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India: Growth Goes Way Back

To many observers, India's torrid economic growth looks like a recent event. The early-'90s teardown of trade barriers and opening to foreign competition are widely viewed as the turning point. But economists Dani Rodrik of Harvard University and Arvind Subramanian of the International Monetary Fund show that real gross domestic product and productivity actually took off in the early 1980s.

What shifted India into high gear? In a National Bureau of Economic Research working paper, the economists say it was a change in political attitude. When Indira Gandhi returned to power in 1980, followed by her son Rajiv Gandhi, who became Prime Minister in 1984, India began to adopt a more pro-business stance.

The moves were often modest, such as gradual reductions of production quotas for manufacturers and import barriers on capital goods. Still, says Subramanian, businesses "clearly got the sense that the government was going to be less restrictive." Freed from too much government oversight, companies were able to expand more freely and cut their costs of doing business. They upped production and invested in new capacity. The result: an economic surge in the '80s. Breaking down India's real GDP performance by decade, the '80s equaled the vaunted '90s, with average yearly growth of 5.8%.

Productivity growth accelerated, too. For factories, the annual pace rose from 2% in the '70s to 6.3% in the '80s and held at 6% in the '90s. While big GDP jumps are always a positive trend, "productivity is the true measure of the long-run ability of an economy to sustain [higher] standards of living," says Subramanian.

India's strategy in the '80s holds a valuable lesson for policymakers of emerging nations who hope to recreate India's experience, say the economists. Reform strategies are often "like going after a target with a spray gun and hoping you will hit it," says Rodrik. He argues that India's success demonstrates that it's usually "a question of figuring out what is the most binding constraint to growth and just alleviating [it]." The 2004 presidential campaign is heating up. And this year's candidates won't have access to federally unregulated donations, or soft money, which were banned by the 2002 Bipartisan Campaign Reform Act (BCRA). That's good news to many observers who say soft money lets big companies gain a regulatory or tax advantage in return for their donations. If so, companies that gave the most should have been hurt when they lost the competitive edge conferred by soft money.

That wasn't the case, according to a working paper by Massachusetts Institute of Technology political scientists Stephen Ansolabehere, James M. Snyder Jr., and Michiko Ueda. The three questioned just how big a financial return soft-money donations gives big donors. To find out, they split publicly listed contributors within the Fortune 500 into three groups according to the amount of soft money donated from 1999 to 2002. Big donors, such as Philip Morris (now Altria Group (MO)), Freddie Mac (FRE), and Pfizer (PFE), gave more than $250,000, small contributors gave $10,000 or less, with moderate givers in between. The political scientists then looked at how the stock prices of big givers fared against those of lesser donors around five key dates of the BCRA, including the bill's passage by the House and its signing by the President.

The authors conclude that there was little difference in the companies' equity performance. In fact, the stocks of the large-donor group rose in the 60 days after the Dec. 10, 2003, Supreme Court decision to uphold the BCRA ban. Shares for the other two groups declined over that period.

The results suggest that, contrary to the arguments of some political critics, investors didn't think soft-money donations provided a discernible boost to a company's profitability. In fact, investors should be happy companies can no longer make such contributions. Instead, businesses can spend those funds on activities that give investors a more worthwhile payoff. Economists expect strong growth for the first half, in part because they're betting on stronger consumer spending financed by large federal tax refunds. That appears to be confirmed by an annual Cambridge Consumer Credit Index survey. Of those getting a tax refund, 68% said they are going to spend the money, up from 59% last year; 23% plan to save the check, down from 27%.

Thanks to last summer's tax cuts, refunds are fatter than a year ago. Through early April, refunds stood at $142.5 billion, up $10 billion from last year. Estimates for the total hike run from the government's $50 billion to Goldman, Sachs & Co.'s (GS) $30 billion to $35 billion. If families spend 68% of that stimulus right away, it will add as much as two percentage points to second-quarter growth in consumer spending, providing "an extra kick to the economy," says Cambridge's senior economist, Allen C. Grommet.

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