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 : " - Soe sk _ _ ay. _ PQ ’ Z : ce or : -Tae a ’ u ; oe 2 7 : 7 a _ 7 ’ : ’ > : mS..S = —- _ ae Ce, 5818.75 491349 13405 = 613 High-income Countries 1306 = 53285.0 ss 40788 ——i(ititttiéid«G India oo AR “6700 3350. 1 Source: World Development Report, 2015. One may make the following observation with regard to this UN classifications of developed and underdeveloped/developing countries on the basis of per capita income. There is gross inequality of income between the rich and the poor countries and this gap is widening over the years. All high-income countries are not necessarily developed countries as Joan Robinson remarked, : For several of the Arab States, GNP per capita suddenly jumped to levels which exceeded that of the richest western states yet in these countries are found some of the poorest and least developed communities in the world. According to Todaro (2013), the simple division of the world into developed and developing countries is often useful for analytical and policy purposes. However, the wide income range of the latter serves as an early warning for us not to overgeneralise. Indeed, the economic differences between low-income countries in sub-Saharan Africa and South Asia and between upper-middle-income countries in East Asia and Latin America can be every bit as profound as those between high- income OECD and upper-middle-income developing countries. As modern development economics defined development as a process involving elimination of poverty, income inequality and unemployment, underdevelopment in this framework would be a situation characterised by the worst kind of deprivation. 34 Indian Economy: Performance and Policies Todaro while defining underdevelopment in terms of poverty, states that, “Underdevelopment is a real fact of life for over three billion people in the world.”* A different approach to underdevelopment is provided by Jacob Viner. According to Viner, development potential of a country is a much better criterion to judge the extent of its underdevelopment. He defined an underdeveloped country as the one “which has good potential for using more capital or more labour or more available natural resources or all of these, to support its population on a higher level of living.” The definition of an underdeveloped country given by the Indian Planning Commission in its Five Year Plan is similar to the one given by Jacob Viner, An underdeveloped country’s economy is characterised by the existence, in greater or lesser degree, of unutilised or underutilised manpower on the one hand and of unexploited natural resources on the other. This state of affairs may be due to stagnancy of techniques or to certain inhibiting socio-economic factors which prevent the more dynamic forces in an economy from asserting themselves.'> Characteristics of the Developing World: Diversity within Commonality _ The underdeveloped countries, also known as developing countries or Third World Countries, have some common characteristics. Todaro classifies these common characteristics into 10 broad categories.'® There are important historical and economic commonalities among developing countries that have led to their economic development problems being studied within a common analytical framework in development economics. At the same time, however, there is a great deal of diversity across the developing world, even within these areas of broad commonality. Different development problems call for different specific policy responses and general development strategies. Lower Levels of Living and Productivity In developing nations, general levels of living tend to be low for the vast majority of people. These low levels of living are manifested in the form of low incomes (poverty), inadequate housing, poor health, limited or low education, high infant mortality and low life expectancy. 14. Todaro, P. Michael (2013). Economic Development (10" edition). New Delhi: Pearson. 15. Government of India, Planning Commission (1952). The First Five Year Plan, Ch. 1, p.7, New Delhi. 16. op cit. no. 14. Economic Development and Under Development 35 The GNP per capita is often used as a summary index of the relative economic well-being of people in different nations. On account of low per capita income, population suffers from poor health, low education, high infant mortality and low life expectancy. Indeed, some star performers among now nearly developed economies such as South Korea and Taiwan were once among the poorest in the world. Some middle-income countries are also relatively stagnant, but others are growing rapidly—China most spectacularly. Indeed, income growth rates have varied greatly in different developing regions and countries, with rapid growth in East Asia, stagnant growth in sub- Saharan Africa, and intermediate levels of growth in other regions. At very low income levels, in fact, a vicious cycle may set in, whereby low income leads to low investment in education and health as well as plant and equipment and infrastructure, which in turn leads to low productivity and economic stagnation. This is the well-known vicious cycle referred to variously as the poverty trap or by Nobel laureate Gunnar Mydral as “circular and cumulative causation.” In India, at the time of Independence, the life expectancy at birth was 32 and literacy was only 18 per cent. Poverty ratio i.e., percentage of population below poverty line was above 50 per cent. As a result of planned economic development during the last six decades, expectation of life has improved to 66.1 in (2006-2010). Since 2011 literacy rate has marginally improved to 71 per cent in rural India and 86 per cent in urban India while the average for middle income countries is 67. Literacy rate has improved to 74.04 per cent against the average of 83 in lower-middle-income countries and 94 in upper-middle-income countries and 61 in low-income countries. Poverty ratio has also declined considerably from more than 50 per cent to around 20 per cent but the total number of poor is still very high 21.9 per cent (2012). Inspite of significant improvement in various human development indicators, India’s rank is still low in several of these indicators. Throughout the developing world, levels of labour productivity are extremely low compared with those in developed countries. Low level of living and low productivity are self-reinforcing social and economic phenomenon in the Third World countries and as such, are the principal manifestation of, and contributors to, their development. Myrdal’s well- known theory of “circular and cumulative causation” in under- developed countries is based on the ‘interaction between low living levels and low productivity. 36 Indian Economy: Performance and Policies Low productivity is due to low level of technology. The sharp differences in productivity between developed and underdeveloped nations can be traced to the level of technology in these countries. Productivity level in Indian economy has been low on account of backward or poor technology and this applies to all sectors of the economy—whether it is agriculture, industry or the tertiary sector. A comparison of productivity levels in Indian agriculture with the levels in other countries shows how low the productivity in Indian agriculture is. Productivity of wheat in India is about 35 per cent of the productivity in France. It is 66 per cent (i.e., less than two-third) of the productivity in comparison to another developing country— China. As far as rice is concerned, productivity in India is 46 per cent of the productivity in China and Japan (i.e., less than half). The productivity of cotton in India is one-third of the productivity in China. Even in comparison to Pakistan, productivity of cotton in India is just 61 per cent. As far as groundnut is concerned, productivity in India is 34 per cent of the productivity in USA, 40 per cent of the productivity in China and 51 per cent of the productivity in Argentina. Similar conclusions hold for most of the other crops.!? The low levels of productivity in Indian agriculture point to the possibilities of increasing productivity by adopting appropriate strategies and policies. International comparisons reveal a wide gulf in India’s performance between achievements in output and productivity. While India compares favourably in terms of total output, it compares poorly in terms of yield per hectare. Since around 80 per cent of world population lives in under- developed/developing countries which have around 40 per cent share in world income, it is obvious that a vast majority of people in these countries must be living under conditions of poverty, malnutrition, | disease, squalor, illiteracy, etc. Even basic necessities of subsistence such as minimum food, clothing and shelter are not easily accessible to the poor masses. The reasons for this mass poverty and low living standards in these countries are to be found in their stagnating or slow growing economies and rapidly growing population. Lower Levels of Human Capital Human capital—health, education and skills—is vital to economic growth and human development. Compared with developed countries, 17. Tata Services (1998-99). Statistical Outline of India. Economic Development and Under Development 37 much of the developing world has lagged in its average levels of nutrition, health (as measured by life expectancy) and education (measured by literacy), as seen in Table 1.3. The under-5 mortality is still 15 times higher in low-income countries than in high-income countries. The well-performing developing countries are much closer to the developed world in health and education standards than they are to the lowest-income countries. While health conditions in East Asia are relatively good, sub-Saharan Africa continues to be plagued by problems of malnourishment, malaria, TB, AIDS and parasitic infections. Despite progress, South Asia continues to have high levels of illiteracy, low schooling attainment and undernourishment. Still, in fields such as primary school completion, low-income countries are also making great progress, for example, enrolments