SPECIAL ARTICLE
Boom and Bust?
A Political Economy Reading of Indias Growth Experience,
1993-2013
Kunal Sen, Sabyasachi Kar
Indias post-reform growth experience can be
separated into three distinct growth episodes. The first
growth episode was from 1993 to 2002 and was
characterised by a set of predictable informal
relationships (ordered deals) between political and
economic elites, which were relatively open as well.
The second episode was from 2002 to 2010, and deals in
this period became increasingly closed, leading to
negative feedback effects along with structural
retrogression of the economy. The third episode,
beginning in 2011, was one of an incipient growth
deceleration, and was characterised by increasingly
disordered deals. This paper argues that this deceleration
is the outcome of two separate phenomena:
(1) increasing political delegitimation of the growth
process that was seen as highly predatory and
corruption-intensive; and (2) the pushback from
accountability institutions in the post-2010 period.
For growth to return, more than economic reforms or
infrastructure spending, it is necessary for a realignment
of the relationships between political and economic
elites and between elites and non-elites such that there
is a return to open ordered deals.
This paper is part of a research project on the politics of growth conducted
by the Effective States and Inclusive Development Research Centre, based
at the University of Manchester (www.effective-states.org), in collaboration
with the Institute of Economic Growth. We thank Jagadish Sahu for his
able research assistance. We thank the participants of the workshop on
Beyond Policy Paralysis on 23 July 2014 at the India International
Centre, Delhi, and particularly thank an anonymous reviewer of this
journal, Barbara Harriss-White, Pratap Bhanu Mehta and Lant Pritchett
for their insightful comments. The usual disclaimer applies.
Kunal Sen (kunal.sen@manchester.ac.uk) teaches at the Institute for
Development Policy and Management, University of Manchester.
Sabyasachi Kar (skar_ieg@yahoo.com) is at the Institute of Economic
Growth, Delhi.
40
1 Introduction
F
or much of the 1990s and 2000s, India was seen as the
new kid on the block among countries that were
growth success stories, and was one of the three fastest-
growing economies in the world, along with China and Vietnam
(Sen 2009). This narrative of Indias emerging growth miracle
came to a sudden stop in 2011-14, as growth slowed down
considerably. The conventional wisdom on why economic
growth in India stagnated usually attributes the growth slow-
down to a combination of internal factors, such as the policy
paralysis that befell the central government and increased
macroeconomic uncertainty, and external factors, such as the
slowdown in global economic growth since 2008. In this paper,
we provide a different reading of Indias growth experience in
the 1990s and 2000s, emphasising political economy and insti-
tutional factors that have received less scholarly and media
attention in the current discourse on Indias economic stagna-
tion. We do so by situating the growth experience of India
within a wider understanding of the nature of economic
growth in developing countries. Since the seminal work of
Pritchett (2000), there has been the realisation that a view of
economic growth that is more consistent with the stylised
facts of economic growth is one that takes economic growth as
movements between different growth phases, rather than
characterised by a steady state rate of economic growth.
Massive discrete changes in growth are common in developing
countries, and most developing countries experience distinct
growth episodes: growth accelerations and decelerations or
collapses (Kar et al 2013a). If economic growth in developing
countries is strongly episodic, it is not surprising that Indias
growth has followed a similar pattern.
But why do we see such boom and bust economic growth
in developing countries? In this paper, we first provide an
argument for why we see what we call boom and bust growth
in developing countries. We then identify Indias growth epi-
sodes, using standard statistical methods to identify structural
breaks in Indias gross domestic product (GDP) per capita time
series. Using this method, we show that Indias post-Independ-
ence growth experience can be divided into three phases:
(1) a period of slow growth till 1993;
(2) a period of growth acceleration from 1993 to 2002; and
(3) a period of further acceleration in economic growth from
2002 onwards.
december 13, 2014 vol xlix no 50 EPW Economic & Political Weekly
 SPECIAL ARTICLE

