INDIAN ECONOMY

PRESENTATION
UNIT-2
GROWTH
AND
STRUCTURA
L CHANGE
INDIA'S LONG
ROAD : THE
SEARCH OF
PROSPERITY
THERE WERE TWO MAJOR ACCELERATION
IN NATIONAL INCOME AND OUTPUT

1950-1980
•Around 1950, the National Income was 3.5% p.a. from 1%
p.a. in 1900-47
•The per capita also increased from less than 0.2% to
1.4% p.a. in 1950

1980-2015
• Around 1980 ,the National Income was 6% p.a.

• The per capita was 4% p..a.

1950 -1980
IN THIS PHASE , ECONOMIC STRATEGY LARGELY
FOLLOWED A “COMMAND AND CONTROL MODEL”.

UNDER THIS PERIOD, THERE WAS A MISTAKEN CONCEPTION OF THE ROLE OF STATE :
—LARGE INEFFICIENCY
—STIFLED BUSINESS DRIVE
—NEGLECT OF PRIMARY HEALTHCARE AND EDUCATION
EVEN THOUGH SAVING AND INVESTMENT RATES DOUBLED BUT STILL GROWTH WAS
SLOW WHICH CLEARLY POINTS TO LOW PRODUCTIVITY OF INVESTMENT (THE
REASON FOR POOR PERFORMANCE

LOW PRODUCTIVITY IN TURN WAS THE PRODUCT OF THREE FEATURES OF ECONOMIC

POLICY :

DOMINANT ROLE OF PUBLIC SECTOR

INAPPROPRIATE AND EXCESSIVE STATE INTERVENTION
NEGLECT OF CRITICAL SOCIAL SECTORS
 1980-2015
IN THIS PHASE, ECONOMIC STRATEGY MOVED TOWARDS
GREATER MARKETIZATION, AT FIRST HESITANTLY, THEN
MORE EXPLICITLY
Partial Reform
Since 1980

1970s Crises of
2003 2011-
and 1991 and
decade onward 12
1980s
of 1990s s onward
 Reformist ideas began. People started criticising
and compared the success of East Asian
countries with the failure of Indian Economy .

From 1980s, when Indra Gandhi was appointed, she

initiated the liberalisation to some extent. Later in
1984, Rajiv Gandhi further took some reforms. But
1970 s
these reforms were hesitant and piecemeal
And
Growth rate was 5.6% p.a. in 1980s ; people would
consider it good but it was due to over expansionary
fiscal policy and foreign borrowing
1980 s
Fiscal deficit increased from 5%(%of
GDP) in 1970s to 10% at the end of
1980s

REFORMS IN 1980S WERE SHALLOW AND A LITTLE WAS DONE BY INTRODUCING

GENUINE COMPETITION ( DOMESTIC OR INTERNATIONAL)
 At this time fiscal deficit was unsustainable; we
approached to IMF for loans and it advised to
have structural adjustments in order to obtain loan

In 1991, P.V. Narasimha Rao and

Manmohan Singh introduced LPG
reforms. ( Liberalisation, Privatisation Decade
and Globalisation)
of
1990
Reforms roll back control on trade,
industry, finance and thereby increasing the
market orientation of the economy

IN 1993-2003 , GROWTH RATE WAS 6%P.A. FOR 10YRS ,

SUBSTANTIALLY ABOVE 5.2% P.A. IN 1980S
Superfast growth rate of 8.5% p.a.
Reasons:
strong tail wind from world
before financial crisis
low oil prices
good harvest

But particularly it was because of the

cumulative effects of reforms in 1991. Given
2003-
2011
the favourable environment, there was
increase in corporate saving and overall
production

In 2008, world crisis occured our

growth was reduced to 6.7% but then
it increased to 8% .
Boom in Indian Economy busted.
Reasons :
• collapse of corporate investment
•need to deleverage after the over

2011
borrowing of boom years
• govt. failures, it was involved in several
scandals and scams whose exposure led to a

- 2013
period of policy paralysis

Worsening macroeconomic outlook

(inflation was around 10% from 6 years
i.e. 2008 onwards and household savings
moved towards gold and widening of
current account deficit

