India in Transition

Population  Population(m) 1,095  Population growth (’01-05) 1.5%  Population growth (’01-05) 1.5%  Second most populous country  81% Hindu, 13% Muslim, 2% Christian, 2% Sikh  Official Languages: English, Hindi, 14 others

Geography  South Asia  3,287,590 sq km  28 States  Borders China, Pakistan

History  550 bc independent kingdoms  Invasions from Central Asia  3 rd century Gupta dynasty “golden age”  Islamic Invasions  Mughal Dynasty  European Traders/Colonizers  British Rule (1857)  Independence 8/15/47

Politics  World’s Largest Democracy  Indian National Congress (INC)  Emergency Rule (Indira Gandhi ’75-77)  Janata Party  Bharatiya Janata Party (1996)  INC (2004)

Economy  10 th Largest GNP  4 th Largest GNP (PPP)  GDP Growth 8.1% 2005(4)  Per-Capita Income (PPP) $3100  Agriculture accounts for 21% of GDP  Major Industries include; mining, petroleum, diamond polishing, films, textiles, IT and business process outsourcing (BPO) services, pharmaceuticals and chemicals, and handicrafts.

Indicative Planning  Instituted as a response to perceived failures of the market system in attaining socially desirable objectives  No formal obligation to fulfill objectives of the plan  Authorities rely on ‘indirect government levers’ (taxes, subsidies, etc.)

The Lewis two-sector Model  Agricultural Labor is redundant  ‘Commercial’ sector is efficient  Purchasing capital goods results in increased demand for industrial labor  Agricultural labor becomes more productive and produces a surplus

The Nehru-Mahalanobis Approach

N-M Approach pt. 2 origins of Indian planning  Didn’t Curb power of wealthy interests  Mahalanobis’ 2-sector model akin to Lewis’ model  Sought to industrialize the economy by increasing production of capital goods  Development economics was dominated by the idea of overcoming the ‘savings constraint’  Similar in approach to USSR  Fabian Influence  Planning Commission Set up in 1950

Origins of Implementation  Defense of India Act (1939)  India Act (1946)  Many other acts PRIOR to independence  War-time controls set up by the British  Suited to regulation and control  Industrial Policy Resolution (1948)  Industries Act (1951)

The Plans  1 st plan (’51-56) – Not so ambitious  2 nd plan (’56-61) – Inspired by Mahalanobis, move towards industrial growth  3 rd plan followed by one year plans – no significant change  4 th plan (’69-74) -- based on input-output model  5 th plan – 7 th plan – included concerns for the redress of poverty

GDP growth ( )

The Crisis  In gross fiscal deficit reached 8.4% of GDP  Inflation peaked at almost 17%  External debt reached 23% of GDP  Low foreign exchange reserves  Resulted in $2.3bn loan from IMF

The Reforms  Consisted of decontrol of private investment, opening the economy to foreign trade and foreign investment, financial sector reforms, etc.

Controls on Private Investment  Removal of industrial licensing  Allowance of private companies into industries once reserved for the state  Little done about small-scale sector rules  Little done about state-level controls

Openness to Trade  Lowering of Import Tariffs  Domestic v. external liberalization – gradual approach  Lowering of quantitative restrictions  Devaluation of Rupee 20:1-31:1 from ’91- ’93

Trade (% of GDP) ’80-’04

Foreign direct investment

Price Controls  Hydrocarbon prices  Electricity prices (not changed) Labor Market Controls Still in effect Still in effect

Public Sector Reforms  Outright privatization was eschewed in favor of more ‘cautious’ reform  Partial Privatization  Board for Industrial and Financial Reconstruction  Allowance of Private Investment in Infrastructure

Financial System  Banking Reform  Capital Market Reform

Inflation (annual %)

East Asian ‘Miracle’ economies  Stable business environment  Fiscal policies aimed at equity  Pro-export exchange rates  Progressive liberalization of the financial sector  Minimal price distortions  Education

Indian Reforms in comparison  Macroeconomic stabilization  More rigid Labor Markets  Education is not compulsory

Conclusion  Reforms were largely successful  Fail to address underlying problems  Gains are not widespread  Much remains to be done

Questions  What are the effects of government policies towards children in terms of economic growth  What role does primary education play in attracting investment to labor-intensive, unskilled industries