The document provides a review of the book "Why Growth Matters" by Jagdish Bhagwati and Arvind Panagariya. It summarizes the authors' biographies and discusses several key points made in the book's introduction. The introduction notes that while India was initially expected to outperform China economically due to its democracy, by the late 1950s India had embraced policies that stalled growth and increased poverty. It was not until economic reforms began in 1991 that growth increased, helping reduce poverty.

1. A Book Review on
WHY GROWTH MATTERS
How economic growth in India reduced poverty and the
lessons for other developing nations
Abhishek Gaurav
Roll number : 11024
Department of Humanities and Social Sciences
Indian Institute of Technology, Kanpur
U.P., India

2. Authors : Biography
The book has been jointly written by the authors Jagdish N. Bhagwati and Arvind Panagariya.
Jagdish Natwarlal Bhagwati is university professor of economics at Columbia and a long time fellow at the Council of
Foreign Relations in the United States. He has combined scientific scholarship with a substantial public policy presence
through writings in leading media worldwide and much-acclaimed books aimed at the general public. He has received
several prestigious awards and honorary degrees. He is well known for his research in International Trade and is a
champion of free trade practices. Widely recognised as the pioneer of India’s reforms, he has also received the Padma
Vibhushan.
Arvind Panagariya is a professor of Economics and Indian political Economy at Columbia University, a non-resident
senior fellow at the Brookings Institution and a past chief economist of the Asian Development Bank. A leading trade
theorist of his generation, Panagariya has written prolifically on global trade policy issues and economic reforms in India.
Author of a dozen books, his technical papers have been published in the leading journals including the American
Economic Review, Quarterly Journal of Economics and Review of Economic Studies while his policy papers have
appeared in the Foreign Affairs and Foreign Policy. Panagariya writes an influential monthly column in the Times of India
and has been honoured with the Padma Bhushan.

3. Introduction
 In the 1950s, at the time when both India and China became independent , there was a great debate among the
Development Economists as to which of them would turn out to be the role models for other developing economies.
 India had an upper hand in the fact that it had inherited a well grounded democracy, a splendid civil service, a relatively
free press and moreover politicians who had fought selflessly for the country’s independence.
 In contrast, China had emerged from a fierce civil war, Great Famine and cultural revolutions which had greatly
undermined the legitimacy of democratic institutions.
 Development Economists initially favoured the prospects of China over India because it is easy to procure high savings
rate through taxation in a monarchical framework than a democratic framework that characterized India.
 However the West rooted for the success of Democratic India against the Communist Behemoth, China .The only hope
for India lay in the fact that the West make up India’s inability in raising savings fast and hence investments with
massive influx foreign aids to match with the China’s saving efforts .

4. Introduction
 India, did become a recipient of foreign aid but was unable to reap its benefits. China, too, continued its
developmental progress on a sloppy pace in the first three decades imitating its neighbouring counterpart.

The authors from here on discuss the reasons that were responsible for the debacle of India’s growth story in the
first three decades and what stimulated it later on.
 Despite having a promising beginning with the hopes of a liberal democracy, we embraced such an economic
policy framework (by the late 50s) that produced an abysmal growth and did little to alleviate poverty.
 Institutions are not exogenous to policies. The License Raj and the virtual monopoly given to government in
almost all policy and development matters resulted in the degeneration of Indian Politics and the stemming of
corruption in the bureaucratic and political lanes.
 It was only after the reforms began in the right earnest in 1991 that the economy recovered from the doldrums
and the increased growth started making an impact in reducing poverty and changing the fortunes of the
marginalised groups.

5. Myths About Early Development Strategies
 A widely held myth is that Indian Planners pursued the objective of growth ignoring poverty reduction and
reducing inequality ,which is the main reason of abysmal social and economic indicators .The authors point
out that it is exactly the opposite what the Indian policymakers had in mind.Their apathy to the good growth
targeted programmes actually hit the Indian economy hard.
 The book quotes an excerpt from the first five year plan “ The elimination of poverty cannot, obviously be
achieved by merely redistributing existing wealth. Nor can a program aiming only at raising production
remove existing inequalities.”
 They dispel the myth that growth is not necessary for poverty alleviation and that redistribution policies can
suffice. The authors reject this proposition completely citing the document of Perambur Pant (1962) which
emphasized on growing the size of the pie rather than sharing it more generously.
 Moreover the idea of redistribution of income on a scale as large as India is meaningless unless it is
accompanied with revolutionary changes in property rights and scale and structure of wages and
compensations.

