare-state model for India? Is a new model needed that centers on economic policies when economic conditions are less than optimal? How can India provide more productive jobs at rising real wages—which is essential for poverty reduction? Can India get stuck in a middle-income trap? Understanding the complexity of the Indian economy will be crucial in addressing such questions and the other obstacles India faces in transforming itself into a modern twenty-first-century economy.

A volume like this is aimed at research scholars, teachers, and policy makers. It will be useful for researchers who are new to the field, as well as those who want to update and extend their knowledge to the frontier of the field.

Acknowledgment

I am grateful to Stephen Wright, Satya Das, Tom Timberg, and Arunava Sen for invaluable comments.

See chapter 3 .

The Economic Survey is the Finance Ministry's view of the annual economic development of the country. See http://indiabudget.nic.in/

A recent estimate developed by the Oxford Poverty and Human Development Initiative shows that India's eight poorest states have more people in poverty—an estimated 421 million—than Africa's 26 poorest nations. These estimates are based on a multidimensional poverty index that measures a range of deprivations at the household level. See http://www.ophi.org.uk/policy/multidimensional-poverty-index/

Looking at decadal changes from 1983 to 1993–94 and 1993–94 to 2004–2005, employment growth has been flat. Most of the job growth has been in subsidiary (i.e., part-time) workers and in self-employment growth. The growth of employment of principal (i.e., full-time) workers has actually slowed down. Further wage growth has decelerated markedly for almost all groups of workers. See the report titled “India's Employment Challenge” (World Bank, 2010 ).

For 2009, inflation stood at 11.49% year-on-year. Inflation was 10.55% in June 2010. It should be pointed out that these rates are not high by historic global standards, or on the standard definition of high inflation .

See chapters 11 and 16 .

The reasons for the persistence of the caste system—which is an interesting question in its own right—is beyond the scope of this volume. See the references in chapter 7 .

As of the 2001 census, Scheduled Castes and Scheduled Tribes constituted 24.4% of the country's population. See http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/scst.aspx

See chapter 7 .

See chapter 20 .

While India was impressed with Soviet planning at an early stage, economic planning after independence received input from several Western economists.

Bhagwati and Desai ( 1970 ) provide an influential critique of these policies. After submitting this volume to the publisher, a raging online debate initiated by CUTS (Consumer Unity and Trust Society) discussed how India's historical lack of emphasis on health and education (what are called Stage II reforms) at an early stage of development led to high poverty rates and a large informal sector. One argument given by planners at the time was the revenue constraint: i.e., when governments have limited capacity, they have no choice but to focus on one or other areas of reforms. Sensible people would differ on what the optimal sequencing should be. See Mehta and Chaterjee ( 2011 ) for the proceedings of this debate.

Measured in 1996 dollars, the increase in per capita GDP corresponds to a growth rate of 1.8% per year in the United States between 1870 and 2000. See Barro and Sala-i-Martin ( 2004 ), p. 1.

The identification of a turnaround in the early 1980s is consistent with a range of studies using aggregate data (see Rodrik and Subramanian, 2005 ). More recent work using disaggregated data (Ghate and Wright, 2011 ) points to a rather later date in the mid-1980s, suggesting a conflict between both approaches. The key issue on which all studies agree is that, at some point during the 1980s, there was an increase in growth, which, from the 1990s, was not only of statistical but also of massive economic significance. See (Ghate, Wright, and Fic, 2010 ) for an expository discussion of these issues.

It should be pointed out that in contrast to India's record in primary and secondary education, the building of high-quality public research institutes like the IITs, IIMs, ISIs, TIFR, and IISc, after independence was one of the great successes of Nehruvian Fabian socialism. Very few countries—at India's level of development—have institutes of higher research and training of such caliber. See Ghate ( 2004 ). See chapter 13 for a discussion of the problems and prospects for the higher education sector.

Papanek ( 2010 ) shows that the all India real agricultural wage (in 1999/2000) prices between 1999–2000 and 2004–2005 remain virtually unchanged. The real nonagricultural wage (in 1999/2000 prices) between 1999–2000 and 2004–2005 has declined by 10%. The question is how a period of high growth in the postreform period led to a worsening of outcomes. A possible reason suggested by Papanek ( 2010 ) is that the increase in the number of jobs was less than the rise in the labor force, implying that the real wage did not rise.

See http://www.mckinsey.com/mgi/publications/india_urbanization/index.asp

See Lal ( 1999 ) for a discussion of these and other factors portending the Indian growth potential. The issue of path dependency is discussed in chapter 2 .

It should be pointed out that relative to the period under British Rule, growth did increase.

See Reserve Bank of India (2008).

These two are related: The global experience suggests that savings and investment reach their peak at such moments of demographic transition.

The important aspects of opening up include portfolio equity flows, FDI,, and certain kinds of debt flows.

Policies to initiate equitable growth are more organizational than economic endeavors as the market will not be used if it does not permit economic agents to transact efficiently. Participants in the market will not typically engage in organizing such an endeavor, being unable to internalize the manifold externalities that impede its functioning in the early stages of development.

See the introductory chapter in Dutta et al. ( 1993 ).

Basu ( 2007 ) and Panagariya ( 2008 ) are two recent excellent volumes on the Indian economy.

See, for instance, chapter 31 .

chapter 16 also discusses the political economy of reforms.

There are three related aspects that are not directly dealt with by the chapters in this section. The first is a larger and more fundamental debate as to whether the farm sector or the nonfarm sector is the route out of poverty. See de Janvry and Sadoulet ( 2010 ). A second aspect is that the sectoral structure of the growth rate matters for poverty reduction. For instance, Ravallion and Datt ( 2010 ) show that in contrast to the prereform period (pre-1991) in India, the postreform process of urban economic growth has bestowed significant gains to the rural poor as well as the urban poor. So rural-urban compositions matter. The third aspect is that the rate of poverty reduction is sensitive to the distribution sensitive growth rate. In other words, it is poverty that makes growth less pro-poor. Finally, for measurement and estimation issues, see http://www.planningcommission.nic.in/eg_poverty.htm for the background papers of the 2010 Tendulkar Committee Report on the issues surrounding and estimation of poverty in India.

Hopefully, future editions of the volume will take up a full evaluation of the National Rural Employment Guarantee Act (NREGA) once more data is available. Important issues are getting the NREGA wage rate right and understanding the design features that matter for the overall goals of the program. The potential impact of NREGA on regional inequality will also need to be addressed.

As this volume was going into production, the microfinance industry was in crisis in India's biggest market, Andhra Pradesh. One reason was that because regulators were introducing new restrictions, and politicians were urging borrowers not to repay. This was leading to a drop in loan repayments.

For instance, a small farmer's typical exposure in the monsoon season is about 40,000–60,000 rupees. However, the payout of a typical insurance contract is 1,000 rupees.

This could be viewed as the other side of coin of massive improvement in productivity growth. Given such high-productivity growth, total GDP growth has not been high enough to increase employment.

See Ghate, Glomm, and Liu ( 2011 ) for a model in which sectoral policies play a key role in explaining India's structural transformation.

See Balakrishnan ( 2010 ). The reverse question is equally important. If returns to schooling are higher in an environment of economic growth, then augmenting the rate of economic growth is a powerful policy mechanism for increasing the human capital of the population. See Foster and Rosenzweig ( 2002 ).

Gary Becker noted at the 2010 World Economic Forum in Beijing that although the transition from low to middle income can be managed by countries if they have the right incentives and the basics of human resource development, the transition from middle to high income is more difficult and requires a capacity to innovate. Innovation is critically dependent on higher education and improvements in its quality. chapter 16 also discusses the political economy of education reform.

These issues are taken up in more detail in Bardhan's recent book (2010).

