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ELEVENTH

EDITION
201 1-12

Indian
Economy
Performance and Policies
Uma Kapila
if New, thoroughly revised Eleventh Edition, 2011-12
k Based on latest recommended readings (restructured course)
it Designed to serve as a textbook for B.Com (H)

ACADEMIC FOUNDATION
NEW DELHI
www.academicfoundation.com

CONTENTS
Preface

23

SECTION -1

Basic Issues in Economic Development


1. Economic Development,
Under Development
and Human Development
-

27

Introduction

- What does Development Mean


- Economic Growth and Economic Development
- The New View of Economic Development
Development as a Multi-dimensional Process

Three Core Values of Development

- Development, Freedom and Opportunities


- Human Development
Human Development Index
Sustainable Human Development
- What Makes Development Unsustainable?
Policy for Sustainable Development
- State of Human Development in India

2. The Environment and Development


-

42

Introduction

- The Basic Issues


Defining Sustainable Development
...Conic/....

\ 0

Indian Economy: Performance and Policies

...Contd....

The Three Pillars of Sustainable Development


The Rio Earth Summit and Agenda 21
Sustainable Development and Environmental Accounting
Population, Resources and the Environment
Poverty and the Environment
Growth versus the Environment
Rural Development and the Environment
Urban Development and the Environment
Global Warming and Climate Changing
Defining Dangerous

- The Indian Case


'

Consequences of Environmental Plunder

- Public Policy
- Climate Change
Status of Climate Change Negotiations
Actions taken by India on Climate Change

SECTION - II

Indian Economy at Independence


3. India's Economy at Independence
- Introduction
The Relative Importance of Various Industrial Activities
Composition of National Income
The Working Force
- The Agrarian Scene
Stagnating Agriculture
Causes
Regressive Organic Structure
Internal Drain of Capital
Poor Technology
India's Industrial Production and its Structure
India's Industrial Resources
The Decline of Traditional Industry and the
Development of Modern Industry

56

Contents in Detail

\ \

- Some other Economic Indicators of Economic Backwardness


- Some Positive Features

SECTION - III

Policy Regimes
4. Planning in India: Development
Strategy and Role of State

69

- Evolution of Planning
- Structural Constraints and the Development Strategy
- Role of the State as Visualised in the Fifties
- Evolution of Strategy and Priorities
' Changing Perceptions
Role of Planning in a Market Economy
Redefining the Role of State

5. Economic Reform and Liberalisation

84

- Debate on Liberalisation
- Economic Reform
The Background
The Macroeconomic Crisis
Ratiofiale for the Reforms
Macroeconomic Reforms
Structural Reforms
Implementation of the Agenda
o Removal of QRs
o Industrial Policy Reforms
Impact of Reforms
Fiscal Adjustment and Stabilisation
Impact of Economic Reforms on the Vulnerable Sections
- Conclusion
-

The Next Round of Reforms


...Contd..

1 2

Indian Economy: Performance and Policies

...Contd....

SECTION - IV

Growth, Development and Structural Change .


6. India's Growth Experience
-

103

The Performance
Phases of Growth
Periodisation of Indian Growth Experience
~~ '
Assessment of Performance
Causal Factors
What Next'
Growth Drivers
Growth Prospects
International Comparisons
Sustaining High Growth
Outward Orientation: Export Promotion Strategy vs.
Import Substitution Strategy
Performance on Inclusiveness
' Multidimensionality of Inclusion
Growth and Structural Change
Growth and Sectoral Shares, Cross-Country Evidence and
Indian Experience
Share of Services in GDP
What are the Factors behind the Dynamism of the
Services Sector in India
Inter-Regional Disparities in Growth and Development
The Way Ahead
Conclusion

7. Institutional Reforms for


Agricultural Growth
- Land Systems at the Time of Independence
Feudal Agrarian Structure
- Policies for Restructuring Agrarian Relations
Economic Arguments in Favour of Land Reform
- Land Reform Legislation in India
Abolition of Intermediaries

138

Contents in Detail

\ 3

Ceiling on Landholdings
Tenancy Reforms
Consolidation of Holdings
Cooperative Farming

- Impact of Land Reforms on the Agrarian Structure


- Emerging Perspectives and Policy Issues

8. Unemployment and Employment


Perspective
.-.

153

- Concepts and Measurement


Labour Force and Workforce Participation Rates

- Long-term Trends in Employment Situation:


1983 through 2005
- Informalisation of Employment
- What Explains Lack of Growth in
Formal Sector Employment?
- Growth and Employment
- Employment Perspective
- Weaknesses in Past Performance
- Employment and Labour Policy
- Indian Labour Laws and Labour Markets
- Public Employment Programme for the
Unorganised Workers: The Case ofNREGA
'

National Rural Employment Guarantee Act


An Overview of the Scheme
The Performance
Success Stories
Remaining Gaps

- Conclusion

9. Poverty in India

181

- Magnitude and Determinants


'

The Selection of Poverty Lines

Poverty and Inclusive Growth


Methodology for Estimation of Poverty and BPL Households
Expert Groups for Estimating Poverty and BPL Families
Reduction in Poverty
...Contd...

