1. India: Economic Overview
FIN 680V/ FIN 360
Spring 2012
P.V. Viswanath

2. Economic History:
Post-independence India had a mixed economy, i.e. including both private and public sectors. The reasons for a strong public sector were:
Greate inequality in income distribution – doubts as to the viability of free markets
Free trade would probably have led to exploitation by stronger foreign countries
Exports were seen as a drain of resources from the country.

3. Post-independence economy
Foreign Investment was seen as foreign domination.
The quickest path to economic development was seen to be rapid industrialization, which would probably not happen without government intervention
Capital goods and heavy industry were seen as particularly needed.
Planning was needed to ensure industrial growth and the concomitant agricultural and service growth, as well as employment growth

4. Objectives The broad objectives were:
Rapid growth in production with a view to achieving a higher level of national and per-capita income.
Full employment
Reduction of inequalities in income and wealth
Socialistic pattern of society with a democratic framework, based on equality and justice and absence of exploitation.

5. Policy Measures for Industrial Development
Trade and Regulatory Regimes designed to shield industrial producers from competition
High tariffs
Industrial licensing of production and investment
Monopoly and Restrictive Trade Practices (MRTP) Act
Foreign Exchange Regulation Act (FERA)
Export Restrictions

6. Industrial Policy
Directed allocation of subsidized credit through the commercial and developmental banking system
Administered interest rates and financial institutions required to lend for specific purposes at the administered rates.
Fixed, overvalued exchange rates; this ensured cheap imports for the government.

7. Industrial & Agricultural Policy
Price control for many products
Rigid labor laws that made it difficult to lay off workers.
Direct public investment in industrial activities.
Management of the agricultural sector to ensure reasonable supplies of food grains, edible oils, sugar and cotton to the domestic market.

8. Agricultural Policy
Procurement prices were fixed, which , in times of surplus, worked as a minimum support price.
At times of deficit, the government mandatorily procured a part of the grain at the procurement price and distributed it to poorer people through ration shops.
Fertilizer, irrigation, power and credit were subsidised for the agricultural sector.

9. Agricultural and Fiscal Policy
The need to mop up excess production led to trade restrictions.
Quantitative restrictions on exports and imports, through licensing
Canalization – the use of a single parastatal for imports and exports; the use of minimum export prices.
High income tax rates

10. Social Policies Higher education was emphasized (IITs and IIMs)
Growth-oriented strategy as a means of mitigating poverty and unemployment.
However, structural inequalities in land ownership, availability of water, access to credit etc. led to growth without income and employment growth for poorer people.

11. Social Policies
Land reform; however, it required the cooperation of the states, which was not always forthcoming for political reasons.
Alleviation of poverty through special programs and policies, such as asset creation programs, employment generation programs, minimum needs programs.
Intervention programs to solve the problems of malnutrition and hunger.
Asset generation programs are focused not just on providing consumption, but on creating assets, such as roads

12. Did the policies work? Industry
Industry grew 6% p.a. between 1951 and 1989
There was little competition; hence there was little R&D.
The capital-input ratio went up considerably; total factor productivity dropped. Capacity utilization fell.
Deeply entrenched interest groups.
Same issue as in China; question of optimal use of resources.

13. Agricultural Progress
Between 1950 and 1980, food grain production increased by 2.8% p.a., due primarily to productivity gains and multiple cropping.
But, investment growth slowed.
R&D suffered, development of irrigation lagged behind plan targets.
There was a substantial rise in subsidies for food and fertilizer and for credit, water and electricity.
India became more or less self-reliant, but at great cost.

14. Social Progress
From , the proportion of population below poverty dropped from 46.17% to 37.76% in urban areas and from 58.75% to 48.69% in rural areas.
Average life expectancy improved from 32.1 in to 58.7 in The death rate dropped from 27.4 to 12.5 during the same period.
Literacy was 52.2% in compared to 18.33% in
But compared to other developing countries, this was not good.

15. The crisis and the change
A massive rise in the government deficit spilled over to the current account deficit because it was financed by external debt.
External shocks, such as increased oil prices, decreased access to concessionary loans from abroad
Structural rigidities in the Indian economy made Indian products non-competitive, globally.

16. The solution A twofold solution: Effects:
Make the economic structure more competitive
Contain the government deficit
Effects:
Structural Change and
Fiscal stabilization.

17. Initial Reforms
Trade policy reforms have done away with most quantitative restrictions and reduced tariff levels
Industrial policy has removed barriers to entry and limits on growth in the size of firms
Regimes for foreign investment and foreign technology have been liberalized considerably
Domestic tax structure has been rationalized.
The financial sector is being deregulated.

18. Second-generation reforms
Privatization of public sector undertakings
Very slow, but steady. BHEL
Exit policy for labor
Reforms of the agricultural sector
Reforms of the state government

19. GDP from to

20. GDP: Post Liberalization

21. Industrial Production

22. Growth in Industrial Production
Atul Kohli, “Politics of Economic Growth in India, ,” Economic and Political Weekly, April 2006, pp and

23. Changes post-1991 Disparity in growth across states
Move towards service sector
Lack of industrial growth
Income inequalities
High poverty in the rural sector – farmer suicides
Continued casteism, gender inequality, communal unrest

24. Change in the structure of the economy
Year
Agriculture and Allied
Industries
Manufacturing
Services 55 11 10 34 47 15 13 38 17 14 45 32 19 49
2004-5 20 60 16 66
Source: Table 3, Components of Gross Domestic Product, Handbook of Statistics on the Indian Economy