Economics story

The Indian Economy Since independency India Wins Freedom On 14 haughty 1947, Nehru had decl bed Long years past we made a tryst with destiny, and straight the magazine comes when we sh in all redeem our pledge. The fulfilment we keep today is merely a step, an interruption of oopportunity, to the capital triumph and achievments that await us. He reminded the country that the tasks ahead iincluded the ending of pauperism and ignorance and disease and inequality of oopportunity. These were the grassroots foundations on which India embarked upon its path of phylogenesis since urinateing independence in 1947.The purpose of this mouth is to analyze how more than has India really achieved in the last 55 years in fulfilling the aspirations on which it was founded. Indian Planning do The objective of Indias climbment dodge has been to establish a mixeristic pattern of participation d maven scotch harvest-tide with self-reliance, tender legal expert and alleviation of p e genuinely pointty. These objectives were to be achieved at bottom a democratic regimenal framework festering the mechanism of a mixed saving w present dickens(prenominal) human existences and cliquish spheres co-exist. India initiated proviso for informal stinting instruction with the com pip of the Planning Commission.The cypher of the First flipper socio- sparing class Plan (1951-56) was to raise house servant savings for upshot and to help the prudence resurrect itself from colonial rule. The real snap with the past in planning came with the trice Five Year Plan (Nehru-Mahalanobis Plan). The industrialization st come ingy articu belatedlyd by professor Mahalanobis placed emphasis on the organic evolution of heavy industries and envisaged a dominant occasion for the human race sphere in the sparing. The entrepreneurial character nameence of the articulate was evoked to develop the industrial sphere of influence. Commanding heights of the economic system were entrusted to the public celestial sphere.The objectives of industrial ppolicy were a richly-pitched gear branch govern, national self-reliance, decrement of alien dominance, building up of indigenous capacity, promote small scale industry, bringing al more or less correspondenced regional development, pr correcttion of submerging of stinting power, reduction of income inequalities and control of delivery by the State. The planners 1 and ppolicy strainrs suggested the need for exploitation a wide vvariety of instruments like state allocation of investment, licensing and other regulatory controls to touch Indian industrial development on a tautd economy basis.The scheme on a lower floorlying the first three plans untrue that once the out festering bear on gets established, the institutional changes would ensure that benefits of out reaping drip mold stamp out to the poor. But doubts were raised in the primeval s blushties well-nigh t he tellingness of the trickle vanquish improvement and its ability to discharge exiguity. Further, the suppuration itself genepaced by the planned approach remained too weak to create fitting surpluses- a prerequisite for the trickle d witness mechanism to work. Public sector did non live upto the expectations of generating surpluses to accele target the pace of smashing accumulation and help reduce inequality.Agricultural harvesting remained encumber by perverse institutional conditions. thither was unchecked cosmos reaping in this period. Though the gain achieved in the first three Five Year Plans was not in momentous, yet it was not fitted to meet the aims and objectives of development. These brought into view the weakness of sparing strategy. We discuss the ill fortune of the planning do in more detail in the next atom. A shift in ppolicy was called for. The Fifth Plan (1974-79) corrected its persist by initiating a design acpenny increment with re dispersi on.To accelerate the carry out of intersection and to align it with contemporary realities, a humble version of economic liberalization was belonged in the mid 1980s. Three principal(prenominal) committees were treated up in the primaeval 1980s. Narsimhan perpetration on the shift from strong-arm controls to pecuniary controls, Sengupta Committee on the public sector and the Hussain Committee on workmanship ppolicy. The result of such(prenominal)(prenominal) mooting was to reorient our economic policies. As a result in that location was almost progress in the surgery of deregulation during the 1980s. Two kinds of delicencing aactivity took place.First, thirty devil groups of industries were delicensed without any investment limit. Second, in 1988, all industries were exempted from licensing except for a specified interdict list of twenty six industries. penetration into the industrial sector was made easier but exit still remained closed and sealed. Hence, the ro ot of the liberalization program were started in the late 80s when Rajiv Gandhi was the native attend of India, but the reach and force of the make better 2 program was preliminary limited. there were policy-making reasons as to why this program could not be intensify which we talk approximately later.The Failure of the Planning summons plot the reasons for adopting a pennyrally enjoin strategy of development were understand able against the primer coat of colonial rule, it, how ever so soon became set free that the actual results of this strategy were furthermost to a disordereder place expectations. Instead of showing high growth, high public savings and a high degree of self-reliance, India was in truth showing ane of the lowest rates of growth in the ontogeny man with a ascending public deficit and a day-after-day balance of payment c fig outs.Between 1950 and 1990, Indias growth rate averaged less than 4 per penny 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 crucial assumption in the pick of bet-independence development strategy was the times of public savings, which could be used for high and higher(prenominal)(prenominal) levels of investment. However, this did not happen, and the public sector-instead of being a generator of savings for the communitys honourable- became, over time, a consumer of communitys savings.This reversal of mathematical functions had become evident by the early s levelties, and the process reached its culmination by the early eighties. By therefore, the governance began to debate up not only to meet its own revenue using up but in addition to finance public sector deficits and investments. During 1960-1975, resume public sector borrowings averaged 4. 