From 2014, there was some

macroeconomic stability but
investment and growth was still
languishing
 MOVING INDIA
TO A NEW
GROWTH
TRAJECTORY
NEED FOR A COMPREHENSIVE BIG
PUSH
 The Indian Economy: A Story of Consistent
Growth
India's economic journey has been characterized by consistent growth over the past few decades.
Despite challenges and fluctuations, India has made significant strides towards prosperity and development.
Key Points:
Comparison with China: India reached a per capita GDP of around US $1800 in 2017, while China's was around US
$8700.
Aspiration for Growth: India aims to double per capita income in the next two decades, requiring a sustained growth
rate of around 7%.
Potential Impact: Achieving this growth trajectory could result in a per capita income of around US $6000 by 2035
and a GDP of approximately US $10 trillion.
Historical Context:
Indian growth dynamics have shown consistent acceleration, except for an interregnum during 1965–81.
India's growth trajectory has the potential to replicate the tenfold increase witnessed in East Asia between 1975
and 2005.
Sustained high growth is essential for India to escape the middle-income trap and eliminate poverty.
A business-as-usual approach will not suffice; bold policy measures are required to accelerate growth to 8-9 percent on
a sustainable basis.
 Understanding Economic Slowdowns and
Reversals
Economic slowdowns, such as the period from 1965 to 1981, can be attributed to restrictive policy actions and external
shocks.
Reversals in growth momentum were seen in the 1980s and 1990s, followed by setbacks due to crises and policy
challenges.
Causes of Slowdown (1965-81):
Restrictive policies closed the Indian economy while other Asian countries were opening up and accelerating growth.
Policy errors during this period had long-lasting impacts, emphasizing the need for growth-friendly economic policies.
Reversal and Reforms (1980s-1990s):
Growth momentum was regained through reform measures aimed at increasing domestic competitiveness.
Comprehensive reforms in various sectors, including industrial deregulation, trade liberalization, and tax
rationalization, led to increased private sector investment and export growth.
Setbacks and Challenges:
Loss of growth momentum in the latter half of the 1990s due to factors like the East Asian financial crisis, fiscal
setbacks, and agricultural slowdown.
Similar challenges observed after the North Atlantic Financial Crisis (NAFC).
Policy Imperatives:
Urgent need for crafting policy strategies to move India to a new growth trajectory.
Recognizing the interconnectivity of policy measures and avoiding siloed decision-making.
Balancing subsidiarity and coordination in policy implementation to address complex economic challenges.
Emphasizing the importance of continuous vigilance and proactive policy adjustments to avoid complacency.
The Golden Era of Growth: 2003-08
After 2003-04, India experienced a distinct strengthening of growth momentum, leading to a period of high economic growth from 2003
to 2008.
Various factors contributed to this golden era of growth, including restructuring measures by domestic industry, reduction in interest
rates, fiscal consolidation, and strong global demand.
Key Factors Driving Growth:
Restructuring Measures: Measures undertaken by domestic industry during 1997-2003 laid the foundation for growth.
Fiscal Consolidation: Progressive reduction in fiscal deficit freed up resources for private sector investment.
Strong Global Demand: Favorable global economic conditions and high liquidity supported growth.
Monetary Management: Successful containment of inflation despite unprecedented capital inflows through innovative monetary
policies.
Contribution of Sectors:
Broad-Based Growth: All key sectors - agriculture, industry, and services - contributed to the growth momentum.
Infrastructure Investment: Stepped-up infrastructure investment, both public and private, contributed to economic expansion.
Notable increase in road infrastructure investment, although railway investment remained stagnant as a share of GDP.
Financial Sector Performance:
Continuous improvements in asset quality and efficiency indicators in the financial sector.
Financial stability and efficiency contributed to sustaining the growth momentum.
Conclusion:
The golden era of growth from 2003 to 2008 was characterized by robust economic expansion driven by domestic reforms, global
demand, and infrastructure investment.
Effective fiscal and monetary management played a crucial role in maintaining stability and sustaining growth during this period
 The Current Deceleration:
2012-18
Growth slowdown during 2012-14 followed a decade of consistent high growth, including a sharp recovery from the 2008-09
crises.
Several factors contributed to this deceleration, including macroeconomic policy responses, fiscal stimulus measures, and
delayed withdrawal of stimulus.
Key Factors Contributing to Deceleration:
Monetary and Fiscal Policy Response to NAFC: Rapid monetary and fiscal stimulus post-NAFC led to inflation and current
account pressures.
Monetary Tightening: Subsequent monetary tightening had a dampening impact on economic activity and growth.
Quality of Fiscal Stimulus: Focus on tax cuts and revenue expenditure, while capital outlays remained stagnant, added to
demand pressures and inflation.
Withdrawal of Fiscal Stimulus: Hesitant and slow withdrawal of fiscal stimulus contributed to crowding out of the private
sector and hampered private investment.
Impact on Corporate Sector: High nominal interest rates and increased interest payments squeezed corporate profitability and
investment.
Conclusion:
The current deceleration in growth from 2012 to 2018 was influenced by policy responses post-NAFC, quality of fiscal
stimulus, and delayed withdrawal of stimulus measures.
Addressing these challenges requires a balanced approach to monetary and fiscal policy, along with structural reforms to
support private sector investment and growth
A Possible Future High Growth Scenario
2020 to 2035
- Overview:
- The National Transport Development Policy Committee (2014) projected a consistent 8-9 percent annual GDP growth from around
7-7.5 percent in recent years over the period 2020-35.
- This scenario aims to work out the necessary conditions and quantitative implications for achieving such growth.