Indian Economy: Performance and Policies

...Contd....

- Comparison of India and China < in Terms of Poverty Reduction


- Poverty Alleviation in Development Debate
Causes of Poverty
Growth Poverty Relationship
Growth and Poverty Reduction
Growth and Inequality
Globalisation and Poverty Reduction
Growth, Employment and Poverty
Growth Pattern and Poverty
i
- Poverty Alleviation Programmes
Programme for Socially Disadvantaged
Land Reforms
Public Distribution System.
Self Employment Programmes
Wage Employment Programmes
- Some Critical Issues in Choice of Programme
Self versus Wage Employment Programmes
Spatial Dimension and Area Focus
Poor in General versus Hardcore Poor
Public Investment in Human Capital and Public Goods
- Concluding Remarks

10. Demographic Constraint: Interaction


between Population Change and
Economic Development

208

- Economic Development and Population Growth


The Theory of Demographic Transition
The Microeconomic Theory of Fertility
How Does Population Growth affect Economic Development
- India's Demographic Transition
Causes of High Birth Rate
Social Factors
Economic Factors
o Poverty
Lack of Social Security
Illiteracy, Ignorance and Belief in Fate
Ineffective Family Planning
Fertility Rate
Causes of Decline in Death Rate
Control of Epidemics
Control of Famines

Curiums in Detail

\ 5

Improved Medical Facilities


Spread of Maternity Homes
Impact of Economic Development
Measures to Reduce Birth Rate
Concerns about Population Growth
Gender Equity and the Demographic Transition
Population Policy since 1947
National Population Policy, 2000
Objectives of National Population Policy
Implications of Mortality Decline for the Future
Human Resource Development
Health Care as a Social Responsibility
The Experience of Kerala and Tamil Nadu
Policy Shift Essential to Check Population Growth
Enabling Factors
The Future

SECTION-V
Sectoral Trends and Issues
11. Agriculture: The Problem of Productivity

241

- Importance of Agriculture in National Economy


Agriculture as a Source of Employment
Linkage between Agriculture and Other Sectors
- Productivity in Indian Agriculture
Low Levels of Productivity
Causes of Low Productivity
- General Causes
Institutional Causes
Technological Factors

12. Agricultural Growth, Performance


and Policies

249

- The Institutional Context

- The New Technology


Characteristics of New Technology
- Better Agricultural Practices
...Contd....

fa

Indian Economy: Performance and Policies

... Contd....

Economic Aspects of New Technology Three Phases of Green Revolution


- The First Phase, 1966-1972
- Debacle and the Second Phase, 1973-1980
- The Third Phase, 1981-1990
Reform Period, 1991 to the Present
Deceleration in Agriculture Growth
<
Agricultural Growth during 2005-06-2010-11
Instability in Ouput

Regional Disparities and Intra-Personal Disparities


New Technology and Environmental Degradation
Major Factors Affecting the Growth Potential
Lack of Long Term Policy Perspective
Investment in Agriculture and Subsidies
Lagging Research and Development Efforts
Technology Generation and Dissemination
Rising Soil Degradation and
Over-exploitation of Ground Water
Degradation of Natural Resources
Rural Distress in Post-reform India
National Policy for Farmers, 2007
High Value Commodities: The Future Sources of
Growth in Agriculture
Reforming the Three Ts: Investments, Incentives, and Institutions
Reforming Incentives
Price and Marketing Policy
Reforming Institutions
Marketing and Warehouse Facilities
Reforming Land and Credit Markets
Challenges and Outlook

13. Food Security, Public Distribution


and Agricultural Price Policy
-

Pre-green Revolution
Green Revolution
'Post-Reform Revolution
Food Management
Food Procurement Policy
Price and Distribution Controls in the Food Grain Market
Public Distribution System (PDS)

278

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Contents in Detail

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Food Subsidy
Buffer Stock
Food Security
Recent Policy Initiatives
Food Security and Future Sources of Growth in Agriculture
Agricultural Price Policy
Removal of Export Restraints

14. Globalisation and Indian Agriculture.:..;

296

- Emerging Trends and Impact of Globalisation


- India and WTO
- Major Issues in the Context of Globalisation

15. Industrial Growth and Policy

302

- The Industrial Scene at Independence


- Industrial. Control Regime 1950s to 1970s
Performance of the Industrial Licensing System
- Industrial Policy Reforms 1980s
- The Policy Regime in the 1990s
- New Economic Policy 1991
' Opening up to Foreign Investment
Public Sector Reforms, Privatisation and Infrastructure
- Industrial Policy: Recent Policy Initiatives
- Industrial Policy Eleventh Plan
- Industrial Growth
Phases of Industrial Growth
Industrial Growth in the 90s
Comparative Growth Rates in the 80s and the 90s
- Relative Contribution of Sectors to Total Production
- The Manufacturing Slowdown (1996-2002)
Factors Causing the Slowdown: Some Hypotheses
- Infrastructure Constraints in the Industrial Sector
- Recovery in Industrial Growth since 2002-03
- Industrial Growth Since 2007-08
Developments that Impacted the Slow down and Recovery
- Raw Material Costs
- The Shrinkage in Demand
- The Recovery
- Why did Manufacturing Sector's Share in Total Employment Stagnate
- Other Aspects of Industrial Change
...Contd....

