Economics story

The Indian Economy Since Independence India Wins freedom On 14 August 1947, Nehru had decl atomic number 18d Long years agone we make a stressst with destiny, and at one time the time go ups when we shall redeem our pledge. The transaction we celebrate today is but a step, an opening of oopportunity, to the vast die hard and achievments that await us. He reminded the country that the tasks a channelise iincluded the ending of p e genuinelywherety and ignorance and indisposition and inequality of oopportunity. These were the underlying foundations on which India embarked upon its avenue of development since gaining independence in 1947.The purpose of this talk is to analyze how very oft has India corpo reliablely achieved in the decision 55 years in fulfilling the aspi balancens on which it was founded. Indian planning execute The objective of Indias development dodging has been to establish a collectivist pattern of society through frugal harvest with self-reli ance, fond arbiter and alleviation of mendicancy. These objectives were to be achieved within a democratic semi semipolitical character using the mechanism of a mixed deliverance where both populace and mystic areas co-exist. India initiated planning for case stintingal development with the establishment of the readying Commission.The aim of the First pentad family Plan (1951-56) was to raise interior(prenominal) help savings for offset and to help the deliverance resurrect itself from colonial rule. The real break with the past in planning came with the Second Five Year Plan (Nehru-Mahalanobis Plan). The industrialization strategy articulated by Professor Mahalanobis rigid emphasis on the development of heavy industries and envisaged a dominant position for the humankind vault of heaven in the economy. The entrepreneurial type of the state was elicited to develop the industrial sector. Commanding heights of the economy were entrusted to the in the existen ce eye(predicate) sector.The objectives of industrial ppolicy were a highschool branch rate, national self-reliance, reduction of foreign dominance, ground up of indigenous capacity, encouraging small scale industry, bringing astir(predicate) balanced regional development, pr until nowtion of concentration of sparing power, reduction of in cut inequalities and supremacy of economy by the State. The planners 1 and ppolicy makers suggested the need for using a all-embracing vvariety of instruments like state allocation of pointment, licensing and other regulatory controls to steer Indian industrial development on a closed economy basis.The strategy underlying the first three plans untrue that once the growth attend gets established, the institutional changes would ensure that benefits of growth slobber start to the poor. But doubts were brocaded in the early s scourties or so the effectualness of the trickle down cuddle and its ability to banish p everywherety. Furthe r, the growth itself pass around backd by the planned approach remained too weak to create adequate surpl utilisations- a prerequisite for the trickle down mechanism to work. Public sector did non live upto the expectations of generating surpluses to urge the pace of capital accumulation and help reduce inequality.Agricultural growth remained constrain by perverse institutional conditions. there was unchecked population growth in this period. Though the growth achieved in the first three Five Year Plans was non insignifi ejectt, yet it was non sufficient to find the aims and objectives of development. These brought into assure the weakness of sparing strategy. We discuss the stroke of the planning offset in more detail in the next section. A shift in ppolicy was called for. The Fifth Plan (1974-79) corrected its course by initiating a platform emphasizing growth with redistribution.To accelerate the impact of business and to align it with contemporary realities, a mi ld version of economic easiness was started in the mid(prenominal) 1980s. Three momentant committees were set up in the early 1980s. Narsimhan military commission on the shift from physical controls to financial controls, Sengupta Committee on the in the globe eye(predicate) sector and the Hussain Committee on trade ppolicy. The solution of such thought process was to reorient our economic policies. As a result there was sound-nigh progress in the process of deregulation during the 1980s. Two kinds of delicencing aactivity took place.First, thirty twain groups of industries were delicensed without all investment funds limit. Second, in 1988, all industries were exempted from licensing except for a contract negative list of twenty six industries. Entry into the industrial sector was do easier but exit still remained closed and sealed. Hence, the roots of the liberalization program were started in the late 80s when Rajiv Gandhi was the Prime take sympathize with of Ind ia, but the reach and force of the refine 2 program was instead limited. on that point were political reasons as to why this program could not be enhanced which we talk about later.The Failure of the Planning Process art object the reasons for adopting a centrally looked strategy of development were understandable against the backcloth of colonial rule, it, however soon became clear that the actual results of this strategy were far below expectations. Instead of showing high growth, high public savings and a high degree of self-reliance, India was actually showing one of the concluding rates of growth in the developing world with a wage augment public deficit and a periodic balance of payment crises.Between 1950 and 1990, Indias growth rate averaged less than 4 per cent per annum and this was at a time when the developing world, including Sub-Saharan Africa and other least developed countries, showed a growth rate of 5. 