Indian Economy and Trade Policies

Background of Indian Economy

Dr. R. Jayaraj, COMES, UPES

Course Outline
MBCE 704: INDIAN ECONOMY & TRADE POLICIES
o

Background of Indian Economy

o
o o o o o o o o

Reforms in Indian Economy Stage I and II

Government EXIM Policies Procedures for Imports

Foreign Exchange Regulations

Documentation - Custom and Shipping Clearances Schemes and Incentives Imports and Exports

Govt. Policies & Procedures for Duty Free Imports

Export Marketing Maritime Insurance

India: An Introduction

Population: 1.13 billion (2007) Federal State with 28 States and 7 Union Territories GDP USD1.2 trillion (2007) External Trade USD 528 billion (2007) Forex Reserves USD 247 billion (end Nov 2008) Market capitalisation (as end Nov 2008): USD 560 billion (50% of GDP).

Indias Geography
Country India USA
India

Population 1.13 b 0.30 b

Land mass 3.2 m sq km 9.6 m sq km

has one-third the land mass of the United States; and nearly four times its population.

India

therefore must develop strategies for sustainable growth and livelihood which suits its requirements, while continuing to integrate with the world economy and moving towards a knowledge-based society efficiency in the use of scarce resources, growth and social cohesion promoting institutions, socio-political norms are therefore imperatives.
4

Economic

Historical Structure of Indian Economy

Colonialism:

The first European power to arrive in India was the army of Alexander the Great in 327326 BC. The Dutch, English, French and Danes established trading posts in India in the early 17th century. Vasco da Gama became the first European to re-establish direct trade links with India since Roman times, by being the first to arrive by circumnavigating Africa. Having arrived in Calicut, which by then was one of the major trading ports of the eastern world.

Establishment

of political and administrative control by foreign states in 1757 ( France) and in 1858 (Britain). interests reinforced by political control and regulations imposed by colonial power, including powers to raise revenue through taxation

Economic Laws

Historical Structure of Indian Economy

British

Rule & Exploitation of India Primary objective is to earn profit through overseas trade. Company was given authorization to export gold & silver bullion and coins of these metals worth of 30000 per annum. After battle of Plassey, they got political power which ensiled pressure to tilt the balance of exchange in its favour and secure maximum goods for minimum payment. Margin between trade and plunder- Palme Dutt.

Colonial Exploitation & Merchant Capital

Historical Structure of Indian Economy

Land revenue was an instrument of plunder. Cornwallis introduced Permanent Settlement in 1773, land revenue was fixed at 34,00,000. They had surplus of 40,37,000 from Bengal alone. Officers of East India were unscrupulous and corrupt. They adopted all possible means to make large fortunes. For instance, Clive himself, had nothing when he came to India, but accumulated large wealth. He went home with 2 Lakhs of pounds, acquired an Indian estate which brought him 27,000 pounds per annum.

Historical Structure of Indian Economy

Industrial Capital & Colonial Exploitation
1.

Export of Machine-made goods to India

Destroy textile industry

2.

Development of Jute Industry and plantations

East India Company established jute industry in Bengal-Monopoly-Huge profits-interests in tea, coffee & indigo plantations.

3.

Revenue & Expenditure policies by British imperialists (adherents)

Large army-1/3rd of NI in army

Historical Structure of Indian Economy

Finance Capital & Colonial Exploitation: Peoples investments
as British capital-public debt system to raise funds
1.

State Sector

2.

All the expenditures in India treated as loans granted to India

Railways British capital was imported for construction of Indian Railways.-Burden of interest to be paid by Indian Tax payers.-Indian railways helped to create huge demand for Iron, coal, equipments- This is used for the development of British industries. Investment in plantations Tea, coffee& rubber plantations- total investments around 24.2 million in 1909. Other sectors Mining, oil, banking, finance and industries such as rubber, match box, paper, engineering, sugar, cotton, etc..

3.

4.

Indias underdevelopment during British period

National

Income estimates

No data-roughly 340 Rs crores in 1867-68

Nature

and extent of poverty

No statistical information-Dadabhai Naoroji after British rule India suffered seriously and sinking in poverty.-Indian Natives were worse than American slaves. British people lived luxurious life.
Trends

in real wage

No data till 1938- but decline in real wages of unskilled laborers.

 Occupational

Indias underdevelopment during British period

Distribution of Population

Data not clearly available for last 70 yrs of British.-roughly 61% in 1881-73 % in 1921
Traditional

Agriculture

1757-1947 over 190 yrs there was hardly any change in farm technology-commercialization of agriculture hardly helped-British was not ignorance of importance of irrigation but they didnt.
Weak

Industrial Structure

Crafts were fairly developed pre-British period. After decline of handicrafts people shifted to agriculturemodern industries not began in mid-19th century. In the first half of 20th century some industries were established and wave of industrialization never came in India.

