SPECIAL ARTICLEdecember 6, 2008 EPW Economic & Political Weekly68Investment and Growth in India under Liberalisation: Asymmetries and InstabilitiesSurajit Mazumdar I wish to thank Jayati Ghosh for her generous assistance when the research leading to this paper was at its incipient stage and for her comments and suggestions on my work. For further comments and suggestions on this paper I am grateful to my colleagues at the Institute for Studies in Industrial Development. The usual disclaimer however applies.Surajit Mazumdar (surajit.mazumdar@gmail.com) is with the Institute for Studies in Industrial Development, New Delhi.This paper makes the case that the growth trajectory of the Indian economy in the post-1991 liberalisation period is characterised by an inherent source of instability in manufacturing and industrial growth that distinguishes this period from the 1980s. This instability is a result of an investment-growth asymmetry that flows from a combination of a services-intensive growth pattern and a manufacturing-intensive investment pattern, which reflects the pattern of demand expansion within the domestic economy as well as in external markets, as also reliance on private corporate investment as the driver of the economy’s investment process. In such circumstances, maintaining the balance between capacity creation and demand expansion in the manufacturing sector becomes impossible. Investment is thus prone to a high degree of instability, which, via its effects on demand, makes industrial growth too highly unstable. The services-intensive growth trajectory after 1991 is therefore more correctly viewed as one which is unable to fully utilise the capital accumulation potential of the economy rather than as a trajectory that is cheap in the use of capital. Correcting this problem however requires measures that are inconsistent with a liberalised economic policy regime.It is well known that the relationship between investment and growth works through two channels since investment has a dual character. Investment is one of the components of final demand that through the multiplier process also influences the overall level of demand in a capitalist economy. At the same time, investment is also the means by which the productive capacity of the economy expands. How does a capitalist economy maintain a stable growth path where a balance or consistency is maintained between these two influences of investment on output? This has been one of the central questions of growth theory since the instability associated with it was conceptualised as the knife-edge or razor’s edge problem in the work of Harrod and Domar. This paper argues that the contemporary growth process of the Indian economy confronts a similar problem of instability, for reasons however that are specific to its context and somewhat different from those highlighted by the Harrod-Domar analysis. If the analysis presented in this paper is correct, then one of its implications would be that some of the perceptions or conclu-sions about India’s growth that have gained currency in the last few years would need to be substantially revised or amended, or at least become subject to very important qualifications. Specifi-cally, this paper calls into question the following three major con-ceptions that can be found in a number of studies that have looked at India’s growth history through the prism of the aggre-gate production function or growth accounting approach:(a) That the period since 1980 can be seen as one single phase, distinguished from the previous three decade long period of highly volatile and low average growth (the “Hindu rate of growth”) by a relatively more stable and higher growth trajec-tory that has been enabled more by a marked improvement in the pace of productivity growth than the greater use of inputs. This transition is of course typically causally linked to the process of liberalisation of the Indian economy.1(b) That the experience since 1980 points towards the distinct possibility that India’s growth performance in the coming decades is likely to be even better than in the last 25 years, perhaps even approaching spectacular levels.2(c) That India’s growth trajectory enjoys one great advantage compared to that of China and east Asia, namely, that it is rela-tively less intensive in the use of capital, reflected in a lower capital-output ratio. For this reason, even if India’s savings rate does not converge to the Chinese and east Asian levels, and the investment rate possible with a sustainable current account deficit is lower, it can achieve similar or higher rates of growth.3Evidence will be provided in this paper to show that the rela-tionship between capital accumulation and output growth in 
PCGCF/GCF PCGCF/GFCF 
Agriculture Services Industry 
SPECIAL ARTICLE
Figure 6: Distribution of Industrial Net Fixed Capital Stock at 1999-2000 Prices (in %)
| 100 | |||
|---|---|---|---|
| 90 | |||
| 80 | Manufacturing | ||
| 70 | |||
| 60 | |||
| 50 | Registered manufacturing | ||
| 40 | Electricity, etc | ||
| 33 | |||
| 20 | Unregistered manufacturing | Construction | Mining |
| 10 | |||
| 0 |
1951 1957 1963 1969 1975 1981 1987 1993 1999 2005
Figure 7: Registered Manufacturing Share in NDP and Net Fixed Capital Stock (%), and Its N/K Ratio
25
20 Share in NFCS
15
10
Share in NDP
5
N/K Ratio × 10
0 1950-51 1956-57 1962-63 1968-69 1974-75 1980-81 1986-87 1992-93 1998-99 2004-05
the experience of the services sector, in whose case liberalisation was accompanied by a sharp acceleration in growth of output without any significant acceleration in the rate of growth in fixed capital, which had in any case been lower than that of output. Thus while investment has increasingly gone in one direction, namely, that of registered manufacturing, output growth has mainly come from other directions, that is services. This specific absence of a strong relationship between capital formation and output growth is the investment-growth asymmetry characteristic of post-1991 Indian economy.
