Indian Economy: Growth and Structural Changes since 1951 - PDF

Okay, I will convert the document in the image into a markdown format as requested. # Growth and Structural Changes since 1951 ## 8 - Growth and Structural Changes since 1951 In this chapter, we analyze the performance of the Indian economy since Independence to the experience of growth, developm...

Okay, I will convert the document in the image into a markdown format as requested. # Growth and Structural Changes since 1951 ## 8 - Growth and Structural Changes since 1951 In this chapter, we analyze the performance of the Indian economy since Independence to the experience of growth, development, and structural change in different phases of growth and policy regimes across sectors and regions. the structure of discussion is as follows: Section 1 outlines the growth experience, the turning points in growth rates of national income, the sectoral contributions and comparison with other countries. In Section 2, the discussion is on growth performance of different states the regional contrasts in terms of growth rates and structural changes. Section 3 draws some conclusions on growth prospects in view of COVID-19 pandemic. ### Periodisation of Indian Growth Experience In order to learn lessons from performance, it is useful to try a different type of periodisation based on when the policy regime changed substantially. Looked at this way, the Indian growth experience can be broken up into the periods indicated in table 8.1. The first three plan periods up to the drought and war crisis of 1965-1966 were the foundational years for laying the institutional infrastructure and the policy regimes for development were put in place. These were the years when the government launched community development and rural credit cooperatives, industrial and important licensing and industrial development banks, Indian Institutes of Technology IITs many research establishments, and many other institutional and policy initiatives. **Table 8.1 - Periodisation of Indian Growth Experience** | Period | Characterisation | GDP Growth (Annual Average) | GFCF Percentage (Annual Average) | ICOR (Column 4 Divided by Column 3) | | ------------- |:-------------:|:-------------:|:-------------:|:-------------:| | 1951-52 to 1964-65 | The foundational years | 4.1 | 11.6 | 2.8 | | 1965-66 to 1969-70 | The crisis years | 3.0 | 14.2 | 4.7 | | 1970-71 to 1979-80 | The turbulent years | 2.9 | 15.7 | 5.4 | | 1980-81 to 1990-91 | The transitional years | 5.6 | 20.4 | 3.6 | | 1991-92 to 2002-03 | The reform years | 5.5 | 22.9 | 4.1 | | 2003-04 to 2007-08 | The high growth years- The best phase in growth | 8.8 | 30.2 | 3.4 | An import substituting heavy industry oriented strategy was put in place with the Second Plan and large investments were made in public sector projects for steel and machine building, major power and river valley developments, and the transport infrastructure. The public sector grew with fresh investment rather than nationalisation. The private sector had ample room to grow and the government was proactive providing technical advice and political support. The twin droughts of 1965 and 1966 were a major shock for which the economy was ill-prepared. Food aid prevented large scale distress but the ambitious development strategy of the foundational years was more or less abandoned. The focus was on agricultural development with substantial results in the form of the Green Revolution. There was also some liberalization of licensing for agriculture related industries. But the overhang of the earlier strategy led to a continued investment in heavy industries, now including fertilizers. This was also the period which saw the real beginnings of the subsidy burden with the growth of the food and fertiliser subsidies. In terms of policy regimes, 1970-71 is an important break point. By 1970-71, the Green Revolution had stabilised in India was past the worst when it came to food security. The Congress split was over and Mrs Gandhi was firmly in the saddle, *garibi hatao* had become the slogan of the day, poverty eradication rather than growth became the dominating consideration in public policy and a public sector oriented strategy was in place. The Monopolies and Restrictive Trade Practices (MRTP) Act was tightened, state trading was actively promoted and for a brief period, the food grain trade was nationalised. The banking system, which was nationalised in 1969, was put under direct bureaucratic control and directed credit with differential interest rates was instituted. The upheavals of the oil crisis of 1973-74 and the emergency intervened in mid-decade followed by the Janata Party government, which, though more business friendly, continued to pursue an anti-poverty strategy in the guise of employment orientation. These were the years of turbulence when the state was in charge but the governments in charge of the state were buffeted by political currents that made it difficult for them to steer the economy with any sense of long-term purpose. These middle years between 1965-66 and 1979-80 were the ones when Indian development performance was at its worst. This can be seen in the low growth rates despite relatively high levels of investment. The public investment programme was poorly managed with delays and cost overruns, inefficiencies imposed by multiple lines of tied credits being used for a single plant and input bottlenecks which could not be relieved through trade because of foreign exchange shortages. The return of the Congress Party to power in 1980 marks a shift in policy relative to the earlier years. Although the rhetoric of garibi hatao continued, there were some changes in policy in Indira Gandhi's second administration that signaled a changed attitude to the private sector. A series of high-level committees under leading figures like L.K. Jha, Vadilal Dagli, Abid Hussain and M. Narasimham laid out an agenda for a more pro-private sector and pro-market policy. But the changes made in the 1980s are nowhere near as deep and far-reaching as the