State Policies & Economic Underdevelopment

Incident of land taxes, land tenure & stagnation in agriculture

1.

Zamindari system by Cornwallis in 1793The zamindar was considered a lord, and would collect all taxes on his lands and then hand over the collected taxes to the British authorities (keeping a portion for himself). No ownership of lands-no harm to state & farmers-zamindars enjoyed

1.

Ryotwari system-temporary -land settlement (Madras, Bombay, and Assam) These revenues included undifferentiated land taxes and rents, collected simultaneously. Where the land revenue was imposed directly on the ryots -- the individual cultivators who actually worked the land

3. Mahalwari system-small part of the country

This was the system in North India. There was zamindari system in Northern India. Their land and crops were inspected, their rights and customs were observed and then Taxes were charged. "Mahal" meant a village. So, this system became to be known as Mahalwari System.

State Policies & Economic Underdevelopment

Industrial 1. 2.

& Commercial policies

Transformation of British India-to create market in India for the products of British Industries After Industrial Revolution , Britain levied protective tariffs on imports of Indian manufactures goods -70 to 80% failed to imports of Indian textiles. Shift in policy after WW I-discriminating protectionsome products allowed.

3.

Drain
1.

of Wealth
Wealth from India to England was equal to the excess of exports over imports.- some charges and interest paid on British investments in India-from 1829-1865 it was 2 crores

 Low

per capita Income

Historical Nature of Indian Economy

distribution of wealth & high incidents of poverty of Agriculture

Inequitable

Predominance

Rapid
Low

population growth
Longevity: life expectancy at birth Knowledge: literacy, primary, secondary & territory ratios Standard of Living: real GDP ( in PPP) of capital backwardness

level of human development

1. 2. 3.

Unemployment Scarcity

Technological

Lack

of entrepreneurs

Indias Share in World GDP

India

constitutes nearly 17 percent of the worlds population, but even in PPP terms its GDP share is only 5 percent.
all good things (eg, agricultural production, GDP, patents, tourists, FDI) Indias share is at least one-sixth of the worlds total.

In

15

Indias Share in World GDP

Conversely,

in bad things, India has a much smaller share, India, can not feel a sense of accomplishment. There is therefore no room for complacency.

India

must continue to be outward oriented, and cultivate a mindset that absorbs ideas and good practices from all parts of the globe an apply them to meet Indias challenges.
Huang (2008) has argues that if India can grow, then no other poor country must face a Faustian choice between growth and democracy
16

Yashend

25%

23%

24% 16%

3% 13% 4% 9%
17

Evolution of Global and Per Capita GDP in the Last 2,000 Years

Source: Commission on Growth and Development (2008)

18

Key Demographic Indicators in Asia

Country Total Population (millions)
2007 2050

Average annual rate of change of population

20052010
1.17 0.58

Total Median Age Life Expectancy Fertility Rate at Birth (TFR) Medium Variant
20052010
2.6 1.7

20452050
0.36 -0.32

20452050
2.0 1.8

2005

2050

2005-2010

2045-2050

World

6671.2 1328.6

9191.3 1408.8

28.0 32.5

38.1 45.0

67.2 73.0

75.4 79.3

China
India

1103.4
231.6 48.2 26.6 87.9 4.4 19.7 63.9 87.4

1592.7
296.9 42.3 39.6 140.5 5.0 18.7 67.4 120.0

1.55
1.16 0.33 1.69 1.90 1.19 0.47 0.66 1.32

0.30
0.10 -0.89 0.41 0.50 -0.38 -0.55 -0.27 0.21

3.0
2.2 1.2 2.6 3.2 1.2 1.9 1.8 2.1

1.8
1.8 1.5 1.8 1.8 1.6 1.8 1.8 1.8

24.3
26.5 35.0 24.7 21.8 37.5 29.5 32.6 24.9

38.7
41.1 54.9 39.3 36.3 53.7 43.4 44.3 41.6

63.1
70.7 78.6 74.2 71.7 80.0 72.4 70.6 74.2

75.9
78.6 83.5 80.1 78.7 84.6 77.6 78.1 80.3

Indonesia Korea Malaysia Philippines

Singapore
Sri Lanka Thailand Vietnam

Sources: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2006 Revision, http://esa.un.org/unpp, 23 November 2007; 3:48:26 PM; UN Statistics Division, http://unstats.un.org/unsd/demographic, 28 November 2007; 6:29 PM.