The investment-growth asymmetry and the change between the 1980s and afterwards is brought out sharply in Table 6. It shows that the share of the registered manufacturing sector in the increase in both the industrial net fixed capital stock and the aggregate stock has been significantly greater in the period after 1991 as compared to the share in the 1980s. But in both cases, the contribution of the sector to the increase in output shows significant decline. Not only has the bulk of the growth of output after 1991 come from the services sector, that sector has also substantially enhanced its contribution to that growth.
The investment-growth asymmetry is not merely an economywide phenomenon but also characterises the private corporate sector, the sector responsible for much of organised manufacturing investment. This is indicated by Table 7 (p 73) which highlights the dramatic turnaround in the sectoral distribution of organised private economic activity, including the sources of its profits that has taken place since the early 1990s.9 In line with the overall trend in the economy, even the organised private sector services have grown faster than manufacturing and industry, and it is
72 s ervices that have raised the organised private sector’s share in NDP from under 13 per cent in 1993-94 to nearly 20 per cent in 2004-05.
Anatomy of the Investment-Growth Asymmetry
One of major factors behind the investment-growth asymmetry that has characterised the post-1991 Indian economy is that the demand pattern generated by external markets, domestic consumption demand, and public expenditure, has been increasingly tilting towards services at the expense of manufacturing.
As is well known, it is in services rather than in manufacturing that India has been relatively more successful in finding a niche for itself in the international division of labour. In 2005, the share of services in India’s total exports (goods and commercial s ervices), at 37 per cent was way above the world average of 19 per cent.10 While India has a substantial deficit in its merchandise trade (which crossed 6 per cent of GDP in 2006-07), services exports and private remittances have ensured that India has maintained a large surplus in invisibles. Services exports have increased from a level that was less than a quarter of m anufacturing-intensive merchandise exports in the early 1990s to nearly 64 per cent of merchandise exports by 2006-07 (Figure 9, p 73), which puts their magnitude nearly at par with that of n on -oil manufactured exports.
Table 5: Annual Rates of Growth of Average Net Fixed Capital Stock and Net Domestic Product of the Registered Manufacturing Sector and of Services
Item 1980-81 to 1990-91 to 1990-91 to 1980-81 to 1990-91 to 1990-91 to 1990-91 2000-01 2005-06* 1990-91 2000-01 2005-06*
Registered
Manufacturing Services
| At 1999-2000 prices | ||||||
|---|---|---|---|---|---|---|
| Average net fixed capital stock | 6.50 | 9.53 | 8.28 | 4.53 | 5.49 | 5.84 |
| Net domestic product | 8.41 | 6.46 | 6.08 | 6.61 | 8.05 | 8.16 |
| At 1993-94 prices | ||||||
| Average net fixed capital stock | 6.96 | 11.35 | 9.97 | 4.71 | 5.61 | 5.47 |
| Net domestic product | 8.82 | 5.81 | 5.48 | 6.61 | 8.45 | 8.39 |
| *1990-91 to 2003-04 at 1993-94 prices. |
Source: Computed from CSO, National Accounts Statistics, 2001, 2004, 2007 and back series at 1999-2000 prices.