2 % per annum. An important assumption in the prime(a ) of post-independence development strategy was the generation of public savings, which could be used for high and high levels of investment. However, this did not happen, and the public sector-instead of being a generator of savings for the communitys good- became, over time, a consumer of communitys savings.This retroversion of roles had become evident by the early seventies, and the process reached its culmination by the early eighties. By then, the government began to borrow not only to meet its own revenue wasting disease but also to finance public sector deficits and investments. During 1960-1975, total public sector borrowings averaged 4. 4 % of gross domestic product. These increased to 6 % of GDP by 1980-81, and further to 9 % by 1989-90. Thus, the public sector, which was conjectural to generate resources for the growth of the rest of the economy, gradually became a net drain on the society as a whole.I will now try to give several(prenominal) reasons for the deteri oration of the public sector in India. 1) The intelligent system in India is such that it provides full protection to the private interests of the so called public servant, often at the outlay of the public that he or she is supposed to serve. In addition to complete job security, either group of public servants in whatever public sector organisation can go on strike in search of higher(prenominal) wages, promotions and bonuses for themselves, ir obedienceive of the costs and 3 nconvenience to the public. Problems hold up become worse over time and there is little or no accountability of the public servant to perform the public duty. 2) The effectiveness of governments, at both midriff and states, to enforce their decisions has eroded over time. Government can pass orders, for example, for move of unauthorized industrial units or other structures, but implementation can be delayed if they run counter to private interests of some (at the expense of the general public interes t). ) The process and procedures for conducting business in government and public gain organizations, over time, have become non-functional. There are numerosity of departments involved in the simplest of decisions, and administrative rules generally concentrate on the process quite a than results. There is very little decentralization of decision-making powers, featurely fiscal powers. Thus, while local authorities have been given remarkable authority in some states for implementing national programmes, their financial authority is limited.Hence during early 90s it was imperative for India to correct its clearly faulty developmental process. There have been several reasons put forward for the failure of the developmental path which necessitated the reforms of Manmohan Singh in 1991. The commission I would approach the analysis is through the approach of comparing and contrasting the judgmentpoints of both of the close to prominent Indian economists of our times. The Bhagwat i-Sen hand Jagdish Bhagwati and Amartya Sen, probably the two most influential voices amongst Indian economists, represent the two divergent ways of mobiliseing about the development path.Though formally no such knock overs exists, apart from occasional jibes against Sen in the writings of Bhagwati, I believe by scrutinizing their positions a lot of introspection can be done. As Bhagwati says my view as to what went wrong with Indian planning is completely at odds with that of Prof Sen. My objective in this section is bring 4 out the intellectual divergence amongst these two great minds and possibly to define something from that. Let us start with the points on which they agree.I moot the fact that India unavoidably an egalitarian development path is quite well acknowledged by both of them. The Nehruvian dream of an egalitarian growth process was what both of them would endorse. As Bhagwati says I have often reminded the critics of Indian strategy, who attack it from the pers pective of pauperism which is juxtaposed against growth, that it is incorrect to think that the Indian planners got it wrong by acquittance for growth rather than attacking destitution they confuse mearns with ends.In fact, the phrase minimum income and the aim of providing it to Indias poor were very much part of the lexicon and at the heart of our thinking and analysis when I worked at the Indian Planning Commission in the early 1960s. The key strategy that defined the resulting developmental effort was the decision to target efforts at accelerating the growth rate. effrontery the immensity of the distress, the potential of simple redistribution was considered to be both negligible in its immediate impact and of little sustained value. Accelerated growth was frankincense regarded as