6. Myths About Early Development Strategies
 The Pant report of 1962 using a formal model, calculated that in a span of fifteen years a 7 % growth
rate combined with redistribution to those outside the mainstream could potentially eliminate abject
poverty measured by 20 rupees per capita income at 1960-61 prices.
 Another widespread myth was that growth is not “sufficient” to reduce poverty, redistribution is
necessary.
 The authors convincingly emphasize that growth helps by drawing poor into gainful employment and
also by generating revenues to finance the poverty targeted programs.
 In an economy with widespread poverty, labour is cheap, thus the economy can specialize in
producing labour intensive products, produce and export these products which in turn will create
employment opportunities, higher wages for the masses with a consistent decline in poverty.
 The authors are critical of the labour laws like small scale industries reservation and chapter VB of the
IDA of 1947 which made the large firms in labour intensive sector uncompetitive in the world markets
and hurt their growth and in the end proved detrimental for the growth of labours and the informal
workforce themselves.

7. Indian Socialism And Its Impact On Development
 In the book, the authors have analysed the various aspects of India’s economic progress not in a
chronological sequence but sector-wise, outlining the various myths surrounding them. They chalk out the
consequences that these myths had on India’s development agenda , how it affected our progress and what
should have been the preferred course.
 They point out that not only the magnitude of investment but also the productivity of that investment is
instrumental in driving growth in an economy. This fact was completely neglected in the early years of
independence , especially in the tenure of Mrs. Indira Gandhi resulting in high and increasing savings and
investments but plummeting growth rates.
 In contrast the East Asian Economies of Japan, South Korea and Taiwan registered impressive growth rates
as their focus was not just on the quantity but also the quality of the investments.
 These comprehensive socialistic measures backfired and the economy took a nosedive with per capita
incomes rising just 0.3 percent annually between 1965 and 1975 and the private final consumption rising
even more slowly.

8. Indian Socialism And Its Impact On Development
 The authors are extremely critical of the industrial and economic policies of Mrs. Gandhi’s ,Ten Point
Programme.
 The ten Point Program included policies like nationalization of fourteen large Banks in 1969, nationalization
of general insurance, oil companies and coal mines in the following four years, forcing the dilution of foreign
equity in virtually all firms to 40 % or less, confining investments by large domestic and foreign firms to
nineteen narrowly defined highly capital intensive industries, strictly limiting the size of urban landholdings
and restricting the layoff of workers in large firms.
 Similarly, India restrained direct foreign investment which dramatically fell during this period, to as low as $
100 million at the time of liberalization reforms in 1991 , that is unbelievable for a country as large as India.
 The country turned away from integration into the world economy, forgoing important gains from taking
advantage of such integration due to the sheer “anti-market fundamentalism” prevailing at the time which
resulted in grave consequences in efficiency and growth.
 The authors feel that these expanding governmental controls closed nearly all avenues for growth in the early
independence period.

9. Reforms And Their Impact On Growth And Poverty
 They have addressed concerns of the various NGOs and journalists that the growth post 1991 reforms have
bypassed and even hurt the socially disadvantaged groups stating that contrary to the general impression reforms
and growth , and not governmental assistance have actually opened opportunities for the scheduled caste and
scheduled tribe entrepreneurs to seize ,in large and small enterprises.
 An extremely important point to note is the significantly larger decline in poverty among the Scheduled castes
and Scheduled tribes relative to the non-scheduled castes during the latest high growth phase. Poverty for the
Scheduled Castes fell by 9.4 percentage points and that for the Scheduled tribes by a gigantic 15.3 percentage
points relative to the 6 percentage points for non-scheduled castes between 2004-05 and 2009-10.( Mukim and
Panagariya - 2013)
 Many Economic historians are of the idea that the post-1991 reforms followed rather than preceded the growth
acceleration. They feel that the quiet process of loosening controls during the 1980s in the reign of Rajiv Gandhi
actually led to the attitudinal changes which accelerated the growth trajectory. Panagariya and Bhagwati refute
this claim completely.

10. Reforms And Their Impact On Growth And Poverty
 They strongly advocate that the structural changes since 1991 have a direct link to the liberalizing reforms,
be it the trade to GDP ratio which has risen from 17 % in 1990-91 to more than 50 % by the late 2000s, or
the foreign investment magnitude which has risen from $100 million in 1990-91 to more than $60 billion in
2007-08 .
 Again attacking the claim of IMF economist Petia Topalova who argued that trade openness has aggravated
the problem of poverty , they advocate that trade openness in a labour abundant economy stimulates growth
in general and the expansion of labour-intensive industries in particular.
 They cite the work of another set of economists Hasan, Mitra, and Beyza Ural(2006-07) who have
questioned the methodology of Topalaova’s analysis adding that the analysis of poverty at the district level
poses several problems due to the insufficient number of observations, mobile boundaries of the district and
also the randomness of the sample.