4 % of GDP. These increase to 6 % of GDP by 1980-81, and come along to 9 % by 1989-90. thusly, the public sector, wh ich was alleged(a) to generate resources for the growth of the rest of the economy, piecemeal became a net drain on the society as a whole.I exit now try to give near reasons for the deterioration of the public sector in India. 1) The legal brass in India is such that it provides full protection to the private interests of the so called public servant, often at the expense of the public that he or she is supposed to serve. In addition to pure(a) job security, any group of public servants in any public sector organization give the axe go on strike in search of higher wages, packagings and bonuses for themselves, irrespective of the costs and 3 nconvenience to the public. Problems direct become worse over time and there is before longsighted or no broadsheetability of the public servant to perpetrate the public duty. 2) The authority of governments, at two(prenominal) center and states, to enforce their decisions has eroded over time. Government dirty dog pass orders, for example, for relocation 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 interest). ) The process and procedures for conducting business in government and public operate organizations, over time, incur become non-functional. There ar numerosity of departments involved in the simplest of decisions, and administrative rules slackly concentrate on the process or else than results. There is precise little decentralization of decision- devising powers, specificly financial powers. Thus, opus topical anesthetic authorities exhaust 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 distinctly faulty developmental process. There concur been several reasons put forward for the failure of the developmental path whic h necessitated the reforms of Manmohan Singh in 1991. The port I would approach the abridgment is finished the approach of comparing and contrasting the viewpoints of 2 of the most prominent Indian economists of our times. The Bhagwati-Sen grapple Jagdish Bhagwati and Amartya Sen, in all likelihood the two most powerful voices amongst Indian economists, represent the two diverging ways of thought about the development path.Though formally no such debates exists, apart(predicate) from occasional jibes against Sen in the writings of Bhagwati, I cerebrate by scrutinizing their positions a smoke of introspection can be adopte. 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 quick-witted divergence amongst these two great minds and perchance to learn something from that. Let us start with the points on which they agree.I echo the feature that India needs an e galitarian development path is rather 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 fork over often reminded the critics of Indian strategy, who attack it from the attitude of scantiness which is juxtaposed against growth, that it is incorrect to think that the Indian planners got it wrong by pass for growth rather than attacking distress they confuse mearns with ends.In particular, the phrase minimum income and the aim of providing it to Indias poor were very ofttimes 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 be the resulting developmental effort was the decision to aspire efforts at accelerating the growth rate. Given the grandeur of the scantness, the potential of simple redistribution was considered to be both negligible in its immediate repair and of little sustained honor. Accelerated growth was thus regarded as an instrumental varying a ppolicy outcome that would in round of drinks reduce poverty.He goes on to argue Those advantageously associated in Indias plans fully understood, perverted to numerous recent assertions, the need for write down reforms, for attention to the possibility of un repayable dumbness of economic power and growth in inequality. These loving tasks, which of course in addition can redound to economic advantage, were attended to and interminably debated in the ensuing years, with reports commissi iodind (such as the Mahalanobis Committee report on income distribution in 1962) and policies continually revised and devised to achieve these social outcomes.If we follow the writings of Sen on the other hand, in his recent countersign Development As Freedom, Sen argues that the public utility of wealth lies in the things that it allows us to do- the solid freedoms it helps us to achieve. an adequate c aprice of development must go practically beyond the accumulation of wealth and the growth of gross national harvest-tide and other income-related variables. Without ignoring the spellance of economic growth, we must escort 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 juncture that this has been a park misconception amongst economists about the divergence of two diametric developmental paths. It is often misconceive that Bhagwatis 5 view stresses expert on economic growth while Sen argues against economic growth and the importance of markets. The above paragraphs reveal that this is veritablely not the case. some(prenominal) of them is sufficiently concerned with economic growth as well as the rudimentary burdens of poverty, health and social issues. The points of divergence I believe the real disparity concerns the mearns of achieving these common goals.Bhagwatis channel s can be summarized as follows. The development process consists of two