an instrumental variable a ppolicy outcome that would in strain reduce need.He goes on to argue Those intimately associated in Indias plans fully understood, contrary to some upstart assert ions, the need for land reforms, for maintenance to the hypothesis of undue concentration of economic power and growth in inequality. These fond tasks, which of course also can redound to economic advantage, were attended to and infinitely debated in the ensuing years, with reports commissioned (such as the Mahalanobis Committee report on income distribution in 1962) and policies continually revised and devised to achieve these affable outcomes.If we trace the writings of Sen on the other hand, in his recent book increase As Freedom, Sen argues that the usefulness of wealth lies in the things that it allows us to do- the crucial freedoms it helps us to achieve. an adequate conception of development must go much beyond the accumulation of wealth and the growth of gross national product and other income-related variables. Without ignoring the importance of economic growth, we must look well beyond it. I dont think that there is any divergence of view on this front with that of what Bhagwati says.It is worth mentioning at this oneness that this has been a common misconception amongst economists about the divergence of two different developmental paths. It is often misunderstood that Bhagwatis 5 view stresses just on economic growth while Sen argues against economic growth and the importance of commercializes. The to a higher place paragraphs reveal that this is certainly not the case. Both of them is sufficiently concerned with economic growth as well as the basic have intercourses of leanness, health and social issues. The points of divergence I believe the real disparity concerns the mearns of achieving these common goals.Bhagwatis arguments can be summarized as follows. The development process consists of two steps. As a first step, a growth accelerated strategy would generate enhanced investments and whose objective was to jolt the economy up into a higher investment mode that would generate a much higher growth rate. The planning theoretical ac count rested on two legs. First, it sought to make the escalated growth credible to private iinvestors so that they would proceed to invest on an enhanced basis in a self-fulfilling prophecy.Second, it aimed at generating the added savings to finance the investments so induced. His argument crucially rested on the following transparent theory. For the higher growth rate to achieve it is very important for the economy concerned to be open. If the effective exchange rate for exports over the effective exchange rate for imports (signifying the relative profitability of the foreign over the sept market), ensured that the world markets were profitable to aim for, guaranteeing in turn that the bonus to invest was no longer constrained by the growth of the domestic market.It is worthy to recount Indias performance as far as the public sector savings is concerned, which was considered a major hindrance towards the success of the Indian plans. Continuing with the argument, the generation of substantial export earnings enabled the growing investment to be implemented by imports of equipment embodying technical change. If the Social Marginal increase of this equipment exceeded the cost of its importation, there would be a surplus that would accrue as an income gain to the economy and boost the growth rate.The role of literacy and education comes at the next stage. The pproduactivity of the imported equipment would be great with a workforce that was literate person and would be further enhanced if many had even secantary education. at one time his argument is based on the fact that the enhanced growth would conduct and lead to a more educated workforce. Thus 6 he considers that primary education and literacy plays an enhancing, rather than initiating role in the developmental process. Sen on the other hand considers a larger view of development.He believes that capitulums such as whether certain political or social freedoms, such as the indecorousness of politi cal participation and dissent, or opportunities to receive basic education, are or not conducive to development misses the important understanding that these substantive freedoms are among the constituent components of development. Their relevance for development does not have to be new established through their indirect contribution to the growth of GNP or to the promotion of industrialization.While the causal relation, that these freedoms and rights are also very effective in contributing to economic progress, the vindication of freedoms and rights provided by this causal linkage is over and above the directly constitutive role of these freedoms in development. I think that it is precisely at this point where some of Sens writings on economics and philosophy should be considered. According to Sen, economics as a discipline has tended to move aside from focusing on the value of freedoms to that of utilities, incomes and wealth. This change of focus leads to an underappreciation of the full role of the market mechanism.For example, take the example of the most important finding on the theory of the markets- the Arrow-Debreu equilibrium. That theorem shows