bonfire of controls in 1991. ### India's Growth Turnaround The shift to a higher growth path during the course of the 1980s is referred to as the Indian growth turnaround. Fast growth in India since the early 1980s has placed it amongst the top nine rapidly growing economies in the world (Ahmed and Varshney, 2009). The upward shift in India's growth path during the 1980s is significant for two reasons: the turnaround happened well before the balance of payments (BoP) crisis of 1991 and the large scale macro economic reforms that ensued. The second puzzling aspect about India's growth turnaround is that it not driven by manufactured exports and therefore, has little in common with the East Asian economic miracle. In particular, there was no industrial policy targeted towards developing specific industries. It was the service sector that led the increase in the overall growth rate in the early 1980s. Since many components of services are incomerelated such as financial services, business services, and hotels and restaurants and begin to increase only after a certain stage in development, the fact that India's service sector created the impulse for the growth turnaround is puzzling. The key issue on which all studies agree is that, at some point during the 1980s, there was an increase in growth, which, from the 1990s, was not only statistical but also of massive economic significance. Whats puzzled many contributors to the literature is that analysis of aggregate data suggests a pickup in growth during the early 1980s, before most of the major policy changes. While there is a reasonable degree of consensus amongst economists about the timing of the Indian growth turnaround, there is less agreement about its causes what is indisputable is that something happened during the 1980s that opened the door to a rise in growth. The challenge facing growth economists is to weave a logically consistent story on the timing and causes of India's growth turnaround (Ghate et al., 2012). According to Subramanian a number of plausible explanations can easily be ruled out. External liberalisation could not have been a factor because the Indian trade regime actually became more restrictive during the 1980s, and the full impact of trade reforms implemented in the 1990s was only felt at the end of the 1990s. Very little internal reform, of product and labour markets, was witnessed in the 1980s, and the only serious effort in this area is the delicensing in manufacturing started in the late 1980s and was fairly limited in scope; in other words, it was 'too little, too late' to explain the turnaround in performance. An alternative explanation comprises three elements. First, there was an attitudinal change on the part of the government in the 1980s, signalling the shift in favour of the private sector, with this shift validated in a very haphazard and gradual manner through actual policy changes. Second, the shift and the limited policy changes were proper business rather than pro competition, aimed primarily at benefiting incumbents in the formal industrial and commercial sectors. Third, these small shifts elicited a large productivity response because India far away from its income possibility frontier. There were few significant policy changes in the early 1980s, and the changes later on beginning in 1985, we are restricted largely to some internal liberalisation relating to the relaxation of industrial licensing. The limited nature of these changes, as well as the form that they took, is best understood by appreciating the political logic of Indira Gandhi's (and later Rajiv Gandhi's) efforts. These were aimed to gather support from the business establishment rather than to alienate it. Hence there was more action where business support existed; for example in reducing taxes, easing access to imported capital inputs, or liberalising capacity restrictions than where it did not for example in external liberalisation. We may draw distinction here between a pro market and pro business orientation. The former focuses on removing impediments to markets and aims to achieve this through economic liberalisation. It favours entrants and consumers. A pro business orientation on the the other hand, is one that focuses on raising profitability of the established industrial and commercial establishments. It tends to favour incumbents and producers. Nevertheless, this shift towards a proper business orientation was central trigger that set off the boom of the 1980s. Another strand of opinion downplays was what happened in the 1980s arguing that the fiscal expansion was in of the 1980s, accompanied by some liberalisation of controls on economic activity, generated real GDP growth of more than 5.8% per-year. This expansion However, was not sustainable and LED the macroeconomic crisis in 1991 Srinivasan and Tendulkar, 2003 2009. And the part in the 1980s signalling a shift in favour the private sector was this validated in had this valid and gradual policy is this it and the changes which is the expansion, as did the 1980s from of the growth so and according to Deepak Nayyar, convinced in there was a several factors. there was a certain policies to with, as to increase. Secondly, the 70s from the start there was such public infrastructure with all the was also the part of with combine policies from with capital the can play. impact economic what 30 play legal and social what economic capacity the by sectors what to by 1980 which essential can for this in 2018 the According to Drèze and Sen (2005), the fact that the reasonable growth rates of the 1980s have been sustained and surpassed in the 1990s its noteworthy achievement. This is all the more so in international perspective, considering that the 1990s have been a period of relatively slow economic growth in many other countries. In the International comparative league, India has recently been among the fast growers. The important point to recognise is not so much the acceleration of economic growth in the 1990s compared with the 1980s that acceleration is quite marginal