INDIAN INSTITUTE OF TECHNOLOGY ROORKEE

Issues in Indian Economy

Growth Trends in National Income and

Per capita Income
What is the India story?

 Where are we coming from?

Population: 350 million, over 70% living off agriculture, in
villages.

 Where are we today?

7th largest economy at current exchange rate (at $2
trillion), and 3rd largest at PPP (as per IMF).
–As against US $18tn, China $11tn

 Where are we going in the future?

The Indian economy has the potential to become the
world's 3rd-largest economy by the next decade, and one of
the two largest economies by mid-century
3
What is the India story?

4
28 years of High Growth
(%) Average annual GDP growth
10
8.9
8
6.0
6
3.5
4
2 1.0

0
1900-1950 1950-1980 1980-2002 2002-2007

Even though the world has

just discovered it, the India
growth story is not new
It has been going on for 25 years
5
Economic Growth Perspective

• India is a story of growth acceleration: No growth during colonial

rule; low growth (3.5% pa) up to 1980; growth acceleration
thereafter (6% pa); and briefly 9% during the boom last decade.

• Phase I: 1950-1 to 1979-80

– Two sub-phases (50to 65; 66 to 79)
• Phase II: 1980-81 to 1993-4
– Start: Policy regime change
– End (a) Crises year(1990-91). (b) Reform initiation 1991-2 (c)
Adjustment/recovery (1992-3 to 1993-4)
• Phase III: 1994-5 to ?
– 1994-95: Statistical significant growth break
– Rising trend growth

6
 -5%
-3%
-1%
1%
3%
5%
7%
9%
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
GdpmpGr

1989
1991
1993
1995
1997
1999
GdpGrTrend

2001
2003
2005
Periodisation of Indian Growth Experience

2007
2009
GdpTndHpf

2011
7
Initial Conditions, c. 1950

• Population: 350 million, over 70% living off agriculture,

in villages.

• Modern sector: port-based export oriented cotton and

jute mills, plantation agriculture.

• Pockets of prosperity, amid stagnation during colonial

period.

• Modern public administration, spread of education in

cities.

8
Period of Planning, 1950-80

1950-65: Rapid ISI in capital and intermediate goods, with public

sector being the biggest “entrepreneur” – Mahalanobis plan.
• Fiscal and physical controls to promote “cottage industries” in
consumer goods industries.
• Outcome: industry grew at 7% annually, ended in a BOP crisis with
crop failure in mid-1960s.
Crises and Shocks, 1966-80
• Focus shifted to food self-sufficiency; Import substitution in
fertilisers, and fuels.
• From rapid ISI to wider distribution of gains – regional dev., Small
enterprises, new entrepreneurs etc.
• Increased controls on investment and output.
• Outcome: food self-sufficiency; Industrial deceleration.
9
Creeping Liberalisation, 1980-

• Emphasis on efficient ISI, step up in public investment in

infrastructure, gradual opening to foreign capital and
technology.
• Step up in agriculture and rural dev. – To spread the
benefits of new agriculture technology – HYV seeds,
irrigation and fertilisers.
• Outcome: growth accelerated to 5.5%. Industry
turnaround, improved agricultural growth, poverty
started to decline – for the first time.

10
Speeding up of Reforms, 1991-
• Responding to external payment crisis, stabilisation and orthodox
reforms were initiated in 1991 – popularly, LPG.
• The pace of it was much faster than in the past, but modest by
comparative standard.
• Fiscal conservatism – sought to cut subsidies for the poor and for
farmers; steep cut in public investment.
• Greater openness to foreign capital and technology; Deregulation
in industry, trade and finance.
• Outcome: acceleration of growth in 2000s. Faster growth of
services and exports, but agriculture suffered; Industry
modernized, but growth did not improve; Poverty reduction
moderated. Increased agrarian distress – farmers’ suicides,
leftwing extremists’ violence.
• Widening inequalities.
11
Boom and Bust, 2003-2016

GDP Growth, 2003-2016

• 1991-2003 – 5.5% PY,
• 2003-08 – 8.9% PY,
• Deceleration after 2011-12.

12
India’s Growth Turnaround
• The Best Phase in Growth : 2003-2008
– Cyclical movement around Rising trend
• GDP: Avg. growth of 8.9%
– Per Capita GDP growth has doubled
• To 7.3% (from 3.7% in 1980-1991)
– Average income will double in ten years
– Average Private Consumption growth rate: Almost doubled
• Growth of Demand
– Investment growth rate doubled
– Private consumption & imports accelerated
– Govt. Consumption-slowed
• Role of private Consumption important but declined below that of Investment
for first time
• External : Short period of positive contribution (low oil prices) over
• Govt. Consumption: Lower contribution
13
India’s Growth Turnaround

• Recent Deceleration since 2011

– Global Financial Crisis: 2008-09
– Followed by Crisis in the Euro area
– Structural Constraints
• Low Investment and High Inflationary pressure
• Low Manufacturing base
• Large informal sector and inadequate labour absorption in
formal sector
• Low Agricultural growth

14
Growth in GDP and Other Key Indicators

15
Growth in GDP and Other Key Indicators

16
Priorities for Reviving Growth

• The focus of policy should be on wide-ranging structural reforms

to ease supply-side constraints and also sector-specific incentives
to boost demand.
– Revival of investment
– Medium term structural reforms to boost productivity and
growth
– Rejuvenating growth in manufacturing
– Strengthening macroeconomic stability
• Fiscal discipline, price stability, manageable current account
balance
– To harness demographic dividend
– Physical and social infrastructure
17
Growth Rates of GDP in South Asia

18
Growth and Structural Change
Shifting Theoretical Emphases

 Three-sector hypothesis (Colin Clark and Jean Fourastié)

Tertiary
Primary Secondary

The process is essentially positive for the increase in quality of life, social security,
blossoming of education and culture, higher level of qualifications, humanisation
of work, and avoidance of unemployment.

Three-sector
Hypothesis

Demand Side Theories (Fisher, Supply Side Theories (Baumol,

1935; Clark, 1940) 1967; Oulton, 2001)
Output elasticity for primary There is a real shift in the
sector is less than output employment structure and this
elasticity for secondary sector was because of the productivity
is less than output elasticity for differentials across the sectors.
tertiary sector.
19
20
Growth and Structural Change

21
Growth and Structural Change

22
Growth and Structural Change

23
Sectoral Composition

24
Sectoral Composition

25
Inter-Regional Disparities in Growth

26
Inter-Regional Disparities in Growth

27
Long Term: Sustaining Growth

• Reforms essential for sustaining 9% for two decades.

• Policy Reform
– Structural change: Labor market flexibility
– Competition: Decontrol, free entry
• Industry(sugar, fertilizer), mining(coal), infrastructure (electricity - open
access), financial services.
– Education and Skills: Regulated (transparency, rating) entry (freer),
controls (minimal)
– Urban Land policy (land use, supply, development, utilities)

28
Sustaining Growth: Institutional Reform

• Public and Quasi-Public goods & services

– National Networks: Drinking Water, Waste (solid and liquid)
– Universal Primary education-outcome (not enrolment)
– Civic/Urban services
• Social service delivery: Empowerment
– Debit/credit (smart card): PC WP 2002
– Multi-application smart card (UID): 2005, 2006, 2007

29
30