Chapters 26 and 30 deal explicitly with long-run growth theoretic issues. chapter 26 revisits the convergence–divergence debate. chapter 30 calibrates an India–China growth model to predict these two countries’ varied growth patterns.

In standard versions of the modern model, for instance, the linkages between the disintegration of financial intermediation and the real economy are missing. These linkages provide an important transmission mechanism whereby shocks in the financial sector can affect the real economy. Chapters 22 and 25 , in part, shed light on this issue. However, chapter 3 makes the point that whereas the robustness of India's growth strategy was tested during the global financial crisis of 2007–2009, the resilience of its growth subsequently is testimony of the underlying strength of the Indian economy.

It is now widely accepted that financial regulation contributed to the amplification that transformed decreased housing prices into a major world economic crisis (2007–2009). This suggests a new role for monetary and regulatory tools to be enacted in conjunction with one another.

See chapter 28 .

Whereas chapter 23 also deals with the capital account, the focus is on monetary policy design in the presence of capital flows.

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Current World Environment

An international research journal of environmental science.

ISSN:0973-4929, Online ISSN:2320-8031

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Climate Change and the Indian Economy - A Review

DOI: http://dx.doi.org/10.12944/CWE.17.1.3

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Sharma M, Singh R, Kathuria A. Climate Change and the Indian Economy - A Review. Curr World Environ 2022;17(1). DOI: http://dx.doi.org/10.12944/CWE.17.1.3

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Introduction For a developing nation like India, climate change is a harsh reality. This is mostly because the backbone of the growth of a developing country is made of conventional methods of generating energy and resources. Despite a huge advancement in technologies, such countries often find themselves in conflicting positions. Economy, development and climate change often cross each other’s paths resulting in increased risk and vulnerability. This can be understood from the precipitation requirements and rainfall. For example, owing to climate change, in many areas the groundwater level has plummeted. This is the outcome of more than ever concrete surfaces diminishing the recharge rate of aquifers. 1 Indian agriculture rests on the support of groundwater and seasonal rainfall for the most part of the year. Consequently, the interplay of climate change and development factors has resulted in an acute water shortage for at least one month every year affecting a billion people in India while around 180 million suffer from severe water scarcity throughout the year. 2 Latterly, climatic variations disguised as cyclones and floods have caused massive desolation of crops, property, and infrastructure. This has also caused negative impacts on human health, especially heat stressors. Rural dwellers continue to depend on agriculture for livelihood and food, making them explicitly vulnerable to climate variability and change. All these factors hitch socio-economic development goals. 3,4 The national policies on climate change (“National Action Plan on Climate Change” (NAPCC)) are concentrated around human development and economic - industrial development policies. Local policies have helped in reducing urban air pollution levels. It is noteworthy that India is not responsible for rising temperatures despite contributing to 17.8% of the world’s population. It accounts for only 3.2% of cumulative emissions. 5 However, a report prepared by Deloitte Economics Institute, entitled “India’s Turning Point: How climate action can drive our economic future” projects that if the current practices and policies continue then India, may lose US$6 trillion in current value by 2050 that is 6% of the GDP in 2050 only. Averagely, in the next 30 years India will lose about 3% of GDP. This figure sores even more when we reach to 2070, wherein India will lose about US$35 trillion i.e., 12.6% of the GDP. 6 Yet, aspiring developmental goals without considering climate change is futile. At the same time, the huge and urgent developmental challenges cannot be ignored. Hence, both international efforts to alleviate the degree of climate change and domestic efforts to acclimatize the global warming already locked from earlier emissions. 7 The literature review on impact of climate change on economic development is quite overwhelming. It is not only in depth but also has good coverage. Although, literature pertaining to developing countries is not in abundance. However, it has been suggested that climate change do leave an impact on the economy and a transition to low carbon economy is possible only if the measures benefit economically. 8 Through this paper, we shall be highlighting how climate change is impacting the economy of India. Such nearly backward countries are not responsible for the large-scale emissions that are jeopardizing the present and future generations. While who is responsible or who is not for current climatic adversities, is very subjective. Herein, we shall be presenting why such immediate policy changes meet reluctance and how despite this India can reach its developmental goals in the long run. Materials and Methods This paper presents a qualitative research based on data extracted and analyzed from crucial government documents like “Assessment of Climate Change over the Indian Region Report 2020” and research papers. 9 Initially, we have tried to express the climate change briefly supported via facts and figures. Appropriate figures for time series analysis of temperature and monsoon have been included for a comprehensive interpretation of the trends from available data. Further we have given context to the pillars that make up the Indian economy and how they have been suffering as a consequence of climate change. We have emphasized on agriculture, livestock, infrastructure, and low-income households. Then we have discussed the energy needs that are crucial to development and how they present a difficult situation. We have discussed how meeting energy needs in developing countries leads to climate changes. Further we have stressed on how we can aspire for growth and development, even while keeping a check on climate change with valuable suggestions. Regional Indian Climate Change The climate of India is quite diversified in nature, from the Himalayan crown to the flat beaches, a significant transition in climate is visible. The climate varies from the freezing temperatures of the Himalayan Mountains to the tropical climatic conditions of southern India. The eastern states received the maximum rainfall while the western states dried of water make up the arid deserts of Thar and Great Indian Desert. Such a vastness of climatic conditions has always benefited India. However, in recent years many reports have projected the possibility of irreversible climatic changes. The IPCC 2021 report of climate change came as a shock for many as the report solidified its case of climatic worries and warned of severe consequences. For India too, in the past, many documents and reports have repeatedly shown the changing climatic trends and their impact on the Indian dimensions. The amplitude of the “CO 2  mixing ratio” has been rising gradually for the last few years. How has the climate so far changed…? Temperature A report on the assessment of Indian climate (“Assessment of Climate Change over the Indian Region Report 2020”) 9 has shown that the annual mean, minimum and maximum temperatures for the period of 1986-2015 have shown considerable warming by 0.15 °C, 0.13 °C, and 0.15 °C respectively. A significant change in pre-monsoon temperatures has also been seen with the highest warming trend. Heat extremes have increased over pan India during the period of 1951-2015. An ascending warming trend has been seen in the recent 30 years. An increase in the warmest day and warmest night temperatures along with the coldest night temperature has been observed since 1986. For India, an earlier IPCC report has forecasted the increased number of heat waves, and hot days. Deaths due to heat stress have also risen in recent years. 10 The Indian Ocean Sea Surface Temperature has been increasing with an average increase of 1.0 °C which was higher than the global average (0.7 °C) during 1951-2015. It has been speculated that around 90% of heating/warming is due to emissions caused by human activity and this will continue in the upcoming future in case of both high and medium emissions. 11

The first graph is for largest maximum temperature for the months of March to May. The second graph is for the lowest minimum temperature for the months of December to February. The third graph is the difference between the two temperatures denoted for four major climate zones that are Bhubaneswar (blue line), Mumbai (green line), and Delhi (red line) during 1951-2015 and Chennai (black line) during 1980-2015. The calculations and graphical analysis have been done using Mann Kendall rank test with a 90% significance level. From the Figure 1, it can be observed that there is high variability in the minimum and maximum temperature in the later years (1981-2015). 12 These observations are in compliance with the theoretical data that has been published in climate assessment reports (Table 1). Below mentioned is tabular data for temperature increase for different months/seasons during a year. 13 Table 1: Temperature Trends for different Months/Seasons during the Years 1986 - 2015.

