(Part I)

The story of
Indian Economy

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 Planning in India

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 Look what the British did

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 Look what the British did

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
“I have no doubt in my mind that our chief national
problems relating to eradication of poverty,
illiteracy and disease and to scientific production
and distribution can be effectively tackled only
along the socialistic lines. The very first thing
which our future national government will have to
do would be to set up a Commission for drawing up
a comprehensive plan of reconstruction.”

Subhash Chandra Bose, President of INC, 1938

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 Before Independence

• National Planning Committee of 1938 – Chaired by Nehru. Prepared reports;

however it could not do enough work because of Quit India Movement.
• The Bombay Plan - In 1944 Eight Industrialists of Bombay including JRD Tata, GD
Birla, Purshottamdas Thakurdas, Lala Shriram, Kasturbhai lalbhai, AD Shroff,
Ardeshir Dalal, & John Mathai working together prepared “A Brief Memorandum
Outlining a Plan of Economic Development for India” which was popularly known
as the Bombay Plan. This plan envisaged doubling the per capita income in 15
years and tripling the national income during this period. Even though Nehru did
not officially accept the plan, yet many of the ideas of the plan were inculcated in
other plans which came later. It wanted to increase the output from agriculture by
130 percent, from industry by 500 percent, and from services by 200 percent.
Heavy investment in education. Total outlay of 30 b $ in 15 years. Believe it or not,
this capitalist-heavy team advocated government intervention and regulation!
• In August 1944, The British India government set up “Planning and Development
Department" under the charge of Ardeshir Dalal. But this department was
abolished in 1946.

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 Before Independence

• The Gandhian Plan (1944) – It was based upon Gandhian philosophy, and put
forward by Shriman N Agarwal of Wardha. The outlay of the plan was
estimated to be Rs. 3,500 crores only and it sought to set up a decentralized
economy with self sufficient villages and Industrial production. It laid
emphasis on small scale industries and agriculture. But its scheme of
financing was unsound. This plan was criticized as inconsistent and
insufficient.
• People’s Plan by M N Roy (1945) – This socialist plan differed from the Bombay
plan in methodology and priorities. Its chief emphasis was on agricultural and
consumer goods industries through collectivization and setting up of state
owned industrialization. The total outlay was of Rs. 15,000 crores. It also
advocated the nationalization of land.
• In 1947, after independence, Economic Programme Committee (EPC) was
formed by All India Congress Committee and Nehru was its chairman. The aim
of this committee was to make a plan which could balance private and public
partnership and urban and rural economies. The EPC recommended in 1948
forming of a permanent planning commission.

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  Planning Commission
• The Planning Commission was set up by a Resolution of the Government of India in March
1950 in pursuance of the declared objectives of the Government to promote a rapid rise in
the standard of living of the people by efficient exploitation of the resources of the
country, increasing production and offering opportunities to all for employment in the
service of the community.
• The Planning Commission was charged with the responsibility of making assessment of all
resources of the country, augmenting deficient resources, formulating plans for the most
effective and balanced utilisation of resources and determining priorities.
• Jawaharlal Nehru was the first Chairman of the Planning Commission.
• For the first eight Plans the emphasis was on a growing public sector with massive
investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997,
the emphasis on the public sector became less pronounced and the thinking on planning in
the country, in general, was that it should increasingly be of an indicative nature. It is
about defining broad national goals and objectives, and presenting an internally consistent
picture of the evolution of the economy in a manner which achieves these national goals
over a defined time horizon.

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 National Development Council

The National Development Council (NDC) was the apex body for decision making
and deliberations on development matters in India, presided over by the Prime
Minister.
• It was set up on August 6, 1952 to strengthen and mobilize the effort and
resources of the nation in support of the Plan, to promote common economic
policies in all vital spheres, and to ensure the balanced and rapid development
of all parts of the country.
• The Council comprised of the Prime Minister, the Union Cabinet Ministers, Chief
Ministers of all States or their substitutes, representatives of the union
territories and the members of the Planning Commission.
• Both, the Planning Commission & the NDC were extra-constitutional, non-
statutory bodies.

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 The process of Planning
I. Approach to the Plan is prepared by Planning Commission
II. Feedback taken from all stakeholders
III. Cabinet Reviews the Approach Paper
IV. Approach is revised based on Cabinet feedback
V. Approach submitted to the National Development Council
VI. After NDC’s approval, it is placed in both houses of the
Parliament
VII. After Parliament’s approval, the National Draft Plan is
prepared
VIII. National Draft Plan is submitted to the Cabinet & the NDC
IX. After NDC’s approval, the PM submits it to the Parliament
X. After Parliament’s approval, the plan is ready to be
implemented!