Based on more recent GDP data, we argue that India has It is not obvious that the factors leading to growth accelera-
entered a period of an incipient growth deceleration from 2011 tion will lead to growth maintenance as well, as Rodrik
to date. Next, we apply our framework of boom and bust (2005: 3) argues:
growth to Indias growth experience, arguing that the institu- Igniting economic growth and sustaining it are somewhat different
tional causes of Indias growth in the 1993-2002 growth episode enterprises. The former generally requires a limited range of (often
were different from those observed for the 2002-10 growth unconventional) reforms that need not overly tax the institutional ca-
pacity of the economy. The latter challenge is in many ways harder, as
episode.1 Using our framework, we also provide an argument it requires constructing a sound institutional underpinning to main-
for why Indias economic growth slowed down in the post-2011 tain productive dynamism and endow the economy with resilience to
period. Finally, we highlight some implications that emerge shocks over the longer term.
from our research. Once we view economic growth as transitions between the
above growth phases, and in particular, the transitions from
2 A Framework for Understanding crisis/stagnant growth to stable/miracle growth, the key ques-
Boom and Bust Growth tions that need to be addressed are:
As the recent empirical literature on economic growth shows, (1) what are the institutional determinants of growth accelera-
economic growth in many developing countries involves tion? and
discrete and quantitatively massive transitions between peri- (2) how are they different from the institutional determinants of
ods of high growth, periods of negative growth, and periods of growth maintenance?
stagnation (Kar et al 2013a). To fix our ideas on transition paths We turn to these two questions next.
around growth regimes, we provide a simple sketch of these
transition paths in Figure 1. Using a rough-and-ready way to 2.1 Institutional Determinants
demarcate growth regimes, we classify growth regimes into What explains the move of the economy from regimes of
four categories: stagnation or crisis to regimes of stable or miracle growth?
(1) a growth regime which we call miracle growth where the Following the work of Acemoglu and Robinson (2008) and
average increase in per capita income is 5% per annum or more; other new institutional economists, the conventional economic
(2) a growth regime which we call stable growth, where explanation for economic growth to occur is that formal insti-
the average increase in per capita income is between 0% and tutions such as written contracts, laws that protect private
5% per annum; property, and properly functioning courts need to emerge.
(3) a growth regime which we call stagnant growth, where However, institutions in most developing countries are weak,
the average increase in per capita income is around 0% per and even if formal institutions exist, they are unlikely to be
annum; and enforced properly. More important in the explanation of
(4) a growth regime we call growth crisis where the average growth acceleration is the existence of informal institutions
change in per capita income is negative. in the form of personalised relationships between political
Figure 1: Transition Paths between Growth Phases and economic elites, which we call the deals space.
Growth Growth A deal is defined as a specific action between two (or
Acceleration Collapse
more) entities in which actions are not the result of
the impersonal application of a rule but rather of
Miracle Growth Miracle Growth Miracle Growth
characteristics or sanctions of specific individuals
which do not spillover with any precedential value to
Stable Growth Stable Growth Stable Growth any other future transaction between other individuals
(Pritchett and Werker 2013: 45). An ordered deal is
Stagnation Stagnation Stagnation a deal that is honoured, once negotiated between
investors and state officials. A disordered deal
Crisis
between investors and the political elite is where
Crisis Crisis
there is no certainty that the deal will be delivered.
TIME t-1 t t+1 Economic growth is likely to accelerate when there is
Source: Authors' illustration. a movement in the deals space from disordered deals
Growth acceleration is the transition from stagnation or to ordered deals. Through ordered deals, the state can ensure
crisis to stable growth or miracle growth. The ability of a that investors commit to the investment decision and engage
country to sustain stable growth or miracle growth in period in production, so that rents can be generated through the
t+1 if it has experienced the same in period t determines its production process. Investors need to consider this commitment
ability to avoid growth collapses and can be defined as growth to ordered deals credible. In other words, investors must
maintenance. If a country does not transition from growth believe that the state or its agents will deliver on its implicit or
acceleration to maintenance, it faces a growth collapse. It is explicit promise not to expropriate all or most of the rents
necessary to understand the factors underlying these dynamics accruing from the production process in the future, especially
to characterise a countrys growth dynamics. Figure 1 makes after investors have made investment decisions involving sunk
this clear. costs in fixed capital. Investors also need to commit to share a
Economic & Political Weekly EPW december 13, 2014 vol xlix no 50 41
SPECIAL ARTICLE
part of their rents to the state (or its constituents, such as
politicians) and to pay the state the necessary taxes (Sen 2013).
What now explains the ability of the economy to stay in a
positive growth process and for growth not to slow down or
collapse? To understand this, we define open deals as deals
that are widely available to all investors, large or small, and
not confined to an elite or a small group of favoured investors
(Pritchett and Werker 2013). On the other hand, closed deals
are offered by the political elite only to a small group of inves-
tors. The move from growth acceleration to growth mainte-
nance would depend on the movement in the deals space from
closed ordered deals to open ordered deals. An ordered deals
environment, even if closed, may be able to sustain growth for
a considerable period. But for growth to be sustained over the
long run, the deals space must while maintaining order
also become more open. This is because openness in the deals
space drives economic competition and facilitates the entry of
new firms, which leads to structural transformation as coun-
tries produce more complex products and as resources shift
from low productivity sectors to high productivity sectors and
firms. We set out the deals space in a 2 2 matrix, as in Figure 2,
and how it relates to different phases of growth. A shift from
disordered deals to ordered deals is associated with growth
acceleration, and a shift from closed ordered to open ordered
deals is associated with growth maintenance.
Figure 2: The Deals Space
Closed Deals
Kickstarting Disordered Only those with political
Growth deals connections get to make
deals, and even they
cannot be certain that
officials will deliver
Ordered Only those with political
deals connections get to make
deals, but they can be
confident that officials
will deliver
Maintaining Growth
Source: Our illustration, from Pritchett and Werker (2013).
However, there is nothing preordained in the evolution of
institutions that suggest that a move from a closed ordered deals
environment or a disordered deals environment to an open
ordered deals environment is linear. As economic growth origi-
nates in a country, two feedback loops occur from the growth
process to the deals space. These feedback loops can be either
positive or negative; in other words, whether with further
economic growth, the deals space may turn from being open
ordered to being closed ordered or being disordered. The first of
these feedback loops is economic in nature, and would depend
on the rents space, or the structure of economic opportunities
in the economy. We characterise the rents space in Figure 3,
categorising the economic structure of the economy in a 2 2
matrix, in two dimensions whether the sectors in the economy
are in exporting and/or import-competing sectors or not affected
by international trade and whether the sectors are characterised
by high rents (that is, excess profits) or are competitive.
42
Figure 3: The Rents Space
High Rent Competitive
Rentiers Magicians
Export-oriented Natural resource exporters Manufacturing and service
or Import-competing exporters, other agricultural
exporters
Power Brokers Workhorses
Legislative monopolies Traders, retailers, subsistence
Domestic market or oligopolies, natural farmers, the informal sector
monopolies or oligopolies
Source: As in Figure 2.
We call the export-oriented high rent sectors rentiers (the
upper left cell of the 2 2 matrix), and the competitive tradable
sectors magicians (the upper right cell of the 2 2 matrix).
We call the monopolistic or oligopolistic domestically oriented
or non-tradable sectors power brokers (the lower left cell of
the 2 2 matrix), and the competitive domestically oriented
sectors as workhorses (the lower right cell of the 2 2 matrix).
Rentiers are more likely to be natural resource-exporting
sectors and magicians are likely to be manufacturing sectors
such as apparel and electronics as well as tradable service sec-
tors such as information technology (IT). Power brokers are
likely to be real estate, construction, infrastructure, utilities
and telecommunications, while workhorses are likely to be
smallholder agriculturists and the informal manufacturing and
services sectors.
We would expect firms in the rentier and power broker
sectors to be the types of private sector actors more likely to
Open Deals
Anyone can make a
push for closed deals than open deals, as these firms would
deal, but no one is lose out in an open deals environment, in which rents in these
certain that officials sectors dissipate with the entry of new firms or from more
will deliver open and transparent regulatory institutions. Since the state
plays a large role in allocating licences and controlling the
Anyone can make a
entry of new firms in these sectors, firms in these sectors
deal, and they can
be certain that are likely to strike close personalised relationships with the
officials will deliver political elite, to capture the process of licence allocation or to
create artificial barriers to entry.
On the other hand, firms in the magician and workhorse
sectors are more likely to push for open deals than closed deals,
for three reasons. First, these sectors are the most dynamic
and creative destruction is most likely to occur here, and
firms in these sectors would benefit the most from an open
deals environment. Second, given the inherent contestability
of these sectors and the presence of a large number of eco-
nomic actors, a closed deals space that excludes many of these
actors is not likely to find political traction. Finally, these two
sectors depend on an efficient power broker sector for cheap
and high quality inputs to their production process, such as
well functioning roads and reliable electricity provision, and
would benefit from the competitive pressures that an open
deals environment would bring to power broker firms.2
Therefore, if the growth acceleration episode is biased
towards the rentier and power broker sectors (say, due to a
commodity price boom or due to the high growth of non-tradable
sectors such as infrastructure and real estate), the economic
feedback loop through the rents space could have a negative
effect on the deals environment, making it closed. On the
december 13, 2014 vol xlix no 50 EPW Economic & Political Weekly