Rainfall As the temperature increases, its effect can be easily seen on the rainfall of the region. This is because warm air holds greater moisture in comparison to cold air and warm water evaporates at a faster pace. A cumulative effect of these is seen in the rain. These are causing more frequent heavy downpours which are not usually common. During the period of 1950 to 2015, there has been a threefold increase in heavy precipitation in the central Indian region. 14 While extreme precipitation has considerably risen over the subcontinent, however, an extremely contrasting observation has also been made. According to the assessment report, there has been an overall plummeting rainfall trend in the annual all-India and mean summer monsoon precipitation in the period of 1951 to 2015. This has been observed largely in the Western Ghats and Indo-Gangetic Plains. The cause for this trend is a notably increased concentration of anthropogenic (human-caused) aerosols over the northern hemisphere. Urbanization, improper land use, and increased anthropogenic aerosols are considered the main factor behind the increased localized rainfall and overall mean rainfall decrease. The time scale analysis of rainfall for the current year during the monsoon season from June to September depicts intense monsoon variability with frequent maximum peaks (Figure 2). As expected from theoretical research, the monsoon is becoming severe. India receives most of its rainfall from the monsoon. This exotic wind pattern has been responsible for a significant amount of rainfall over the Indian subcontinent. Hence, a major impact of climate change has been seen on this pattern. It has been projected that the monsoonal precipitation is going to become more severe in the future due to an increase in mixture content as a consequence of increased temperatures.

The first graph is for the monsoon season from June to September. The second graph is a comparison of the cumulative rainfall for the monsoon season for the current year (2021) and from 1961-2010. The third graph is the depreciation in monsoon rainfall for the current year. 15 Drought During the period of 1951 to 2015, the number and geographical extent of droughts have risen over the subcontinent. Drought severity is mainly observed in parts of central India and parts of Indo-Gangetic Plains. These observations are in-line with a decrease in mean summer season monsoon precipitation. However, at the same time rise in the occurrence of localized rainfall has increased the probabilities of fatal floods. Climate models have projected a rise in the extent, occurrence, and severity of droughts over pan India while flood propensity is predicted to be higher in Himalayan River basins. Continuous drought in the years 1999 and 2000 led to a steep decrease in the groundwater tables of the northwest region and the 2000-2002 droughts caused extreme crop failure which led to the worst massive starvation and affected 11 million people in Orissa. 16 Himalayan Region According to the “Assessment of Climate Change over the Indian Region report 2020” of India,9 substantial warming in the Himalayan region has been observed in the twentieth century. The warming is quite prominent in the Hindu Kush Himalayan (HKH) regions that is having the most area with non-temporal ice cover after the south, and north poles. The annual mean temperature in the HKH region has been incessantly increasing by 0.1 °C per decade during 1901-2014, which further increased at about 0.2 °C per decade during 1951-2014. At elevated regions (>4000m), the warming is quite strong, as high as 0.5 °C per decade. It has been further projected that the HKH region will keep on warming in the range of 2.6-4.6 °C by the end of the 21st century. Economy and Climate Change Positively, the Indian democracy has resulted in equity moderately greater than the global average and the dependency ratio is also relatively greater. Nonetheless, the poor living standards of people involved in agriculture and people born into socially and economically backward castes and regions limit the robustness of the wholesome economy. It is possible and predicted that climate change will rip off the existing economic standards of these people so much so that it will result in severe taxes on the economic and industrial assets of the state and central government. It has been projected that climate change can deplete India’s GDP by circa 2.6% by 2100 even while capping the global temperature rise below 2 °C. In a scenario where global temperature also keeps increasing (4 °C), this depletion is projected at 13.4%. These figures are an outcome of the changes in precipitation and temperature levels, and the impact of climate change on labor productivity. Labor productivity may as well get affected by endemic vector-borne diseases like malaria, dengue, etc. The probability of the outbreak of such diseases increases due to climate change. 17 Nevertheless, gauging the exact financial and economic costs of climate change is a herculean task and also appears complicated due to uncertainties at every step. The absolute cost of flooding, heatwaves, cyclones, water scarcity, sea-level rise, and other climate-related hazards can be determined by the level and direction of economic development, the solutions opted in infrastructure development, spatial planning in the future, and the intermingling of hazards and how they will multiply each other. On top of everything, global warming will have a major role to play in determining the economic costs. Agriculture Even after 74 years of independence, India is still mostly an agrarian economy. About 50% of the Indian population is still directly or indirectly dependent on agriculture for meeting essential needs. If the harvest is good enough, the economy also benefits. So, Indian economic development can be seen on a proportional line with agriculture. However, agriculture is itself dependent on natural forces like the monsoon, rainfall and temperature. Agriculture contributes about 50% to the Indian economy. Although this has been decreasing recently, yet even today, slight upheavals in agriculture directly impact the economy. When we discuss the impact of climate change, its impact on agriculture can’t be ignored. Even in its raw and backward form, agriculture has been supporting the backbone of the Indian Economy. In many parts of the country, farmers are dependent on the monsoon for irrigation and good harvest. There is a huge demand for another green revolution as the benefits of the first green revolution was limited to only a few parts of the country, mainly Punjab and Haryana. Admittedly, the effects of climate change will be felt chiefly on the agricultural sector and the corresponding water requirements and availability. Agriculture production in the North region depends on spring snowmelt to replenish water supplies. It has been predicted that earlier snowmelt on account of climate change can substantially reduce the water table during the growing season impacting production. The southwest monsoon is critical for agriculture as it provides for about 80% of rainfall to the country. This also acts as an important tool to determine optimal dates for plantings. Many models have projected that India will suffer from intense and longer summer monsoon and weak and short winter monsoon. At the same time, pronounced warming will contract overall rainfall. 18 Monsoon-dependent agriculture will see profound transitions. Without proper or no irrigation, landless agriculture laborers, and small farmers will face loss of livelihood and extreme food shortages. Most of these will go to cities in search of work and economic prospects. 19 Numerous people will be affected by decreased food productivity leading to malnutrition, hunger, diseases, etc. This will also increase the burden of providing assistance to these small landholders on the state and center. There will be increased demand for infrastructure following a major internal migration will occur, owing to decreased agriculture output and income, to urban areas. The need to replace the existing infrastructure (e.g., in the transportation and energy sectors, irrigation systems) due to climate change will cause greater economic costs. Livestock India has the most livestock population globally. This is primarily because of the large-scale milk production, nutrient recycling (manure), household capital, draft animals, etc. These animals are used as household capital in landless households. Many low-income rural families even use animals as means of transportation and consider livestock as a potential economic asset. However, the reproduction and production of livestock are affected by increasing temperatures. Heat stressors reduce feed and fodder intake and increase vulnerability to diseases. Feeding is affected as fodder gets expensive due to increasing agricultural - produce costs. One example of a heat stressor was the outbreak of foot and mouth disease in cattle. 52% (Andhra Pradesh) and 84% (Maharashtra) were found to be affected, owing to high temperature, rainfall, and humidity conditions. A disease called mastitis occurs in dairy animals during hot and humid weather. 20 Infrastructure A good and sound infrastructure contributes a great deal to the economy of a nation. Without proper infrastructure many economic prospects and projects are desolate. However, the increased extremes of natural calamity as an outcome of climate change have deeply affected the infrastructure. Palpably, in India, 14% of the annual maintenance and repair budget is spent on maintaining the Konkan Railway. Consequently, tracks, cuttings, and bridges are damaged each year due to uneventful weather conditions. Landslides remain a constant source of worry. During heavy rains, the developmental projects have to be stalled for more than seven days leading to extended costs. Massive destruction of on-site material also takes place. 21 In the last few decades, as flood-like situations have prominently risen, a major portion of the budget goes to disaster relief. India spent $3 billion of economic damage caused by floods in the last decade which is 10% of the global economic loss. 22 In 2020, cyclone Amphan distressed around 13 million people and caused more than $13 billion in damage in the region. 23 In such a disaster, the direct impact can be seen on low-income households which are displaced and find it difficult to accumulate assets to enhance their security. Low Salaried/Income Household Low-income households are more susceptible to economic losses due to climate change. This is because they settle in densely populated regions that lack basic infrastructure and services like paved roads, safe and piped water, decent housings, drainage, etc. it has also been found that many people live in low-lying coastal areas, steep slopes, and flood-prone regions as the cost of land is cheaper. 24 Furthermore, these people will also be directly affected by a combination of increased cereal prices, a slower economic growth rate due to climate change, and declining wages in the agricultural sector. It is feared that if the situation persists, it might increase the national poverty rate by 3.5% in 2040 contrastingly greater than what is expected in a zero-emission-warming scenario. 25,26 Energy Economy and Climate Change Energy is required to sustain not only people but everyone all around. It lights homes, runs factories and vehicles, draws water, and much more. In a way, energy needs and production are also a measure of economic progress. Hence, it won’t be wrong to conclude that energy dynamics and climate change are inseparable. Climate change has a direct consequence on the energy demands and production of a country and vice-versa. The extremism of climate change is becoming a major cause of concern for the energy sector of developing and under-developed countries. Owing to a stressed economy, lack of technological innovation, and infrastructure to sustain new technologies, these countries are forced to stick to the conventional sources of energy. These sources of energy largely depend on fossil fuel burning and hence contribute significantly to Green House Gas (GHG) emissions. The per capita demand for energy is about 1/10th of the OECD average with a constantly increasing demand - 3.2 percent per year (2000-2005). It is speculated that the energy needs of India will double by 2030 (considering the growth rate of 6.3% GDP annually). 27 In India major energy usage is for producing electricity and transportation fuels. Most of these energy needs are met by domestic coal and petroleum reserves along with imported oil. Fossil fuels contribute about 82.7%, hydropower 14.5%, and nuclear only 3.4%. The transportation sector is supported by imported fuels as the domestic production is extremely less, about 785,000 bbl/day opposed to a demand of 2.45 million bbl/day. The IEA has described this situation as a system fueled “largely by coal and combined renewables and waste, with much smaller but growing shares of gas, oil, hydro, and nuclear". 28 At the same time, the growing inequality in energy demand and supply cannot be ignored. As development paces, the demand for energy increases. However, the current production is not sufficient. Circa 401 million people live without electricity, use of fuel wood and dung is prevalent leading to greater than 400,000 premature deaths yearly, mostly of children and women. Energy poverty can be seen in India as the economy booms and the economic conditions have benefited the “haves” but not the “have-nots”. 26 Income inequalities are largely responsible for this economic disparity. Evidently, electrical vehicles are being made available for Indians, however, their soaring prices make them unappeasable for the majority of the population. To bridge this gap, India must heavily invest in providing energy to all its people. However, this can’t happen without involving fossil fuels in the picture in the short run. In such a scenario, for India the battle becomes more difficult as it can’t severe itself from the conventional means of energy generation and employment. The discontinuation of coal will affect employment of numerous and at the same time putting millions of people into darkness and shut hundreds of productions units. This will again add to the woes of economy. Results and Discussions By now we have seen the existing climatic variations and the challenges presented to the pillars of economy. We now have an idea as to how climate change has affected us in every possible way. Perhaps something unavoidable. Yet, development measures themselves possess great risk when it comes to climate change. Rainfall As evident from the above discussion, the temperatures are rising consequently of climate change. This will result in escalated evaporation of water and accumulate abundant water for precipitation, thereby leading to flood-like situations. Similarly, increase in the evaporation rate of water and tremendous change in wind pattern will lead to decreased rainfall leading to drought like situations. Hence, there will be an overall increase in storms and strong rainfall. So, areas in their direct contact will experience excessive precipitation. While areas away from them will experience water scarcity. Temperature Temperature is itself regulated by the water cycle and the atmospheric gasses. With an increase in the concentration of greenhouse gases, the temperature of earth will rise as more and more heat will get trapped in the atmosphere. All this is powered via climate change. Agriculture Both temperature and rainfall directly impact the agriculture. The reason being certain crops need certain physical condition for proper growth. Hence, climate change can make the growth of a particular crop difficult. For example, crops that need lower temperature will suffer from lower yields due to global warming (heating of the earth atmosphere). At the same time, crops needing less amount of water will get destroyed due to increased precipitation. Impact of Development on Climate Change The impact of development on climate change is very subjective and highly improbable. The reason being, the impact of development varies according to the different techniques used. However, as a summation it can be concluded that conventional mode of development like dependence on fossil fuels have degraded the climate and contributed to maximum climate change. As the time changed, and policies started adopting greener methods of development, there have been positive impact on the climate change. But the impact of development before the 20 th  century had impacted the climate in the most non-ignorable ways. It may be noted that the countries contributing to global pollution levels, global warming, and climate change are developed economies which experienced development through the 19 th  and 20 th  century. While countries who are either developing or underdeveloped contribute less to climate change parameters. Economy and Environment Go Hand In Hand India is blessed with enormous alternatives to meet its developmental needs. Stronger carbon emission targets can be met without compromising on developmental aspirations. The gradual decrease in public support for coal and improvement in electricity distribution can help to free fiscal space when public debt is increasing. This can also help in the generation of economic diversifications in the regions heavily dependent on coal for revenues and employment. Promoting clean and green electricity generation can help in diverting the burden from fossil fuels and reducing air pollution while generating more employment opportunities. Developing new mass transit systems and extending the present ones can reduce vehicular emissions while blooming employment. It will also stimulate economic growth through agglomeration economies in the future. Conservation and enhancement of wetlands and forests will support agricultural productivity, sequester CO 2  emissions, and enhance resilience power to environmental shocks. New metro systems are being developed and ambitious plans for vehicles and full electrification of railways are imperative. India has also started considering climate change in its policies for agriculture and water. Many times, the low-carbon options are more affordable than their counterparts and they also help in addressing socio-political needs urgently like the cleansing of air and access to quality jobs and services. The low-carbon alternatives will help in raising the standards of living and reduce GHG emissions simultaneously. 29,30,31,32 The Nationally Determined Contribution (NDC) report of India aims at 40% of energy generation from clean energy and a 33–35% reduction in emission intensity of GDP by 2030. India today is spending on energy-efficient lighting and renewable electricity more than ever. 33,34 India has committed to reduce its carbon emission by 1 billion by 2030 and reduce the dependence of the economy on carbon by 45% by the end of the decade at the COP26 Glasgow summit. It also aspires a net-zero carbon emission by 2070. 35 The below mentioned can be considered as a pivot point while forming climate policies.