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 The first two FYPs

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 Harrod-Domar Model
The Harrod-Domar model states that
the rate of growth in an economy
depends on the level of saving and the
capital output ratio (productivity of
capital).

It suggests that if developing countries

want to achieve economic growth,
governments need to encourage
saving, and support technological
advancements to increase the
economy’s capital output ratio.

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  Mahalanobis Model
P C Mahalanobis (1953) developed a two-sector model where the entire net output of the
economy was to be produced in the investment goods sector and the consumer goods sector.
• The model assumes an economy that is related to a closed economy; non-shiftable capital
equipment once installed in any of the sector; a full capacity production in both the
consumer and capital goods sectors; determination of investment by the supply of capital
goods; and no changes in prices.
• A higher rate of investment on capital goods in the short run would make available a
smaller volume of output for consumption. But in the long run, it would lead to a higher
growth rate of consumption.
• Thus the strategy suggests that in order to reach a high standard in consumption,
investment in building a capacity in the production of capital goods is firstly needed.
• The model was put into practice in 1956 as the theoretical pathway of India's Second Five
Year Plan. However problems such as unexpected and unavoidable costs contributed to
increased money supply and growing inflation. The biggest problem was the fall in the
foreign exchange reserve due to liberalised import policy, leading to modifications in the
Second Plan in 1958. It was finally abandoned and replaced by the Third Five Year Plan in
1961.

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
2014: NITI Aayog replaces
Planning Commission

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 I didn't raise my boy to be a soldier,
I brought
“The secret himisup
of change nottotobe myall
focus pride andenergy
of your joy. on fighting
Who
the old, butdares to place
on building the a musket on his shoulder,
new..."
To shoot some other mother's darling boy? ~ Socrates
 Globalization
Liberalization, Privatization,

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 Before LPG came the BoP Crisis

By 1985, India had started having balance of payments (BoP)

problems.
• By the end of 1990, it was in a serious economic crisis. The
government was close to default, the central bank (RBI) had
refused new credit and foreign exchange reserves had been
reduced to such a point that India could barely finance three
weeks’ worth of imports.
• This forced the Indian government to airlift national gold reserves
as a pledge to the International Monetary Fund (IMF) in exchange
for a loan to cover balance of payment debts.
• India’s ego was hurt and its economy was jolted out of sleep.
India faced no "soft options" and must now open the door to
foreign investment, reduce red tape that often crippled
initiative and streamline industrial policy.
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 The metrics of The BoP Crisis

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 The metrics of THE BoP Crisis

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 The metrics of THE BoP Crisis

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 What caused the Crisis?

1. Collapse of the Soviet Union: Since 1960s, India depended on the

Soviet Union for its exports - as it failed to develop good economic
relationships with the US and Western Europe. In late 1980s, Soviet
Union started to crack and by 1991 it was split into 15 nations. Now,
India had a major problem because its primary buyer was reduced in
size & strength. Exports were down significantly.
2. 1990 Oil Price Shock: Due to the Gulf War, average monthly prices of
oil rose from $17 per barrel in July to $36 per barrel in October 1991.
3. Political instability: In the late 1980s India's political system was
imploding. Rajiv Gandhi was involved in a series of troubles - Bofors
scandal, IPKF misadventure, Shah Bano case that eventually led to his
ousting in 1989. What followed were two more governments which
were as unstable as they were incompetent. This had a negative effect
on Indian economy that was totally forgotten in the political crisis…

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 India got its gold back within a
 year…& kept buying more!

In 2009, the International Monetary Fund (IMF)

sold 200 tons of gold to the RBI for $6.8 billion
to refurbish the aid agency’s coffers, mirroring
the stunning turnaround in India’s fortunes
from 1991 when it had to pawn gold abroad to
avoid defaulting on foreign exchange payments.

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 Before the story begins…

In response to the BoP crisis, a combination of standard and

unorthodox policies for stabilisation and structural change was
undertaken to ensure that the crisis did not translate into
generalised financial instability.
• Such steps included pledging gold reserves, discouraging of non-
essential imports, accessing credit from the IMF and other
multilateral and bilateral donors.
• While dealing with the crisis through an IMF program, a
comprehensive program of structural reforms was undertaken
simultaneously with special emphasis on the external sector.