Figure 4: A Framework for Understanding 'Boom' and 'Bust' Growth
Deals Space Growth Outcome
Disordered To
Open Ordered
Phase one
Disordered to
Closed Ordered
1 Distribution of Power
2 Rent-Space
Ordered to
Disordered
Close Ordered
Persist
Phase two
Open to Close
Ordered
Close to Open
Ordered
Source: Authors' illustration.
other hand, a growth acceleration episode biased towards
the magician and workhorse sectors is more likely to lead to
further opening of the deals space.
The second of the feedback loops would be mostly political
in nature, and would depend on how influential groups such
as civil society, judiciary, the middle class, and the media view
the growth process, as well as how non-elites mobilise them-
selves against elements of the growth process that they see as
politically illegitimate. Particularly in countries with strong civil
society presence and electoral politics, the political feedback
loop can be negative if the deals environment underpinning
the growth episode is seen as exclusionary or if the nature of
economic growth is highly predatory. The political feedback
loop can lead to changes in the distribution of power, as groups
such as civil society, the middle class, and those excluded from
the growth process begin to gain de facto political power, with
greater political mobilisation and pushback from accountability
institutions such as the judiciary and the media. Therefore, while
a shift from a disordered deals environment to a closed ordered
deals environment is often necessary for growth to accelerate,
the political feedback effect may turn negative if the deals
space remains closed for too long, especially in democracies.
If the positive growth episode is underpinned by closed
ordered deals that do not become open over time, both eco-
nomic and political feedback loops will likely turn negative and
the closed ordered deals environment may become increas-
ingly disordered, ending the positive growth episode. On the
other hand, economic and political feedback loops can be posi-
tive if the deals space becomes increasingly open, and the ma-
gician and workhorse sectors become increasingly important
in the growth process, leading to structural transformation, as
Economic & Political Weekly EPW december 13, 2014 vol xlix no 50
SPECIAL ARTICLE
new firms, products, and industries emerge in the growth
process. In this case, the positive growth episode will carry on,
and sustained economic growth will result. We depict the dif-
ferent possibilities in Figure 4, which sets out visually our
framework for understanding boom and bust growth.
Growth
Acceleration 3 Identifying Indias Growth Episodes
Before we examine the causes of boom and bust growth in
India, we first need to periodise Indias growth and establish
Feedback when its growth accelerations and decelerations occurred. We
Loops
follow our own procedure, set out in Kar et al (2013b). This
procedure differs from previous approaches that have attempted
to identify the timing of Indias growth acceleration, which
have been either ad hoc, in that they have simply eyeballed the
Growth
Collapse data to establish the timing of the break (such as Sen 2007), or
used a statistical method (Bai-Perron 1998) mechanistically
(such as Balakrishnan and Parameswaran 2007). While a
statistical procedure is definitely more scientific than simply
Growth eyeballing, it has a significant shortcoming that is well-
Stagnation
known in the literature. The problem is the low power of the
Bai-Perron test, the standard workhorse of the statistical
Growth
approaches, which leads to false rejections of many true
Persistence breaks. To overcome this shortcoming, we use a two-stage pro-
cedure for identifying structural breaks in economic growth,
where the first stage is identical to the first part of the Bai-Perron
(BP 1998) procedure that involves maximising the F-statistic to
identify candidate years for structural breaks in growth, and
the second stage imposes thresholds on the magnitude of the
shift in candidate breaks in order to determine the actual
breaks (Kar et al 2013b). Thus, this procedure involves the best
fit of the BP method to the data in the first stage, and the
application of a filter to the breaks identified from the first
stage in the second stage. It may be noted that by using filters
in the second stage instead of statistical inference (which
really leads to the low power in the BP tests), our methodology
is able to identify many more true breaks compared to the
pure statistical approach.
The threshold rules are that the absolute value of the change in
the growth rate after a potential break had to be (a) 2 percent-
age points if it was the first break, (b) 3 percentage points if
the potential break was of the opposite sign of the previous
break (an acceleration that followed a deceleration or a decel-
eration followed an acceleration), and (c) 1 percentage point if
the potential break was of the same sign as the previous break
(an acceleration that directly followed an acceleration or a
deceleration that followed a previous deceleration). Thus the
magnitude filters used in our methodology are also able to
take into account the previous history of breaks in any country.
To estimate potential breaks, we assumed that a growth
regime lasts a minimum of eight years (as in Berg et al 2012).
The use of shorter periods (e g, three or five years) risk confla-
tion with business cycle fluctuations or truly short run
shocks (e g, droughts). Longer periods (e g, 10 or 12 years)
reduce the number of potential breaks. Application of this
procedure to the PWT7.1 data for 125 countries (eliminating all
countries with very small populations and those that did not
43
SPECIAL ARTICLE
have long enough data series) for the period 1950-2010 identi-
fied 314 structural breaks in growth, with some countries hav-
ing no breaks (e g, US, France, Australia) and others having
four breaks (e g, Argentina, Zambia).
Using this methodology on the Indian data, our procedure
identifies 1993 as the beginning of the first growth accelera-
tion episode, and 2002 as the beginning of the second growth
acceleration episode. It may be noted that there were other
candidate breaks including 1985 (which would be consistent
with the previous literature on growth breaks in India), but
they were not significant enough to be identified as actual
breaks by our methodology (nor by the BP methodology with
the updated data set). In India, GDP per capita growth acceler-
ated in 1993 to 4.23% per annum versus a predicted rate of
2.34% per annum and then accelerated again in 2002 to 6.29%
per annum versus a predicted rate of 2.91% per annum. The
net present value (NPV) (at a 5% discount rate) of the addi-
tional output from the 2002 growth acceleration was $2.65
trillion (purchasing power parity, PPP, dollars). The NPV of out-
put gained from the 1993 acceleration was $1.05 trillion.
Therefore, the total NPV gained from growth accelerations
since 1993 was $3.7 trillion (Pritchett et al 2013). Taken
together, Indias two growth accelerations added about $4,000
in PPP terms to the average Indians income as compared to the
counter-factual of what the income would have been without
the two growth accelerations.
We plot Indias real GDP per capita growth in Figure 5 (five-
year moving average to smoothen out spikes in growth rates).
As is clear from the figure, economic growth starts increasing
steadily since the 1990s to 2010. However, economic growth
declines sharply in the period 2011-13 (2013 being the most
recent year for which we have GDP data), and the average for
these three years is 3.35% as compared to 6.33% in 2002-10.
While the economic growth slowdown may well be a temporary
one, we will argue later in the paper that the decline in eco-
nomic growth may well be medium term and, thus, constitutes
an incipient growth deceleration phase.
4 Understanding the 1993-2002 Growth Episode
Indias political economy has been supportive of pro-business
and pro-growth policies since the 1980s (Kohli 2012; Mehta
and Walton 2014). When Indira Gandhi returned to power in
1980, the governments economic policy focused on promoting
economic growth. This led to a growing alliance between the
political and economic elites. As Kohli (2012: 30-31) notes:
Just after coming to power in January 1980, Indira Gandhi let it be
known that improving production was now her top priority. In meet-
ing after meeting with private industrialists, she clarified that what
the government was most interested in was production.
Therefore, beginning in the 1980s, the Indian state clearly sig-
nalled to domestic capitalists its intention to credibly commit
to an environment where private enterprise would be sup-
ported and growth-enhancing policies followed. This was re-
flected in changes in economic policies, such as the slow but
steady liberalisation of import controls, especially on capital
and intermediate goods. The shift in the relationship between
44
Figure 5: Indias Economic Growth (annual change in per capita GDP, %, 1961-2013,
five- year moving average)
8
Per Capita Growth (5-Year Moving Average)
7
6
5
4
3
2
1
0
1969
1969 1971 1973
1973 1975 1977
1977 1979 1981
1981 1983 1985
1985 1987 1989
1989 1991 1993
1993 1995 1997
1997 1999 2001
2001 2003 2005
2005 20072009
2009 2011 2013
2013
-1
Source: World Bank, World Development Indicators 2014, for 1960-2012, and IMF's World
Economic Outlook for 2013, our calculations.
political and economic elites from one of mutual distrust to a
more collaborative and synergistic relationship was further
accentuated with Rajiv Gandhis coming to power in 1985.
Gandhi took particular interest in modern sectors, such as IT
and engineering, and tried to bring in new economic elites
from these emerging sectors into the relationship that the
political elite had with the business sector. In addition, with
the rise of non-traditional business groups in southern and
western India, there was a growing diversification of business
ownership, leading to a broadening of the political connecti-
vity of the business elite (Mehta and Walton 2014).
Therefore, by the late 1980s, the macro-level deals environ-
ment had already become distinctly ordered and more open,
with the emergence of new economic elites in both modern
sectors and in regions outside the industrial heartlands of
Gujarat and Maharashtra.
4.1 The 1993 Growth Acceleration Episode
Two further developments in the early 1990s led to a strength-
ening of the ordered nature of the deals environment, parti-
cularly at the micro level.
First, the dismantling of the industrial licensing system in
1991 removed an important source of disorder in the deals
environment at the micro level. This development ensured that
the approval of applications that firms made for their expansion
or that new firms made to enter the industrial sector during the
previous licensing regime no longer depended on the whims
and fancies of individual bureaucrats in the government.
Second, the removal of the import licensing system in the
early 1990s for most commodities also meant that the highly
discretionary and case-by-case nature of imports that were not
on Open General Licence was done away with. As Bhagwati
(1993: 50) noted:
The industrial-cum-trade licensing system had degenerated into a series
of arbitrary, indeed inherently arbitrary, decisions, where for instance
one activity would be chosen over another simply because the adminis-
tering bureaucrats were so empowered and indeed obligated to choose.
The growth acceleration of 1993 was in great part due to
the ordered deals environment that had already taken shape
december 13, 2014 vol xlix no 50 EPW Economic & Political Weekly
 SPECIAL ARTICLE

