Rapid Economic Growth: Contributing Factors and Challenges Ahead*

Abstract

The sustained improvement in the underlying conditions for growth for more than two decades has resulted in lifting the Indian economy from the bottom of the growth heap to one of the fastest growing economies in the world. This paper presents the factors that have contributed to the growth acceleration in India over the past 25 years and the challenges faced by the growth process in the years ahead. The inadequate and poor quality of infrastructure, particularly electricity, the emerging scarcity of skilled labor, and a lagging agricultural sector pose serious medium-term challenges to the sustainability of high growth, while management of the macroeconomic environment poses more immediate challenges in view of the proliferation of unsustainable and sometimes invisible subsidies, sharp increases in the world prices of food and fuel, and pressure on the exchange rate executed by strong capital inflows.

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“…This lack of balanced diversification of sectoral growth has caused a serious decline in agricultural productivity. Ahluwalia (2008) concurs with Grabowski's thesis. He points out that a lagging agricultural sector poses serious medium-term challenges to the sustainability of high growth.…”

“…Third, there has been a depletion of food stock in China and India, the major exporters of rice. Fourth, the current global financial crisis and the rush of capital inflows into India has put enormous pressure on the currency (Ahluwalia, 2008), and hence, on prices. The crisis has also reduced the leverage room for fiscal policy of the government, since it already has a very high public debt of 80% (Grabowski, 2008).…”

Editors’ Overview

“…Isher Ahluwalia (2008) presents an overview of the factors that have contributed to the growth acceleration in India over the past 25 years, and the challenges faced by the growth process in the years ahead. The factors contributing to the economic growth, namely, the gradual reorientation of the policy regime towards a market orientation and a greater openness to trade and foreign investment, tax reforms, and financial sector reforms, are described in detail.…”

Comment on “Rapid Economic Growth: Contributing Factors and Challenges Ahead”

“…In reviewing India's long‐term growth trends over the past 25 years, Ahluwalia (2008) clarifies the evolution of the reformist policy regime, analyzes the critical factors contributing to this unprecedented rapid growth, and identifies the three medium‐term challenges to the process of sustaining the high growth process. Her discussion, based on robust and rich data, is marvelously comprehensive and clear‐cut.…”