• Solar Energy

India has been recently investing a lot in solar energy. This will help to eventually shift from fossil-fuel-based electricity generation. At the same time, it will create more employment opportunities in the short and long term. It can also help in reducing the gender gap in the economy. The people already involved in fossil fuel-based jobs can be trained for this switch, thereby protecting their employment prospects. The development of solar villages will not only help in raising the standards of all people but also cap GHG emissions.

• Waste Management

Mismanagement of waste is also leading to widespread water pollution and disturbs the ecological balance. In many areas, people are exposed to untreated waste leading to poor health and reduced life expectancy. Currently, India does not have any clear policy mandate on waste management. In recent years a lot of efforts have been given to solid waste management, but they remain lacking. The development of waste-selective management plants like waste gasification will tackle this problem. Building the infrastructure of these plants and future maintenance will open new employment opportunities for both skilled and unskilled laborers.

• Gasification

Gasification is also another field of interest when it comes to reducing climate change. At present many alternatives for petrol and diesel are present. Organic fuels like methanol and biofuels can essentially help motivate people to go green without any compromise on quality. In many countries, gasification is already used as an alternative to fossil fuels in countries like Japan. India should also join them. It will help in achieving the short-term goals of climate change. 36

• Electrical Vehicles

Electrical vehicles are the future of this world. In many countries, a lot of stress is already being given to EVs. However, these come at greater costs and are not affordable without compromise on quality. So, they should be developed as long-term goals. Special highways and express easy should be built to initiate the process.