in the 1980s and was enhanced by the dismantling of the 2000s.4 Kathuria, Raj, and Sen (2010) show that the improve-
industrial-cum-trade licensing system in 1991.3 These deals ment in productivity performance in the manufacturing sector
were largely open, as barriers of entry to many industries were in the 1990s was not confined to the formal sector but encom-
removed. This was reflected in the entry of new firms in manu- passed the informal sector as well.
facturing and services, and especially in pharmaceuticals and The dynamism that one observes in the private sector in the
IT (Alfaro and Chari 2009). At the same time, the Indian states 1990s is also reflected in indicators of growth and structural
collusive relationship with certain sections of the business transformation. Thus, in the 1993-2002 growth acceleration
elite in the pre-reform period remained, and may have been phase, economic growth was mostly driven by the exporting
accentuated by the rise of increasingly powerful regional busi- competitive sectors (such as IT and chemicals) and domesti-
ness groups closely connected with regional political elites cally oriented service sectors such as hotels and restaurants
(Mehta and Walton 2014). Thus, during the 1990s, closed deals (Tables 1 and 2).5
existed side by side with open deals and, consequently, many Table 2: Average Share in Total Manufacturing Real Gross Value Added
traditional industries (such as consumer durables) were still Average 1981-92 1993-01 2002-07
dominated by entrenched business groups that had emerged Food beverage and tobacco 15.33 13.80 11.09
in the licence raj (Alfaro and Chari 2009). Textiles and apparel 12.12 11.28 9.96
There is evidence from detailed firm-level analysis of the Refined petroleum products 6.19 5.60 13.03
1990s of significant dynamism in the corporate sector in this Chemical 17.68 20.59 17.83
period. Harrison et al (2012) find a large allocation of market Metals 15.72 16.18 17.27
Non- metallic minerals 4.43 4.82 4.80
share from less productive firms to more productive firms in
Machinary 8.62 7.93 7.62
the first half of the 1990s, but not in subsequent years. Mody,
Motor vehicles and accessories 3.42 3.63 3.50
Nath and Walton (2011) find significant entry of new firms in
Others 16.49 16.18 14.90
virtually all industrial sectors in the early-to-mid 1990s, which Authors' calculation based on data from Annual Survey of Industries.
stops in the late 1990s, with very little entry of new firms in the
5 Understanding the Post-2002 Growth Episodes
Table 1: Average Sectoral GDP Per Capita Growth Rates by Regime
Sector 1951-92 1993-2001 2002-10 There were two distinct growth episodes in the post-2002
1 Agriculture, forestry, and fishing 0.59 1.30 1.46 period; (1) a further growth acceleration episode from 2002 to
1.1 Agriculture, including livestock 0.75 1.30 1.59 2010; and (2) an incipient growth deceleration from 2011
1.2 Forestry and logging -1.42 -0.07 0.20 onwards. We discuss the features of these two episodes in turn.
1.3 Fishing 2.33 2.88 2.42
2 Mining and quarrying 3.41 2.21 3.42 The 2002-10 Growth Acceleration Episode
3 Manufacturing 2.98 4.87 7.38
In the 2002-10 episode, Indias per capita economic growth
3.1 Registered 3.95 5.61 8.57
(6.42% per annum) was faster than during 1993-2002 (4.15%
3.2 Unregistered 1.86 3.52 5.07
per annum on average). However, there was a shift in the pat-
4 Electricity, gas and water supply 6.95 3.87 4.89
5 Construction 2.78 3.41 8.75
tern of growth towards non-tradable sectors such as construc-
6 Trade, hotels and restaurants 2.80 6.54 7.64 tion, communications, and banking and insurance the aver-
6.1 Trade 2.78 6.36 7.69 age growth rates of these sectors in 2002-10 were 8.6%, 23.1%,
6.2 Hotels and restaurants 2.94 8.66 7.30 and 11.2%, respectively, as compared to 3.4%, 15.7%, and 7.4%
7 Transport, storage and communication 3.58 7.42 11.05 in 1993-2002 (Table 1). Within the manufacturing sector, the
7.1 Railways 1.95 2.02 6.17 importance of the refined petroleum sector in total gross real
7.2 Transport by other means 4.17 5.32 7.52 Table 3: India's Merchandise Exports (1990-2010, % of total exports in
7.3 Storage 2.40 0.39 5.82 commodities)
7.4 Communication 4.44 15.73 23.07 1990-91 2000-01 2010-11
8 Finance, insurance, real estate Agricultural products 14.57 9.66 6.36
and business services 2.85 5.86 8.46 Ores and minerals 4.21 1.87 2.27
8.1 Banking and insurance 5.69 7.37 11.17 Petroleum products 2.27 3.02 10.89
8.2.1 Real estate and ownership of dwellings 1.98 2.96 2.24 Leather 6.29 3.15 1.03
8.2.2 Business services (including IT) 3.29 14.96 13.56 Chemicals 7.50 9.52 7.59
9 Community, social and personal services 2.53 4.68 5.25 Engineering goods 9.77 11.03 15.29
9.1 Public administration and defence 3.83 4.35 5.30 Machinery and instruments 3.02 2.56 3.11
9.2 Other services 1.68 4.95 5.31 Transport equipment 3.02 2.56 3.11
10 Primary (1+2) 0.75 1.38 1.68 Textiles 5.08 5.60 1.52
11 Tertiary (6+8) 2.81 6.18 8.04 Garments 9.71 9.01 3.05
12 Infrastructure (4+7) 4.17 6.46 9.85 Gems and jewellery 12.70 11.94 10.64
13 Agriculture (1) 0.59 1.30 1.46 Other commodities 21.85 30.09 35.13
14 Industry (2+3+4+5) 3.00 4.02 7.17 Natural resource exports 21.04 14.55 19.53
15 Services (6+7+8+9) 2.79 5.88 7.79 Non-natural resource exports 78.96 85.45 80.47
16 Total Gross Domestic Product (13+14+15) 1.86 4.15 6.42 Natural resource exports = agricultural products + ores and minerals + petroleum products.
Source: National Accounts Statistics, CSO. Source: Reserve Bank of India, our calculations.