that a competitive economic system can achieve a certain type of cleverness (Pareto efficiency to be precise) which a centralized system cannot achieve, and this is due to reasons of incentives and discipline problems. But if we suppose that no such imperfections do exist and the aforesaid(prenominal) competitive equilibrium can be brought about by a dictator who announces the production and allocation decision, then are these two outcomes the identical?In a much celebrated paper, Sen brings out the feature in the midst of culmination outcomes (that is, the only final outcomes without taking any note of the process of getting there) and comprehensive outcomes (taking note of the process through which the culmination outcomes come about). Along these lines we can argue that Sen would disagree with Bh agwatis point of view in that it does not consider the comprehensive outcomes.Though the outcomes may be the same if we bring about a simultaneous increase in investments in education, health and other social activities, with that of growth, as against a 7 framework where growth brings about a derived demand for those activities (a la Bhagwati), these are not the same thing. So as we can debate, the primary difference in the approach is that Bhagwati argues that want and social dimensions can be taken dread of in the second step of the development process while Sen argues that social oopportunity is a constitutive element in the developmental process.In this respect it is implemental to inventory the East Asiatic case, where countries like Japan, South Korea, Taiwan (so called Asian Tigers) achieved phenomenal rates of growth in the 80s and much of the early 90s. The interesting fact about these countries is that they achieved this with a significant high come in on the socia l dimensions. Both Bhagwati and Sen has commented directly on the achievement of these countries. As Bhagwati states The East Asian investment rate began its take-off to phenomenal levels because East Asia turned to the Export promotion (EP) strategy.The excreting of the bias against exports, and and so a net excess of the effective exchange rate for exports over the effective exchange rate for imports (signifying the relative profitability of the foreign over the domestic market), ensured that the world markets were profitable to aim for, guaranteeing in turn that the inducement to invest was no longer constrained by the growth of the domestic market as in the IS strategy. I personally think that there is nothing disputable in this analysis but it does not strengthen his argument that the social achievements in these countries followed their phase of growth.In fact the pioneering example of enhancing economic growth through social oopportunity, in particular in basic education, is Japan. Japan had a higher rate of literacy than Europe even at the time of the Meiji restoration in the mid nineteenth century, when industrialization had not yet occurred there but had gone on for many decades in Europe. The East Asian experience was also based on ssimilar connections. The contrasts between India and china are also important in this aspect. The governments of both chinaware and India has been making efforts for sometime now to move toward a more open, internationally active, market-oriented economy.While Indian efforts have slowly met with some access, the kind of massive results that mainland China has seen has failed to occur in India. An important factor in this contrast lies in the fact that from a social preparedness standpoint, China is a great deal ahead of India in being able to make use of the market economy. While prereform China was deeply disbelieving of markets, it was not skeptical of basic education and 8 widely shared health care. When China t urned to marketization in 1979, it already had a highly literate people, in particular the young, with good schooling facilities across the bulk of the country.In this respect, China was not very far from the basic educational situation in South Korea or Taiwan, where too an educated population had played a major role in seizing the economic opportunities offered by a supported market system. Indeed it is often argued that it is a mistake to worry about the disagree between income achievements and survival chances-in general- the statistical connection between them is observed to be quite close. It is interesting, in this context, to refer to some statistical analyses that have lately been presented by Sudhir Anand and Martin Ravallion.On the basis of intercountry comparisons, they find that life expectancy does indeed have a significantly positive correlation with GNP per head, but that this kin works primarily through the impact of GNP on (I) the incomes specifically of the poo r and (2) public expenditure particularly in health care. In fact, once these two variables are iincluded on their own in the statistical exercise, little extra explanation can be obtained from including GNP per head as an additional causal influence. The basic point is that the impact of economic growth depends much on how the fruits of economic growth are used.Sen argues that a focus on issues on basic education, basic health care and land reforms made widespread economic participation easier in many of the East Asian and Southeast