NATIONAL INCOME OF INDIA

How well the economy is performing is a matter of concern to all the citizens of India. But how do they judge its performance? This document analyses the economic data of India over the past years and thus determines the performance of the economy during certain decades/eras.

From 1980-81 to 2008-09 there has been a GDP growth of 5.7% per annum compared to 6.3 % growth from 1990-91 to 2008-09. Particular emphasis is given to growth rate during last 20 years, a period during which the GDP growth rate has averaged 6.2 percent per annum, a full 2.6 percentage points above the average growth during the previous 30 years (1950 to 1980). Growth during the years from 2003-04 to 2007-08 has been marvelous. Overall growth rate:

The central statistical organization (CSO) has recently shifted the base year from 1999-00 to 2004-05. But we will consider base year as 1999-00 to study the national income trend. We are not considering 2004-05 as base year because the new series is currently available only for five years.With the base year as 1999-2000, NNP of India was Rs. 204924 crores in 1950-51. Since then it has grown at a modest rate of 4.6% per annum in the period of economic planning and stood at Rs. 2941971 crores in 2008-09. During the period from 2002-03 to 2006-07 the NNP registered a growth rate of 7.8 per annum.

OBJECTIVE

During the Seventh Plan period, gross domestic product was projected to increase at the rate of 5 percent per annum. However, the economy performed extremely well and the national income rose at the rate of 5.5 percent. The point which most of the analysts might have missed is that there was a global slowdown in the 1970s, a period when Indian growth collapsed to an average of only 2.9 percent per annum. Hence, the acceleration or break in the trend during the 1980s seemed to be large, when in reality there was only a gradual, and minor acceleration to the existing growth trend.

India was predominantly a rural economy at the time of independence in 1947, with agricultureaccounting for approximately 75 percent of the work force and 55 percent of GDP.

The trend has shifted from 1947 to 1980 from the lesser productive agriculture to the service/industrial sector (higher productivity) which resulted in the extra growth of the economy.Thus there was an acceleration of national income growth in the decade starting from 1980 and the three factors which allowed the economy to register higher growth in the 1980s as compared to 1960s and 1970s are:

The increased government expenditure provided fiscal stimulus to the economy. Liberalization of imports, especially of capital goods and components of manufacturing

induced production of luxury articles Associated with the above two factors, there was an increased reliance on external

commercial borrowing by the State The most important factor behind the observed acceleration of GDP growth in the 1980s

was the reallocation of labor from agriculture to industrial sector.

1.) What prevented India’s growth from accelerating in the nineties as would have been forecast by the magnitude of the 1991 economic reforms??

During the period from 1985-1990, the rate of increase in national income of the 1980s could not be sustained. During these years, the country passed through a phase of major economic crisis.Responding to economic reforms, GDP growth did accelerate and averaged above 7.4 percent in each of the three years from 1994 to 1996. But this acceleration had some unintended consequences. The RBI panicked because this acceleration coincided with global and domestic inflation.RBI tightened monetary policy to an unprecedented degree. Further, the RBI did not cut interest rates in response to the decline in worldwide and domestic inflation in the mid to late 1990s. By keeping deposit rates at high double digit levels, and inflation collapsing, the RBI ensured that real rates reached double digit levels. This caused the growth to collapse.

This is illustrated in the tables below:

We can see that the inflation during the periods of 1991, 1992, 1993 was around 11% and was highest in 1992. In 1992 inflation was 13.78% and it is the highest in past 30 years.

Mar-85

Mar-86

Mar-87

Mar-88

Mar-89

Mar-90

Mar-91

Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

6.42 4.46 5.79 8.17 7.46 7.43 10.2 13.8 10.0 2.59 12.6 7.99 4.62 4.38 5.95 3.31

These high borrowing rates caused government interest payments to rise, which caused the fiscal deficit to rise. In the mid to late nineties, interest payments accounted for more than 50 percent of the fiscal deficit. In the 1980s, interest payments were only 2 percent of GDP versus near 5 percent of GDP in the late 1990s. The share of interest payments in the consolidated fiscal deficit of India has been higher than 60 percent in every year since the mid-1990s.