Economic & Political Weekly EPW december 13, 2014 vol xlix no 50 45
SPECIAL ARTICLE

value added also increased sharply, with its share increasing Figure 7: Indias Economic Complexity (Product Complexity of Exports),
from 5.6% in 1993-2001 to 13% in 2002-07 (Table 2). There was also a Five-Year Moving Average
0.25
shift in Indias exports towards more resource-intensive sectors,
such as refined petroleum and minerals, with the share of natural

Economic Complexity Index

0.2
resource intensive exports in Indias total exports increasing
from 14.6% in 1993-2002 to 19.5% in 2002-10 (Table 3, p 45). 0.15

Thus, economic growth in the second growth episode was

0.1
qualitatively different from the first episode, in that it relied more
on rentier sectors (such as mining and petroleum refining) and 0.05
other high rent power broker sectors (such as telecommunications
and real estate). There was, however, strong growth in magician 0
sectors such as IT (or business) services, which observed an 1993 1995 1997 1999 2001 2003 2005 2007
Source: Authors' calculations, from Atlas of Economic Complexity, http://atlas.cid.harvard.edu
increase in average growth from 2.9% during 1993-2002 to
17.4% during 2002-10 (Table 1). At the same time, there was a post-2002 period). The fall in the share of the workhorse sector,
larger increase in new firm entry during the 1993-2002 episode where most of Indias poor are located, has negative implica-
than in the 2002-10 episode a 53% increase in new firms in tions for a growth strategy that favours the working poor, and
the 1993-2002 episode, and 9.8% decrease in new firms in the suggests that this sector had less of a role in influencing the
post-2002 period, as seen in Table 4 (Alfaro and Chari 2009). deals environment in the post-2002 period. Since this sector
Table 4: Entry of New Firms (1988-2005) has a strong interest in an open deals environment, the decline
Period Pre-1993 Post-1993 Post-2002 in this sector implied that one important source of pressure for
(1988-90) (1995-98) (2003-05)
Number of private firms 10,582 16,136 14,495
open deals was gradually diminishing over time. On the other
Growth in number of firms (%) 52.5 9.8 hand, the net effect on deals with the growing importance of
Ratio of old firms (%) 64 39 36 the magician sector (which characteristically asks for open
Ratio of new firms (%) 26 52 56 deals) and the power broker sector (which characteristically
Old-to-new firms Ratio (%) 250 75 64 asks for closed deals) was less certain.
Source: Calculated from Alfaro and Chari (2009). What happened to structural transformation during this
In Figure 6, we plot the relative importance of the rentier, period? Hidalgo et al (2007) view structural transformation
power broker, magician, and workhorse sectors as reflected in as the upgrading of products in a countrys economic structure
their shares in GDP over time.6 We see that both the power such that firms in that country move over time to more complex
broker and magician sectors have increased their importance products. Following this view, and using data on product
in economic activity over time, and especially in the post-2002 complexity from the Atlas of Economic Complexity, we plot
period. This has been mirrored by a steady decline in the the five-year moving average of product complexity for India
workhorse sector until 2002, followed by a sharp drop in the between 1993-94 and 2007-08 in Figure 7. We find that
share of this sector in total output from 2002 onwards (the structural transformation (as captured in increasing product
rentier sector has marginally increased its importance in the complexity) mostly increased during the 1993-2002 growth
episode but fell during the 2002-10 episode.
Figure 6: Relative Importance of the Rentier, Power Broker, Magician and Workhorse Sectors There was also a shift in the deals envi-
100
ronment in this period from relatively open
90 to closed deals. This was most evident in the
increasing level of crony capitalist deals
80
that political elites struck with economic
70
elites in high rent natural resource sectors
such as bauxite, coal, iron ore, manganese
60 ore, and natural gas, at both national and
Percentage share

regional levels. In various ore-rich states

50
such as Jharkhand, Karnataka, Goa and
40 Odisha, influential, politically connected
business elites systematically underpaid
30 mining royalties to state agencies (along
20 Workhorse with extracting iron and bauxite in excess
of the amounts stipulated by the leases that
10 Powerbroker the private mining firms held with the state
Magician
Rentier
governments). There was a succession of
0
such scams, highlighted by the media. In
1950-51
1952-53
1954-55
1956-57
1958-59
1960-61
1962-63
1964-65
1966-67
1968-69
1970-71
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-04
2006-05
2008-09
2010-11

