MODULE 5: INDIAN ECONOMY

5.1 MAIN FEATURES OF INDIAN ECONOMY AND MAJOR ISSUES OF DEVELOPMENT

Low per Capita Income Income inequalities. High incidence of poverty. Predominance of agriculture and instability of output. Rapid population growth. High dependency Ratio. Low level of human development. Unemployment. Imbalance between population size, resources and capital. Inadequacy of entrepreneurs. Low level of productive efficiency.

5.2 CHANGING SCENARIO OF INDIAN ECONOMY

Growth of National Income.

Rise in per Capita income.

Structural transformation.

Slowly changing occupational distribution of population.

Growth of basic capital goods industries.

Expansion of social capital.

5.3 INDIAN ECONOMY IN THE GLOBAL

PERSPECTIVE

Country 1980 - 1990 1990 – 2003

Low Income 4.4 4.7

High Income 3.4 2.6

China 10.3 9.6

India 5.7 5.9

G D P Growth Rate: % per annum Per Capita G N I: 2004

Country Income in $

High Income 32,040

Low Income 510

China 1,290

India 620

Origin of G D P: % Share – 2002

Country Sector

Ag. Ind. Services

U.K 1 26 73

U.S.A 2 24 74

China 13 46 41

India 22 27 51

Pakistan 23 24 53

Malaysia 10 48 42

Country Sector

Ag. Ind. Services

Malaysia 18 32 50

Pakistan 48 18 34

China 47 22 31

India 61 17 22

% Share in Employment:

H D I (2003):

Country H D I RANK

U.S.A 10

Japan 11

China 80

India 127

5.4 Economic Reforms and Structural Adjustments in India since 1991.

5.4.1 Paradigm Shifts In Macroeconomic Policy:

Adam Smith: Laissez faire → Market Economy

Alfred Marshall: Glorification of capitalism and market economy

Karl Marx: Destruction of capitalistic system and market economy

J. M. Keynes: Market economy with government interference

1950’s and 1960’s: Planning and public sector fundamentalism

1970’s: Decade of the development of the poor

1980’s onwards: Revival of market economy paradigm Back to Adam Smith?

5.4.2 Four Decades of Economic Policy Regime In India: 1950 – 1990:

Planning – Public Sector – Regulation Fundamentalism Planning: A panacea Public sector dominance Protection of agriculture, industry and trade Self – reliance and import substitution Inward looking development strategy.

Performance Record During Old Policy Regime:

Respectable GDP growth Good performance in agriculture: Green Revolution India: On the industrial map of the world Development of science and technology and a large pool of scientific and technological manpower But three dark spots of development.

5.4.3 Economic Reforms During 1980’s: The First Wave:

Improvement in productivity

Absorption of modern technology

Fuller utilization of production capacity

Larger scope to private sector

Foreign equity capital

Remove controls and restrictions gradually.

5.4.4. Economic Reforms Since 1991: The Second Wave:

U – turn from planning – Public Sector Fundamentalism to Market-Private Sector Fundamentalism.

Huge budget deficit Balance of payments crisis: Foreign exchange reserves (About $15 billion) to meet two weeks imports Low global credit rating

Over 13 ½ rate of inflation

Western ideologies and propaganda Collapse of planned economies in the Soviet Block

Problem of demand management in developed economies

Prescriptions of IMF & World Bank Ideology of Indian elite Disenchantment with 40 years of inward looking development strategies Hence change of track in July, 1991.

5.4.5. Contours of New Economic Policy Since July, 1991:

Stabilization and Demand Management:

Reduce budget deficit Control inflation Reduce deficit in balance of payments.

Structural Adjustment Programme (SAP) and Supply Management:

Liberate economic agents Delicense, dereserve and de-protect industry, agriculture and trade Dismantle import license Reduce tariff rates and remove quantitative restructions Privatize and allow FDI Disinvest in public sector industries Reduce taxes Allow market forces to govern Exchange Rates.

5.4.6. Performance of Indian Economy Since 1991: Major Performance Variables:

GDP growth rate: Sectoral Growth Performance

Employment generation

Reduction of population living below poverty line

Promotion of equity leading to a better deal for the poor and less well-off sections of our society

Reduction in regional disparities between the rich and the poor states of India.

Control of inflation

Foreign trade

Control of Budget Deficit

GDP Growth Rate:

Average Annual Growth Rate (%)

1980 /81 – 1990 / 91: 5.6%

1990 / 91 – 2000 / 01: 5.6 %

2000 / 2001 – 2004 / 2005: 6.3

• Employment Growth

% Per Annum

UOS OS Total

1983 / 1990 / 91 1.3 2.4 2.39

1990 / 91 / 1997 – 98 0.6 1.1 1.0 Recall Employment growth more in service sector:

Employment Elasticity of Output: 1980’s and early 1990’s: 0.52% Late 1990’s: 0.16

Job – creation per unit of output has decreased

Downsizing of public sector

Increased capital intensity per unit of output

Growth pattern moving in favour of capital intensive sectors.

