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MODULE 5: INDIAN ECONOMY
5.1 MAIN FEATURES OF INDIAN ECONOMY ANDMAJOR 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.
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5.2 CHANGING SCENARIO OFINDIAN 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.
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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
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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
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5.4 Economic Reforms and StructuralAdjustments 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
1950s and 1960s: Planning and public sector fundamentalism
1970s: Decade of the development of the poor
1980s onwards: Revival of market economy paradigm Back to Adam Smith?
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5.4.2 Four Decades of Economic Policy Regime InIndia: 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 scientificand technological manpower
But three dark spots of development.
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5.4.3 Economic Reforms During 1980s: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.
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5.4.4. Economic Reforms Since 1991: The Second Wave:
U turn from planning Public Sector Fundamentalism to Market-PrivateSector 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 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.
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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.
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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-offsections of our society
Reduction in regional disparities between the rich and the poorstates of India.
Control of inflation
Foreign trade
Control of Budget Deficit
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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:1980s and early 1990s: 0.52% Late 1990s: 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 childs shoes, but costs the father his job
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Economic Reforms and Reduction of Poverty: Slowing Down
Poverty reduction over 1983 to 1990/91: 3.1% per annum
Poverty reduction in 1990s: 1% per annum
In rural sector the rate of reduction in poverty: Almostzero 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 distributionaccelerated during LPG regime.
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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
I ndex of growth
1981 / 82 / 1990 91 7.8 %
1993 93 / 2003 - 04 6.6 %
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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 GrowthRate (%)
Merchandise 0.51 0.73 9.1
Export of Services 0.61 2.18 17.5
Merchandise and ServiceExports
0.53 1.01 11.6
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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 01
to2004 - 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 10major sectors 1991 2004.
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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 91About 200 billion now Rate of Inflation:
About 13 % in 1990 91Over 5 % now
Economic Reforms and Increased Development I erased disparities:
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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
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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 MarketsMarkets 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 needto 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 peoplethroughout world.
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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 tofresh water: India accounts for 30% of the Worlds software engineers but also 25% of theWorlds malnourished.
India has one of the Worlds largest reservoirs of technical personnel but also the Worldslargest 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 asunemployment, poverty and inequalities.o Any development paradigm which ignores the many poor for the few rich is notsustainable.o Remember: Micro level success stories would obscure the macro picture the picture ofdark spots of Indian development.
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Agenda for Fair and Inclusive Growth:
A higher rate of growth
But dont 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 torealise the potential.
Reduce the number of people below poverty line
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Approach in Eleventh plan:
Towards faster and more inclusive growth
Shift in emphasis from mere increase in GDP growthrates to improvement in standards of living of the poor.
Realise the lag in achievement of MDG
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THANK YOU
