After decades of slow growth since Independence from the British Raj, Indian economy registered its own small miracle, when growth rate of GDP per capita surpassed the long term growth rate of many advanced economies. What caused this miracle? In this paper, we search for an answer in the neoclassical growth model. We use productivity as measured by Solow residual as our exogenous shock. Our idea is to quantitatively measure to what extent ‡fluctuations in productivity can account for observed ‡uctuations in macro economic aggregates in India. We find that exogenous fl‡uctuations in productivity can well account for fl‡uctuations in output during the boom periods of 1982 to 1988 and 1993 to 2002. However, fluctuations in productivity alone results in a much worse drop in ouput during 1988 to 1993 than observed in the economy.
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Paper provided by EconWPA in its series Macroeconomics with number
0512013.
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