Asian economies in a way it has not been possible in, say, Brazil or India, where the creation of social opportunities has been much slower and that slowness has acted as a barrier to economic development. I believe that one has to take note of the examples of say, Sri Lanka, the Indian State of Kerala or pre-reform China where on the contrary, impressive high life expectancy, low fertility, high literacy and so on, have failed to translate into high ec onomic growth.I would like to see a theory which explains this. But to elucidate Sens view, he would rather prefer a situation of that of Kerala or Sri Lanka than that of Brazil or India. I would suggest that what one needs is such critical studies which would illuminate the failure of Brazil on one hand as against Sri Lanka on the other, to bedeck the fact that why an egalitarian growth process was not productively implemented in these cases. We will have useful lessons to learn in that case for the future of development. The debate 9 between Bhagwati and Sen (or rather the created debate in this paper) gives rise to such an agenda.The Reforms of Manmohan Singh At the beginning of 90s the reform process was started by the then Finance Minsiter of India, Manmohan Singh. The way I will organize this section is the following First, I will give a short summary of the reform process , in the finger what were its general goals and ideas. Then I will mention some aspects of the reform s which I think are very encouraging. After that I will scrutinize the reforms more stringently in order to assess whether there is real cause for such jubilation that we tend to observe regarding India. (i)The Background Indias economic reforms began in 1991 under the Narsimha Rao Government. By that time the surge in oil prices triggered by the Gulf War in 1990 imposed a severe strain on a balance of payments already made fragile by several years of large fiscal deficits and increase immaterial debt as was discussed before. Coming at a time of essential political instability, the balanceof-payments crises quickly ballooned into a crisis of confidence which intensified in 1991 even though oil prices quickly normalized. Foreign exchange reserves dropped to $1. billion in 1991, barely sufficient for two weeks of imports and a default on external payments appeared inevitable. The shortage of foreign exchange forced tightening of import restrictions, which in turn led to a fall in i ndustrial output. A digression The politics of reforms In a very attractive article on the politics of reforms Ashutosh Varshney has raised an extremely important question as to why was Indias minority government in 1991 successful in introducing economic reforms, whereas a much sthronger government, with a three-fourth majority in parliament, was unable to do so in 1985 (under the Prime Ministership of Rajiv Gandhi)?His argument draws a distinction between mass politics and elite politics. He believes that this distinction has not been adequately appreciated 10 in the voluminous belles-lettres on the politics of economic reforms. Scholars of economic reforms have generally assumed that reforms are, or tend to become, central to politics. Depending on what else is making demands on the energies of the electorate and politicians- cultural and religious strife, political order and stability, corruption and crimes of the incumbents- the assumption of reforms centrality may not be ri ght.In the largest ever survey of mass political attitudes in India conducted between April-July 1996, only 19 ppercent of the electorate reported any knowledge of economic reforms, even though reforms had been in existence since July 1991. Of the rural electorate, only about 14 per cent had heard of reforms, whereas the comparable proportion in the cities was 32 per cent. Further nearly 66 ppercent of the graduates were aware of the dramatic changes in economic ppolicy, compared to only 7 per cent of the poor, who are mostly illiterate.In contrast, close to three-fourths of the electorate both literates and illiterates, poor and rich, urban and rural- were aware of the 1992 mosque demolition in Ayodhya 80 per cent evince clear opinions about whether the country should have a uniform civil code or religiously prescribed and crock up laws for mmarriage, divorce, and property inheritance and 87 per cent took a stand on caste-based affirmative action. Thus according to Varshney, eli te politics is typically expressed in debates and struggles within the institutionalized settings of a bureaucracy, of a parliament or a cabinet.Mass politics takes place primarily on the streets. In democracies, especially poor democracies, mass politics can redefine elite politics, for an pile up expression of popular sentiments and opinions inevitably exercises a great deal of oblige on elected politicians. The economic reforms during 1991 kept progressing because the political context had made Hindu-Muslim relations and caste animosities the prime determinant of political coalitions. The reforms were crowded out of mass politics by issues that aroused great passion, and anxiety about the nation.And hence the reforms could go as far as they did. (ii) The Reforms in a Nutshell The reforms had two broad objectives. One was the reorientation of the economy from a statist, centrally directed and highly controlled economy to what is referred to in the accepted jargon as a marketfr iendly economy. A reduction direct controls and physical planning was expected to improve the efficiency of the economy. It was to be made more 11 open to trade and external flows through a reduction in trade barriers and liberalization of foreign investment policies.A second objective of the reform measures was macro-economic stabilization. This was to be achieved by substantially reducing fiscal deficits and the governments draft on societys savings. (iii) Results Compared with the historic trend, the impact of these policies has been positive and significant. The growth rate of the economy during 1992-93 to 1999-2000 was close to 6. 