Indian Economy PPT

A Tour d' Horizon

1947-2016

Joshi, Vijay

India's Long Road, Chapter 2

Group 7

Index

1.

Introduction

2.

The Ancien Regime: A Political and Economic Narrative

3.

The Ancien Regime: Economic Policy and Performance

4.

Partial Reforms since 1980

5.

Poverty, Deprivation and Inequality since 1980

6.

Overview of 1980-2014

1. lNTRODUCTION

INTRODUCTION

1. Economic development and Political Narrative of the country

Between 1950-1980 Between 1980-2015 2. Growth and Poverty Policies 3. In the first period - Economic strategy is followed by ‘Command and Control Model’. 4. During the Second period the economic strategy moved towards a greater marketization.

Two steps that shaped India’s economic trajectory in 20th century

The second one took place during 1980-2015

The first one took place during 1950-1980

• Increase in Growth Rate from less than 1% to 3.5% ( Fascinating?) .
• No , because the Growth Rate of 3.5% which was mockingly dubbed as ‘Hindu Rate of Growth’ was a major disappointment -
• Slower than the world average.

• Average for the Developing Countries
• Too slow to make any impact on poverty ratio

• Increase in Growth Rate to 6% per year (4% per head)

• Major achievement for India

• India became one of the fastest growing nation in the world

• Towards the end of the period long term growth seems faltering

2. THE ANCIEN REGIME

The Ancien Regime : A Political and Economic Narrative

1. During 1950-1980, India’s national political scene was mostly controlled by two Prime Ministers - Jawaharlal Nehru and his daughter Indira Gandhi. 2. First few years from 1950 - Agenda is to stabilise the country after the trauma from partition 3. In 1950-51 , planned economic development was initiated.

• Comprehensive detailed planning came during the second five year plan that began in 1956-57.
• Acute Foreign exchange crisis.
• GDP grew around 3.9% a year on the back of rapid public investments

4. Nehru died in 1964. Lal Bahadur Shastri took over but faced many problems

• 1964 drought
• War with Pakistan
• Promoted Green Revolution to transform Indian Agriculture

2. THE ANCIEN REGIME

The Ancien Regime : A political and Economic Narrative

5. Shastri died in 1966 . Indira Gandhi took over the charge.

• Droughts in 1965 and 1966
• Inflation and Recession

6. In 1966, the Government had to carry out a large devaluation.

• Because of drought and Inflation

7. 1971 victory over Pakistan.

• Congress won the national election
• Indira Gandhi moved towards the path of state ownership and control

2. THE ANCIEN REGIME

The Ancien Regime : A political and Economic Narrative

8. Indira Gandhi was challenged by court for minor electoral offences.

• Emergency was declared in 1975

9. Congress was defeated in the 1977 election . Janata Party coalition took over

• Drought in 1977 (Worst since Independence!)
• Doubling World oil price
• Inflation

10. Congress came back with a sweeping victory

• Growth rate fell to 2.9% per year during 1979-80

3. THE ANCIEN REGIME

The Ancien Regime: Economic Policy and Performance

Striking to see growth rate was slow, even declined over time, despite doubling of savings and investment rates. The productivity of investment was low.

Low productivity was a product of three features of economic policy, namely:

1. Inappropriate and excessive state intervention in the market
2. The dominant role of the public sector
3. Neglect of critical social sectors like health, education and poverty alleviation

Why did India fail to achieve rapid growth for three decades after Independence, i.e, from the period 1950-1980?

Indian Policymakers acted with a mistaken conception of the role of the state.

3. THE ANCIEN REGIME

3. Neglect of critical social sectors like health, education and poverty alleviation

1. Inappropriate and Excessive State Intervention in the Market

2. The Dominant Role of the Public Sector

It led to making growth non inclusive. India’s performance in these areas was dismal; and many people were denied the opportunity to enhance their principal income-earning asset, namely themselves. Part of the reason for this failure was low growth itself and the consequent shortage of revenues that could finance social expenditures. India started from a somewhat lower base than the East Asian economies (other than China). Slow growth and neglect of human development also led to a comprehensive failure in poverty alleviation

The dominant role accorded to the public sector extended well beyond the traditional utilities and included a large chunk of the manufacturing industry, many consumer goods and even hotels. While public sectors were expected to be highly profitable and to serve as the spearhead of investment, in reality returns in most public sectors were abysmally low out of which many firms did not only make losses but became bankrupt. Keeping them alive imposed a large fiscal burden

The statist doctrine thinking was given a further twist by a heavy industry strategy which was adopted in the Second Five Year Plan and used to justify the physical allocation of investment. It was taken for granted that extensive government intervention and control were necessary to subdue the market and make the private sector’s activities consonant with the planned trajectory of output. This led to take over of rent seeking and the onset of the License Raj system. There existed excessive control in every facet of business decision making. Most harmful effect of such controls were the controls on foreign trade and investment that stemmed from the belief in self reliance

4. PARTIAL REFORMS SINCE 1980

PARTIAL REFORMS SINCE 1980 : A POLITICAL BACKDROP

Congress and Indra Gandhi returned to power when India was : • In the middle of a drought • Oil price shock • Macroeconomic crisis Crisis response : Government took expansionary adjustment without cutting Public investment, with the help of a large IMF loan.

