Deciphering the Hindu growth epic

Abstract

Purpose

The purpose of this paper is to provide a quantitative assessment of the factors contributing to India's growth acceleration since 1970, based on the neoclassical growth model.

Design/methodology/approach

A feature of neoclassical growth models is that capital accumulation is induced by both productivity growth and increases in investment rates. The paper uses a growth decomposition method based on that of Robertson. The method reconstructs India's actual growth path exactly, then decomposes the growth using counterfactual simulations, holding investment rates constant and productivity growth constant. The role of human capital is also discussed.

Findings

An increase in the productivity growth rate from 1970 accounts for 68per cent of India's post 1970s growth and the rise in the investment rate accounts for 30 per cent. Hence an upward trend in productivity growth has been more than twice as important as the doubling of the investment rate. A similar conclusion applies for the post 2000 era, where a rise in investment from 25 per cent to 37 per cent of GDP, only adds about 0.7 percentage points of growth to the 4.5 per cent annual growth rate over this period.

Originality/value

The paper provides quantitative estimates of the role of investment and productivity to India's growth based on the neoclassical growth model. It thus improves upon existing growth accounting studies by allowing for the induced effect of productivity growth on capital accumulation. It also improves upon existing development accounting techniques that rely on steady state restrictions, and which would therefore be inappropriate for evaluating India's recent transitional growth.

Citation

Robertson, P.E. (2012), "Deciphering the Hindu growth epic", Indian Growth and Development Review, Vol. 5 No. 1, pp. 51-69. https://doi.org/10.1108/17538251211224132