“No point in reducing the price of child’s shoes, but costs the father his job”

• Economic Reforms and Reduction of Poverty: Slowing Down

Poverty reduction over 1983 to 1990/91: 3.1% per annum

Poverty reduction in 1990’s: 1% per annum

In rural sector the rate of reduction in poverty: Almost zero and in urban sector higher rate of reduction in poverty Rural–Urban divide.

Paradox of higher GDP growth rate and lower rate of poverty reduction due to unequal income distribution accelerated during LPG regime.

• Neglect of Agriculture Sector

The emphasis of reform process, more on service and manufacturing sectors and

lesson agricultural sector.

1990 – 91 over / 1980 – 81: 3.8 %

2003 – 04 over / 1990 – 91: 1.54 %

• Average Annual Growth rate of industrial production

Index of growth

1981 / 82 / 1990 – 91 7.8 %

1993 – 93 / 2003 - 04 6.6 %

• Growth of Exports and Imports: % per annum

Period Exports Imports

1981 / 82 – 1985 / 86 2.3 1.00

1986 / 87 – 1990 / 91 14.3 10

1991 / 92 – 1995 / 96 11.8 9.3

1996 / 97 – 2000 / 01 6.8 6.3

2001 / 02 – 2004 / 05 22.5 28.3

Period Exports (% ) Imports (%)

1990 5.8 8.8

2000 – 01 9.9 12.6

2004 – 05 11.8 17.1

• Exports and Imports as % of GDP

• Exports: % of World Exports

Exports 1990 2003 Annual Growth Rate (%)

Merchandise 0.51 0.73 9.1

Export of Services 0.61 2.18 17.5

Merchandise and Service Exports

0.53 1.01 11.6

• Foreign Investment Flows:

F D I: To increase productive capacity of the economy.Foreign Portfolio Investment (F P I): More of speculative nature.

($ in billions)

Period FDI FPI Total

1990 – 91to

1994 - 95

2, 441(24.2 %)

7, 645(75.8 %)

10, 086(100 %)

2001 – 01to

2004 - 05

25, 169(48.8 %)

26, 450(51.2 %)

51, 619(100 %)

FDI to which sector: Major ones:- Electrical equipment, transportation, telecommunication, energy and service sector. Gap between approval and inflow: 26.8 % of approval to 10 major sectors 1991 – 2004.

State NSDP Growth (%)

Growth of Per Capita NSDP (%)

Gujarat 6.3 4.3

West Bengal 6.8 5.1

Karnataka 6.6 4.9

Orissa 4.1 2.6

M.P 0.3 0.8

Bihar - 0.7 - 0.9

The impact of favourable and unfavourable Investment climate Better off states attract more domestic and foreign investment

HDI (2003): Recall

Foreign Exchange resources: $ 5.83 billion in 1990 – 91

About 200 billion now Rate of Inflation: About 13 % in 1990 – 91 Over 5 % now Economic Reforms and Increased Development I erased disparities:

5.4.7. Impact of Globalization on Indian Economy.

Meaning of Globalization:

Reduce trade barriers Free flow of Capital Free flow of technology Free movement of Labour Developed countries limit the definition of Globalization only to the first three. Developing countries want the inclusion of fourth one also.

Why Globalization?

Direct foreign investment needed for developing countries Use technology developed by other countries Access to Exports, and get quality of consumer goods Enlarge the share of foreign trade as a percentage of world trade

• Impact of Globalization – Economic reforms on Indian Economy:Recall: The Impact on GDP Employment Poverty and HDI Regional development disparities Foreign trade FDI and FPI Inflation Foreign exchange reserves Recall And: Weakening of role of State in favour of Markets “Markets have a place, but the task is to place the Markets in their place. Markets should not be allowed to destroy the social fabric. Markets need to be regulated in order to prevent them from causing social disruption” Need Fair Globalization: Globalization: To benefit all countries to raise the welfare of all the people throughout world.

• Economic Reforms: Mixed Results.

LPG regime: Profit motive dominant, equity goal less emphasised.

To illustrate: Millions of Indians are connected to the internet, but millions more are not yet connected to fresh water: India accounts for 30% of the World’s software engineers but also 25% of the World’s malnourished.

India has one of the World’s largest reservoirs of technical personnel but also the World’s largest pool of illiterates and poor people.

Paradox: Proud of 311 Indian billionaires? But about 300 million people below poverty line

A Country of super rich and super poor.

Hence the Challenge:

o Tap the benefits of LPG regime, but address the problems of equity such as unemployment, poverty and inequalities.o Any development paradigm which ignores the many poor for the few rich is not sustainable.o Remember: Micro level success stories would obscure the macro picture – the picture of dark spots of Indian development.

• Agenda for Fair and Inclusive Growth:

A higher rate of growth

But don’t want job – less growth

Enlarge employment generation across sectors

Raise the productivity of informal sector (UOS): Agriculture etc

Promote skill development

Balance regional development

Huge domestic market: Shift income in favour of the poor to realise the potential.

Reduce the number of people below poverty line

Approach in Eleventh plan:

Towards faster and more inclusive growth

Shift in emphasis from mere increase in GDP growth rates to improvement in standards of living of the poor.

Realise the lag in achievement of MDG

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