The overnight lending rate of the central bank (the repo rate) was introduced in 2000.

Real interest rates increased by 400 basis points from 3.4 percent in 1993 to 7.2 percent in 1996, and peaked in 2000 at 7.3 percent. The growth rate declined from 7.8 percent in 1994 to 4.1 percent in 1997, and bottomed at 4 percent in 2000. The acceleration in GDP growth (8.4 percent vs. 3.8 percent the previous year) started in 2003/4, ostensibly because of good weather; agricultural growth topped 10 percent that year. In the years 1999 to 2003, the government had proceeded to cut administered interest rates on deposits from 12.5 percent to 8 percent. With inflation staying broadly constant at 4 percent, this meant a 400 to 500 basis point decline in real interest rates; and this has been the major, and only identifiable, contributor to the growth accelerator of recent years.

During the period from1985-1990, the rate of increase in national income of the 1980s could not be sustained. During these years, the country passed through a phase of major economic crisis.

Also, the 1991 reforms did lead to a sharp acceleration to 7.5 percent GDP growth but this growth rate was not sustained due to a mis-management of monetary policy. Real long-term interest rates rose to double digit levels in the mid-1990s and growth collapsed.

1.) What caused the growth rate to sharply accelerate from 2003-04??

The new Congress government came to power in May 2004, after agriculture induced robust growth of 8.4 percent in 2003-04. During the preceding five years (excluding 2003-04), GDP growth averaged only 5.3 percent per annum, about 0.3 percent per year less than the long term 1980s and 1990s average of 5.6 percent. With no growth friendly policy inputs during2004-2007, the economy continued to average 9 percent growth, a record

In 1999, inflation had reached a low of 3.5 percent and the government took the first major step towards interest rate reforms. Within a space of four years, government bond yields were at 5 percent, down from double digit plus levels of the late 1990s. In “normal” economies, such a large decline in long-term real interest rates is of great significance.

This interest rate change is most likely a major cause for the marked increase in investment that is observed for the post 2003 period. Savings rates had hovered around 25 percent the previous decade (1993 to 2002) and investment rates had averaged the same. Since 2002, in just five years, savings and investment rates had increased by 11 and 12 percentage points respectively.

And higher GDP growth leads to higher savings rates, and expectations of higher growth lead to an increase in investment rates. This is what explains the jump in investment rates, savings rates, and GDP growth rates in the last five years.

GDP growth shows a clear acceleration from an average of 2.8 percent in the 1970s to a level double that in the 1980s – 5.7 percent per annum

When savings and investment have increased we can see that GDP growth is significant. In the above table savings was mere 8.3% during 1950s. But gradually savings have increased and this led to a significant change in GDP growth rate.

Growth in investment has an important role to play in GDP growth rate. Investments have grown from 9.1% in 1950-60 to 36.7% currently.

Conclusion:

Firstly, in India, agriculture still remains the predominant economic activity and nay fluctuations in it have serious impact on the whole of the economy. However, the importance of agriculture appears to be slowly declining. In the early years of the 1970s, its share in the net domestic product used to be around 50 percent, it has now come down to less than 20 percent.

Secondly, not only the country has gradually moved towards industrialization, but the industrial sector has also undergone a structural change. However, during the past six decades, the rapid growth of modern industries has clearly undermined the relative importance of the unorganized small sector.

Thirdly, the growing shares of transport, communications, energy and banking and insurance to the net domestic product reflect the expansion of economic infrastructure in the country.

To sum up, since independence the Indian economy has become less geared to the primary sector and its dominant component—agriculture. It is now more attuned to the secondary and tertiary sectors. This may be regarded from the development point of view a progressive change in the structure of the economy during the last six decades.