The past couple of months I have been in India working on my dissertation. Part of my efforts have been towards finding good quality data and trying to reconcile numbers. What I keep stumbling upon is the 3% hindu rate of growth (real) which was the norm until the late 80s. My committe, at my presentation in April, was surprised that we call this a low growth rate and urged me to dig deeper. Have been at it since then and what I find is that source after source quotes the same numbers, and it just does not make sense to me. If I simply go by OLS (Optical Least Squares) it does not seem possible that suddenly in the 90s, hitherto absent entrepreneurship suddenly presented itself to take the country to close to 9% real growth rate. The problem with many transitioning economies is that, as soon as they embrace free market ideas, they do not really do that well cause the required institutions are not present. This has not happened in India. Much as the popular press and politicians like to lament growing poverty in India, absolute poverty rates have actually gone down from close to 50% at Independence to about 26% now. I am not saying that's trivial. Indeed 26% of a billion plus people is a staggering number, but it needs to be noted that it is not half a billion but about a quarter which is a significant achievement for a developing country like India.
My dilemma right now is this. Firstly, if the 3% is an over-estimate and there are problems of measurement, how did the capacity to go upto 9% suddenly emerge in the last two decades or so? The best guess is that it was all underground and outside of the legal structure thanks to onerous policies and regulations. Some estimates say that the black economy in India is as big as the legitimate sector. I am inclined to believe those numbers although I do not know how these numbers can be validated or verified. One pointer would be the revenues from Voluntary Income Disclosure Scheme of 1997. Close to Rs.336.9732 billion was declared as previously unreported income and Rs.97.2902 billion was paid as taxes on the above income. That is quite significant, however it is not considered very significant compared to actual volumes of black money in the economy. If all of this is true then why was the poverty rate close to 50% and not closer to 25% or even lower? Were the poverty estimates also so wrong all along?
On the other hand, if the 3% is an under-estimate, where was all the true prosperity these past few decades? Even if income estimates do not show it, people's lifestyles and consumption patterns would show it. Agreed there were several controls on all kinds of consumption goods, many of them were not even produced. If entrepreneurs made money what did they do with all the money? I guess a 94% peak marginal tax takes care of some and the rest goes underground into numbered untraceable accounts. I wonder how much gold hoarding existed, especially since people could not openly consume more. There were also gold import restrictions. Here is a real puzzle! How do we reconcile India's growth numbers from the past??