in India are up from 68 per cent in the early 1990s to 89 per cent by 2005. Some development economists contend that a country's level and distribution of education is the most fundamental determinant of future development prospects. High Rate of Population Growth and Dependency Burden Population dynamics is another area of wide variation among developing countries. Populations of some developing countries, particularly in Africa, continue to grow rapidly. From 1990 to 2005, population in the low-income countries grew at 2 per cent per year, compared to 1.1 per cent in the middle-income countries, the high- income countries grew at 0.7 per cent per year, reflecting both births and immigration. Middle-income developing countries show greater variance, with some having achieved lower birth rates closer to those prevailing in rich countries. As seen in Table 1.2, the birth rate is almost three times higher in the low-incoming countries than in the high-income countries. Developing countries also have higher death rates in each age bracket. However, given their youthful populations, overall death rates are now lower in developing countries (8 per 1,000 population) than in the developed countries (10 per 1,000). As of 2005, the average rate of population growth was about 1.5 per cent in the developing countries (1.8% excluding China). A major implication of high birth rates in least development country (LDC) is that children under age 15 make up almost 32 per cent of the total population in these countries (35% excluding China) as opposed  38 :3j0N8& dN ‘soyeunys® :a24n0¢vq Wo PION ABCA (SIOZ) pj4oy, juaudojaaaq 140daySIOZ snorea “sopqe) ‘uojZurysem "qd ‘iO Indian Economy: Performance and Policies Economic Development and Under Development 39 to 17 per cent of the total population in the developed countries. Thus in most developing countries, the active labour force has to support proportionally almost twice as many children as it does in richer countries. By contrast, the proportion of people over the age of 65 is much greater in the developed nations. Both older people and children are often referred to as an economic dependency burden in the sense that they are non-productive members of society and therefore must be supported financially by the country's labour force (usually defined as citizens between the ages of 15 and 64). The overall dependency burden (i.e., both young and old) represents only about one-third of the populations of developed countries but almost 40 per cent of the populations of the less developed nations. Fast growing population in the Third World is both a cause and effect of underdevelopment. These countries have effectively brought down the mortality rates but birth rates continue to be high due to wide spread poverty, ignorance, and social and religious factors. Due to high birth rate, the dependency burden is about half of the population as against one-fourth in developed countries. The active labour force has to support almost twice as many children as it does in richer countries. Population has been growing in the Third World countries in the range of 2 to 3.5 per cent per annum as compared to less than 1 per cent in developed countries. In India, for instance, the rate of growth of population increased from 1.25 per cent per annum in 1951 to 2.5 per cent in 1981. It started declining only thereafter and 1991 census recorded a growth rate of 2 per cent with children under the age 15 forming 38 per cent of the total population. Average annual growth rate during 2000-2012 has been estimated at 1.4 per cent as comparedto 0.6 per cent for high-income countries, 1.2 per cent for middle-income, 1.3 per cent in low- and middle-income and 2.2 per cent for low-income countries (World Development Report, 2012). We may conclude, therefore, that not only are developing countries characterised by higher rates of population growth, but they must also contend with greater dependency burdens than rich nations. Higher Levels of Inequality and Absolute Poverty The magnitude and extent of poverty in any country depend on two factors: the average level of national income and the degree of inequality in its distribution. Clearly, for any given level of national per capita income, the more unequal the distribution, the greater the incidence of poverty. Similarly, for any given distribution, the lower the average income level, the greater the incidence of poverty. 40 Indian Economy: Performance and Policies Development economists use the concept of absolute poverty to represent a specific minimum level of income needed to satisfy the basic physical needs of food, clothing and shelter in order to ensure continued survival. A problem, however, arises when one recognises that these minimum subsistence levels will vary from country to country and region to region, reflecting different physiological as well as social and economic requirements. Economists have therefore tended to make conservative estimates of world poverty in order to avoid unintended exaggeration of the problem. The incidence of extreme poverty varies widely around the developing world. The World Bank estimates that the share of the population living on less than $1.25 in 2011 per day is 7.9 (forecaste 4.1 in 2015) per cent in East Asia and the Pacific, 4.6 per cent in Latin America and the Caribbean, 1.7 per cent in the Middle East and North Africa (forecaste 2.0 in 2015), 24.5 (forecaste 18.1 in 2015) per cent in South Asia, and 46.8 (forecaste 40.9 in 2015) per cent in sub-Saharan Africa. The share of world population living in extreme poverty has fallen encouragingly an estimated 14.5 per cent in 2011 and is estimated to fall to 11.5 per cent in 2015. As a result, the global incidence of extreme poverty has been increasingly centred in South Asia and sub- Saharan Africa. Development economists have increasingly focused on ways in which poverty and inequality can lead to slower growth. That is, not only do poverty and inequality result from distorted growth, but they can also be a cause of it. Greater Social Fractionalisation Low-income countries more often have ethnic, linguistic and other forms of social divisions, sometimes known as fractionalisation. This is sometimes associated with civil strife and even violent conflict, which can lead developing societies to divert considerable energies to working for political accommodations if not national consolidation. It is one of a variety of governance challenges many developing nations face. Today, more than 40 per cent of the world's nations have more than five significant ethnic populations. In most cases, one or more of these groups face serious problems of discrimination. Over half of the world's LDCs have recently experienced some form of interethnic conflict. Just in the 1990s, ethnic and religious conflicts leading to widespread death and destruction took place in Afghanistan, Rwanda, Mozambique, Sri Lanka, Iraq, India, Somalia, Ethiopia, Liberia, Angola, Myanmar, Sudan, Yugoslavia, Haiti, Indonesia, and the Democratic Republic of Congo. Economic Development and Under Development 41 Ethnic and religious diversity need not necessarily lead to inequality, turmoil or instability, and unqualified statements about its impact cannot be made. There have been numerous instances of successful economic and social integration of minority or indigenous ethnic populations in countries as diverse as Malaysia and Mauritius. And in the USA, diversity is often cited as source of creativity and innovation. The broader point is that the ethnic and religious composition of a developing nation and whether or not that diversity leads to conflict or cooperation can be important determinants of the success or failure of development efforts. Larger Rural Populations but Rapid Rural-to-Urban Migration One of the hallmarks of economic development is a shift from agriculture to manufacturing and services. In developing countries, a much higher share of the population lives in rural areas. Although modernising in many regions, rural areas are poorer and tend to suffer from missing markets, limited information and social stratification. A massive population shift is also under way as hundreds of millions of people are moving from rural to urban areas, fueling rapid urbanisation, with its own attendant problems. Substantial Dependence on Agricultural Production and Lower Levels of Industrialisation and Manufactured Exports The vast majority of people in the Third World nations live and work in rural area. Almost 80 per cent are rurally based compared with less than 35 per cent in economically developed countries. The proportion of labour force engaged in agriculture in less developed countries is 66 per cent compared with 21 per cent for developed nations. Moreover, agriculture contributes about 32 per cent to the GNP of the former, while it accounts for only 8 per cent of GNP of the latter. The basic reason for the concentration of people and production in agricultural and other primary production activities in developing countries is the simple fact that for the low income levels, the first priority is for food, clothing and shelter. Agricultural productivity is low not only because of the large number of people in relation to available land but also because in lower development countries, agriculture is often characterised by primitive technologies, poor organisation, and limited physical and human capital inputs. 42 Indian Economy: Performance and Policies In India, the predominance of the primary sector is reflected in the contribution of this sector to GDP and employment in the economy. In 1951, the contribution of primary sector to India’s GDP was 57 per cent and to employment 73 per cent. Even today, primary sector provides employment to about 60 per cent of the workforce, and its contribution to GDP is around 15 per cent as compared with 3 per cent of workforce engaged in primary sector in the UK and 4 per cent in the USA contributing about 2 per cent to their GDP. Indian economy has moved from underdevelopment to a developing economy. One of the most widely used terminologies for the Group of Seven (G-7) countries and other advanced economies such as smaller European countries and Australia is the ‘industrial countries.’ Industrialisation is associated with high productivity and incomes, and has been a hallmark of modernisation and national economic power. It is no accident that most developing-country governments have made industrialisation a high national priority. Along with lower industrialisation, developing nations have tended to have a higher dependence on primary exports. Most developing countries have diversified away from agricultural and mineral exports to some degree. The middle-income countries are rapidly catching up with the developed world in the share of manufactured goods in their exports, even if these goods are typically much less advanced in their skill and technology content. However, the low-income countries, particularly those in Africa, remain highly dependent on a relatively small number of agricultural and mineral exports. Underdeveloped Financial and Other Markets There is a greater prevalence of imperfect markets and incomplete information in developing countries, so that domestic markets, particularly financial markets, have worked less efficiently. In many LDCs, legal and institutional foundations are either absent or extremely weak. LDCs often lack a legal system that enforces contracts and validates property rights; a stable and trustworthy currency; an infrastructure of roads and utilities that results in low transport and communication costs so as to facilitate interregional trade; a well-developed system of banking and insurance; formal credit markets that select projects and allocate loanable funds on the basis of relative economic profitability and enforce rules of repayment; substantial market information for consumers and producers about prices, quantities, and qualities of products and resources as well as Economic Development and Under Development 43 the creditworthiness of potential borrowers; and norms of behaviour that facilitate successful long-term business relationships. Lingering Colonial Impacts Most developing countries were once colonies of Europe or otherwise dominated by European powers, and institutions created during the colonial period often had adverse effects on development that in many cases have persisted to the present day. Both domestically and internationally, developing countries have more often lacked institutions and formal organisations of the type that have benefited the developed world: domestically, on average, property rights have been less secure and a smaller segment of society has been able to gain access to and take advantage of economic opportunities. Decolonisation was one of the most important historical and geopolitical events of the post-World War II era. More than 80 former European colonies have joined the United Nations. But the effects of the colonial era linger for many developing nations, particularly the least developed ones. External Dependence Developing countries have also been less well organised and influential in international relations, with sometimes adverse consequences for development. For example, agreements within the World Trade Organization (WTO) and its predecessors concerning matters such as agricultural subsidies in rich countries that harm developing-country farmers and one-sided regulation of intellectual property rights (IPRs) have often been relatively unfavourable to the developing world. More generally, developing nations have weaker bargaining positions than developed nations in international economic relations. Developing nations often also voice great concern over various forms of cultural dependence, from news and entertainment to business practices, lifestyles, and social values. The potential importance of these concerns should not be underestimated, either in their directs effects on development in its broader meanings, or indirect impacts on the speed or character of national development. In contrast, China and India, with over 40 per cent of the developing world's population and recently enjoying high average income growth and expanding international corporate presence, are gaining considerable autonomy in many respects. 44 Indian Economy: Performance and Policies Developing nations are also dependent on the developed world for environmental preservation, on which hopes for sustainable development depend. Of greatest concern, although global warming is projected to harm developing regions more than developed ones, both accumulated and even current greenhouse gas emissions still predominately originate from the high-income countries. Thus the developing world endures what may be called environmental dependence, in which it must rely on the developed world to cease aggravating the problem and to develop solutions. The net effect of all these factors is to create a situation of ‘vulnerability’ among the Third World nations in which forces largely outside their control can have decisive and dominating influences on their overall economic and social well-being. According to Michael Todaro, the phenomenon of under- development needs to be viewed in a national and an international context. Economic and social forces, both internal and external, are responsible for the poverty, inequality and low productivity that commonly characterise most Third World nations.'* The successful pursuit of economic and social development will require not only the formulation of appropriate strategies within the Third World but also a modification of the present international economic order to make it more responsive to the development needs of poor nations. Nature of Indian Economy Indian economy is in transition from an underdeveloped to a developing economy since 1951 when India embarked on a programme of planned economic development of the country. Indian economy certainly had all the characteristics of an underdeveloped economy at the time of Independence but the planned economic development during the last six decades has definitely brought Indian economy in the category of developing economies, coming closer to middle-income category countries. Indeed, in terms of growth, India performed much better than the industrialised countries which 18. “The 157 developing African, Asian, and Latin American member countries of the United Nations often collectively refer to themselves as the Third World. They do this primarily to distinguish themselves from the economically advanced capitalist (First World) and the formerly socialist (Second World) countries of eastern Europe and the Soviet Union— some of which could ‘now justifiably be considered part of the Third World. It is unfor- tunate that the terms first, second, and third may sometimes be taken to connote superi- ority or inferiority when in fact they merely reflect the historical sequence of industriali- sation” Todaro (2013 op.cit. no. 14). Economic Development and Under Development 45 experienced a slowdown in growth, the transition economies which did badly, and much of the developing world. And it was only east Asia, particularly China, which performed better. India has been widely heralded as a success story for globalisation. Over the past two decades, the country has moved into the premier league of world economic growth; high-technology exports are booming and India’s emerging middle-class consumers have become a magnet for foreign investors. Why has accelerated income growth not moved India onto a faster poverty reduction path? Extreme poverty is concentrated in rural areas of the northern poverty-belt states, including Bihar, Madhya Pradesh, Uttar Pradesh and West Bengal, while income growth has been most dynamic in other states, urban areas and the service sectors. While rural poverty has fallen rapidly in some states, such as Gujarat and Tamil Nadu, less progress has been achieved in the northern states. The deeper problem facing India is its human development legacy. In particular, pervasive gender inequalities, rural poverty and inequalities between states are undermining the potential for converting growth into human development. Perhaps the starkest gender inequality is revealed by this simple fact: girls aged 1-5 are 50 per cent, more likely to die than boys. This fact translates into 130,000 ‘missing’ girls. Female mortality rates remain higher than male mortality rates through age 30, reversing the typical demographic pattern. These gender differences reflect a widespread preference for sons, particularly in northern states. Girls, less valued than their brothers, are often brought to health facilities in more advanced stages of illness, taken to less qualified doctors and have less money spent on their health care. The low status and educational disadvantage suffered by women have a direct bearing on their health and their children’s. About one-third of India’s children are underweight at birth, reflecting poor maternal health. Translating economic success into human development advances will require public policies aimed explicitly at broadening the distribution of benefits from growth and global integration, increased public investment in rural areas and services and—above all—political leadership to end poor governance and address the underlying causes of gender inequality. With the objective of inclusive growth taking centre stage, the government has strengthened its efforts for social sector development 46 Indian Economy: Performance and Policies in recent years. Several initiatives have been launched, especially for the poor. Programmes like the National Rural Employment Guarantee Scheme, Pradhan Mantri Gram Sadak Yojana, Aam Aadmi Bima Yojana and Rashtriya Swasthya Bima Yojana (RSBY), can go a long way in improving the living conditions of the common man in the remotest part of the country. Proper implementation of these programmes is essential. Consequently, the role of states and district administrations responsible for the implementation of the welfare schemes is vital. Along with higher economic growth and poverty reduction, there has been an improvement in many important social indicators like life expectancy, infant mortality rate and gross enrolment ratios at primary level of education. However, disparities continue at the state and regional level. The current Twelfth Five Year Plan also aims at reducing poverty and the disparities across regions and communities. Economic Development and Under Development APPENDIX TABLE - A-1.1 Millennium Development Goals, Targets and Achievements for 2015 Goals Targets Achievements 1. Eradicate Reduce by half the Developing countries as a extreme poverty _ proportion of people whole met the Millennium and hunger living on less than Development Goal target $1 a day of halving extreme poverty Reduce by half the tates five years ahead of the proportion of people 2015 deadline. Forecasts _ who suffer from indicate that the extreme hunger poverty rate will fall to 13.4 per cent by 2015, a drop of | more than two-thirds from the 1990 estimate of 43.6 per cent. East Asia and Pacific has had the most astounding record of poverty alleviation; despite improvements, — - Sub-Saharan Africa still lags behind and is not forecast to meet the target by 2015. 