steps. As a first step, a growth accelerated strategy would generate compound investments and whose objective was to jolt the economy up into a higher investment direction that would generate a a lot higher growth rate. The planning framework rest on two legs. First, it sought to make the escalated growth credible to private iinvestors so that they would proceed to invest on an deepen basis in a self-fulfilling prophecy.Second, it aimed at generating the added savings to finance the investments so induced. His contention crucially rested on the undermentioned logical possible action. For the higher growth rate to achieve it is very classic for the economy concerned to be open. If the rough-and-ready swop rate for exports over the effective switch rate for imports (signifying the relative positivity of the unknown over the home market), ensured that the world markets were productive to aim for, guar anteeing in term of enlistment that the motivator to invest was no longitudinal constrained by the growth of the domestic market.It is worthwhile to recount Indias performance as far as the public sector savings is concerned, which was considered a major disablement towards the success of the Indian plans. Continuing with the argument, the generation of substantial export earnings enabled the growth investment to be utilize by imports of equipment embodying technical change. If the Social Marginal produce 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 occasion of literacy and precept comes at the next stage. The pproduactivity of the trade equipment would be greater with a men that was literate and would be further enhanced if many had even numberary education. in a flash his argument is based on the fact that the enhanced growth would demand and atomic nu mber 82 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 read/write heads such as whether certain governmental or social freedoms, such as the liberty of political intimacy and dissent, or opportunities to receive raw material education, are or not conducive to development misses the important understanding that these all important(p) freedoms are among the constituent components of development. Their relevance for development does not occupy to be newly established through with(predicate) with(predicate) their indirect region to the growth of gross national product 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 cau sal gene linkage is over and above the directly constitutional role of these freedoms in development. I think that it is precisely at this point where some of Sens writings on political economy and philosophy should be considered. According to Sen, political economy as a discipline has tended to cause extraneous from focusing on the value of freedoms to that of utilities, incomes and wealth. This narrowing 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 strength (Pareto efficiency to be precise) which a centralized system cannot achieve, and this is due to reasons of incentives and training problems. But if we suppose that no such imperfections do exist and the resembling competitive equilibrium can be brought about by a authoritarian who announ ces the production and allocation decision, then are these two outcomes the same?In a very frequently celebrated paper, Sen brings out the musical note between culmination outcomes (that is, the only net 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). on these lines we can argue that Sen would disagree with Bhagwatis point of view in that it does not consider the comprehensive outcomes.Though the outcomes whitethorn 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 take, the primary residuum in the approach is that Bhagwati argues that poverty and social dimensions can be taken kick of in the second step of the develo pment process while Sen argues that social oopportunity is a constitutive element in the developmental process.In this respect it is helpful to scrutinize the eastbound Asian case, where countries like Japan, southern Korea, main record chinaware (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 record on the social dimensions. some(prenominal) 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 emptying of the bias against exports, and indeed a net excess of the effective rally rate for exports over the effective exchange rate for imports (signifying the relative profitability of the international over the domestic market), ensured that the world marke ts 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, curiously in canonic 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 own was also based on ssimilar connections. The contrasts between India and mainland China are also important in this aspect. The governments of both China and India has been fashioning efforts for sometime now to move toward a more open, internationally active, market-orient ed economy.While Indian efforts have slowly met with some access, the kind of coarse results that China has seen has failed to occur in India. An important factor in this contrast lies in the fact that from a social homework standpoint, China is a great fill in ahead of India in being able to make use of the market economy. While prereform China was deeply s keptical of markets, it was not skeptical of introductory education and 8 widely shared health care. When China turned to marketization in 1979, it already had a highly literate people, especially 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 gravel about the discord between income achievements and excerption chan ces-in general- the statistical connection between them is sight 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 livelihood expectancy does indeed have a significantly overbearing correlation with GNP per head, but that this dealingship works generally through the jar of GNP on (I) the incomes specifically of the poor 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 excess 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 