As the heading states, the subject for the current post is to see if there are any major differences in the reasons for growth that took place in in the 90's and the growth that has taken place in the first decade of 21st century. Currently I am reading a book titled, " Why Nations Fail", the main thrust of the book is that only growth that is backed by inclusive political and economic institutions leads to sustainable growth. In case either of the two are not present, we could see spurts of growth which would not be sustainable in the long run. These days we are seeing many news articles about the growth of private companies over the last decade is not due to any productivity or innovation led growth but due to their ability to obtain natural resources at a low cost. So does it mean the growth has been due to extractive economic institutions?
The main drivers of growth of the 90's was, as expected, the growth of services space especially the trade/hotel/communications space( CAGR of 7%) and the financial services/real estate/business services (CAGR of 7%) in the '90-'99 period. For the next period of 10 years, the main factors of the growth were the above two in addition to the strong performance of the construction sector (CAGR of ~10%). The strong growth of the construction sector is evident in the period from 2004-2009, wherein the growth was in double digits. This was the period wherein the CAGR of the gross capital formation of the private corporate sector and the public sector was ~14% whereas the household capital formation CAGR fell to 9% from 14% for the '90's.
The above data points shows the strong performance of the infrastructure sector. Thus the growth of the 2004-2010 period has been in both non-construction services sector growth plus the construction side growth.
It is this construction side that is facing issues post 2010, the growth rates for the last 3 years has been 7% in 2010, 8% in 2011 and 5% in 2012. The growth of the mining sector which also was growing at nearly 5% p.a. since 1990 has slowed down to NIL growth over the last two years.The dismal performance of these sectors has been one of the major causes for the slowdown of the Indian economy over the last 2-3 years. The growth of the infrastructure space is the main difference between the growth of the 90's and the growth of the first decade of the 2000.
Does this slowdown have to do with the fact that most of the construction and mining related activities were undertaken or given to companies on a preferential basis and thus leading to an situation of existence of extractive economic institutions? The current fight regarding the coal mines allocation is an instance of the existence of these extractive economic institutions and the instability these institutions are facing due to stronger oversight of the other institutions in the country. Due this the growth from these extractive economic institutions has gone and as evident in the slowdown in the infrastructure growth.