2. Achieve universal ¢ Ensure that all boys _ The primary school completion primary and girls complete ~ rate for developing countries education a full course - reached 91 per cent in 2012 of primary schooling but appears to fall short of the MDG 2 target. Promote gender e Eliminate gender Developing countries have equality and disparity in primary made substantial gains in empower women and secondary closing gender gaps in education, preferably education and will likely by 2005, and at all reach gender parity in primary levels by 2015 and secondary education. In particular,the ratio of girls’ to boys’ primary and secondary gross enrollment rate in South Asia was the lowest of all regions in 1990, at 68 percent,. but improved dramatically to reach gender parity in 2012, surpassing other regions that were making slower progress. 4. Reduce child Reduce by two-third The under-five mortality rate mortality among children in developing countries mortality rate under 5 declined by half, from 99 contd... 48 Indian Economy: Performance and Policies...contd... deaths per 1,000 live births in 1990 to 50 in 2013, Despite this tremendous progress, developing countries as a whole are likely to fall short of the MDG 4 target of reducing under-five mortality rate by two-thirds between 1990 and 2015. However, East Asia and Pacific and Latin America and the Caribbean have already achieved the target. 5. Improve ¢ Reduce by three- The maternal mortality ratio maternal health | quarters the maternal has steadily decreased in mortality ratio developing countries as a whole, from 430 in 1990 to 230 in 2013. While substantial, the decline is not enough to achieve theMDG 5 target of reducing the maternal mortality ratio by 75 per cent between 1990 and 2015, though no region is likely to achieve the target on time. Despite considerable drops, the - maternal mortality ratio in Sub-Saharan Africa and — South Asia remains high. 6. Combat HFV/ ¢ Halt and begin to The prevalence of HIV is AIDS, malaria, reverse the spread of highest in Sub-Saharan and other HIV/AIDS Africa. The spread of HIV diseases ¢ Halt and begin to AIDS there has slowed, reverse the incidence and the proportion of adults of malaria and other living with HIV has begun to major diseases fall while the survival rate of those with access to antiretroviral drugs _ has increased. Global _ prevalence has remained flat since 2000. Tuberculosis prevalence, incidence, and death rates have fallen since 1990. Globally, the target of halting and reversing tuberculosis incidence by 2015 has been achieved. contd... Economic Development and Under Development 49...contd... 7. Ensure Integrate the principles In developing countries the environmental of sustainable proportion of people with sustainability development into access to an improved water country policies and source rose from 70 per cent programmes; reverse in 1990 to 87 per cent in 2012, loss of environmental achieving the target. The resources - proportion with access to Reduce by half the improved sanitation facilities proportion of people rose from 35 per cent to 57 without sustainable per cent, but 2.5 billion people access to safe. still lack access. The large drinking water urban-rural disparity, especially Achieve significant in South Asia and Sub- Saharan improvement in lives Africa, is the principal reason of at least 100 million the sanitation target is unlikely slum dwellers by 2020 to be met on time. 8. Develop a global Develop further an In 2000 Internet use was partnership open, rule-based, rapidly increasing in high- for development predictable, non- income economies but barely discriminatory trading under way in developing and financial system;- countries. Now developing include a commitment countries are catching up. to good governance, Internet users per 100 people development and have grown 27 per cent a year poverty reduction— ~ since 2000. The debt service— both nationally to-export ratio. averaged and internationally 11 per cent in 2013 for developing countries, half its 2000 level but with wide disparity across regions. It will likely rise, considering the 33 per cent increase in their combined external debt stock since 2010. Address the special needs of the least developed countries; include tariff and quota free access for least developed countries’ exports; enhanced programme of debt relief for heavily indebted poor countries (HIPCs) and contd... 50 Indian Economy: Performance and Policies...contd... cancellation of official bilateral debt; and more generous official development assistance (ODA) for countries committed to poverty reduction Address the special needs of landlocked countries and small island developing states Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term In cooperation with developing countries, develop and implement strategies for decent and productive work for youth In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries In cooperation with the private sector, make | available the benefits of new technologies, especially information and communications Source: United Nations Development Program (2007). Millennium Development Goals. http:// www.undp.org/mdg/goallist.shtml, 16 August. World Bank (2015). World Development Report 2015.  2 Human Development Human Development The first Human Development Report (HDR) published by the United Nations Development Programme (UNDP) focused on the new paradigm of development that puts people at the centre of development. The concept, developed by Mahbub ul Haq and Amartya Sen, is defined as ‘the process of enlarging people’s choices,’ emphasising the freedom to be healthy, to be educated and to enjoy a decent standard of living. But it also stressed that human development and well-being went far beyond these dimensions to encompass a much broader range of capabilities, including political freedoms and human rights.' Economic growth is considered only a means of capability expansion and not as an end in itself. Such a paradigm of development enables all individuals to enlarge their human capabilities to the full and to put these capabilities to their best use in all fields—economic, social, cultural and political. It also protects the options of the unborn generations. It does not run-down the natural resource base needed for sustaining development in the future. Disadvantaged people are a central focus of human development. This includes people in the future who will suffer the most severe consequences of the risks arising from our activities today.” Human Development Index The Human Development Index (HDI), used in the HDRs to compare countries in the world, has been designed as an alternative to per capita income, the single most commonly used measure to evaluate 1. UNDP (2010). Human Development Report 2010. p.2. 2. UNDP (2011). "Overview", Human Development Report 2011. p.1. 52 Indian Economy: Performance and Policies development outcomes thus far. The index includes three important choices: i Longevity measured by life expectancy at birth. Pe Educational attainment as measured by adult literacy rate and gross enrolment ratio gross domestic product (GER) (primary, secondary and tertiary level combined). Adjusted real GDP per capita—PPP stands for purchasing power parity. PPP GDP is calculated after eliminating price differences among countries. The HDI value indicates how far a country has gone to attain certain defined goals: an average life span of 85 years, access to education for all and a decent standard of living. The maximum and minimum values for each variable, which are fixed, are reduced to scale between 0 and 1. Countries are classified into three groups: ity High human development countries: countries with HDI values of 0.800 and above. Medium human development countries: countries with HDI values of 0.500 to 0.799. Low human development countries: countries with HDI values below 0.500. Inherent in the human development tradition is that the approach be dynamic, not calcified. Human development is an evolving idea— not a fixed, static set of precepts—and as the world changes, analytical tools and concepts evolve. To quote HDR 2010, Human development is the expansion of people’s freedoms to live long, healthy and creative lives; to advance other goals they have reason to value; and to engage actively in shaping development equitably and sustainably on a shared planet. People are both the beneficiaries and the drivers of human development, as individuals and in groups. The report further adds, Human development is not only about health, education and income— it is also about people’s active engagement in shaping development, equity and sustainability, intrinsic aspects of the freedom people have to lead lives they have reason to value. Human Development 53 As documented in HDR 2013? Over the past decades, countries across the world have been converging. towards higher levels of human development, as shown by the Human Development Index (HDI), a composite measure of indicators along three dimensions: life expectancy, educational attainment and command over the