Table 6: Contribution of Different Sectors to Point-to-Point Increase in Average Net Fixed Capital Stock and Net Domestic Product at 1999-2000 Prices
Industry/Sector % Share in Increase of % Share in Increase of Industry Total Economy Total 1980-81 to 1990-91 to 1990-91 to 1980-81 to 1990-91 to 1990-91 to
1990-91 2005-06
2000-01
2005-06
1990-91
2000-01
Of average net fixed capital stock: Mining and quarrying 13.18 4.38 3.18 7.57 2.62 1.78 Manufacturing 56.91 74.64 75.61 32.69 44.67 42.36 Registered 32.70 54.15 51.96 18.78 32.40 29.11 Unregistered 24.21 20.50 23.65 13.91 12.26 13.25 Electricity, gas and water supply 28.40 18.10 16.30 16.31 10.83 9.13 Construction 1.51 2.87 4.91 0.87 1.72 2.75 Industry 100.00 100.00 100.00 57.44 59.84 56.02 Services 29.52 32.64 35.49
Of net domestic product: Mining and quarrying 12.14 6.69 6.43 3.46 1.58 1.62 Manufacturing 58.34 58.01 53.13 16.60 13.74 13.36 Registered 45.58 38.06 36.97 12.97 9.01 9.30 Unregistered 12.75 19.95 16.16 3.63 4.73 4.06 Electricity, gas and water supply 6.54 8.14 5.98 1.86 1.93 1.50 Construction 22.98 27.16 34.47 6.54 6.43 8.67 Industry 100.00 100.00 100.00 28.46 23.69 25.15 Services 46.01 59.64 62.11
Source: Computed from CSO, National Accounts Statistics, 2007 and back series at 1999-2000 prices.
december 6, 2008 EPW Economic & Political Weekly
At 1999-2000 prices At 1993 94 prices At 1980 81 prices 
10 20 30 40 50 60 70 
0 10 20 30 40 50 60 Services Manufactured products except fuels fuel intensive expenditures Electricity 
0.85 0.9 0.95 1 1.05 1.1 1.15 1.2 1.25 Manufactured/food Manufactured/non-food Manufactured/services 
4 6 8 10 12 14 Public sector GFCF GFCE 
1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 Index of output capital ratio Growth rate of NDP 2005-06 0 0 80 60 40 20 0 0 
0 50000 100000 150000 200000 250000 300000 Minimum potential output Actual output 
SPECIAL ARTICLEdecember 6, 2008 EPW Economic & Political Weekly76observed in the 1980s like the declining capital-output ratio in manufacturing. It is therefore inappropriate to treat the growth from 1980 onwards as movement along a single trajectory. Moreover, the asymmetry has meant a coincidence of the rising importance of services and increase in capital use per unit of out-put in the manufacturing sector because of demand constraints. The services-intensive growth trajectory after 1991 is therefore more correctly viewed as one which is unable to fully utilise the capital accumulation potential of the economy rather than as a trajectory cheap in the use of capital.Those who have interpreted the growth experience of the past two and a half decades as being a pointer to the future growth potential of the Indian economy also typically hold the view that realisation of this potential is contingent upon continuation along the path of liberalisation. But the asymmetry between capital accumulation and growth is not a transient pheno-menonbut rather is structurally embedded in the growth trajec-tory initiated by the liberalisation measures after 1991. If this asymmetry persists, industrial growth will remain highly prone to instability. Since agriculture too has not graduated to a higher growth path, nor become more stable, it is premature to conclude that India has embarked on a virtuous cycle of sta-ble and high growth simply on the basis of the continued momentum of growth in services. It will certainly be grossly incorrect to conclude that India is on the path towards successful industrialisation.If in fact the future growth of the Indian economy is to be put on a more stable basis, then it requires the state to take measures that are incompatible with its designated role under a liberal eco-nomic policy regime. Income distribution patterns have to be altered so that the market for manufactured products is widened. Investment in agriculture and other sectors like infrastructure have to be promoted that could both absorb capital as well as expand the market for manufactured products. A lot of this restructuring of the investment pattern depends on there being appropriate growth of