19

Key Demographic Indicators in Asia

Country Life Expectancy at age 60, 2000-2005 Percentage of total population aged 60 and above Medium Variant
2005
N.A. 17 10.3 11.0

Population aged 60 and above (millions) Medium Variant

Men World
N.A. 20

Women

2050
21.8 31.1

2005
672.8 144.0

2050
2005.7 437.9

China
India

16
18

18
16

8.0
8.3

21.0
24.8

89.9
18.9

329.6
73.6

Indonesia

Korea
Malaysia Philippines Singapore Sri Lanka Thailand Vietnam

23
19 19 23 17 20 20

18
17 17 20 21 17 18

13.7
6.7 6.0 12.3 9.7 11.3 7.6

42.2
22.2 18.2 39.8 29.0 29.8 26.1

6.6
1.7 5.1 0.5 1.9 7.1 6.5

17.8
8.8 25.5 2.0 5.4 20.1 31.3

20

Demographic Trends

Asia is set to experience rapid ageing in the 21st century. China, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand will have nearly as many elderly by 2050 as in the world in 2005.
Asia in 2050 will account for nearly three-fifths of the worlds population.

21

Demographic Trends
The

rapid ageing of Asia is a result of reduction in fertility rates and increased life expectancy at birth and at age 65. By 2045-50, the above countries will have Total Fertility Rate (TFR) below the replacement rate as compared to only four in 2005-10. fertility rate is the total fertility rate at which newborn girls would have an average of exactly one daughter over their lifetimes. That is, women have just enough female babies to replace themselves (or, equivalently, adults have just enough total babies to replace themselves.

Replacement

As

is well known, increased longevity raises social security costs disproportionately. Uncertainty about longevity trends (example, due to uncertain impact of medical technology) is increasing the complexity of designing pension programs.
22

Population Aged 15-59 for Asia-Pacific Economies 1950-2050

Source: United Nations, 2002, World Population Ageing 1950-2050 Sales No E02XIII.3, Department of Economic and Social Affairs, Population Division, New York: United Nations Publications.
23

New Jobs in the World Economy 2005-2020

New jobs in the developing world Developing Asia In millions % of world increase 67

315.5

China
India Latin America United States EU 25 Total

65
142.4 45 12.5 8.4 471.3

13.8
30.2 9.5 2.6 1.8 100

Source: Economist Intelligence Unit

24

The Four Phases

Panagariya (2008) identifies four distinct phases in Indias growth and economic reforms since independence.
1. 2.

Phase I (1951-65): Takeoff under a liberal regime Phase II (1965-81): Socialism Strikes with a Vengeance Phase III (1981-88): Liberalization by Stealth Phase IV (1988-06): Triumph of Liberalization

3. 4.

25

The Four Phases

Phase Time Period Growth Rate

Phase I
Phase II Phase III Phase IV

1951-65
1965-81 1981-88 1988-06

4.1 %
3.2 % 4.8% 6.3%

Indias real GDP grew at 6.9% pa during 2000-2007 (RBI Handbook 2008)

26

Composition of GDP

1950-51
Agriculture and Allied Industry Manufacturing Service

2004-05
Agriculture and Allied Industry Manufacturing Service

Declining share of agriculture; increasing share of industry and services

27

Food grain production

The governments wheat stocks on August 1 were up 102%, rice was down 6% Rice procurement is still on and the government will be able to buy about 1.2 mt in the last two quarters of 2008 The governments rice stocks have fallen despite higher procurement, as several states have kept stocks for their own use.

28

Merchandise Exports and Imports as Proportion of GDP

Year 1965-66 1975-76 1985-86 2005-06

Exports/GDP 2.9 4.8 3.9 20.5

Imports/GDP 5.1 6.3 7.1 22.6

29

Merchandise Exports and Imports as Proportions of GDP

Merchandise Exports and Imports as Proportions of GDP
25 20

% of GDP

15 10 5 0 1965-66 1975-76 1985-86 2005-06

Exports/GDP Imports/GDP

30

External Sector Data

In

2007, Indias total external trade in goods and services was USD 528 billion (47.9% of GDP)

This

is one of the important indicators of Indias rapidly integration with the world economy.
plans to achieve a target of USD 1000 billion before 2015 in its external trade. This will be a huge challenge in view of the current global crisis. others are inward Foreign Direct Investment ( $32.3 billion in 2007-08), and remittances (~$ 30 billion in 2007) outward investment is also growing.

India

The

Indias

31

Official Poverty Estimates

32

Poverty Decline under Liberalization Reforms

33

 Growth

in PerCapita Net State Domestic Product variation among states

Wide

34

Major Challenges
Ensuring

that good economics is good politics (this will require a shift from ruling to governing mindset, and administrative and civil service reforms). challenges. and Food Security. Urbanization. physical and social infrastructure

Environmental Energy

Managing

Accelerating

investments.

Developing

human capital for sustainable livelihoods through application of knowledge economy .

with demographic challenges.
35

Coping