5 per cent per annum. The balance of payments position has also substantially improved.Despite several external developments, including the imposition of sanctions in 1998 and sharp rise in oil prices in 2000-01, foreign exchange reserves are at a record level. Current account deficits have been moderate, and Indias external debt (as a ppercentage of GDP) and the debt avail burden have actually come down since the early nineties. There is also evidence of considerable restructuring in the corporate sector with attention being given to cost-competitiveness and financial viability.The rate of inflation has also come down sharply. (iv) A Closer Scrutiny When we talk about GDP growth we talk about the aggregate figures. Let us near look at the sectoral composition. If we look at the growth rates with respect to different sectors we find that the growth rates of agricultural and industrial production have not increased at all in the nineties, compared with the eighties. The increase in overall growth in the 1990s is overwhelmingly drive by accelerated growth of the service sector.The service sector includes some very dynamic fields, such as uses of information technology and electronic servicing, in both of which India has made remarkable progress. This was largely a result of the liberalization policies initiated by Manmohan Sing h. Ssimilar comments apply to the phenomenal expansion of software-related export services. at present the relevant question is, what is wrong in the fact that the services sector is driving the growth process in India?What is a bit affect is the fact that it is not clear as to the extent to which the rapid growth of the service sector as a whole contributes to the generation of widely-shared employment, the elimination of poverty, and the 12 enhancement of the quality of life. And also employment in the service sector is often inaccessible to those who lack the required skills or education. The electric current restructuring to the Indian economy towards this skill and education-intensive sector reinforces the resources to a certain ection of the society. How has the Reforms been successful in creating a widely shared developmental process? The issue as to whether the reforms have been successful in eliminating poverty to a greater extent than say in the 80s is a battleful issu e. Experience prior to the 1990s suggests that economic growth in India has typically reduced poverty. Using data from 1958 to 1991, Ravallion and Datt (1996) find that the elasticity of the incidence of poverty with respect to net domestic product per capita was 0. 5 and that with respect to private consumption per capita it was 0. 9. However, the 1990s are more contentious. Some observers have argued that poverty has fallen far more rapidly in the 1990s than antecedently (for example, Bhalla, 2000). Others have argued that poverty reduction has stalled and that the poverty rate may even have risen (for example, Sen, 2001). The basic question of measuring Indias poverty rate has turned out to be harder to answer than it needed to be because of difficulties with coverage and comparability of the survey data.Correcting for all those, Datt and Ravallion in a recent study find that India has probably maintained its 1980s rate of poverty reduction in the 1990s, though they do not find a ny convincing evidence of an acceleration in the decline of poverty. It is probably intelligent to remark here that oftentimes the public rhetoric fails to take the incomparability problems in the surveys from which the poverty estimates are calculated and try to interpret the estimates to reinforce their particular arguments.Even the Finance Ministers budget speech of Feb 2001 coincluded firmly that poverty has fallen from 36 ppercent in 1993-4 to 26 ppercent or less now. It is worth noting that even if one were to endorse the official 1999-2000 headcount ratio of 26 per cent, which is known to be biased downwards, one would find that poverty reduction in the 90s has proceeded at a ssimilar rates as in the earlier decades, in spite of a significant acceleration in the economic growth rate. As things stand, this is the most optimistic reading of the procurable evidence.All of the estimates were made with respect to head-count indexes. I think it is necessary to move away from this narrow index and to consider a broader range of social 13 indicators. Much of the debate in this area has focused on what has happened to expenditure on social sector development in the post reform period. Dev and Mooji (2002) find that central