public investment. Sustained public invest-ment in any case would generate stability in investment and growth. Public investment could be the channel for directing investible resources to sectors short of capital and also act as an inducement for private investment in agriculture (by households) and industry. Public investment in economic and social infra-structure could also contribute to increasing the international competitiveness of Indian manufactured products and generate increases in their exports. But each of these sets of measures involves an “activist” State of a kind that is anathema to a liberal economic policy regime.Notes 1 This general view can be found in many places and is also tied up in the debate on the signifi-cance of the 1990s liberalisation in the growth turnaround [Acharya 2007; DeLong 2003; Virmani 2004a and b; Sinha and Tejani 2004; Rodrik and Subramanian 2005; Srinivasan 2005; Panagriya 2004; Kohli 2006 a and b; Kaur 2007; and Wallack 2003]. The central issues in that debate relates to the sources of the 1980s growth upturn given the relatively minor policy changes of that decade and the apparent paradox that the more widespread reforms of the 1990s produced no significant acceleration in productivity-driven growth beyond that. Some have even emphasised that the most important turning point was before, in the 1950s [Hatekar and Dongre 2005; Nayyar 2006]. But the treatment of the period since 1980 as part of the same growth trajectory has not been really questioned in this debate. 2 The Goldman Sachs BRICS report of 2003 [Wilson and Purushothaman 2003] played a prominent role in the crystallisation of this view. Its projec-tions have however been considerably scaled upwards in many writings that have subsequently appeared, including two further Goldman Sachs Studies, Purushothaman (2004) and Poddar and Yi (2007), Rodrik and Subramanian (2004), Rajiv Ranjan et al (2007), Mishra (2006) and Kelkar (2004). Kelkar has gone so far as to suggest that India is poised at the doorstep of a golden age of growth where its performance might even sur-pass that of the east Asian miracles. These projec-tions of India’s future growth potential are based on the assumed potential for productivity growth and factor accumulation. Given the large gaps that still exist between productivity levels in India and in the developed countries, and between agriculture and non-agricultural activities within the Indian economy, catching up and relocation of labour are supposed to offer considerable scope for sustained productivity growth. India’s “demo-graphic dividend” is expected to yield both increases in the workforce as well as a faster rate of capital accumulation through an increase in the savings rate, with the latter trend being reinforced by rising per capita income. 3 India’s capital-output ratio is supposed to be relatively low compared to say China for a combi-nation of reasons – the greater efficiency in the use of capital in India, the large contribution of low capital using service sectors to Indian growth, and the absence of large investments in high- capital infrastructure projects [Mishra 2006; Debroy 2006]. 4 There are of course numerous other issues con-cerning the theoretical validity of the concept of an aggregate production function. See Felipe and Fisher (2003) for a relatively recent comprehen-sive discussion. 5 Riddle(1986).6 Problems associated with the measurement of household sector fixed capital formation could mean that the degree of actual fluctuations in aggregate GFCF have been greater than that captured in the data [Shetty 2005]. 7 For the purposes of the subsequent discussion: Agriculture includes also fishing and forestry, and logging; Industry is composed of mining and quarrying, manufacturing, electricity, gas and water supply, and construction; the remaining four sectors are included in services, with the exception that real estate, ownership of dwellings and business services are excluded from both the services and economy aggregates. 