2010, the central government constituted a

Source: Authors' calculations, from National Accounts Statistics, CSO. commission to investigate irregularities in
46 december 13, 2014 vol xlix no 50 EPW Economic & Political Weekly
 SPECIAL ARTICLE

the extraction, trade, and transportation of iron ore and man-
ganese ore across the country. It was headed by Justice M B Shah
of the Supreme Court. The commission found evidence of
enormous and large scale multi-stage illegal mining of iron ore
and manganese ore running into thousands of crores of rupees
every year (Shah Commission 2012: 1). The Shah Commission
also found clear evidence of collusion between ruling politi-
cians at the state and national level and private mining firms,
stating that the State has gifted property of thousands of
crores in the hands of private companies/firms/individuals
(Shah Commission 2012: 604). There were similar concerns in
the allocation of licences for coal deposit blocks to private
firms by the central government in the 2004-11 period, which
were done preferentially at lower-than-market rates, instead
of a competitive bidding process, according to investigations
on the nature of the allocation process by the Comptroller and
iron ore; the price of this commodity increased rapidly from
2005 to 2010, before declining in 2011-13. Consequently,
increasing profits could be made in natural resource sectors,
where the state had the power to allocate licences for produc-
tion to private firms. (In contrast, after the 1991 economic
reforms, licenses were no longer required to start operations
in manufacturing or services sectors such as IT.) Therefore,
there were clear incentives for political elites to preferentially
allocate these licences to selected economic elites on terms
that were not transparent, or the most economically competi-
tive, in return for extralegal monetary rewards.
Figure 8: World Price of Iron Ore, Monthly (1999 to 2013)
200
160

Price in US Dollars
Auditor General (CAG). 120

The existence of closed deals was not confined only to

80
natural resource sectors; it was also evident in an infrastructural
sector such as telecommunications. The latter sector witnessed
40
impressive growth in the 1993-2002 growth episode, driven by
high demand for mobile phones among a rapidly expanding 0
middle class. In 2008, under the aegis of the Ministry of Tele-
10/2000

12/2001

11/2004

10/2007

12/2008

11/2011
1/1999
8/1999
3/2000

5/2001

7/2002
2/2003
9/2003
4/2004

6/2005
1/2006
8/2006
3/2007

5/2008

7/2009
2/2010
9/2010
4/2011

communications (MOT), the Department of Telecommunications
(DoT) decided to allocate second-generation (2-G) spectrum
licences to mobile phone operators on a first-come, first-served
(FCFS) basis at a price significantly below the market price.
Later investigation by the CAG found clear evidence of insider
information being passed to selected private firms on the
timing of the FCFS announcement, as well as of the very short
time given to submit the applications (Guha-Thakurta and
Kaushal 2010). The CAG (2011) also found irregularities in the
selective interpretation of the MOT of the recommendation of
the telecommunications regulator, the Telecom Regulatory
Authority of India (TRAI), which led it not to conduct a com-
petitive bidding process for award of the 2-G licences. The CAG
estimated the loss to the Indian exchequer due to the under-
pricing of 2-G licences at over Rs 1,76,000 crore.
It is important to note that the rents were obtained from the
deals in the post-2002 growth episode did not always lead to
outright corruption. Economic rents, as conventionally defined,
are the surpluses over cost of production to a factor of production.
Except for Schumpeterian rents (which are due to innovation
and are temporary as they dissipate away with new firm
entry), there is a discretionary aspect in how this surplus is
generated, and typically it is the political elite which exercises
this discretionary power. The high rents in the post-2002 growth
6/2012
1/2013
8/2013
Source: http://www.indexmundi.com/commodities/?commodity=iron-ore, accessed on
1 February 2014.
Second, as rapid economic growth in the previous growth
episode spurred an increase in demand for the services of in-
frastructural sectors such as telecommunications (naturally
oligopolistic and characteristically high-rent), political elites
entered into rent-sharing arrangements with business groups
that were awarded contracts to operate in these sectors. Strong
private sector growth fuelled a similar surge in demand for
commercial real estate, and there were increasing signs of
closed deals between political elites and real estate developers
in the allocation of land for commercial real estate (Nagaraj
2013). This is evident from Figure 9, where one observes a
clear increase in the proportion of wealth of Indian billionaires
originating in rent-thick sectors (primarily real estate, con-
struction, mining, infrastructure) as compared to other sectors
(manufacturing, IT), from 2002.
Figure 9: Distribution of Wealth of Billionaires by Sources of Wealth
1996-2012, India
100
80
Others
Rent thick
60

episode were linked to this discretionary power, especially in 40

the rentier and powerbroker sectors, but not in all cases were
these rents for private monetary gains.7 20