resources needed for a decent living. All groups and regions have seen notable improvement in all HDI components, with faster progress in low and medium HDI countries. On this basis, the world is becoming less unequal. Nevertheless, national averages hide large variations in human experience. Wide disparities remain within countries of both the North and the South, and income inequality within and between many countries has been rising. Further the HDR 2013 remarks, Although most developing countries have done well, a large number of countries have done particularly well—in what can be called the ‘rise of the South’. Some of the largest countries have made rapid advances, notably Brazil, China, India, Indonesia, South Africa and Turkey. But there has also been substantial progress in smaller economies, such as Bangladesh, Chile, Ghana, Mauritius, Rwanda and Tunisia. The South has risen at an unprecedented speed and scale. For example, the current economic takeoffs in China and India began with about 1 billion people in each country and doubled output per capita in less than 20 years—an economic force affecting a much larger population than the Industrial Revolution did. By 2050, Brazil, China and India combined are projected to account for 40 per cent of world output in purchasing power parity terms. During these uncertain times, countries of the South are collectively bolstering world economic growth, lifting other developing economies, reducing poverty and increasing wealth on a grand scale. They still face formidable challenges and are home to many of the world’s poor. But they have demonstrated how pragmatic policies and a strong focus on human development can release the opportunities latent in their economies, facilitated by globalisation. According to the report, The world is getting more connected, not less. Recent years have seen a remarkable reorientation of global production, with much more destined for international trade, which, by 2011, accounted for nearly 60 per cent of global output. Developing countries have played a big 3. UNDP (2013). Human Development Report 2013. 54 Indian Economy: Performance and Policies part: between 1980 and 2010, they increased their share of world merchandise trade from 25 per cent to 47 per cent and their share of world output from 33 per cent to 45 per cent. Developing regions have also been strengthening links with each other: between 1980 and 2011, South-South trade increased from less than 8 per cent of world merchandise trade to more than 26 per cent. Are there Limits to Human Development‘? Most people around the world have seen major improvements in their lives over the last 40 years. But there are major constraints in our capacity to sustain these trends. If we deal decisively with these challenges, we could be on the cusp of an era of historic opportunities for expanded choices and freedoms. But if we fail to act, future generations may remember the early 21“ century as the time when the doors to a better future closed for most of the world’s people. We care about environmental sustainability because of the fundamental injustice of one generation living at the expense of others. Poeple born today should not have a greater claim on Earth’s resources than those born a hundred or a thousand years from now. We can do much to ensure that our use of the world’s resources does not damage future opportunities. Amartya Sen notes that “a fouled environment in which future generations are denied the presence of fresh air... will remain foul even if future generations are so very rich.” The fundamental uncertainty about what people will value in the future means that we need to ensure equal freedom of choice, the lynchpin of the capability approach, in part by protecting the availability and diversity of natural resources. Such resources are critical in allowing us to lead lives that we value and have reason to value. The early HDRs recognised the centrality of the environment. The first report warned of the continuing increase in environmental hazards, including health risks from Earth’s warming, damage to the ozone layer, industrial pollution and environmental disasters. The 1994 HDR asserted “there is no tension between human development and sustainable development. Both are based in the universalism of life claims.” Sustainable development gained prominence with the 1987 publication of Our Common Future, the report of the UN World Commission on Environment and Development, headed by former 4. Ibid: 14. Human Development 55 Norwegian Prime Minister Gro Harlem Brundtland. The report produced what became the standard definition of sustainable development: “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Many problems of resource depletion and environmental stress arise from disparities in economic and political power. An industry may get away with unacceptable levels of water pollution because the people who bear the brunt of it are poor and unable to complain effectively. A forest may be destroyed by excessive felling because the people living there have no alternatives or because timber contractors generally have more influence than forest dwellers. Globally, wealthier nations are better placed financially and technologically to cope with the effects of climatic change. Hence, our inability to promote the common interest in sustainable development is often a product of the relative neglect of economic and social justice within and amongst nations. Sustainable human development addresses both inter-generational and intra-generational equity—enabling all generations, present and future, to make the best use of their potential capabilities. In the final analysis, sustainable human development is pro-people, pro-jobs and pro-nature. It gives the highest priority to poverty reduction, productive employment, social integration and environmental regeneration. It accelerates economic growth and translates it into improvements in human lives, without destroying the natural capital needed to protect the opportunities of future generations. The strongest argument for protecting the environment is the ethical need to guarantee the future generations opportunities similar to the ones previous generations have enjoyed. This guarantee is the foundation of ‘sustainable development.’ Sustainability, Equity and Human Development* The human development approach recognises that people have rights that are not affected by the arbitrariness of when they were born. Further, the rights in question refer not only to the capacity to sustain the same living standards but also to access the same opportunities. This limits the substitution that can occur across dimensions of well- being. Today’s generation cannot ask future generations to breathe polluted air in exchange for a greater capacity to produce goods and 5. UNDP (2011). Human Development Report 2011, ch.1. p.17. 56 Indian Economy: Performance and Policies services. That would restrict the freedom of future generations to choose clean air over more goods and services. A central concern of the human development approach is protecting the most disadvantaged groups. The most disadvantaged are not just the generations that are worse off on average. They are also those who would suffer most from the realisations of the adverse risks they face as a result of our activity. Thus, we are concerned not only with what happens on average or in the most likely scenario but also with what happens in less likely but still possible scenarios, particularly those that entail catastrophic risks. Promoting human development entails addressing local, national and global sustainability; this can—and should—be equitable and empowering. What Makes Development Unsustainable? When increase in GNP is brought about through depletion of resources under unhealthy environmental conditions by the present generation, the future generations will be left with much depleted resource to produce output under polluted environmental conditions adversely affecting their health and efficiency. Under such circumstances, the rate of economic development in future is bound to fall. Thus, when we are producing more at the cost of future generations the present level of development is not sustainable i.e., we will not be able to maintain it in future.® Even when countries progress in the HDI, they do not necessarily excel in the broader dimensions. It is possible to have a high HDI and be unsustainable, undemocratic and unequal just as it is possible to have a low HDI and be relatively sustainable, democratic and equal. These patterns pose important challenges for how we think about human development, its measurement and the policies to improve outcomes and processes over time. There is no straightforward pattern relating the HDI to other dimensions of human development such as sustainability and empowerment. An exception is inequality, which is negatively related to the value of the HDI, but even that relationship shows wide variation. The lack of correlation can be seen in the large number of countries that have high HDI values but perform poorly on the other variables: 6. OECD (2010). Sustainable Development: Linking Economy, Society Environment by Tracey Strange and Anne Bayley. New Delhi: Academic Foundation. Human Development 57 about a quarter of countries have a high HDI but low sustainability; we can see a similar though less marked picture for political freedoms.’ But perhaps the greatest challenge to maintaining progress in human development comes from the unsustainability of production and consumption patterns. For human development to become truly sustainable, the close link between economic growth and greenhouse gas emissions needs to be severed. Some developed countries have begun to alleviate the worst effects through recycling and investment in public transport and infrastructure. But most developing countries are hampered by the high costs and low availability of clean energy. Climate change will be one of the defining forces shaping prospects for human development during the 21* century. Through its impact on ecology, rainfall, temperature and weather systems, global warming will directly affect all countries. Nobody will be immune to its consequences. However, some countries and people are more vulnerable than others. In the long term, the whole of humanity faces risks, but more immediately, the risks and vulnerabilities are skewed towards the world’s poorest people (HDR 2008). Concentrated in fragile ecological areas, drought-prone arid lands, flood-prone coastal areas and precarious urban slums, the poor are highly exposed to climate change risks—and they lack the resources to manage those risks. The Current State of Human Development® Every HDR has monitored human progress, notably through the HDI, a composite measure that includes indicators along three dimensions: life expectancy, educational attainment and command over the resources needed for a decent living. Other indices have delved into inequality, poverty and gender deficits. Over the past decades, countries across the world have been converging towards higher levels of human development. The pace of progress on the HDI has been fastest in countries in the low and medium human development categories. This is good news. Yet progress requires more than average improvement in HDI value. It will be neither desirable nor sustainable if increases in HDI value are accompanied by rising inequality in income, unsustainable patterns of consumption, high military spending and low social cohesion. 7. UNDP (2010). Human Development Report 2010, ch.1. 8. UNDP (2013). Human Development Report 2013. 58 Indian Economy: Performance and Policies Human Development: International Comparison The 2014 Human Development Report (HDR) presents the Human Development Index (HDI) values and ranks for 187 countries in terms of three basic parameters: to live a long and healthy life, to be educated and knowledgeable, and to enjoy a decent standard of living. India’s HDI value for 2013 is 0.586, positioning the country at 135 out of 187 countries and territories—the lowest among the BRICS countries, with Russia at 57, Brazil at 79, China at 91, and South Africa at118, and slightly ahead of Bangladesh and Pakistan. Significantly, while China improved its ranking by ten places between 2008 and 2013, India’s position improved by just one rank. There are large differences across HDI groups and regions in the components of the HDI—life expectancy, mean years of schooling and income. Average gross national income (GNI) per capita in very high HDI countries is more than 20 times that in low HDI countries (Table 2.1). Life expectancy in very high HDI countries is a third higher than in low HDI countries, while average years of schooling among adults over 25 are nearly three times greater in very high HDI countries than in low HDI countries. However, expected years of schooling, which better reflect changing education opportunities in developing countries, present a much more hopeful picture: the average incoming elementary school student in a low HDI country is expected to complete 8.5 years of school, about equal to the current years of schooling among adults in high HDI countries (8.8 years). Overall, most low HDI countries have achieved or are advancing towards full enrolment in elementary school and more than 50% enrolment in secondary school. Overall, the last decade has seen greater convergence in HDI values, involving accelerated human development among countries with lower HDI values. All HDI groups and regions saw notable improvement in all HDI components, with faster progress in low and medium HDI countries. East Asia and the Pacific and South Asia saw continuing progress from earlier decades, while sub-Saharan Africa saw more rapid progress in the last decade. The convergence in HDI values has become more pronounced in the last decade. State of Human Development in India’? Over the years, India has made substantial progressin human development. Sustained and high economic growth in the post-reform 9. Economic Survey 2011-12, 2012-13. Government of India.  } ct : Sé = §: —:a10N eyeqore payySiom Aq uoNe[ndod pue poye[nojeo peseq UO [GH sanjea JOJ 1g] ‘SelUNOD gqdst Surseyoind somod ‘Ayued :224n0g daNN ‘(y10Z) uvpuny juamdojaaag 140day*¢10Z 60 Indian Economy: Performance and Policies period reduced the poverty ratio significantly. There was also noteworthy improvement in the literacy rates over time leading to a decline in the absolute number of illiterates. India has a long way to go as it is still in the medium human development category with countries like China, Egypt, Indonesia, South Africa and even Vietnam having better overall HDI ranking within the same category and Sri Lanka moving to the high human development category from medium in the 2012 HDI ranking despite years of internal conflicts. The existing gap in health and education indicators in India as compared to developed countries and also many of the developing countries highlights the need for much faster and wider spread of basic health and education. Though lower in HDI ranking, in terms of average annual HDI growth rate for 2000-2012, India is well ahead of many countries with high and very high human development. With 1.50 per cent average annual HDI growth it is ahead of China (1.42), Brazil (0.73), Egypt (0.92) and Bangladesh (1.46), though it is behind Pakistan (1.74). While China and Egypt performed very well in terms of HDI growth in the 1980s and 1990s, there was a deceleration in the 2000s. On the other hand, India, which seems to have faltered in the 1990s, has picked up again during 2000-2012 (Table PRGNY With the objective of inclusive growth taking centre stage, the Government of India (Gol) has strengthened its efforts for social sector development in recent years. Expenditures of the Gol on social services and rural development have more than doubled over the last four years. Impressive outlays on education, health, water supply and housing indicate the emphasis which government places on these sectors. The central government expenditure on social services and rural development (plan and non-plan) as a percentage of total expenditure which contributes to human development has gone up consistently over the years.'° It has increased from 13.38 per cent in 2006-07 to 18 per cent in 2010-11. However, it fell from 18 per cent in 2010-11 to 15.12 per cent in 2012-13 (RE). It picked up to 16.70 per cent in 2013-14 (BE). These expenditures have supplemented sustained high level of economic growth in achieving better social sector performance and improvement in the quality of life. Better governance and improved service delivery are essential to ensure that leakages are plugged and the funds under the welfare 10. Economic Survey 2013-14, 2014-15. Government of India.  o§ S Q S v = iS § :ajony :e eyed JOJoI 0} ZI[OZ IO OY} JSOUL yUOdOI19K ‘o[qe[teAe :¢ ssoIS [euoNeU euloour (INH)Jod eydeo st paseq uo GQoz reyjop Surseyoind somod Aytzed ‘6 (ddd) ‘ i = "PLOT dGNN 140day upwny ‘(y10Z) :224n0g juawudoj  "plOZ uuodey iuaudojaaag upunzy (v10Z) dANN :224n0g $ Performance and P licies 5 omy: Ss & X), the balance of trade (BoT) is said to be unfavourable or negative, or there is said to be a deficit in the balance of trade. Since goods are also called merchandise, the balance of trade or trade balance is also called balance of merchandise account. India’s Balance of Trade Ever since the beginning of planning era in 1951, India has continued to suffer from an unfavourable balance of trade. The only exceptions to this trend have been the years 1972-73 and 1976-77 when the country had a positive trade balance of Rs. 104 crore and Rs. 68 crore, respectively. conta.... Foreign Trade and Trade Policy 455 «Contd.... In the early years after Independence, the value of India’s exports as well as imports were low and the difference between them was small. This resulted in comparatively lower magnitude of deficit in trade balance. From Rs. 174 crore in 1951-52, average annual deficit rose to an annual average of Rs. 626533 (April-December 2011-12, Economic Survey 2011-12 Table 7.1(A)). Thus, the trade deficit has not only persisted since 1951 but has increased widely over the years. Causes of Unfavourable Balance of Trade Continued excess of imports over exports has perpetuated the unfavourable balance of trade since 1950-51. To begin with, the trade deficit was small, but it widened over time, more particularly from the Sixth Plan onwards, it rose sharply to assume serious dimensions during and after the Eighth Five Year Plan. This has happened because exports from India have not been able to keep pace with the high growth rate of imports. India’s Balance of Trade (® Crore) Plans Average Annual Trade Balance ee ee First Plan (1951-1956) 605 735 -130 Second Plan (1956-1961) 606 + 973 -367 Third Plan (1961-1966) 753 1,240 -487 Annual Plans (1966-1969) 1,238 1,998 -760 Fourth Plan (1969-1974) 1,810 1,973 -163 Fifth Plan (1974-1979) 4,728 5,538 -810 Annual Plans (1979-1980) 6,418 9,143 -2,725 Sixth Plan (1980-1985) 8,967 14,683 -5,716 Seventh Plan (1985-1990) 17,382 25,112 -7,730 Annual Plans (1991-1992) 38,297 45,525 -7,278 Eighth Plan (1992-1997) 86,557 97,609 -11,352 Ninth Plan (1997-2002) 1,68,400 2,04,763 -36,363 Tenth Plan (2002-2007) 20,52,041 26,58,294 -6,06,253 Eleventh (2007-08) 6,55,864 10,12,312 -3,56,448 Plan (2008-09) 8,40,755 13,74,436 -5,33,680 (2009-10) 845,534 13,63,736 -5,18,202 (2010-11)(P) (Apr-Dec.) 7,51,633 11,86,513 -3,74,880 Note : P: Provisional Source : Compiled from Economic Survey, 2003-2004, 2005-06, 2007-08 and 2010-11. contd.... 