India s Economic Growth and Structural Change

From Independence to the Present

Calculation of Growth Rate Annual average growth rate

Period GDP (Rs cr) Y-o-Y 0.05 0.05 0.27 0.05 0.11 0.02 0.17 0.10 0.15 0.05 0.08 0.12 0.10
r = {(GDPt GDPt-1)/GDPt-1}/12

100 1 105 2 110 3 140 4 147 5 163 6 167 7 196 8 215 9 247 10 260 11 282 12 315 Average annual growth rate

Calculation of growth rate (contd).

Constant annual growth rate or compound growth rate
Period 0 1 2 3 4 5 6 7 8 9 10 11 12 GDP (Rs cr) 100 105 110 140 147 163 167 196 215 247 260 282 315

r = (end year/start year)^(t-1)

Calculation of growth rate (contd) Exponential growth rate

GDP (Rs cr)
350 300 250 200 150 100 50 0 0 5 10 15 GDP (Rs cr) Expon. (GDP (Rs cr))

Ln Y = a + rt where r is the growth rate

Change in sector-wise shares in GDP

Sectoral shares in GDP - 1950-60 Sectoral shares in GDP - 2001-02

24.3 28 Services Services Industry Industry 56 Agriculture 21.6 16 54.1 Agriculture

Growth Rates of GDP sectors

8

Services Industry

Agriculture

0 1950-60 -1 1960-70 1970-80 1980-90 1990-2000 2000-01 2001-02

Phases of Economic Growth

The earlier phase: 1951-80 (3.5% Hindu rate of growth: Raj Krishna) 1951-56 3.5% pa actual against a target of 2.1% p.a 1956 61 4.2% pa actual against a target of 4.5% p.a 1961-66 2.8% pa actual against a target of 5.6% p.a

The early phase

1969-74 3.2%pa 1974-79: 4.7% pa. 1979-80: -5.2%

Assessment of the Earlier Phase

Impressive compared to the near stagnation of the colonial era. Better than most newly industrialising countries at the same stage of development like in Latin America. Better than Africa but worse than East Asia. But this growth rate was not enough to take the GDP to world levels.

Mahalanobis Strategy
Developing a sound base for initiating the process of long term growth Food security (1st Plan), industrial base (2nd Plan) High priority to industrialisation Emphasis on development of capital goods industries against consumer good Capital goods in the public sector, agriculture and consumer goods in the private sector

Import Substitution
Arguments for import substitution

Infant industry protection Balance of payments problem Demand for industrial goods in an underdeveloped economy rises faster than foreign demand for its exports Creating employment opportunities outside of agriculture

Import Substitution (contd)

Objections to Import substitution

Operational problems
Remain dependent on imported inputs, inappropriate technology and relative factor endowments, duplicate market structure and marketing methods of advanced countries

Discriminate against technological innovations

Development of light consumer goods and discriminate against investment goods, no development of indigenous technology, no emphasis on productivity

Second Phase
1980-81 to 2004-05: 5.6% p.a 1980-81 to 1990-91: 5.9%p.a 1990-91 to 2004-05: 5.4%p.a 20004-05 to 2006-07: 8%p.a 2007-08 to 2009-10: 7%p.a In the 1990s and 2000s, growth in the primary and secondary sectors were slower than in the tertiary sector. 1991 liberalisation did not bring about drastic improvement in growth

Structural break in 1980-81

Output per capita, output per worker and total factor productivity accelerated sharply. TFP increased from 0.3%p.a in 1960-80 to 2% pa in 1980-2000. Manufacturing and services grew at 6% pa in 1980s and 1990s compared to 2-3% pa in 1960s and 1970s.

Causes of structural break: Deepak Nayyar

Fiscal expansionism of the 1980s boosted aggregate demand, particularly through salaries of government employees Public investment increased Limited liberalisation in external (trade) and internal (delicensing) economy import of capital goods liberalised, broad-banding reduced industrial licensing Shift towards the private sector. But the shift was pro-business rather than pro-competition (FDI not yet opened up) Social and legal institutions were also in place. Capital goods sector had developed. Science, technology and higher education had fostered.