11. Reforms And Their Impact On Growth And Poverty
 Several studies, Jewel Cain, Hasan Mitra(2012) and Mukim and Panagariya (2012) clearly indicate that
states that are more exposed to foreign competition had lower rural and urban poverty ratio with the effect
being more pronounced in states having more flexible labour market institutions.
 Addressing the concerns of the critics that there has been no substantial decrease in the poverty after the
reforms, they state that whichever estimate is taken in the right perspective would reflect substantial
reduction in poverty as well as the absolute number of poor in India.
 In the time period from 1983-84 till 2004-05 alone, there has been an exit of 187.5 million people from
poverty, a substantial reduction in the poverty ratio from 44.5 percent till 27.5 percent.
 As far as the claim of reforms having not helped certain underprivileged sections is concerned, it has already
been pointed out poverty has gone down among all broad based groups, such as Scheduled Castes and
Scheduled Tribes and across all states.
 The important point is that poverty in India everywhere is showing a declining trend.

12. Reforms And Inequality
 Recent reports of the media give an impression that the reforms have led to the increased inequality, more so because
we are more concerned in viewing inequality between regions rather than within regions.
 The authors in fact feel that some amount of inequality is essential for promoting growth, the poor may react by
celebrating conspicuous inequality thinking that they too may some day “make it big”.
 They advocate that in a mobile labour abundant economy, pro-growth policies lead to specialization of skills that raise
employment and wages. The poor can easily switch from low-paying jobs to high paying jobs, from countryside to
urban centres, thereby reducing inequality.
 They quote Krishna and Sethupathy (2012) who in their research pointed out that the inequality within states accounts
for more than 90 % of the total inequality over the country.
 The authors point out that the rise in interstate inequality does not reflect the poorer states’ remaining poor but it
represents the richer states growing faster than the poorer ones in an environment in which all the states can grow fast.
 Citing examples of Orissa and Bihar, they point that this interstate inequality has a diffusion effect on the
underdeveloped states, wherein the poorer states will demand more from its leaders , prompting policy and leadership
changes as has happened in both Orissa and Bihar.

13. Track I and Track II Reforms : Possible Way Out
 Track I Reforms : Reforms aimed at accelerating and sustaining growth while making it even more inclusive.
 Track II Reforms : Reforms that can actually make the distributive programs more effective as their scope widens
 Neither of them in isolation is sufficient enough. UPA after coming to power in 2004 focused exclusively on
Track II Reforms aimed at promoting social programs with the result that the government is facing structural
paralysis at present.
 Productivity of the work force remains a key issue at present. According to a 2007 government report 57 % of the
workforce is employed in the agricultural sector producing less than 20 % output of the country.
 Within the industry and services also, 84 percent of the workers were employed in enterprises employing fewer
than ten workers , which are generally characterized by low productivity.
 An extremely large percentage of the workforce depends on a very small share of the national income, Track I
reforms become all the more important for them to create gainful employment opportunities.
 The outdated and draconian labour laws like IDA 1956, 1970 Contract Labour Act especially in the
manufacturing sector, have discouraged large players from entering the market.

14. Track I and track II Reforms : Possible way out
 The Track I reforms in addition to accelerating growth would also result in making it more inclusive. track II reforms must
be implemented as a follow up to the Track I reforms.
 One alternative to use the generated revenues could be to boost the purchasing power of the poor by direct cash transfers or
employment in public works at above market wages

Giving the private player an equal footing in providing these services and facilities will actually promote healthy
competition and ensure quality delivery of services.
 The preferred strategy that the authors talk about consists of unconditional cash transfers for most of the needs, vouchers
for elementary education and insurance vouchers for illness with governments covering the premiums. The provisions can
be a mixture of both public and private schemes, leaving the power to decide in the hands of the beneficiaries.
 The authors also advocate the need of targeted rather than the universal schemes. A substantial exclusion will prevent the
social expenditures from being spent too thinly and thus being diluted.

15. Multitude Of Labour Reforms
 Despite a significant decline in the output share, the employment share of agriculture in India has remained
high.
 Employment in industry and services also remains predominantly in small, informal firms characterised by
low productivity.
 The manufacturing sector which is often the sector that absorbs the maximum workforce has been performing
rather badly in India, in addition to the slow growth that it experienced in the past
 Industries Disputes Act 1956, Contract Labour Regulation Act 1970, 1926 Trade Union Act, 1948 Employees’
State Insurance Act have added to the woes of large private players in this sector.
 The IDA allows every single industrial dispute to go to the labour courts and tribunals, this time consuming
practice should be replaced by one under which an independent authority is empowered to deliver a time
bound and final verdict in a designated class of cases.