456 Indian Economy: Performance and Policies...contd.... Large Increase in Imports In terms of value, India’s imports have increased sharply between 1950-51 and 2009-10 from a level of Rs. 608 crore to estimated Rs. 1363736 crore in 2009-2010. Some of the factors that have contributed to this massive import growth are as below: (i) Large Increase in Developmental and Other Imports: Under planned economic development of the country starting with the First Plan, there has been a continuous expansion in imports of capital goods, machinery equipment, etc. Also with globalisation and liberalisation, imports of all kinds have increased. (ii) Large Increase in Import of Petroleum: Petroleum, oils and lubricants (POL) have registered more than 500-fold increase between 1960-61 and 1991 as the value of POL imports increased from Rs. 69 crore to Rs. 4,11,649 crore in 2009-10. Petroleum is a major source of energy used in industry and in surface as well as air transport. (iii) Fertiliser Imports: In spite of increased domestic production, fertilisers are imported to meet their fast growing consumption requirements. Thus, import of fertilisers has gone up from Rs. 13 crore in 1960-61 to Rs. 3,034 crore in 2000-01 and Rs. 31,755 crore in 2009-10. (iv) Import of Pearls and Precious Stones: The import of unfinished and finished/worked precious and semi-precious stones has increased from Rs. 1 crore in 1960-61 to Rs. 76,678 crore in 2009-10. Modest Growth in Exports Growth of exports was quite low and insignificant till the Third Five Year Plan. The total value of exports increased from Rs. 606 crore in 1950-51 to Rs. 810 crore in 1965-66. However, the growth of exports picked up after the 3rd Plan to reach the level of Rs. 36,711 crore in 1980-1981 and Rs. 32,553 crore in 1991. The policy of liberalisation following the economic reforms resulted in marked improvement in export performance. In the year 2000-01, the total value of exports was Rs. 2,03,571 crore which jumped to Rs. 8,45, 534 crore in 2009-10. Inspite of this large increase in exports, the gap between the value of imports and value of exports not only persisted but also widened particularly during the last decade. Both external and the internal factors are responsibles for this. Some of the external factors are: low world demand for our products due to continuing recession and downturn in many countries; low income and price elasticity of demand for some of our exports; import restriction on our goods entering foreign countries and disintegration of the Soviet Union—our largest trading partners providing a big market for Indian goods. — Among the internal factors, the important ones are: increasing domestic demand not leaving large surplus for export and low quality and high cost of production. contd.... Foreign Trade and Trade Policy 457...contd.... ¥ Measures to Correct Deficit in Balance of Trade The Government of India has been adopting and implementing various policies for restricting imports and promoting exports to reduce trade deficit. Restrictions on Imports Following measures have been taken to regulate imports: (i) Licensing of Imports: For quite a long time, the import of non-essential consumer goods was not permitted while the importers of capital goods essential for country’s development were given import licences. However, now under the liberalised trade policy, licensing requirements for most of the goods have been abolished; only a small negative list of import items remains under licensing system. (ii) Tariff Restrictions: For the goods that are permitted to be imported under licence from the government, further restrictions are imposed by way of custom duties or import duties also called import tariffs. This means a tax is imposed on the goods which arrive at the Indian ports and thus the price of such goods becomes higher for the Indian buyers. The higher the rate of custom duty, the greater is the price that Indian buyers need to pay for imported goods. These high prices of imported goods are expected to reduce their demand in the domestic market and thereby to restrict imports. (iii) Quantitative Restrictions: The government may determine the total import quota of goods, i.e., the total amount of goods that can be imported and allot this quota to various importers. Nothing beyond the quota is allowed to be imported. This naturally limits the quantity of imports. However, under an agreement with the World Trade Organization (WTO), such quantitative restrictions have been removed. Export Promotion With the continuing large deficits in India’s balance of trade and limited scope for imports reduction, the only long-term solution to the problem lies in promotion of exports to earn sufficient foreign exchange to pay for our growing imports. Export promotion measures opening up wider international market for our entrepreneurs will stimulate industrial development in the country under the incentive of larger world demand for our goods. Export Promotion Measures The export promotion measures adopted by the Government of India include monetary and non-monetary incentives, fiscal reliefs, credit facilities, establishment of institutions to help exporters as well as strict quality controls and inspection of goods meant from export. Some of the major steps in this direction are as below: (i) Devaluation: In July 1991, the rupee was devalued by about 20 per cent in terms of major world currencies. This was expected to cheapen our goods to foreign buyers, thereby encouraging our exports. (ii) Cash Assistance: Under this scheme, cash assistance is given to exporters to compensate them for indirect taxes (e.g., custom duties) levied on the imported inputs that are used in production of goods for exports. contd.... 458 Indian Economy: Performance and Policies SJcantd:.. (iii) Income Tax Concessions: Income from exports is given several concessions under the income tax laws. For example, profits from exports are totally exempted from income tax. (iv) Import Concessions: Several concessions in imports of machinery, equipment and technology are given to export production units. Export- oriented units are allowed duty-free imports of machines, raw materials and technology. Exporters are also allocated foreign exchange for import of raw materials used in production of export goods. (v) Concessional Bank Credit to Exporters: For financing production meant for exports and also for financing exports themselves, banks give credit to exporters at concessional terms. (vi) Import Licences to Exporters: Since imported goods fetched very high prices in the domestic market as their imports were highly restricted, the exporters were granted licences for import of goods up to a certain percentage of value of goods exported by them. This was expected to provide added incentive for exports. (vii) Issue of Exim Scrips: The system of granting import licences to exporters was later replaced by exim scrips. The exporters were given exim scrips equivalent to 30 per cent of value of their exports. These exim scrips could be used to import a large variety of items. The exim scrips could also be sold in the market. Since these enjoyed a premium, the exporters could make additional profits from their sale. This could act as a great incentive to exporters. (viii) Convertibility of the Rupee: The system of exim scrips was also replaced by partial convertibility of rupee in March 1992. Under this scheme, exporters, who earlier had to surrender their entire foreign exchange earnings to the Reserve Bank of India (RBI) at a rate fixed by it, were now obliged to sell only 40 per cent of their exchange earnings at the official rate to the RBI. The rest, they were free to sell in the market at the market determined rate, which was obviously higher than the official rate. This indeed was a great liberalisation measure and a bigger incentive. In March 1997, even this was replaced by a system of full convertibility of rupee on the trade account. (ix) System of Advanced Licensing: Exporters are given advance licences for duty-free import of goods used in production of export items. (x) Relaxation of Controls on Exports and Simplification of Procedures: Controls on exports have been relaxed. Exports of many items have been decontrolled while export procedures and formalities have been simplified. (xi) Export Processing Zones: Many export processing zones have been set up. The units operating there are allowed free trade with other countries. They also enjoy various concessions like five-year tax holiday. (xii) Export Promotion Organisations: Some such organisations are Export Advisory Council, Export Promotion Councils, Directorate of Export Promotion, etc. (xiii) Export-Import Bank: The EXIM Bank provides financial services to exporters and importers and coordinates the work of other institutions engaged in financing export trade. It pays special attention to export of capital goods. Foreign Trade and Trade Policy 459 TRADE POLICY: AN OVERVIEW Import Substitution-based Strategy As we embarked on a period of planning, during the 1950s, import substitution came to constitute a major element of India’s trade and industrial policies. Planners, more or less chose to ignore the option of foreign trade as an engine of India’s economic growth. This was primarily due to the highly pessimistic view taken on the potential for export earnings. A further impetus to the inward orientation was provided by the existence of a vast domestic market. In retrospect, it is now abundantly clear that the policy makers not only underestimated the export possibilities but also the import intensity of the import substitution process itself. As a consequence India’s share of total world exports declined from 1.91 per cent in 1950 to about 0.53 per cent in 1992. India’s participation in world markets declined steadily during the second half of the 20" century, with only a marginal improvement following the reforms of the 1990s. Its share of world merchandise exports was 2.2 per cent in 1948, higher than China’s 0.9 per cent or Japan's 0.4 per cent. It fell to one-fifth its initial level, 0.5 per cent in 1983 and recovered only marginally to 0.7 per cent in 2000. Japan, in contrast, progressively increased its share from 0.4 per cent in 1948 to a peak of 10.0 per cent in 1993. China’s share first increased to a high of 1.3 per cent in 1963, then fell to a low of 1.0 per cent in 1973, later recovering dramatically after its opening to the world economy in 1978 to 4.0 per cent in 2000. India’s inward orientation has had significant economic costs in lower overall growth and stagnating living standards. Japan’s rapid export growth was associated with very rapid GDP growth and improvements in living standards. Its export sector became more efficient over time. Its image as a producer of low-cost, low-quality imitative products shifted to that of a world leader in producing high-quality high-technology goods. Although China's internal market is large, international trade has played a powerful instrumental role in its growth process. The country achieved an average annual growth rate of more than 10 per cent during the period 1980-2000 (World Bank, 2002) and its real GDP and exports have grown even more rapidly since 1980. India’s GDP growth rate, in contrast, averaged 3.75 per cent a year from 1950 to 1980, putting it in the category of a low-income, slow- growing economy among the 41 “Third World’ countries examined by Reynolds (1985). 