Assessment of growth over the decades

GDP has grown over the decades except in the 1970s Agriculture has witnessed large decadal variations; 1970s saw a sharp deceleration followed by a marked recovery in the 1980s Manufacturing grew in the 1950s and 1960s from a low base because of focus on capital goods sector. There was marked stagnation from the mid 1960s and recovered in the 1980s. Industrial reforms in 1991 resulted in pick up of growth but the east Asian crisis in 1997 and the dotcom boom bust in 2000 led to deceleration. Services began to grow from the 1980s but decelerated in 1999-2000 following the dotcom boom bust

Structural change in GDP

Share of industry and services have grown while share of agriculture has declined Share of services has grown from the 1980s, particularly since the 1990s. Growth in services has given more resilience to the economy and less cyclical as agricultural growth. Share of industries has increased less than services. Since the 1990s, it has been stagnant.

Reasons for services growth

Income elasticity of demand for services grows faster than the demand for goods and commodities as income grows Technical and structural changes in an economy make it more efficient to contract out services that were earlier produced by industry outsourcing or splintering of industrial activity. Economic reforms industrial reforms led to greater demand of producer services; financial reforms led to greater financial services IT era Growing external demand for services exports

Occupational structure
1% 2% 15% 2% 4% 3%

Occupational sector - 1961

Professional & technical workers Administrative, executive & managerial workers Clerical workers Sales workers Service workers Agricultural workers Manufacturer workers

73%

Occupational structure (contd.)

Occupational structure, 1993-94
4% 18% 7% 2%

3%

3% Professional & technical workers Administrative, executive & managerial workers Clerical workers Sales workers Service workers Agricultural workers Manufacturer workers

63%

Occupational structure (contd.)

Occupational structure, 1999-2000
4% 20%

3% 3% 7% Professional & technical workers Administrative, executive & managerial workers Clerical workers Sales workers Service workers Agricultural workers Manufacturer workers

4%

59%

Savings and Investment

Gross domestic savings as % of GDP has increased from 9.6% in 1950 to 35% in 2000. Gross domestic investment as % of GDP has increased from 10.8% to 36% over the same period. But, savings-investment gap increased to -8.2% of GDP in 199091 led to financial crisis. Growing fiscal deficits, mainly on account of deterioration of public sector savings, over the 1970s and 1980s, financed by increasing SLR, led to inflationary pressures. At the same time, growing fiscal deficits spilled over to the external sector and the large current account deficit led to the financial crisis of 1990-91.

Public sector savings

Fiscal Responsibility and Budget Management (FRBM) Act, 2003 Revenue augmenting strategy moderating tax rates, expanding the tax base, removal of exemptions, improvement in tax administration Total expenditure of the centre declined from 17% to 14.1% but capital outlay increased from 1.2% to 1.6%. Savings of non-departmental undertakings increased since 1990s

Private savings
Corporate tax rate has come down, peak customs duty on nonagricultural products have come down. Monetary policy has led to reduction in nominal interest rates. All these have improved entrepreneurial activity. Profit after tax has seen large increases. Debt-equity ratios have come down. Higher retained earnings and finance availability from banks and capital markets have reduced financing requirement from the government. Improved corporate performance has resulted in more than doubling of private corporate sector savings, from 1% in the 1950s to 1.7% in the 1980s to 3.8% to the 1990s to 8% now.

Household savings
Continuous increase in total and financial savings of the household sector. Spread of bank branches, post office savings and capital markets have mobilised financial savings. Household credit has also grown in the recent times with private sector banks, followed by public sector banks, introducing retail credit for housing, vehicles and consumer durables. These have increased household financial liabilities. As a result, net household financial savings have increased marginally in the current decade.

Financial sector reforms

Introduction in auction of government securities, deregulation of interest rates, reduction in monetisation of fiscal deficits, market determined exchange rates, current account convertibility, deregulation of the equity market Monetary policy through indirect market-based instruments Both public and private investment have increased: Crowding-in effect of public investment