Journal Article

An alternative explanation of India’s growth transition: a demand-side hypothesis

Kevin S. Nell

in Cambridge Journal of Economics

Published on behalf of Cambridge Political Economy Society

Volume 37, issue 1, pages 113-141
Published in print January 2013 | ISSN: 0309-166X
Published online November 2012 | e-ISSN: 1464-3545 | DOI: https://dx.doi.org/10.1093/cje/bes051
An alternative explanation of India’s growth transition: a demand-side hypothesis

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  • Economic Growth and Aggregate Productivity
  • General Aggregative Models
  • Development Planning and Policy
  • Macroeconomic Aspects of International Trade and Finance

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This paper formalises the balance-of-payments-constrained (BPC) growth model in a two-regime framework to re-examine India’s growth transition in 1980 from a demand-side perspective, as an alternative to the ‘supply-oriented’ approaches of previous studies. The results provide strong evidence of a demand-led growth transition. Although the government-led expenditure strategy of the 1980s fulfilled the role of moving the Indian economy out of its slow-growing demand regime (1952–79) into a faster-growing one, it could not sustain demand growth at the natural rate due to a balance-of-payments constraint. Consistent with the prediction of the BPC growth model, faster export growth in the post-1990 liberalisation period sustained demand growth at its maximum rate by allowing expenditure (including government spending) to grow at a fast rate. The analysis further suggests that India’s export surge in the post-1990 liberalisation period has a significant demand-side explanation, rather than an exclusively supply-side interpretation.

Keywords: balance-of-payments-constrained growth model; fiscal policy; India; sustainable demand-led growth; trade policy; E12; F43; O23; O24; O40

Journal Article.  13662 words.  Illustrated.

Subjects: Economic Growth and Aggregate Productivity ; General Aggregative Models ; Development Planning and Policy ; Macroeconomic Aspects of International Trade and Finance

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