• Afforestation

Forests are known for regulation rainfall and temperature. Restoration of the lost forest cover is essential. This will help in meeting needs and maintaining the ecological balance. A great amount of CO? will also get absorbed leading to maintained CO? levels. At the same time, precipitation and temperature will also be checked. This will improve/ maintain agricultural productivity.

• Alternatives for Pollution-Causing Substances

India should invest a great deal into its Research and development sector. Explorations and innovations for alternatives to existing pollution-causing substances will help in meeting the desired targets as soon as possible. Conclusion We have seen how climate change is affecting the pillars of Indian Economy (Agriculture, livestock, etc.) and why adopting harsh climate policies often meet reluctance (energy economy). Although India is the only G20 nation with a 2 °C compatible emissions, there is no harm for it to adopt an even more stringent approach in reducing climate change. The adoption of more carbon-efficient and resilient policies like National Clean Energy Fund and International Solar Alliance will enable it to climate-proof its future developmental endeavors. This will require the collective efforts of the government and the people. This is possible when people abide by the rules and regulations formed by the government towards reduction of climate change. At the same time, the government also boosts the motivation of the people via rewards.  Recently, the Indian government at the COP26 summit committed to a net zero carbon economy in the near future.  The words ‘climate’ and ‘economic-development’ are therefore inevitably and closely linked in India for decades to come. Funding Source No funds, grants or other support was received to assist with the preparation of this manuscript. Conflicts of Interest The authors have no conflicts of interest to declare that are relevant to the content of this article. Acknowledgement We gratefully acknowledge Ramjas College, University of Delhi and Central University of Jammu for providing the financial support and assistance to the authors. References

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Advancing the entrepreneurship ecosystem of India: A qualitative study with Chevening Fellows

• Published: 26 December 2023

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• Kamal Gulati 1 ,
• Amrik Sohal 2 ,
• Tharaka de Vass 2 &
• Nrupal Das 3  

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Using social cognitive theory as a guide, this research seeks to explain the perceptions of current and aspiring Indian entrepreneurs. A multiple case study approach using 19 interviews with intellectuals provided qualitative data to conduct a cross-case analysis of the two groups with the qualitative analysis software NVivo. Rare insights from current and aspiring opportunity-motivated entrepreneurial Chevening Fellowships from a predominantly necessity-motivated context offer valuable insights into entrepreneurship in India. The findings reveal what entrepreneurship means to established entrepreneurs, their motivation for embarking on the entrepreneurial journey, the skills they require to be successful, the challenges they face and their strategies to sustain are mostly different to what aspiring entrepreneurs believe how it would be. Compiled recommendations may help strengthen the entrepreneurial ecosystem, particularly in developing economy contexts, to help improve the 10% startup success rate.

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Acknowledgements

Authors gratefully acknowledge the support of Chevening fellows who consented to participate in this study, Chevening Secretariat, Foreign Commonwealth & Development Office, Prof. Richard Briant, University of Oxford, Prof. John Hoffmaire, Chairman, Oxford Pharmaceuticals, Ms. Sarah Fallon, Regional Director, Science and Innovation, British High Commission New Delhi, Ms. Supriya Chawla, Head Chevening Scholarships India for their support.

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Chapter: iii research paper: india's knowledge economy in the global context, iii research paper.

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India’s Knowledge Economy in the Global Context 1

Carl J. Dahlman

Georgetown University

INTRODUCTION

The rise of India as an emerging economic power is increasingly in the global headlines. This is due in part to its large population and impressive growth rates, not just in the past three years, but the past decade and a half. However, it is also due to India’s increasing scientific and technological capability.

This paper assesses India’s knowledge economy in the global context. To put the analysis in context, the second section quickly summarizes some of the key global trends. The third provides an overview of the Indian economy and its recent economic performance. The fourth presents India’s rising economic power and briefly summarizes some of its advantages and challenges. The fifth section benchmarks India’s position in the global knowledge economy using a four-part framework that includes the economic and institutional regime, education and training, the information infrastructure and its use, and the innovation system. It summarizes some of the key challenges and policy issues in the first three of these. The innovation system is analyzed in more detail in the sixth section. That analysis includes a quick overview of the innovation system as well as some of the key issues that need to be addressed. The seventh section summarizes some of the key opportunities for greater U.S.–India collaboration. The final section provides a very brief summary and conclusions.

KEY GLOBAL TRENDS

India’s rise needs to be seen in the broader context of some of the broader global trends affecting growth and competitiveness.

One of these is the increased importance of knowledge. The world is in the midst of what could be considered a knowledge revolution. It is not that knowledge has not always been important for growth and competitiveness, but that there has been a speeding up in the rate of creation and dissemination of knowledge.

A second key trend is an increase in globalization. The share of goods and services that are traded as a percentage of global GDP has increased from 38 percent in 1990 to 48 percent in 2004. This is the result of greater trade liberalization worldwide. However, it is also the result of reductions in transportation and communications costs that result from rapid advances in technology.

A third and related trend is that knowledge markets have become global. Products and services are increasingly designed and developed for global markets in order to recoup the research and development (R&D) investments. In addition, R&D itself is becoming increasingly globalized. This is not just an increase in joint authorship of technical papers by teams from different countries, or joint patenting. An increasing amount of R&D is now being done by multinationals in countries other than their respective home countries, and not just among developed countries. India and China in particular are also benefiting from this trend as they are becoming hosts to many R&D centers set up by multinational companies, as well.

In addition, thanks to the reduction in communications costs, there is an increasing trend to source many knowledge-intensive services in lower-cost developing countries. This is part of what is driving global offshoring of knowledge-intensive services, such as back office functions, as well as engineering design, and even contract innovation services. 2

The result of these trends is that innovation and high-level skills are becoming the most important determinants of competitiveness. Thus countries such as India need to develop more explicit strategies to take advantage of the rapid creation and dissemination of knowledge and to develop their own stronger innovation capabilities.

THE INDIAN ECONOMY

The Indian economy has had a very impressive performance ( Table 1 ). Between 1990 and 2000, it grew at an average annual rate of 6.0 percent. Between

TABLE 1 Growth of output overall and by sector (average annual % growth)

2000 and 2004, it grew at an average rate of 6.2 percent. In the past three years, it has grown at slightly over 8 percent. The sector that has been growing the fastest has been services.

Compared to China, the structure of the economy has not changed as rapidly. Twenty-five years ago the per capita income of these two giant economies was very similar. However, China has had a much faster rate or growth for a longer period of time and more rapid structural change ( Table 2 ). To some extent, India has not followed the traditional pattern of a large increase in the share of industrial value added and then a shift to services. There has been a faster and earlier shift to services, driven in part by a rapid growth of high-value knowledge-intensive services (such as information technology [IT], banking, consulting, and real estate), although they account for only a very small share of India’s very large labor force.

Another difference between India and other developing countries is that it is much less integrated into the global system through trade ( Table 3 ). The contrast with China is again very stark as the share of trade of goods and services in the Chinese economy is more than twice that of India.

INDIA AS A RISING ECONOMIC POWER

India is a rising economic power, but one that has not yet integrated very much with the global economy. It has many strengths, but it also will be facing many challenges in the increasingly globalized, competitive, and fast changing global economy.

Figure 1 presents the current and projected size through 2015 of the world’s 15 largest economies in terms of purchasing power parity (PPP) comparisons. 3 Using PPP exchange rates, India already is the fourth largest economy in the word. Moreover, using average growth rates for the period 1991–2003 to project future size, India surpasses Japan by the end of next year to become the third largest economy in the world. During the period projected, China (currently, the second largest economy), will become the largest economy, surpassing the United States by about 2013. However, it should be emphasized that past performance is not necessarily a good predictor of future performance—just of potential, as future reality is usually different than projected trend. Nevertheless, this projection based on PPP exchange rates is helpful to emphasize that India has great potential, but also faces competition, particularly from China. It is therefore useful to quickly take stock of India’s strengths and challenges.

