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Growth and Structural Changes Since 1951

• Indian economy performance was analyzed since Independence focusing on growth, development, and structural changes
• The analysis is based on different phases of growth across sectors and regions
• The country's growth experience is outlined and the turning points in national income growth rates are identified
• Section 1 outlines growth experience, turning points in national income growth rates, and sectoral contributions
  • It makes comparisons with other countries
• Changes in the growth performance of individual states and regional disparities are observed
• Section 2 discusses growth performance of different states and regional contrasts
  • These contrasts are analyzed in terms of growth rates and structural changes
• Some conclusions about growth prospects are drawn in light of the COVID-19 pandemic.
• Section 3 draws some conclusions on growth prospects in view of COVID-19
• In order to better understand performance, focus is placed on when the policy regime changed substantially
• The foundational years were the first three plan periods up to the drought and war crisis of 1965-66
  • These laid the groundwork for institutional infrastructure and policy regimes
• The government launched community development and rural credit cooperatives
• Industrial and import licensing were created
• Industrial development banks like Indian Institutes of Technology (IITs) and research facilities were created
• India's growth shift in the 1980s is referred to as its growth turnaround
• India's shift in the 1980s is significant because it happened before the BoP of '91, and macroeconomic reforms
• The growth turnaround was not driven by manufactured exports, or an industrial policy targeting specific industries
• The service sector was responsible for the increase in the overall growth rate in the early 1980s
  • The service sector created the impulse for the growth turnaround

Policy Regimes and Economic Events

• By 1970-71, the Green Revolution had stabilized and India was past the worst days related to food security
• Poverty eradication became the slogan of the day
• Monopolies and Restrictive Trade Practices Act was tightened and grain trade was nationalized
• Banking system was put under direct bureaucratic control and directed credit with differential interest rates was instituted.
• Oil crisis of 1973-74 and the emergency intervened
• Years of turbulence occurred
• Indian development performance was the worst between 1965-66 and 1979-80 and levels of investment were low
• Public investment program was poorly managed with cost overruns
• The return of the Congress Party to power in 1980 marks a policy shift
• Indira Gandhi's second administration signaled a changed attitude for the private sector via policy changes
• Committees led by leaders like L.K. Jha and M. Narasimham presented an agenda for a pro-private sector market policy
• Tax reductions that started in 1985-86 conveyed a positive signal to capital markets and may have improved collections

External Factors

• External liberalization could not have been the reason for the growth shift
• The Indian trade regime actually became more restrictive during the 1980s
• Reforms in the 1990s wasn't felt until the end of of the 1990s
• Reforms in product and labor markets were not witnessed in the 1980s
• The government in the 1980s validated a shift favoring the private sector through actual policy changes in a haphazard manner.
• There was an attitudinal change on the part of the government in the 1980s validated through policy changes
• These shifts and changes were were often pro-incumbent, which elicited large productivity
• Significant policy changes in the early 1980s were restricted largely to internal liberalisation of industrial licensing
• The government aimed to gather support from the business establishment rather than alienate it
• The reduction in taxes, access to capital inputs, or liberalising capacity restrictions received action where business support existed

Economic Perspectives

• Two distinct business orientations may be drawn
  • Pro-market aims to remove impediments to markets via economic liberalisation, which favors entrants and consumers
  • Pro-business aims to raise the profitability of established industrial and commercial establishments, which favors incumbents and producers
• Deepak Nayyar stated that the acceleration in economic growth, since 1980, was attributable to expansionary macroeconomic policies
  • Increased public investment and trade liberalisation also contributed
• Economic policies over 30 years created institutional capacities, legal frameworks for a market economy, and a system of higher education

Growth in the 1990s and 2000s

• The reasonable growth rates of the 1990s have been sustained compared to that of the 1980s
• The rates of growth of the Indian economy, by international standards, in both decades combined shows sustained rapid growth
• India ranks among the 10 fastest-growing countries, along with China, Vietnam, South Korea, Malaysia, Thailand and Singapore
• The Indian economy hit a crisis in 1991 largely because India had not built up a viable relationship with the international economy
• Indian industry remained highly protected and was not subject to competitive pressures with small exceptions
• There was a major change in the policy on foreign investment
• Securities and Exchange Board of India (SEBI) was established and the National Stock Exchange (NSE) shifted away from bureaucracy
• 2003-2008 were the best phase in growth where average growth stood at about 8.5 per cent annually
• Rising world trade since 2002, a technological change and deregulation in USA birthed outsourcing and boosted India’s services exports
• Large increases in bank lending to the private sector, FDI, FPI and FCCBs occurred
• FDI rose to 2.8 per cent of GDP
• The financial crisis hit employment in manufacturing and female labor participation declined
• The economy recovered due to monetary and public expansions

GDP

• The decline in output growth was stronger than the decline in investment
• The slowdown was a result of domestic structural constraints

Structural Factors

The following are structural factors affecting economic growth:

• Difficulties in taking quick decisions on project proposals have affected the ease of doing business
• Ill-targeted subsidies cramp the fiscal space for public investment and distort resource allocation
• Low manufacturing base and value addition
• Sizable informal sector and inadequate labour
• High food inflations, also referred to as structural factors, need to be reduced by significant presence of intermediaries, shortages storage and interstate commerce

Recent Economic Changes

• Central Statistics Office shifted to the new base of 2011-12
• The new series of national accounts was released by the CSO on January 30, 2015, which is the result of substantial methodology overhauls
• The economic scenario from the new economic series reveals perceptible improvement in the economy in 2013-14
• Economic growth measured was at 5.1% and 6.9% respectively during 2012-13 and 2013-14
• According to Rangarajan, the output growth was stronger than the decline in investment
  • Investment rate came down to 32.3%
• Speedy completion of projects can raise the growth rate

Change is measurement

• Headline growth rate = GDP and constant market prices ("GDP")
  • Used internationally.
  • Prior = GDP growth rate and factor cost at constant prices.
• Sector estimates of gross value added (GVA)
  • At basic prices instead of factor cost

Sector Trends

• Sector-wise shares in aggregate GVA have undergone significant revision, especially in the case of manufacturing and services
• The share of services has been increasing
• Robust growth in communication and banking drive service sector especially after 2011

Structural Changes

• Since 1951 there has been:
• A decline in agriculture
  • Increase in industry then decline
• Overall
  • Reduction in agriculture
  • Overall increase in industry

Inequality

• The problem of poverty and unemployment are the biggest challenges
• Disparities in GSDP have increased since the 1990s
  • GSDP growth is greater in rich states than poor states
  • Poorer sates experienced faster growth in population
• A larger effort should be placed on improving social and economic infrastructure

Factors in Growth

• Positive impact: public investment, sector and industry discussions
• Negative: banking stress, high NPA ratio

Recent Events

• There are structural factors which caused economic issues the past few years
• These factors have created an undesirably low investment rate

Demonetization

Demonetization led to the following:

• An adverse impact on economic activity
• Reduced GDP growth
• Resulted in economic disruption

COVID

• Recent crisis on top of a downslide
• Economic damage is very evident

Structural Reform and Way Forward

• Continue economic reform

State Performance

• Differ by state
• Some above average, some below
• Increased during and after this period
• 6 states showed growth
• Performance affected by geography, resources, level of diversity

Sectoral Linkages

• Industry matters to the service sector in input flow
• The agriculture sector accounts for 11.8% of the total inputs

Shifting Economy

• Economy is shifting away industry and agriculture towards commercialization