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. I nd. 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. I nd. 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

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?
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 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.
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 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:
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
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: Almost
zero and in urban sector higher rate of reduction in poverty
RuralUrban 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
I ndex 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 91
to
1994 - 95
2, 441
(24.2 %)
7, 645
(75.8 %)
10, 086
(100 %)
2001 01
to
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 Worlds software engineers but also 25% of the
Worlds malnourished.

India has one of the Worlds largest reservoirs of technical personnel but also the Worlds
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 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 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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