There were four factors of the emergence of a closed deals

environment in the post-2002 growth episode, as compared to
a more open deals environment in the earlier growth episode.
First, with increased demand for minerals originating from
China, there was a sharp increase in the price of several miner-
als in the early-to-mid-2000s. This is evident from Figure 8 for
Economic & Political Weekly EPW december 13, 2014 vol xlix no 50
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Gandhi and Walton (2012).
Third, with the increased fractionalisation of the political
system at the national level (Figure 10, p 48), and the growing
importance of regional political elites in the coalition
47
SPECIAL ARTICLE
governments of the 2000s, closed deals between these elites
and powerful economic interests both at the national and at
the regional levels become more prevalent in the post-2002
period. This was accentuated by the rapid turnover of govern-
ments and closely contested elections, both at the national and
regional levels, which led to a shortening of the time horizon
of political elites, who were more interested in finding ways to
extract rents to finance elections that they would have to fight
in the immediate future.
Figure 10: Measures of Total Fractionalisation and Proportion of Seats Won
by the Majority Party, National Elections, 1975-2009, India
0.9
Fractionalisation Measure, Percentage of
Total fractionalisation
0.8
Seats Won By Majority Party
0.7
Majority seats
0.6
0.5
0.4
0.3
1975 1979 1983 1987 1991 1995 1999 2003 2007 2009
Total fractionalisation measures the probability that two randomly chosen Members of
Parliament belong to two different parties.
Source: Quality of Government Database, Gothenburg University. http://www.qog.pol.gu.se,
accessed on 1 February 2014.
Fourth, related to the previous point, election campaigns
became increasingly expensive as in the competitive Indian
political system, political parties tried to outspend each other
to attract voters with various inducements. Reforms in Indian
election expenditure laws in 1975 and 2003 put the expendi-
tures of party and supporters of individual candidates outside
the purview of the expenditure limits on these candidates and
banned corporate donations. These led to increased informal
financing of election campaigns, and a greater reliance on
informal deals to finance costly election campaigns. This was
also reflected in the increasing participation of criminals in
electoral politics, as political parties preferred wealthy candi-
dates who had the deep pockets to finance their own cam-
paigns. The growing reliance of informal private funding in
the absence of state funding also meant that parties and politi-
cians raised funds from businesses informally in return for
discretionary contracts and regulatory favours (Gowda and
Sridharan 2012).
The Post-2010 Growth Slowdown
As is well known by now, Indian per capita economic growth
slipped from 6.42 during 2002-10 to 3.4% over 2011-13. It is, of
course, possible to have a turnaround in the future that makes
up for the slowdown, but in all probability when we have suf-
ficient time series data in future this period would still show
up as an episode of deceleration.8 We now analyse in terms of
our deals framework why this deceleration took place.
The conventional analysis of this phenomenon attributed
the slowdown to a combination of external and internal factors,
namely, the global economic slowdown or macroeconomic
policy (mainly a tight monetary policy) or recessionary expec-
tations as a result of these. However these explanations are
48
either inadequate or incomplete. For example, although the
global slowdown and the resultant recessionary conditions are
definitely important factors, the IMF (2014) finds that two-
thirds of Indias slowdown is due to internal problems, and not
to a worsening external environment. Similarly, tighter mone-
tary policy is not really the problem as shown by Tokuoka
(2012) and Anand and Tulin (2014). An alternative explanation,
based on institutional factors like policy paralysis within the
bureaucracy and loss of investor confidence due to policy
uncertainty over natural resources, have been put forward
both in the academic literature (Tokuoka 2012; Anand and
Tulin 2014) and in the popular media. However, these institu-
tional explanations are completely ad hoc and hence incom-
plete, treating policy paralysis and low investor confidence as
unexpected shocks rather than an outcome of the growth
process itself. The deals framework, on the other hand, relates
this institutional paralysis to the negative feedback effects
from the closed ordered deals that characterised the 2002-10
growth episode.
As we have discussed earlier, a closed deals environment
that is thought to be exclusionary by the non-elites (e g, high
rates of profit but not high on employment generation or in-
volves acquisition of land from the non-elites) can lead to a
negative political feedback that challenges the political settle-
ment between the political and business elites. In terms of the
institutional framework, these challenges may disrupt ordered
deals and this may result in a disordered deals environment.
In the Indian case, this effect became stronger because,
together with the high rent in the closed deals sector, there
were also major cases of corruption against the political elite.
These cases of corruption were mostly observed in rentier
and power broker sectors, where there were high rents to
be shared between economic and political elites. As media
accounts of corruption became widespread, and there was
growing popular discontent at the flagrantly excessive levels
of rents shared between political and economic elites in these
deals, state legitimacy was being gradually eroded towards
the end of the 2002-10 growth episode.
The negative feedback from the closed ordered deals envi-
ronment in India during 2002-10 that ultimately disrupted
this orderliness post-2010 and turned it into a disordered deals
environment worked through two different channels. The
first was through the mobilisation of the non-elites against both
forced acquisition and corruption. There was strong social and
political movements of the masses against the attempts by the
political elite in states such as Odisha and West Bengal to
obtain land through extralegal and often coercive means for
mining or for providing land to large business groups to set up
manufacturing plants. The movement led by Anna Hazare is
an important example of the mobilisation against corruption.
All these cases significantly destabilised the ordered deals
environment as they eroded the credibility of the political
elites in terms of their capacity to deliver on the deals. The
second channel that transmitted the negative feedback on the
institutional environment worked through the coming together of
the accountability institutions the CAG, the Central Bureau of
december 13, 2014 vol xlix no 50 EPW Economic & Political Weekly
 SPECIAL ARTICLE

Investigation (CBI) and the judiciary. Figure 13: Gross Fixed Capital Formation, Public Sector, Private Corporate Sector and Household Sector,
Important examples of this are the as Ratios 40
of GDP, Constant Prices

Supreme Court banning iron ore ex-

ports, and the CAG investigating 35

corruption in the allocation of 2-G GFCF

30
and coal block licences. These again
eroded the deals environment by 25

As per cent of GDP

raising the possibility of all deals
being challanged and scrutinised 20
HHS
PUB
legally, thus pushing the economy
15
back to a disordered deals world
paradoxically by the action of formal 10
accountability structures.9
5
All these developments made the
PCS
closed deals environment unsus- 0
tainable towards the end of the first
1950-51
1952-53
1954-55
1956-57
1958-59
1960-61
1962-63
1964-65
1966-67
1968-69
1970-71
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
decade of the 2000s. In addition,
with increasing uncertainty over the GFCF: Gross fixed capital formation; PUB: public fixed investment; PCS: private corporate sector; household sector (HHS).
Source: Authors calculations based on the National Income Accounts of the Central Statistical Organisation, India.
nature of deals, and as the ruling
party at the centre lacked the authority to credibly commit to the credibility of deals (Figure 11). In addition, in Figure 12, we
new deals in the face of both popular and legal challenges, plot investors perception of the viability of contracts, which
deals became increasingly disordered as well.10 This is evident captures the risk of expropriation a measure of institutional
from the behaviour of investor perception of the risk of invest- quality widely used in the literature (e g, Acemoglu et al 2001)
ment. After rapid improvement in the 1990s (except for a drop as well as the probability of the repudiation of contracts. We note
during 1998-2000) and during 2000-05, investor perception a sharp drop in this measure of investors perception of institu-
of the risk of investment started increasing from 2006 on- tional quality pertaining to investment from 2011 onwards.
wards (a decline in the measure indicates higher risk of invest- Thus, the post-2002 episodes were qualitatively different
ment). This suggests that, towards the end of the 2002-10 from the 1993-2002 episode in that the deals environment had
growth episode, investors were increasingly concerned about shifted decisively from being open to closed and, as we pro-
Figure 11: Evolution of Investors Perception of Risks of Investment gressed into the 2000s, from ordered to disordered deals as
10 well. The changing pattern of growth was also reflected in the
Investors Perception of Risk of Investment

increasing importance of natural resource sectors in Indias

9
export basket, the importance of sectors such as construction
8 in Indias economic growth, as well as a decline in structural
transformation (as measured by the economic complexity of
7
exports). As investor uncertainty increased, there was a fall in
6 private corporate fixed investment in the second half of the
2000s (Figure 13), and the rapid economic growth of the 2000s
5 ended in 2010.
4
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 6 Implications
The variable plotted is investment profile obtained from the ICRG database, which is
captures the viability of contracts, the restrictions on repatriation of funds, and payment
Sustained rapid economic growth of well over a decade is
delays. Higher values imply lower risk. a feature that we do not observe frequently in developing
Source: Authors' calculations from ICRG database.
countries. Indias per capita income gain over 1993-2010 is
Figure 12: Investors Perception of the Viability of Contracts among the largest income gains in growth episodes witnessed
9
in the developing world in the post-second world war period
(Pritchett et al 2013). Yet, there are clear signs that Indias
8 growth acceleration ended in 2010. In this paper, we examine
Viability of Contracts