- Key Projections and Implications:

- Gross Fixed Capital Formation (GFCF) Rate: Expected to increase from about 31 percent in 2012-18 to around 33-35 percent during
2020-25, and further ascending to 35-38 percent during 2030-35.
- Domestic Savings Rate: Envisaged to increase from about 31-33 percent during 2020-25 to 33-36 percent during 2030-35.
- Role of External Savings: The absorption of external savings is projected to be around 2-2.5 percent of GDP throughout the period,
consistent with a sustainable Current Account Deficit (CAD).

- Efficiency and Productivity:

- Incremental Capital Output Ratio (ICOR): Estimated at about 4.2 over the projected period, indicating a relatively high and improved
level of efficiency in resource use compared to recent years.
- Sectoral Growth Transformation: Manufacturing growth approaching 10 percent is deemed necessary to achieve overall GDP
growth rates in excess of 8 percent, highlighting the need for a revival of competitive Indian manufacturing.

- Conclusion:
- The projected high growth scenario for 2020-35 requires significant increases in investment and savings rates, along with a focus
on improving efficiency and productivity, particularly in the manufacturing sector.
 Financing Growth - Household and Private Corporate
Savings
- Household Savings:
- Steady increase over the years, reaching 21% of GDP during 1997-2003 and declining to around 17% in 2016-2018.
- Net household financial savings fell from 11-12% of GDP in 2007-08 to around 7% recently, needing restoration to 10% and gradual increase to 13% by
2030-35.
- Measures like financial inclusion initiatives and technology advancements should aid in increasing savings, accompanied by efficient intermediation for
productive use.

- Private Corporate Sector Savings:

- Doubled from 3.9% of GDP during 1997-2003 to about 7.9% during 2008-11, reflecting buoyant profitability.
- Essential to maintain private corporate savings and investment at current levels (10-12% of GDP) to enable investment levels of 12-15% of GDP in
2025-35.
- Fiscal consolidation and inflation management crucial for positive impact on corporate savings and investment.

Public Sector Savings and Infrastructure Investment

- Public Sector Savings:

- Government savings turned negative post-2008-09 fiscal stimulus, requiring restoration to mildly positive levels.
- Public enterprise savings declined, aiming for restoration to 3-4% of GDP, contributing to overall public sector savings increase from 1.5% to 3.5% by
2030-35.
- Fiscal consolidation and reduction in subsidies essential for maintaining overall public sector savings.