1$

Indian Economy; Performance and Policies

j
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...Contd....

- fl^Ay *//rf the Reforms Fail to Deliver the Expected Results?


Labour Market Regidity Hypothesis
Infrastructure Bottlenecks
- What Should be Done Now?
- Conclusions

16. Public Sector in the Indian Economy

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331

- The Rationale
' ., -
- Performance of Central Public Sector Undertakings
Output and Capital Formation
Fall in Public Sector Employment Growth
Improvement in Efficiency of Thermal Power Plants
Central PSEs' Profitability
Reasons and Implications
- Public Sector and 1991 Industrial Policy
Policies toward CPSEs and their Implementation
- Privatisation
Privatisation: Indian Experience since 1991

17. Micro and Small Enterprises (MSEs)

346

Role ofSMEs in Global Economy: International Scenario


Defining MSEsMSMED Act, 2006
Role of MSEs in Indian Economy
To Generate Large-Scale Employment
To Sustain Economic Growth and Increase Exports
For Making Growth Inclusive
Globalisation and Small Industry Performance
' Infrastructure
Economic
Technological
Financial
Marketing
Future Prospects of Small Industry
New Initiatives
Summary and Conclusions

18. Services in the Indian Growth Process


Importance of the Services Sector for India
Services GDP
Services Employment in India

362

Contents in Detail

\ 9

Growth and Sectoral Shares, Cross Country


Evidence and Indian Experience
Services GDP: International Comparison
Share of Services in Employment
FDI in Services in India
Services Exports
Important Services for India
Which Services have Grown Rapidly?
Factors Underlying the Services Growth
World Trade in Services Sector
India's Services Trade
India's Services Exports
India's Services Imports
Liberalisation of Services in India
India and Trade Negotiations in Services
Challenges and Outlook

19. The Financial Sector: Structure,


Performance and Reforms

381

Financial Sector Development in India


Institutional Structure
Financial Sector Reforms
' Directions of Reforms
Administered Structure of .Interest Rate
Autonomy, Prudential Regulations and Supervision
1991 and After: The Reform Years
Financial Sector and Monetary Policy: Objectives and Reforms
Banking Sector
Spread of Banking
Capital Position and Asset Quality
Competition and Efficiency
Productivity
Some Emerging Issues
Growth Challenges for the Financial Sector

20. Foreign Trade

394

Constraints arising from Foreign Trade and


Import Substitution based Policies
Exports and Imports: Broad Trends
Exports
Composition of India's Exports
...Contd....

20

Indian Economy: Performance and Policies

... Contd....

- Direction of Exports
Imports
.
- Composition of Imports
- Direction of Imports
Services Trade
- Special Economic Zones (SEZs)
- Challenges and Outlook
- Appendix: Balance of Trade

21. Balance of Payments and Trade Policy


- Concepts
- Trade Policy: An Overview
Import Substitution based Strategy
- Towards Efficient Import Substitution
Trade Policy since 1991
- Outward Orientation Focusing on Export Promotion
Recent Trade Policy Measures

- Tariff Reforms
-

Contingency Trade Policy and Non-tariff Measures


Trade Policy Reforms: Some Challenges for the
Medium and Long Term
India's Balance of Payment Trends 1950-2000
The Decades of Fifties and Sixties
Balance of Payments in the Seventies
- A Decade of Comfort
Balance of Payments in the Eighties
- The Period of Difficulties up to 1981-82
- Easing of Pressure 1982-83 to 1984-85
- The Build-up to the Crisis 1985-1990
Balance of Payments in the Nineties
- The Crisis: 1990-1992
Balance of Payment during 2006-07 to 2009-10
External Debt
International Comparison
Foreign Exchange Reserves
Approach
Developments
Issues
Foreign Exchange Rate Policy
Concluding Remarks

414
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Contents in Detail

22. Foreign Capital

21

445

- Introduction
- The Debate on the Role of Foreign Capital
- Forms of Foreign Capital
Foreign Direct Investment
Portfolio Capital
External Aid
Commercial Debt Capital
- FDI Policy: A Historical Perspective
First Phase 1950-1967
Second Phase 1967-1980
Third Phase 1980-1990
Fourth Phase-1991 Onwards
- Liberalisation: Trends and Patterns in FDI Inflows
Changes in Sectoral Composition
Changes in the Sources of FDI
Pattern of FDI by Type of Approvals
FDI Outlook
- Concluding Remarks and Policy Lessons

23. Globalisation:
India and the W T O

461

- Globalisation
Historical Development
- Gains and Losses from Globalisation
Trade in Goods and Services
Movement of Capital
Financial Flows
- Concerns and Fears
- Improving the International Architecture for Integration
- World Trade Organization
- India and the WTO
India's Participation in WTO Meetings
WTO Negotiations and India
India's Stand on Various Issues

Questions

479

Glossary

489

Select Bibliography

501