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 The story begins…

On 24th July 1991 Manmohan Singh, then India's finance minister, presented a budget
to India's parliament that would change India forever. It was an unlikely victory
wrested from a moment of national humiliation.
• Trade policies, exchange rate policies & industrial policies were recognised as part
of an integrated policy framework so as to boost the overall productivity,
competitiveness and efficiency of the economy.
• In addition, to contain the trade and current account deficits and enhance export
competitiveness, the exchange rate of rupee was adjusted downwards in two
stages on July 1 and July 3, 1991 by 9 per cent and 11 per cent, respectively.
• Subsequently, India moved to current account convertibility in August 1994 by
liberalising various transactions relating to merchandise trade and invisibles.

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 Structural Adjustment

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  Structural Adjustment

Structural adjustment programs (SAPs) consist of conditions which come with the loans
provided by the International Monetary Fund (IMF) and the World Bank (WB) to
countries that experience economic crises.
• The conditionality clauses attached to the loans have been criticised because of their
effects on the social sector.
• SAPs are created with the goal of reducing the borrowing country's fiscal imbalances
in the short and medium term or in order to adjust the economy to long-term
growth.
• SAPs are supposed to allow the economies of the developing countries to become
more market oriented. This then forces them to concentrate more on trade and
production so it can boost their economy. Through conditions, SAPs generally
implement "free market" programs and policy. These programs include internal
changes (notably privatization and deregulation) as well as external ones, especially
the reduction of trade barriers.

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 New Economic Policy of India
 - Beginning of LPG

The economy of India had undergone significant policy shifts in the beginning of the 1990s.
This new model of economic reforms is officially known as the New Economic Policy &
commonly known as the LPG or Liberalisation, Privatisation and Globalisation model.
• The primary objective of this model was to make the economy of India the fastest
developing economy by making it globally competitive.
• Liberalization: It refers to the relaxation of previous government restrictions usually in
areas of social and economic policy. Thus, when government liberalizes trade it means
it removes the tariff, subsidies and other restrictions on the flow of goods and services
between countries.
• Privatization: It refers to the transfer of assets or service functions from public to
private ownership or control and opening of the hitherto closed areas to private sector
entry. It can be achieved by leasing, contracting, divesture and franchising.
• Globalization: Integrating domestic economy with the world economy.

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 Liberalization

The fundamental feature of the new economic policy is that it provides freedom
to the entrepreneurs to establish any industry/trade/ business venture.
• The entrepreneurs are not required to get prior approval for any new
venture. What they need is that they have to fulfill certain conditions to get
into a line of one's choice. The procedure involving a case by case
examination of the proposals for new ventures has been wiped off.
• Apart from this the entrepreneurs no longer need licenses to come into
business. The capital markets have also been freed and opened to the private
enterprises.
• In case the entrepreneurs require imported equipment, they are no longer
required to approach the central authority for foreign exchange.
• The areas of liberalization are (i) Licensing business (removed), (ii) Foreign
Investment (iii) Foreign Technology (iv) Establishment, Merger,
Amalgamation and take-over, and (v) Simple Exit policies.

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  Globalization

The new economic policy has made the economy outward oriented. Now, its activities
are to be governed both by domestic market as also the world market.
• Now, the rupee has been made fully convertible on current account of the balance
of payments.
• Moreover, elimination of licensing of a large number of import items has enabled
the importers to import any where in the world.
• The reduction in custom duties on imports has also been done to bring them in
line with the duties in other countries of the world.
• In short, globalization involved
(a) Reduction of trade barriers with a view to allowing free flow of goods to and
from the country.
(b) Free flow of foreign capital in terms of investment i.e., direct and portfolio for
ensuring conducive atmosphere (FERA Amended in 1993 to become FEMA), and
(c) Free flow of technology

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 India’s Reforms

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 MRTP Act

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 MRTP Act Amended (1991)

i) The MRTP Act was amended to remove the threshold limits of assets in
respect of MRTP companies and dominant undertakings. This eliminated the
requirement of prior approval of Central Government for establishment of
new undertakings, expansion of undertakings, merger, amalgamation and
takeover and appointment of Directors under certain circumstances.
ii) Emphasis placed on controlling and regulating monopolistic, restrictive and
unfair trade practices. Simultaneously, the newly empowered MRTP
Commission authorised to initiate investigations suo moto or on complaints
received from individual consumers or classes of consumers in regard to
monopolistic, restrictive and unfair trade practices.
iii) Necessary comprehensive amendments made in the MRTP Act in this
regard for enabling the MRTP Commission to exercise punitive and
compensatory powers
Replaced by the Competition Commission Act of 2002.

