PG/Eco204: Module 1

Dated, 05/04/2022
Long Term Macroeconomic Performance
Aggregate and Sectoral Growth Performance
• Growth slowdown in 1960s. Decad Agricul Industr Manuf Service GDP
e/Sect ture & y acturin s
• Growth transition during 1980s. or Allied g
Activiti
• Low growth in agriculture with es
variations. 1951- 2.78 6.21 6.40 4.69 3.87
60
• Almost stagnating growth in 1961- 2.32 4.60 4.31 4.75 3.54
services sector during first three 70
decades. 1971- 2.10 4.95 4.74 4.53 3.66
80
1981- 3.10 6.48 5.99 6.61 5.35
90
1951- 2.16 5.37 5.24 4.63 3.58
80
Actual Growth of the Economy
• The actual growth of the Growth of Growth of Growth of
Real GDPFC Real Per Population
economy prior to the transition (%) Capita (%)
phase has been quite slow. GDPFC (%)
1951-60 3.87 1.88 1.95
• Much of the economic growth
1961-70 3.54 1.30 2.22
has been accounted for by
1971-80 3.66 1.35 2.28
population growth. 1981-90 5.35 3.12 2.16
1951-80 3.58 1.36 2.19
Sectoral Contribution in the Growth of Real
GDP
• Primary sector includes agriculture and Primary Seconda Tertiary GDPFC
allied activities such as agriculture, Sector ry Sector Sector
forestry and logging and fishing.
1951-60 52.23 17.08 30.69 100.00
• Secondary sector consists of mining and
quarrying, manufacturing (both 1961-70 42.89 23.16 33.95 100.00
registered and unregistered), 1971-80 38.14 24.85 37.01 100.00
construction and electricity, gas and
water supply. 1981-90 32.37 26.42 41.21 100.00
• Tertiary sector basically comprises of
services – trade, hotels and restaurant;
transport, storage and communication;
financing, insurance, real estate and
business services; and community, social
and personal services.
Growth in Savings and Investments
• Indian economic growth has GDS/GDP GDCF/GDP (S-I)/GDP
(%) (%) (%)
been financed predominantly by
1951-60 10.89 12.38 -1.49
domestic savings. 1961-70 13.83 15.70 -1.87
• Disturbing phase of 1980s. 1971-80 19.22 19.43 -0.21
1981-90 21.02 23.17 -2.15
Incremental Capital Output Ratio
Savings and Investments

Sector-wise Saving Rate Sector-wise Investment Rates

Saving-Investment
Gaps
Saving-Investment Gap
Key Deficit Indicators of the Centre
• Fiscal situation deteriorated 1970s 1980s

during 1980s. GFD/GDP (%) 3.8 6.8

PD/GDP 2.3 4.2
RD/GDP -0.3 1.7
Some Other Macroeconomic Indicators
• Investment eaten up by M3 Growth Growth of WPI
(%) Investment (average)
government securities. in Govt.
• Money supply grew fast. Secs. (%)
1950s 5.9 12.4 1.2
• Inflation rose sharply. 1960s 9.6 5.6 6.4
1970s 17.3 20.8 9
1980s 17.2 19.4 8
External Sector
Current Account Balance as per cent of GDP
Short Term Departures from Long Term
Objectives and Corrective Actions
The decade of 1950s
• Balance of payments crisis in 1956-57 due to large utilization of
foreign exchange reserves for financing investment needs.
• The corrective action at macro-level was RBI providing funds to the
Government – deficit financing.
The Decade of 1960s
• Indo-China War in 1961-62.
• Macro-level corrective action: increase in defense and developmental
expenditures and other strategic measures.
The Decade of 1960s continued
• Terrible harvest failure during 1963-66;
• Change in Government;
• War with Pakistan.
• Outcomes – shortage of essential commodities, price rise, food
import, increase in debt and debt services, drainage of forex reserves.
The decade of 1960s continued
• Macro-level corrective actions:
• India’s increasing reliance on Western aid;
• Attempts to strengthen land-reforms;
• Introduction of Green Revolution with limited success;
• Nationalisation of major banks in 1969.
The Decade of 1970s
• Indo-Pak War in 1971.
• Drought in 1972.
• Oil price shock in 1973.
• Emergency in 1975.
• Second oil price shock in 1979.
The Decade of 1970s continued
• Macro-level corrective actions:
• India’s reliance on USSR for trade.
• FERA enacted in 1973 to restrict repatriation of private income.
• India’s stand towards foreign investment became harder.
• Some peacemeal reforms towards trade liberalization started in the
second-half.
The Decade of 1980s
• A combination of positive and negative shocks.
• Deterioration of Government’s revenue account since 1983.
• Current account deficit widened.
• There was also an increase in general price level.
• Collapse of USSR.
The Decade of 1980s continued
• Corrective actions:
• Active use of exchange rate to improve export competitiveness;
• Encouragement for technology import in the private sector.
• Relaxing licensing norms and also those for foreign investments.
• Large borrowing to finance deficit.