- Infrastructure Investment:
- Infrastructure investment crucial for sustaining economic growth, especially transportation.
- NTDPC projected infrastructure investment to rise from 5-5.5% of GDP to around 8% during the 2020s and beyond, necessitating both public and
private sector participation.
- Fiscal consolidation critical for the public sector to play a predominant role in vital infrastructure sectors.
INDIAN
ECONO
MY
REFORM
License Raj:
Post-independence, India adopted a centrally
planned economy fostering bureaucratic controls,
known as the License Raj. It mandated licenses
for business activities, fostering inefficiency and
corruption.
Brief overview
Slow Growth:
Pre-reform, India faced sluggish economic
of the economic
growth, averaging 3-4% annually, insufficient
situation in
to tackle poverty and unemployment. India pre-1991
High Fiscal Deficits:
Defic financing was common, leading to
elevated fiscal deficits, exacerbated by
subsidies, especially in agriculture.
 Balance of Payments Crisis:
By the late 1980s, India confronted a severe
balance of payments crisis due to depleted foreign
reserves, widening trade deficits, and low export
competitiveness.
Limited Global Integration:
Import substitution policies hindered global Brief overview
integration, fostering inefficiencies and trade of the economic
barriers, with restrictive FDI policies further
limiting foreign investment.
situation in
India pre-1991

Overall, pre-19 India struggled with slow growth,

bureaucratic hurdles, fiscal strains, and limited global
integration, necessitating significant reforms for
economic revitalization and structural improvements.
Stagnating Growth:
India's economy faced stagnant growth rates,
averaging around 3-4% annually, insufficient to
address burgeoning population growth and
alleviate poverty.

Fiscal Deficits: Why

High fiscal deficits resulted from extensive
government spending, particularly on
reforms
subsidies and welfare programs, surpassing were
revenue generation. necessary
External Debt:
Mounting external debt, coupled with dwin
ing foreign exchange reserves, led to
concerns about India's ability to meet i s
international debt obligations.
 Inefficiencies:
The bureaucratic regulatory framework,
exemplified by the License Raj, stifled
innovation, hindered business growth, and
perpetuated corruption and red tape.

Global Integration: Why

India's limited integration with the global
economy under import substitution policies reforms
hindered access to international markets, were
impeding competitiveness and hindering
economic growth potential.
necessary:
Overall, these challenges underscored the necessity for
comprehens ve reforms to stimulate economic growth,
enhance efficiency, attract foreign investment, and
alleviate fiscal strains.
The main objectives of the 1991 reforms in India were :

1. LIBERALIZATION
Reduce Government Control:
Lessen government interference in the economy by
dismantling bureaucratic regulations, particularly the
License Raj, which required businesses to obtain licenses
Main
for various activities.
objectives
Promote Competition:
Foster competition by opening up sectors to private and
of the 1991
foreign investment, thus encouraging efficiency,
innovation, and growth.
LPG Reform:
Trade Liberalization:
Ease impor estrictions and reduce tariffs to integrate the
Indian economy with global markets, enabling access to a
wider range of goods and services and enhancing
competitiveness.
2. PRIVATIZATION

Efficiency Enhancement:
Transfer ownership and management of state- owned
enterprises to the private sector to improve operational
efficiency, productivity, and profitability. Main
objectives
Resource Allocation:
Allow market forces to determine resource allocation of the 1991
rather than government intervention, leading to optimal
utilization of resources and improved economic LPG Reform:
performance.

Reduce Fis al Burden:

Generate revenue through the sale of state assets to reduce
fiscal deficits and alleviate the burden on government
finances.
3. GLOBALIZATION

Integration with Global Economy:

Increase integration with the global economy through
trade liberalization, financial sector reforms, and
promotion of foreign investment, facilitating access to
international markets and technologies. Main
objectives
Enhance Competitiveness:
Expose domestic industries to international competition, Of the1991
encouraging efficiency, innovation, and quality
improvement to compete effectively in the global market. LPG Reform:
Diversificat n and Growth:
Encourage d versification of exports and investment,
reducing dependency on domestic demand and ostering
sustained economic growth through participation in global
value chains.