The solution lies in indirect labour market reforms, which would accelerate the growth in formal sector
employment, skill creation that will make workers employable in better paid jobs and strengthen the
redistributive reforms.

16. Land Acquisition and Infrastructure Reforms
 The century old 1894 Land Acquisition Act though having been amended several times remains archaic and
unfit to be implemented in a dynamic and progressive country like India.
 Mandatory advertisements of the prevailing prices by the buyer of large tracts of land offer a better alternative to
the problem of imperfect information.
 The Revenue Department can post guidance prices to make the public aware about the market conditions.
 the authors claim that the need of the hour is to enhance the productivity of the farmlands and not to increase
their already large coverage.
 Infrastructure has assumed special importance in the wake of globalization and industrialization.
 Simply spending billions in infrastructure will not automatically generate economic growth that would give rise
to the appropriate demand for that infrastructure.
 There is a need to coordinate the various arms of the government in order to bring about coherence in the
working of the road building programs.
 We have to do away with the horizontal model of expansion of the cities and relax the floor –space index that
can stimulate the vertical growth of Indian towns and cities.

17. Higher Education Reforms
 Higher Education reforms are very essential for India which needs an ever increasing skilled workforce
 A central problem of the higher education in India is the virtual monopoly status that has been accorded to UGC
(University Grants Commission) which determines the curricula at various levels, degrees to be awarded and
fees and the faculty salaries.
 The entry itself of the private universities is very tough and even if they manage to do, they are not allowed to
open any satellite campuses in other states without the approval of UGC, that involves complex procedures.
 Areas like Management and Accountancy which are outside the purview of UGC have done fairly well and have
fairly catered to the needs of the ever increasing student demands.
 The solution lies in opening up the education sector for both the profit and the non-profit institutions of domestic
as well as foreign market
 Lifting the control over tuition fees in both the public and private universities is an important policy change that
the UGC must consider.

18. Attacking Poverty by guaranteeing Employment
 The principal instrument of direct attack on poverty in India has been schemes providing to the employment to the poor
in the rural areas.
 Mahatma Gandhi National Rural Employment Guarantee act surpasses all of them in magnitude and scale. The program
guarantees one member of every household whether poor or not, 100 days’ worth of unskilled manual employment.
 The scheme, according to them has resulted in large fiscal deficits and inflation and has adversely impacted the
economic activity by distorting the labour market.
 The alternative means of cash transfers has certain obvious advantages over the antipoverty scheme of MNREGA.
 Cash transfers greatly increases the purchasing power of the individuals.
 The MNREGA has resulted in the creation of substandard capital assets
 Even assuming equal volumes of leakages as under MNREGA which is highly implausible, cash transfers would
certainly place greater volume of purchasing power in the hands of the poor and withhold the future of redistributive
programs in India.

19. Criticisms
 The authors strongly believe in free market economy and deregulation of the public sector undertakings. But history
shows that free market economics and complete deregulation may not always bring positive results.
 When private players start handling public goods, they often neglect the welfare motives which characterises such a
project because they are often driven by profit incentives.
 The scheme of Cash transfers which they aggressively advocate requires an all-encompassing financial institutions
coverage which in itself is an enormous task.
 The analysis of labour rigidity is of critical importance and the authors detailing of the specific laws that are getting in
the way helps focus the issue. But parts of it are quite dry and aimed at specific people rather than a broader audience.
 The main issue with their approach is that they believe that governmental intervention often does more harm than
good. Well it is not true, China is a good example of how a committed and forward looking government can help to
steer a nation towards economic robustness primarily driven by sound economic policies.

20. Conclusions
 In this book the authors put forward a forceful case that further market-orientated reform, of the kind introduced
haltingly in 1991 is the only way to raise the masses out of poverty, not only in their country but elsewhere in the
developing world.
 Two stages of reform are needed for successful long-term economic development, the authors argue, Track I reforms
and Track II Reforms, as has already been discussed earlier. They aggressively advocate Track 1 reforms which are
made possible only by increased revenues.
 Why Growth Matters is a useful summary of both the history of economic reform in India and of the controversies these
reforms have generated, as well as a detailed and practical explication of what is necessary for the future.
 Bhagwati and Panagariya squarely blame leftist economists, such as their Columbia colleague Joseph Stiglitz, Belgianborn Jean Drèze and Harvard's Amartya Sen, for being “intellectually lazy and unwilling to learn from the ruin they had
visited on India and its poor”.
 Whoever is right, what can safely be said is that this book by Bhagwati and Panagariya makes a weighty and wellreasoned contribution to a policy debate that has become of critical importance in India.