8 Balakrishnan and Babu (2003) have highlighted this decline in capital efficiency.9 It should however be noted that since the value added to gross output ratio in industry and manu-facturing is significantly lower than in services, industry’s share in gross output would still be comparatively larger.10 WTO, International Trade Statistics, 2006. This share of services in Indian exports also stands out in contrast to the east Asian economies, including China, in whose cases the services share is typically less than or equivalent to the world average.11 An available example of this kind of process is that of expenditures on one service that has alsoexperienced a process of cheapening during the same period, namely communication, in whose case the decline in relative prices since 1997-98 has been accompanied by a rise in its share in consumption expenditure even at current prices. 12 As per the 1998-99 Input-Output Tables for the Indian Economy, 49 per cent of the total demand for secondary output was intermediate demand, of which 36 percentage points (that is nearly three-fourths) was accounted for by the sector’s internal demand. 13 The net effect of this on manufacturing output however will also depend on what happens to the import component of this capital formation, as well as to the relative weight of the induced con-sumption expenditure (since that consumption expenditure would also be services intensive).14 Azeez (2002) has however shown that economic capacity utilisation did not significantly decline in the 1990s compared to the 1980s and the correla-tion between it and the minimum capital-output ratio based measure of capacity utilisation actu-ally came down. Azeez however only considered the period up to 1998 and did find that economic capacity utilisation dipped towards the end of the period. Additionally, his results have to be inter-preted keeping in mind questions about his methodology that he himself refers to in his footnote18, p 16.15 Nagaraj (2003) has argued along similar lines. The decline in total factor productivity growth rates in manufacturing in the 1990s has also been attributed to low capacity utilisation [Goldar and Kumari 2003].ReferencesAcharya, Shankar (2007): ‘India’s Growth: Past Performance and Future Prospects’, paper for presentation at the Eighth Annual Global Devel-opment Conference of the Global Development Network, January 14-16.Azeez, E Abdul (2002): ‘Economic Reforms and Indus-trial Performance: An Analysis of Capacity Utili-sation in Indian Manufacturing’, Working Paper 334, CDS, Thiruvanantapuram.Babu, M Suresh (2005): India’s Recent Economic Growth: Some Limits and Limitations’,Economic & Political Weekly, Vol 40, No 30, July 23. 
SPECIAL ARTICLEEconomic & Political Weekly EPW december 6, 200877Balakrishnan, Pulapre and M Suresh Babu (2003): ‘Growth and Distribution in Indian Industry in the Nineties’,Economic & Political Weekly, Vol 38, No 38, September 20.Bosworth, Barry and Susan M Collins (2007): ‘Accounting for Growth: Comparing China and India’, National Bureau of Economic Research Working Paper 12943, http://www.nber.org/papers/w12943.Debroy, Bibek (2006): ‘India’s Demographic Dividend’, The Telegraph, December 6.DeLong, J Bradford (2003): ‘India since Independ-ence: An Analytic Growth Narrative’ in Dani Rodrik (ed),In Search of Prosperity: Analytic Nar-ratives on Economic Growth, Princeton University Press, Princeton, New Jersey.Felipe, J and F Fisher (2003): ‘Aggregation in Produc-tion Functions: What Applied Economists Should Know’,Metroeconomica, 54, pp 208-62.Goldar, Bishwanath and Anita Kumari (2003): ‘Import Liberalisation and Productivity Growth in Indian Manufacturing Industries in the 1990s’, The Deve-loping Economies, XLI-4, December, pp436-60.Hatekar, Neeraj and Ambrish Dongre (2005): ‘Struc-tural Breaks in India’s Growth: Revisiting the Debate with a Longer Perspective’,Economic & Political Weekly, Vol 40, No 14, April 2. Kelkar Vijay L (2004): ‘India: On the Growth Turn-pike’, Narayanan Oration, Australian National University, Canberra.Kohli, Atul (2006a): ‘Politics of Economic Growth in India, 