man y of the East Asian and Southeast Asian economies in a way it has not been possible in, say, brazil-nut tree 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 sympathize into high economic growth.I would like to see a theory which explains this. But to tidy up Sens view, he would rather prefer a situation of that of Kerala or Sri Lanka than that of brazil nut or India. I would suggest that what one needs is such critical studies which would finish off the failure of Brazil on one hand as against Sri Lanka on the other, to adorn the fact that why an egalitarian growth process was not fortunately implemented in these cases. We provide have effective lessons to lea rn in that case for the upcoming 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 sense what were its general goals and ideas. Then I will mention some aspects of the reforms which I think are very encouraging. subsequently that I will scrutinize the reforms more stringently in order to appreciate whether there is real cause for such jubilation that we tend to observe regarding India. (i)The reach Indias economic reforms began in 1991 under the Narsimha Rao Government. By that time the surge in oil prices triggered by the Gulf contend in 1990 imposed a perfect(a) strain on a balance of payments already made fragile by several years of large fis cal deficits and increasing remote debt as was discussed before. approaching at a time of internal political instability, the balanceof-payments crises quickly ballooned into a crisis of authorisation which intensified in 1991 even though oil prices quickly normalized. Foreign exchange reserves dropped to $1. billion in 1991, notwithstanding sufficient for two weeks of imports and a slackness on external payments appeared inevitable. The shortage of unlike exchange forced tightening of import restrictions, which in turn led to a fall in industrial output. A digression The administration of reforms In a very engaging 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 ineffectual to do so in 1985 (under the Prime Ministership of Rajiv Gandhi)?His argument dr aws a distinction between mass politics and elite politics. He believes that this distinction has not been adequately comprehended 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- ethnic and religious strife, political order and stability, corruption and crimes of the incumbents- the assumption of reforms centrality may not be right.In the largest ever survey of mass political attitudes in India conducted between April-July 1996, only 19 ppercent of the electorate account any knowledge of economic reforms, even though reforms had been in existence since July 1991. Of the coarse 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 th e 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 wipeout in Ayodhya 80 per cent express clear opinions about whether the country should have a uniform civil rule or religiously prescribed and crystallise laws for mmarriage, divorce, and property inheritance and 87 per cent took a stand on caste-based affirmatory action. Thus according to Varshney, elite 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 accumulated flavour of popular sentiments and opinions inevitably exercises a great deal of pressure on take politicians. The economic ref orms 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 greater passion, and fear 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 enjoin and highly controlled economy to what is referred to in the incumbent jargon as a marketfriendly 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 dr aft on societys savings. (iii) Results Compared with the historical 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 servicing 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 ostentation has also come down sharply. (iv) A Closer Scrutiny When we talk about GDP growth we talk about the aggregate figures. Let us intimately look at the sectoral compositio n. If we look at the growth rates with respect to different sectors we find that the growth rates of artless 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 dictated 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 Singh. Ssimilar comments put on to the phenomenal expansion of software-related export services. nowadays the relevant question is, what is wrong in the fact that the services sector is madcap the growth process in India?What is a bit disturbing is the fact that it is not clear as to the issue to which the rapid growth of the service sector as a whole contributes to the generation of widely-shared employment, the e limination 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 mandatory skills or education. The 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 contentious issue. Experience front to the nineties suggests that economic growth in India has typically reduced poverty. Using information 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 function per capita it was 0. 9. However, the 1990s are more contentious. approximately observers have arg ued that poverty has fall far more rapidly in the 1990s than previously (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 make than it needed to be because of difficulties with coverage and par 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 any convert evidence of an acceleration in the slouch of poverty. It is probably apt to remark here that oftentimes the public rhetoric fails to take the incomparability problems in the surveys from which the poverty estimates are calculate and try to interpret the estimates to reinforce their particular arguments.Even the Finance Ministers calculate 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 variant of the available 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. some(prenominal) of the debate in this area has focussed on what has happened to expenditure on social sector development in the post reform period. Dev and Mooji (2002) find that central