PROBLEMS DURING VP SINGH’S RULE –

RAJIV GANDHI’S RULE –

• Oil prices doubled, this increase affected –
• 1) Current account of balance of payments
• 2) Capital account
• Acute difficulties were experienced in new commercial borrowing sector
• Existing short term loans, credits and reserves fell sharply
• Communal and caste conflicts grew because of VP singh’s attempt to implement the recommendations of the Mandal Commission

• He took liberalizing measures but that didn’t last long

• In 1987, his reputation was tainted by Bofers scandal which led to his downfall

• In 1989, he called for an election again where in he lost

4. PARTIAL REFORMS SINCE 1980

• This government collapsed when BJP withdrew its parliamentary support

• In may 1991, PV Narsimha Rao became the Prime Minister with Manmohan Singh as finance minister

PROBLEMS FACED BY PV NARSIMHA RAO’S GOVERNMENT – • Inflation was 12% and rising • The current account deficit was 3.5% of GDP and 45% of Exports • Reserves were down to two weeks of imports • Consolidated fiscal deficit was more than 10% of GDP • External debt to exports ratio was 250%

4. PARTIAL REFORMS SINCE 1980

New government announced stabilisation and liberalization policies : • Fiscal retrenchment was undertaken • Combined with devaluation of rupee • And supported by credit from IMF Growth crashed to negative levels for a year because of fiscal contraction, temporarily There was smart recovery in the following year with reduction in fiscal and current account deficits

4. PARTIAL REFORMS SINCE 1980

ECONOMIC PERFORMANCE FROM 1980-81 TO 1992-93 • Average growth rate increased to 5.2%, this increase in growth rate was because of the following factors – 1. Investment went up to average of 21% of GDP compared to 17% in the last 15 years 2. There was an increase in both public and private investment 3. Productivity increased • this higher growth was also based on large increases in government and foreign borrowing • Thus, the Liberalisation policies led to a sizeable increase in the economic efficiency Rao’s gle party and formed the government with Atal Bihari Vajpayee as the prime Prime Minister.

4. PARTIAL REFORMS SINCE 1980

• Rao’s government lost the next elections and in 1998, BJP emerged as the largest single party and formed the government with Atal Bihari Vajpayee as the prime Prime Minister. ATAL BIHARI BAJPAYEE’S RULE - • There was further liberalisation of : 1. Trade 2. Finance 3. Foreign investment • They introduced privatisation of Public sector Undertakings • There were also advances in infrastructure provision • Their record was stained by the 2002 communal riots, which led to its downfall.

4. PARTIAL REFORMS SINCE 1980

UPA IN POWER ( 2004-2014) - • Nuclear Deal was negotiated with US • Growth was super-fast at 8.5% • during the UPA-1’s term , the global economic environment was highly supportive • growth slipped to 6.7% in 2008-9 before it rebounded • From 2011-14, growth fell to around 5 per cent a year • Fall in growth, corruption among others resulted in it’s collapse.

THE PARTIAL REFORM MODEL : GROWTH SINCE 1980

THE CRISIS OF 1991

THE PARTIAL REFORM MODEL

• The data reveals that fiscal deficit during 1990-91 was as large as 8.4 percent of GDP.
• The trade deficit increased from Rs. 12,400 crore in 1989-90 to Rs. 16,900 crore in 1990-91
• The average Inflation rate went up to 13% in 1991-92
• Forex reserves declined from Rs. 5,277 crore in 1989 to Rs.2,512 crore in 1991
• Exports to Eastern Europe declined to 10% out of total exports from 22.1% in 1980
• The oil import bill increased by about 60 percent in 1990-91

• In 1980 Growth rate rose to 5.6%

• Congress enacted government friendly policies

• Growth was led by expansionary fiscal policy and foreign borrowings.

• These reforms were very shallow

5.Poverty, Deprivation and Inequality since 1980

Poverty, Deprivation and Inequality since 1980

In a poor developing country, the touchstone of successful economic performance is poverty alleviation.

1. In 2011 Suresh Tendulkar Committee defined the poverty line on the basis of monthly spending on food, education, health, electricity and transport.
2. The Rangarajan committee estimated poverty line should be based on certain normative levels of adequate nourishment, clothing, house rent, conveyance and education, and a behaviourally determined level of other non-food expenses
3. Progress in reducing the headcount poverty ratio .
4. Poverty has fallen in these groups too, but the disparity between their poverty rates and the all- India average has remained unchanged between 1993 and 2010.
5. The gross enrolment rate in secondary schools is only 63 per cent, compared with 81 per cent in China; and around half of the enrollers drop out before completion

5.Poverty, Deprivation and Inequality since 1980

Poverty, Deprivation and Inequality since 1980

6. For various reasons, including severe under- reporting of and by the rich, measured consumption inequality systematically underestimates true income inequality. 7. Secondly, there is plenty of evidence of a rising premium for higher education and skills. 8. Gini coefficient is a measure of statistical dispersion intended to represent the income inequality or the wealth inequality within a nation or a social group.

6. Overview of 1980-2014

Overview of 1980-2014

1. In most respects, India’s economic performance has undoubtedly been much better after 1980 than before.
2. Fiscal management is the outstanding exception.
3. Until the late 1970s, Indian fiscal policies were prudent.
4. The fiscal slippage was in part a consequence of public sector losses and inefficiency but also of a massive growth in subsidies that occurred for various reasons grounded in political economy.
5. Though the fiscal position improved after the 1991 reforms, it remains fragile, and enduring fiscal consolidation has not been achieved.

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