1980-2005, Part I: The 1980s’, Economic & Political Weekly, Vol 41, No 13, April 1. – (2006b): ‘Politics of Economic Growth in India, 1980-2005, Part II: The 1990s and Beyond’, Economic & Political Weekly, Vol 41, No 14, April 8.Krugman, Paul (1994): ‘The Myth of Asia’s Miracle: A Cautionary Fable’, Foreign Affairs, November/December.Mishra, Deepak (2006): ‘Can India Attain the East Asian Growth with South Asian Saving Rate?’, paper presented at the World Bank – ICRIER a Workshop on ‘Increased Integration of China and India in the Global Financial System: Issues and Implications’, May 26, New Delhi.Nagaraj, R (2003): ‘Industrial Policy and Performance since 1980: Which Way Now?’,Economic & Poli-tical Weekly, Vol 38, No 35, August 30. – (2005): ‘Industrial Growth in China and India: A Preliminary Comparison’,Economic & Political Weekly, Vol 40, No 21, May 21. Nayyar, Deepak (2006): ‘Economic Growth in Inde-pendent India: Lumbering Elephant or Running Tiger?’,Economic & Political Weekly, Vol 41, No 15, April 15. Panagriya, Arvind (2004): ‘Growth and Reforms dur-ing 1980s and 1990s’, Economic & Political Weekly, Vol 39, No 25, June 19.Poddar, Tushar and Eva Yi (2007): ‘India’s Rising Growth Potential’, Goldman Sachs Global Eco-nomics Paper No: 152.Purushothaman, Roopa (2004): ‘India: Realising BRICs Potential’, Goldman Sachs Global Econom-ics Paper No 109. Ranjan, Rajiv, Rajeev Jain and Sarat C Dhal (2007): ‘India’s Potential Economic Growth: Measure-ment Issues and Policy Implications’,Economic & Political Weekly, Vol 42, No 17, April 28. Riddle, Dorothy I (1986): Service-Led Growth: The Role of the Service Sector in World Development, Praeger, New York.Rodrik, Dani and Arvind Subramanian (2004): ‘Why India Can Grow at 7 Per Cent a Year or More: Pro-jections and Reflections’, Economic & Political Weekly, Vol 39, No 16, April 17. – (2005): ‘From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transi-tion’,IMF Staff Papers, Vol 52, Number 2.Shetty, S L (2005): ‘Savings and Investment Estimates: Time to Take a Fresh Look’,Economic & Political Weekly, Vol 40, No 7, February 12.Sinha, Ajit and Shirin Tejani (2004): ‘Trend Break inIndia’s GDP Growth Rate: Some Comments’, Economic & Political Weekly, Vol 39, No 52, December 25.Srinivasan, T N (2005): ‘Comments on “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition” ’,IMF Staff Papers, Vol 52, No 2.Virmani, Arvind (2004a): ‘India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth’, Working Paper No 122, Indian Council for Research in International Economic Relations (ICRIER).– (2004b): ‘Sources of India’s Economic Growth: Trends in Total Factor Productivity’, Working Paper No 131, Indian Council for Research in International Economic Relations.Wallack, Jessica Seddon (2003): ‘Structural Breaks in Indian Macroeconomic Data’,Economic & Political Weekly, Vol 38, No 41, October 11.Wilson, Dominic and Roopa Purushothaman (2003): ‘Dreaming With BRICs: The Path to 2050’, Gold-man Sachs Global Economics Paper No 99.SAMEEKSHA TRUST BOOKSInclusive GrowthK N Raj on Economic DevelopmentEssays from The Economic Weekly and Economic & Political WeeklyEdited by ASHOKA MODYThe essays in the book reflect Professor K N Raj’s abiding interest in economic growth as a fundamental mechanism for lifting the poor and disadvantaged out of poverty. He has also been concerned that the political bargaining process may end up undermining growth and not provide support to those who were excluded from access to economic opportunities. These essays, many of them classics and all published in Economic Weekly and Economic & Political Weekly, are drawn together in this volume both for their commentary on the last half century of economic development and for their contemporary relevance for understanding the political economy of development in India and elsewhere.Pp viii + 338 ISBN 81-250-3045-X 2006 Rs 350Available fromOrient Blackswan Pvt LtdMumbai Chennai New Delhi Kolkata Bangalore Bhubaneshwar Ernakulam Guwahati Jaipur LucknowPatna Chandigarh Hyderabad Contact: info@orientblackswan.com