TABLE 2 Structure of output, 1990 vs. 2004

India’s key strengths are its large domestic market, its young and growing population, a strong private sector with experience in market institutions, and a well-developed legal and financial system. In addition, from the perspective of the knowledge economy, another source of strength is a large critical mass of highly trained English-speaking engineers, business people, scientists, and other professionals, who have been the dynamo behind the growth of the high-value service sector.

However, India is still a poor developing country. Its per capita income in 2004 was just $674 and with a billion people, it accounted for 17 percent of the world’s population. Its share of global GDP is less than 2 percent (using nominal exchange rates), and just 1 percent of world trade. Moreover, 80 percent of its population lives on less that $2 a day, and 71 percent is rural, with about 60 percent of the total labor force still engaged in agriculture.

TABLE 3 Integration with global economy (% of GDP)

FIGURE 1 Current economic size and projection through 2015 for 15 largest economies.

SOURCE: Author’s projections based on data in the WDI database. World Bank, World Development Indicators 2006 , Washington, D.C.: World Bank, 2006.

One of India’s key challenges is its rapidly growing and young population. India’s population is expected to continue to grow at a rate of 1.7 percent per year until 2020 and to overtake China as the most populous country in the world. Part of the challenge is that India’s population has low average educational attainment. Years of school for the adult population averages less then 5 years, compared to nearly 8 years in China now, and 12 in developed countries. In addition, illiteracy is 52 percent among women and 27 percent among men.

Another challenges is poor infrastructure—power supply, roads, ports, and airports. This increases the cost of doing business. In addition, India is noted for an excessively bureaucratic and regulated environment which also increases the cost of doing business.

All these challenges constrain the ability of the Indian economy to react to changing opportunities. Low education reduces the flexibility to respond to new challenges. Poor infrastructure and high costs of doing business constrain domestic and foreign investment. The high costs of getting goods in or out of India also constrain India’s ability to compete internationally and to attract export-oriented foreign investment except for business that can be done digitally rather than requiring physical shipments.

Figure 2 presents alternative projections of India’s per-worker income to 2020. The projections assume that the growth of capital, labor, and education in

FIGURE 2 India’s choice set in determining its future growth path: Real GDP Per Capita—Alternate projections, 2001-2020.

NOTE: The projections assume that capital, labor, and human capital (the educational complement to labor) grow at their 1991–2000 respective annual rates of growth. What is varied is the rate of total factor productivity growth. The TFP numbers are taken from the historical experience noted for each of the projections.

SOURCE: Carl Dahlman and Anuja Utz, India and the Knowledge Economy: Leveraging Strengths and Opportunities , Washington, D.C.: The World Bank, 2005.

India continue their trend lines. The only parameter that is changed is the rate of growth of total factor productivity (TFP)—the efficiency with which these basic factors are utilized. 4 The projections show that the real per-worker income in India could be between 46 to 167 percent higher in 2020 than in 2001, depending on how effectively knowledge is used. As noted, these projections are based on

the historical trends in the growth of inputs and of TFP. To a very large extent, these depend on policy measures that are under the control of India’s policy makers, business, and the broader Indian society. The point of this projection is to emphasize that India’s performance to a very large extent depends on its policy choices—what is holding India back is itself.

There is a tremendous window of opportunity for India to leverage its strengths to improve it competitiveness and increase the well-being of its population. However, it is important to seize these opportunities and to move quickly to action. The next section will examine India’s position in the context of the global knowledge economy as a way to identify some of the key policy issues that need to be addressed to make India’s recent rapid growth sustainable.

INDIA IN THE GLOBAL KNOWLEDGE ECONOMY

The World Bank Institute has developed a useful benchmarking tool that helps to rank countries in terms of their readiness to use knowledge for development. 5 The methodology consists of examining a country’s rank ordering in four pillars based on a series of 20 indicators in each pillar. The four pillars are:

an economic and institutional regime that provides incentives for the efficient use of existing and new knowledge and the flourishing of entrepreneurship;

an educated and skilled population that can create, share, and use knowledge well;

a dynamic information infrastructure that can facilitate the effective communication, dissemination, and processing of information;

an efficient innovation system of firms, research centers, universities, consultants, and other organizations that can tap into the growing stock of global knowledge, assimilate and adapt it to local needs, and create new knowledge.

Broad Assessment of India’s Position

A simple summary measure called the Knowledge Economy Index has been developed for quick comparative benchmarking. It is an amalgamated index consisting of the average ranking of three of the most indicative indicators for each of the four sectors. 6 This index is tracked over time. It permits the comparison of a country’s current ranking to that in 1995. This is done in Figure 3 for India plus five other countries: Brazil, Russia, China, Korea, and Mexico 7 plus some other standard reference countries.

Figure 3 shows that India is placed roughly in the sixth decile of a rank-ordering distribution from the most advanced countries. It also shows that India’s relative position has slipped relative to where it was in 1995. Figure 4 shows the contribution of each of the four pillars to India’s relative ranking. India has improved its relative position on the innovation indicators and slightly on the information and communications technology (ICT) indicators. On the economic and institutional regime and education, it has slipped back. (See Annex Table A-1 for the ranking on each of the pillars.) 8

The rest of this section summarizes very briefly some of the key issues in the economic and institutional regime, education and training, and information and communication technology. The following section looks at the issues in innovation in more detail. 9

FIGURE 3 Changes to Knowledge Economy Index, 1995–2003.

NOTE: The horizontal axis represents the relative position of the country or a region in 1995. The vertical axis represents the position in the most recent year (generally 2000– 2004). The graph is split by a 45 degree line. Those countries or regions that are plotted below the line indicate a regression in their performance between the two periods. The countries or regions that are marked above the line signify improvement between the two periods, while those countries that are plotted on the line indicate stagnation. The KAM methodology allows the user to check performance in the aggregate Knowledge Economy Index (KEI), as well as the individual pillars: Economic Incentive Regime, Education, Innovation, and ICT (Information Communications Technologies).

SOURCE: World Bank Institute, KAM 2006, < http://www.worldbank.org/kam >.

Key Issues in the Economic and Institutional Regime

The economic and institutional regime is an important aspect of a country’s ability to take advantage of knowledge. It includes the overall regime of policies and institutions that give an economy the incentives to improve efficiency and the flexibility to redeploy capital and labor to their most productive use. It also includes the rule of law and government effectiveness. As was seen from the summary variables in the KAM basic scorecard, this is the second weakest of the four pillars of the knowledge economy in India, and one in which India has actually lost relative standing with respect to the rest of the world. Based on a more detailed analysis, including surveys of foreign and Indian businessmen, some of the key issues that have to be improved in the economic and institutional regime include: 10

FIGURE 4 KEI: Major world regions and largest country in each, 1995 vs. most recent.

NOTE: Each bar chart represents the most recent aggregate KEI score for a selected region or country, split into the four KE pillars. Each color band represents the relative weight of a particular pillar to the overall country’s or region’s knowledge readiness, measured by the KEI. The first line for each country is its position in the most recent year for which data are available (generally 2002–2005). The second line is for 1995. (See Annex Table A-1 for the actual ranking for each of the pillars. See Annex Figure A-1 for a comparison of the basic scorecard rankings for India with China and the United States.)

reducing the bureaucracy for the entry and exit of firms,

updating physical infrastructure,

easing restrictions on the hiring and firing of labor,

reducing tariff and nontariff barriers to trade,

encouraging foreign direct investment and increasing e-linkages with the rest of the economy,

strengthening intellectual property rights and their enforcement, and

improving e-governance and encouraging ICT use to increase government’s transparency and accountability.