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 Economic Progress post-1991

• The initiation of economic reforms in the 1990s saw India gradually

breaking free of the low growth trap which was euphemistically called the
“Hindu growth rate” of 3.5 per cent per annum.
• Real GDP growth averaged 5.7 per cent per annum in the 1990s, which
accelerated further to 7.3 per cent per annum in 2000s.
• A feature of the growth acceleration during the period was that while the
growth rate of industry and services increased, that of agriculture fell. This
was because there was no notable technological breakthrough after the
“green revolution” of the mid-1960s which saw sharp increase in yields of
cereal production particularly in northern part of India. By the 1990s, the
momentum of “green revolution” had died down.
• Notably, the decade of the 2000s encompassed the inflexion point in the
growth trajectory with an annual average GDP growth of about 9 per cent
for the 5-year period 2004-08. Growth in all the sub-sectors of the economy,
including agriculture, accelerated during this period. However, this growth
process was interrupted by the global financial crisis.
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 Propelled by Services

The growth dynamics altered the structure of the Indian economy with a decline in
the share of agriculture from 28.4 per cent in the 1990s to about 14 per cent today.
• There was corresponding gain in the share of services, including construction,
from 52 per cent to 65 per cent in 20 years.
• What is, however, of concern is that the share of industry remained unchanged at
around 20 per cent of GDP in two decades.
• This suggests that India’s growth acceleration during the last two decades has been
dominated by the services sector.
• The pace of average annual industrial growth had nevertheless picked up from 5.7
per cent during the 1990s to 9 per cent during 2004-08 before being interrupted by
the global financial crisis.

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 Two decades of LPG

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  Workforce

• With work participation rate of 39.2 per cent, India had a workforce of 400 million in 2009-
10. Of this, 53 per cent was in agriculture and the rest 47 per cent in non-agricultural
activity.
• While the bulk of the employment is in agriculture despite its shrinking share, the
noteworthy feature of the employment structure has been that for the first time the
absolute workforce in agriculture declined in the latter half of the 2000s.

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 Trade

The structure of Indian economy also underwent a change during this

period in terms of openness
• Exports and imports of goods and services more than doubled from 23
per cent of GDP in the 1990s to 50 per cent in 2009-11.
• If the trade flows are considered alongside capital flows, the rise in
openness (measured as current receipts and payments plus capital
receipts and payments) was more dramatic from 42 per cent of GDP in
the 1990s to 107 per cent in 2010-11.
• Empirical evidence suggests that with increasing openness of the Indian
economy, the trade and industrial cycles were getting more
synchronised with the global business cycle.

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 Fiscal Indicators

Gradual improvements were also observed in the fiscal position with fiscal
deficit moderating sharply during the high growth phase of 2004-08, which
also coincided with a period of switch over to a rule based fiscal
consolidation process (FRBM Act, 2003).
• The deficit indicators, however, deteriorated in the period following
financial crisis-induced fiscal expansion

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 To Conclude

Dr. Manmohan Singh in his Union Budget 1991-92 speech that launched wide
ranging economic reforms had quoted Victor Hugo’s saying, “no power on earth can
stop an idea whose time has come”.
• Ever since, there has been no looking back as India launched wide ranging
structural reforms and has made significant economic progress over the past two
decades.
• India’s industrial environment has become more competitive and open,
infrastructural gaps have been sought to be bridged through public-private
initiatives with both domestic and foreign sources of funding, current account
has become fully convertible while capital account is virtually free for non-
residents.
• The policy environment has become more enabling with rule-based
commitment on fiscal policy and considerable instrument independence for
operation of monetary policy.
• As statutory preemptions were reduced and interest rates were deregulated,
banks gained operational autonomy for commercial lending.

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 To Conclude

As a result, India’s per capita income, which had taken four decades to double by 1991,
doubled thereafter in 15 years and is doubled again in 10 years by 2017-18.
• If India could maintain the current pace of growth it will lift millions out of poverty and
enrich the global economy.
• While India has come a long way, maintaining the current pace would itself be challenging
and require continued reform efforts…

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 Answer these!

1. What were the factors responsible for opening up of

Indian Economy 1991 onwards?
2. Discuss the changes made to the structure and nature of
the Indian Economy post 1991 reforms.
3. India’s reforms are a continuing process. Discuss.

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
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