460 Indian Economy: Performance and Policies India’s international trade policy had the direct effect of limiting its participation in world trade. It sought to minimise imports by supporting indigenous production and according priority to domestic ‘use in the disposition of production. Import tariffs, based on the recommendations of the Tariff Commission, were initially used to provide infant-industry protection to selected industries. The ambitious investment in heavy industries at the start of the Second Five Year Plan (1956-1961) led to a significant spurt in import demand and a rapid depletion of foreign exchange reserves, and it precipitated a balance of payments (BoP) crisis in 1957. Quantitative restrictions (QRs) on imports were initially imposed to meet the crisis but continued until early 2001 in varying intensities. Graded import tariffs (highest on ‘least essential’ consumer goods, lower on industrial intermediate inputs, and the lowest on capital goods deemed ‘essential’ for development) were also introduced in the 1960s in an effort to contain BoP deficits. Persistent deficits in the BoP were mitigated by increases in tariff levels and in the severity of QRs rather than by devaluation of the rupee. Towards Efficient Import Substitution Foreign trade policy issues became the subject of intensive discussion in early 1980s. It came to be realised that a scheme of import licensing under which imports were permitted only to the extent that domestic production fell short of domestic demand irrespective of difference in cost and prices, could only lead to inefficiency. The view gained ground that a more liberal policy of imports of capital goods and technology would enable India to reap the benefits of international division of labour. The attempt therefore was to move away from import substitution per se towards efficient import substitution, so that considerations relating to cost and efficiency were incorporated in the overall policy framework. It also became increasingly clear that production for export could not be isolated from production for the home market and that trade policy had to be integrated with the policy for domestic industrialisation. With the realisation of the drawbacks of the excessively inward- looking trade strategy on the one hand and the need for modernisation and technology upgradation of the Indian industry on the other, certain policy measures in the direction of trade liberalisation were initiated in the late 1970s. The strategy towards a greater integration of the Indian economy with the rest of the world has been pursued since then. Foreign Trade and Trade Policy 461 The liberalisation process remained somewhat slow during the first- half of the 1980s and it gathered momentum during the second-half of the decade. The policy changes have been influenced, inter alia, by the recommendations of a number of committees, which were set up during the ’1970s and the 1980s. In this context, mention may be made about two prominent committee reports: the Report of the Committee on Import Export Policies and Procedures (Chairman: P.C. Alexander, 1978) and the Report of the Committee on Trade Policies (Chairman: Abid Hussain, 1984). The Alexander Committee recommended simplification of the import licensing procedure and provided a framework involving a shift in the emphasis from ‘controls’ to ‘development.’ Following the recommendations of the Alexander Committee, selective import liberalisation measures were initiated in the late 1970s primarily aiming at making the import of capital goods easier. Imports of certain raw materials that were not available indigenously were also placed under the OGL List. The emphasis of the policy efforts was also to simplify the procedures governing India’s foreign trade. During this period, special measures were initiated to boost the export of project goods. The Abid Hussain Committee envisaged ‘growth-led exports’ rather than ‘export-led growth’ and stressed upon the need for harmonisation of foreign trade policies with other economic policies arguing for a phased reduction of effective protection. The committee also favoured announcement of trade policies for longer periods in order to impart a degree of continuity and facilitate long-term planning of export business. In line with these recommendations, long-term trade policy was introduced with the announcement of an import export policy covering the period 1985-1988. The policy was formulated with the aim of boosting exports and encouraging efficient import substitution. While the signs of liberalised trade policy became visible in the latter half of 1980s, it was only in 1991 that the country embarked on a truly liberalised trade policy with a short negative list of exports and imports and with quantitative controls over imports withdrawn for all, except consumer goods. It was recognised that trade, exchange rate and industrial policies must form part of an integrated policy framework if the aim was to improve the productivity and efficiency of the economic system. 462 Indian Economy: Performance and Policies Trade Policy since 1991 Outward Orientation Focusing on Export Promotion The trade policy changes in the post-1991 period sought to minimise the role of quantitative restrictions and substantially reduce the tariff rates on the lines suggested by the Tax Reforms Committee (Chairman: Raja J. Chelliah). The developments in India’s trade policy during this period needs to be viewed in conjunction with policy reforms initiated in other spheres of the economy. The devaluation of the rupee in July 1991 and the transition to the market-based exchange rate regime deserve mention in this regard. These measures were aimed at enhancing the price competitiveness of exports. The policies governing foreign investment and foreign collaboration also have undergone significant change, which have a bearing on trade performance. Apart from unilateral measures, the liberalisation of India’s trade policies also reflects the multilateral commitments of the country to the WTO. The focus of these reforms has been on liberalisation, openness, transparency and globalisation with a basic thrust on outward orientation focusing on export promotion activity and improving competitiveness of Indian industry to meet global market requirements. In early 2002, the government presented a Medium-Term Export Strategy (MTES) for 2002-2007 providing a vision for creating a stable policy environment with indicative sector-wise targets, with a mission to achieve one per cent of global trade by 2007. The Export and Import (EXIM) Policy framed for the period 2002-2007 and unveiled on 31 March 2002 also sought to usher in an environment free of restrictions and controls. Trade policy reforms in the recent past have provided an export friendly environment with simplified procedures for trade facilitation. Such continued trade promotion and trade facilitation efforts of the government have also aided the current strengthening of export growth. On 31 August 2004, a new Foreign Trade Policy (FTP) for the period 2004-2009, replacing the hitherto nomenclature of EXIM Policy by FTP was announced. A vigorous export-led growth strategy of doubling India’s share in global merchandise trade in the next five years, with a focus on the sectors having prospects for export expansion and potential for employment generation, constitutes the main plank of the policy. These measures are expected to enhance international competitiveness and aid in further increasing the acceptability of Indian exports. Foreign Trade and Trade Policy 463 The year 2008-09 was marked by adverse developments in the external sector of the economy, particularly during the second-half of the year, reflecting the impact of global financial crisis on emerging market economies including India. Emerging economies were affected in varying degrees depending upon the extent of openness and the dependence on capital flows as the external environment deteriorated on account of slowdown in global demand, reversal of capital flows and reduced access to external sources of finance in the face of adverse global credit market conditions (Economic Survey 2008-09). With gradual deepening of the global financial crisis, its impact was transmitted from the financial sector to real economic activity in advanced countries and then to emerging economies through the trade and financial channels. The effect on the Indian economy was not significant in the beginning. The initial effect of the subprime crisis was, in fact, positive, as the country received accelerated foreign institutional investment (FIL) flows during September 2007 to January 2008. This contributed to the debate on ‘decoupling,’ where it was believed that the emerging economies could remain largely insulated from the crisis and provide an alternative engine of growth to the world economy. The argument soon proved unfounded as the global crisis intensified and spread to the emerging economies through capital and current account of the BoP. The net portfolio flows to India soon turned negative as FIIs rushed to sell equity stakes in a bid to replenish overseas cash balances. This had a knock-on effect on the stock market and the exchange rates through creating the supply-demand imbalance in the foreign exchange market. The current account was affected mainly after September 2008 through slowdown in exports. Despite setbacks, however, the BoP s