Key Issues in Education and Training

Educated and skilled persons underlie the ability of an economy to take advantage of knowledge and to create new knowledge to improve economic

performance and welfare. Key elements of education and training for the knowledge economy include the level and quality of educational attainment as well as the relevance for the needs of a rapidly changing economy such as India. This is also a pillar in which India has slipped compared to its relative global ranking in 1995. Some of the key issues that India needs to address in education and training include:

expanding quality basic and secondary education to empower India’s rapidly growing young population;

raising the quality and supply of higher education institutions, not just the Indian Institutes of Technology and the Indian Institutes of Management;

embracing the contribution of private providers of education and training by relaxing bureaucratic hurdles and putting in place better accreditation systems;

increasing university–industry partnerships to ensure consistency between education, research, and the needs of the economy;

establishing partnerships between Indian and foreign universities to provide internationally recognized credentials;

using ICT to meet the double goals of expanding access and improving the quality of education;

investing in flexible, cost-effective job training programs that are able to adapt quickly to new and changing skill demands.

Key Issues in ICT

Advances in information processing, storage, and dissemination are making it possible to improve efficiency of virtually all information-intensive activities and to reduce transaction costs of many economic activities. Some of the key elements to make effective use of the potential of this new information infrastructure are the regulatory regime for the information and telecommunications industries and the skills to use the technologies, software, and applications. Some of the key issues that need to be improved in India include:

boosting ICT penetration and reducing/rationalizing tariffs on hardware and software imports;

massively enhancing ICT literacy and skills;

increasing the use of ICT as a competitive tool to improve efficiency of production and marketing (supply chain management, logistics, etc.);

moving up the value chain in IT by developing high-value products through R&D, improving the quality of products and services, marketing of products and services, and further positioning the “India” brand name;

launching suitable incentives to promote IT applications for the domestic economy, including local language content and application;

strengthening partnerships between government agencies, research/ academic institutions, private companies, and nongovernmental organizations (NGOs) to ramp up ICT infrastructure and applications;

developing/scaling up, through joint public–private partnerships, ICT applications, community radio, smart cards, Internet, satellite communications, etc.

STRENGTHENING INDIA’S INNOVATION SYSTEM

This section starts by placing India in the international context using the KAM innovation pillar as well as other data. The next subsection develops a brief framework for analyzing a developing country’s innovation system. This framework is then used to assess India’s innovation system. The last section then presents a matrix of key issues that need to be addressed to improve India’s innovation system.

Broad Assessment of India’s Position in Innovation

Figure 5 places India’s innovation system in the global context using the KAM innovation system pillars. This is based on one measure of R&D input (scientists and engineers) and two measures of output (scientific and technical publications, and patents in the United States). By this narrow measure linked primarily to formal R&D, India is in the top 13th percentile of the global distribution of countries. 11 Furthermore, it has improved its position relative to the rest of the world.

Clearly, because of India’s large critical mass of scientists and engineers engaged in R&D, India is a major player in global R&D. However, it is instructive to compare India’s share of the world in scientists and engineers, scientific and technical publications, and patents with its share of population and GDP measured in nominal as well as PPP exchange rates ( Figure 6 ). From this figure, it can be seen that, as expected, India’s share of scientists and engineers in R&D is much lower than its share of population or GDP in PPP terms, although it is slightly higher than its GDP share in nominal terms. Its share of scientific and technical publications is smaller than its share of GDP in nominal terms. Its share of all patents in the United States is extremely small (only 0.2 percent—too small to be in the figure). One quick conclusion from this comparison is that India is stronger in its basic scientific inputs that in its outputs of basic scientific and technical knowledge, since its share of publications is smaller than its share of personnel engaged in R&D. It is even weaker in turning that scientific output into commercially relevant knowledge, as suggested by its much smaller share of

FIGURE 5 Global context of India’s innovation system.

NOTE: This figure is based on the absolute size of India’s innovative effort. If this were to be scaled by population (i.e., scientists and engineers in R&D per million population, scientific and technical publications per million population, patents in the United States per million population), India’s relative position would fall to the 67th percentile of the country distribution.

patents in the United States. However, a developing-country’s innovation system should be analyzed in a broader context, as developed below.

Components of a Developing County’s Innovation System

A country’s innovation system consists of the institutions and agents that create, adapt, acquire, disseminate, and use knowledge. It also includes the policies and instruments that affect the efficiency with which this is done. In developing countries, innovation should not be interpreted only as application of knowledge that is new at the level of the world frontier, but as product, process, organization, or business knowledge that is new to the local context. Therefore, in developing countries the innovation system should include not only domestic research and development and its commercialization and application. It should

FIGURE 6 Key indicators of India’s share in the world.S&T Publications

SOURCE: Calculated from World Bank, World Development Indicators 2006 , Washington, D.C.: World Bank, 2006.

also include the policies, institutions, mechanisms, and agents that affect the extent to which the country taps into and makes effective use of global knowledge that is new to the country.

The innovation system of a developing country such as India can be thought of as consisting of four parts. One is formal R&D that is carried out in India. This is the most visible and most easily measured. A second is the informal innovation in India. This may happen as the result of insights or experience by individuals or groups working in large of small enterprises or informal production. It can also be the result of decades of indigenous informal experimentation or accumulation of knowledge. This is not so visible and there is very little systematic quantification of this type of innovative effort. A third is formal acquisition of foreign knowledge. This includes the knowledge first brought in through direct foreign investment or technology transfer. The fourth is the informal acquisition, adaptation, and use of knowledge acquired through the import of capital goods, component products, and services that are new to the economy. It also includes knowledge obtained by copying, reverse engineering, or otherwise imitating what has already been done by others abroad. Other informal mechanisms include foreign study, travel, or work experience, as well as technical literature. Increasingly,

it also includes all kinds of knowledge that can be acquired through the Internet including detailed manuals, designs, and data sets. 12

Assessment of India’s Innovation System

Table 4 compares some of the key indicators of India’s broadly defined innovation system with that of the other BRICKM economies. China is the most relevant country for comparison because it is the closest in size and level of development. Figure 7 presents the main variables for India and China in graphical scorecard mode. 13

Formal R&D

In India, the formal R&D effort is quite small. Total expenditures are only 0.8 percent of GDP and have been at that level for 15 years. The bulk of that effort (around 70–80 percent) is carried out by the public sector (federal and state), and most of that is mission-oriented R&D in defense, aerospace, and oceans. Only about 20 percent of that, or roughly 0.16 percent of GDP, is more applied work in agriculture, medicine, and industry. 14

R&D spending by the private sector is only 16–20 percent of the total, or about 0.12 percent GDP. It is highly concentrated in a few large enterprises. The sectors that do the most R&D are pharmaceuticals, auto parts, electronics, and software.

A special feature is increasing R&D being done by multinational companies (MNCs) As of the end of 2004, there were nearly 200 R&D centers, including ABB, Astra Zeneca, Bell Labs Boeing, Bosch, Dell, Cummins, Dupont, Ericsson, Google, Honda, IBM, GE, GM Honda, Hyundai, Microsoft, Monsanto, Motorola, Nestle, Nokia, Oracle, Pfizer, Philips, Roche, Samsung, Sharp, Siemens, Unilever, and Whirlpool. 15 MNCs are attracted to set up R&D centers in India because of the lower salaries for Indian scientists and engineers, which are one-fourth to one-fifth that of comparable engineers in the United States.

TABLE 4 Innovation comparisons with BRICKMs

FIGURE 7 India-China comparison on selected indicators of innovation system.