the political and institutional causes of Indias growth acceler-

7 ation and its possible end. We argue that Indias post-reform
growth experience can be separated into three distinct growth
6
episodes: the first growth episode was from 1993 to 2002 and
characterised by a set of relatively open ordered deals
between political and economic elites. The second episode was
5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 from 2002 to 2010 and deals in this period became increasingly
Source: Authors' calculations from ICRG database. closed, leading to pushback from accountability institutions
Economic & Political Weekly EPW december 13, 2014 vol xlix no 50 49
SPECIAL ARTICLE

and the middle class. The third episode, beginning in 2011,
was one of an incipient growth deceleration, and was charac-
terised by increasingly disordered deals. We argue that this is
the outcome of two separate phenomena:
(1) increasing political delegitimation of the growth process
that was seen as highly predatory and corruption-intensive; and
(2) the pushback from accountability institutions in the post-
2010 period, leading to greater uncertainty in the deals envi-
ronment in 2011-14.
A clear implication of our analysis is that the fundamental
cause of Indias current economic stagnation is related to the
institutional environment underpinning the 2002-10 growth
episode, and that relying only on greater infrastructural
spending or more economic reforms will not suffice to revive
economic growth. Our analysis suggests that the high growth
episode of the 2000s contained the seeds of its own destruc-
tion, and that it was inevitable that the growth boom of the
first decade of the 2000s was bound to end. The policy
paralysis in the national government that one observes in the
2011-14 period is simply an outward manifestation of a closed
deals environment falling apart, with the increasing challenge
from the middle class and other social groups and actors and
the interventions of rule of law institutions in India.
A second implication of our analysis is that it is necessary to
return to the ordered open deals environment observed in the
1990s to revive and sustain economic growth. For this to hap-
pen, a reconfiguration is required in the settlement between
political and economic elites (who straddle both rentier/power
broker and magician/workhorse sectors, such as business
groups in natural resource extraction, telecommunications,
and retail trade). In this reconfiguration, economic elites
should see an interest in moving from closed to open deals, as
the rents available from the closed deals diminish over time.
Simultaneously, the political elites should be more interested
to invest in the states capacity to regulate and discipline these
economic elites and allocate licences with greater transpar-
ency. In addition, there needs to be a more open deals environ-
ment for the few magician sectors in India (such as IT and
pharmaceuticals) to grow, and new magician sectors in export-
oriented labour-intensive manufacturing need to be created.
At the same time, the relationship between the political
class and the private sector on the one hand and accountability
groups such as the professional middle class and civil society
actors on the other needs to be realigned. In this realignment,
there must be the recognition that ordered deals between
the state and the business sector are essential for economic
growth to return as long as these deals do not lead to outright
corruption or to the exploitation of socially marginalised
groups such as tribal populations.
Impersonal rule-based institutions are not likely to be
enforced in India for some time to come. The re-emergence of
credible and repeated personalised relationships between
economic and political elites that are neither exclusionary nor
politically illegitimate is essential for economic growth to
revive so that the predatory growth episode of the 2000s is not
repeated. Only if all important actors the private sector,
political class, bureaucracy, media, judiciary, civil society and
middle class can recognise this reality and find a realistic
middle ground in the deals environment will economic
growth return to India and be sustained.

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Notes
1 We base our reading of Indias growth experience
on key informant interviews we conducted with
representatives of the business sector and the
media as well as on document analysis.
2 Treating tradable sectors such as pharmaceuti-
cals and IT as magician sectors which are most-
ly interested in open deals is clearly a simpli-
fication. These sectors have also benefited from
government protection and preferential alloca-
tion of licences in the case of the pharmaceuti-
cals sector. However, given the relatively free
entry to these sectors since 1991, and that these
sectors benefit from the competitive pressures
and firm dynamism that an open deals envi-
ronment would bring with it, most firms would
be likely to push for an open deals environ-
ment in these sectors.
3 It should be noted here that we are not com-
paring the deals environment of 1993-2002
just to the immediate pre-1993 period, where
elements of ordered deals could be observed,
but the entire period 1950-93, which by and
large was a disordered deals environment in
India, with significant investor uncertainty
brought about by nationalisation episodes and
the ambiguous attitude of the political elite to-
wards private capital for much of this period.
4 While the shift to a more ordered deals envi-
ronment at the micro level was the key contrib-
utory factor, in our view, for growth accelera-
tion of 1993, there were also other important
contributory factors, related to policy reforms,
such as removal of barriers to entry in manu-
facturing, as well as the large increase in
opportunity for the magician and workhorse
sectors to grow.
5 However, as Goldberg et al (2010) show, much
of the product churning in the 1990s was
due to product additions rather than product
shedding. In this sense, Indias experience of
the 1990s with creative destruction was more
creative and less destruction.
6 We use GDP factor cost at constant price to
calculate the shares of the four sectors. We in-
clude only sectors where much of the economic
activity is produced by the private sector, as the
rents space in Figure 3 does not apply to the
public sector (in other countries, large firms in
the public sector such as Gazprom in Russia
could be considered to be part of the rentier
sector, given their close connection to the
political elite this is not the case in India
where there are no clear systematic direct links
between the management of public sector com-
panies and the political class). In the rentier
sector, we include mining and quarrying (only
from 2002, as mining was under state owner-
ship before 2002). For the power broker sector,
we include utilities, construction, communica-
tions, and real estate (again, only from 2002,
as these sectors were mostly under state own-
ership before 2002). For the magician sector,
we include registered manufacturing and busi-
ness services (IT). For the workhorse sector, we
include agriculture, forestry, fishing, unregis-
tered manufacturing, trade, hotels and restau-
rants, transport by other means, storage, dwell-
ings, and other services.
7 For example, the allocation of land on a prefer-
ential basis to industrialists in states such as
Gujarat.
8 In the Indian context, given that the slowdown
has mostly occurred in key growth sectors
such as manufacturing and tradable services,
this suggests that in terms of Figure 1 in our pa-
per, this would be a transition from rapid
growth phase to a phase of growth stagnation,
if the slowdown was to continue for a few
more years.
Economic & Political Weekly EPW december 13, 2014
9 There was widespread coverage in this period
in the business press on the chilling effects on
investor sentiments of the actions taken by the
CAG, CBI and the Supreme Court. See https://
www.ashurst.com/publication-item.aspx?id_
Content=5895 and http://www.ft.com/
cms/s/0/f3a7bafc-7437-11e1-9951-00144fea-
b49a.html#axzz3JJn0lSvO.
10 The disorder was not limited only to the deals
environment, as even in the rule-based world of
taxation, the government brought in significant
uncertainty by adopting retrospective taxation
and General Anti-Avoidance Rules (GAAR).
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