Informal Innovation

Informal innovation efforts are quite large. This consists not only of the experimentation and learning by doing that is done in the formal and informal sectors. There is very likely a grassroots innovation effort. Several NGOs have sprung up to support such grassroots innovation. They include Honeybee network, the Society for Research and Initiatives for Sustainable Development (SRISTI), and the Grassroots Innovation Augmentation Network (GIAN). In addition, the government has set up the National Innovation Foundation (NIF) to help document and finance grassroots innovations. The NIF has created a database of over 50,000 grassroots innovations. These consist of improvements in simple agricultural instruments, and agricultural techniques as well as indigenous knowledge. However, despite all these efforts, it has been difficult to develop appropriate funding and mechanisms to support the improvement, scale-up, and broad dissemination of grassroots innovations because of very high transaction costs and limited resources. 16

Formal Acquisition of Foreign Knowledge

In India this has been small until relatively recently. For a long time, India has had a very strongly autarkic technology policy. There has been a gradual

opening up of various parts of the economy to foreign investment. Now most sectors are open. The same is true for technology licensing, although there are still controls on the maximum royalty rates that can be charged. Until relatively recently, foreign investment into India was not allowed in many sectors, and was strictly regulated and kept to minority shares in joint ventures in others. There has been significant liberalization over the past 15 years, but India has not received as much foreign investment as the BRICKM countries. As can be seen from Table 4 , gross foreign investment inflows as a share of GDP between 1994 and 2003 were the lowest among the six countries. Purchases of foreign technology have also been the lowest among the six countries, both in absolute terms and even more on a per capita basis. In addition, part of the reluctance of foreigners to invest in India, even after the sectors have been opened up, is the high degree of red tape, corruption, and bureaucracy as well as very poor physical infrastructure services. Some also worry about poor intellectual property rights enforcement.

Informal Acquisition of Foreign Knowledge

This is perhaps the most important source of domestic innovation in developing countries (except those that are very dependent on foreign investment such as Singapore and Hong Kong). As can also be seen in Table 4 , India is again the least open economy of the six BRICKM countries as measured by degree of integration into the world economy through imports and exports of manufactured products. The share of manifested trade is only 13.5 percent of GDP in India compared to around 50 percent in China, Korea, and Mexico. Brazil and Russia are also less integrated with the global economy. However, these countries are outliers as the rest of the countries of the world are much more integrated into the global system (refer back to Table 3 for the share of merchandise trade and services in India compared to the average for other low-income countries, as well as lower and upper middle income countries, developed countries, and the world).

From Figure 7 , comparing the key variables on the innovation system between India and China, it can be seen that China is ahead of India in virtually all the indicators, except the availability of venture capital, as well as some qualitative assessments on firm-level technology absorption and value chain reference where the persons surveyed have put India ahead.

However, in terms of the four-part framework laid out above, the following summary assessment can be made. It is hard to compare the domestic informal efforts, and so, that will be left aside. On acquiring knowledge from abroad informally, China is considerably ahead of India because it is much more integrated into the global system through trade and foreign education, and has a higher level of average educational attainment that facilitates the rapid assimilation of foreign knowledge. On acquiring foreign knowledge formally, China is also ahead because it has had a much more open policy for a longer period of time and has attracted much higher volumes of foreign investment as part of an explicit strategy

to use foreign investment to produce new goods and services new to the Indian market, but also for exporting to the global market. Finally, in formal R&D effort, whereas China’s spending as a share of GDP was comparable to India’s in 1998, by 2005 it had been increased to 1.4 percent of GDP. China also plans to increase it further to 2.0 percent by 2010. In fact, in PPP terms, China in 2006 is probably already the second spender on R&D in the world, ahead of Japan and second only to the United States. Essentially, while China has been very effective at tapping global knowledge informally and informally leveraging these sources of innovation to improve its growth and welfare, it has now decided to do more to innovate on its own account, hence its major drive to increase formal R&D spending. Thus, it will be an even more formidable player on the global stage.

Key Areas for Strengthening India’s Innovation System

Given the foregoing analysis, there is much that India needs to do to strengthen its innovation system. Time is of the essence given the trends and the increasing competitive demands of the global system, and the strategies of other countries—China in particular.

Table 5 summarizes in matrix form the main assessments made in the preceding section and proposes some areas for policy reform. The list is quite extensive. Furthermore, some of the proposed reforms get into areas where there may be considerable opposition and internal debate in India from various groups. Some of this is based on concerns about national sovereignty and ideology. Others are based on the concerns of groups with vested interests who want to maintain their position vis a vis new entrants, domestic as well as foreign. Thus, in a large complex democracy such as India, there will necessarily be a lot of debate. This process will take time. It is hoped that the analysis presented here can contribute to that debate and that concrete policies and investments will soon emerge.

OPPORTUNITIES FOR U.S.–INDIA COLLABORATION

There are many fertile areas for greater U.S.–India collaboration. These include trade, foreign investment, research, and education, and they are likely to increase as India advances in its reforms.

In trade, there is scope for increased exports and imports from each country to the other. Currently, trade levels are quite low, but the products and services produced by each country are very complementary so there is great potential to increase trade in both goods and services, particularly as India further liberalizes its trade regime.

There is also great scope for increased U.S. foreign investment in India as well as for more Indian investment in the United States. U.S. firms are already the largest investors in India, particularly in ICT service-related areas as well as in R&D centers. There is also much scope for increased strategic technological

TABLE 5 Summary of assessment and of areas in need of improvement

alliances between firms from the two countries. Some of the sectors in which there is strong potential for greater collaboration include pharmaceuticals, engineering goods, automobiles and auto parts, telecommunications equipment and services, and software.

There is also potential for greater collaboration between the United States and India in joint research on energy, environment, and space and in fact, several major agreements have recently been initiated between the two countries. Furthermore, given India’s needs and experience and its large public research institute infrastructure, there is scope for joint work on major public good initiatives in health and preventive medicine as well as in agriculture and sustainable livelihoods.

In addition, there are many opportunities in higher education, including joint degrees, joint ventures, wholly owned subsidiaries or franchises. Furthermore, these are not just from the United States into India, but also from India to the United States. For example, NIT has set up many training facilities and developed specialized corporate training activities in the United States.

In sum, India has made great progress but faces daunting challenges. India has many strengths, particularly a young and growing population, experience and institutions of a market economy, a critical mass of entrepreneurs and highly skilled professionals, and a large public research infrastructure. It has the potential to leverage its strengths to improve its competitiveness and welfare. It faces many internal challenges as well as a much more demanding and competitive international environment.

This paper has presented a quick overview of the broad range of issues where India needs to deepen its economic reforms and make additional investments. It has assessed in a little more detail some of the key issues in its innovation system, and identified specific areas that need improvement.

There is also tremendous potential for increased U.S.–India cooperation across many areas. This conference is an opportunity to begin to develop this mutually beneficial cooperation. Hopefully this is just part of a series of events that will help to push the reforms and investment forward. Greater mutual understanding will spur greater public–public, public–private, and private–private cooperation, which will strengthen the mutually beneficial and strategic relationships between these two countries.

FIGURE A-1 Basic scorecard.

TABLE A-1 KAM ranking: How India compares with world regions and BRICKMs

As part of its review of Comparative National Innovation Policies: Best Practice for the 21st Century , the Board on Science, Technology, and Economic Policy convened a major symposium in Washington to examine the policy changes that have contributed to India's enhanced innovative capacity. This major event, organized in cooperation with the Confederation of Indian Industry, was particularly timely given President Bush's March 2006 visit to India and the Joint Statement issued with the Indian government calling for strategic cooperation in innovation and the development of advanced technologies. The conference, which brought together leading figures from the public and private sectors from both India and the United States, identified accomplishments and existing challenges in the Indian innovation system and reviewed synergies and opportunities for enhanced cooperation between the Indian and U.S. innovation systems. This report on the conference contains three elements: a summary of the key symposium presentations, an introductory chapter analyzing the policy issues raised at the symposium, and a research paper providing a detailed examination of India's knowledge economy, placing it in terms of overall global trends and analyzing its challenges and opportunities.

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