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India: Economic Overview

FIN 680V/ FIN 360 Spring 2012. India: Economic Overview. P.V. Viswanath. Economic History: 1950-1990. Post-independence India had a mixed economy, i.e. including both private and public sectors. The reasons for a strong public sector were:

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India: Economic Overview

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  1. FIN 680V/ FIN 360 Spring 2012 India: Economic Overview P.V. Viswanath

  2. Economic History: 1950-1990 • Post-independence India had a mixed economy, i.e. including both private and public sectors. The reasons for a strong public sector were: • Greate inequality in income distribution – doubts as to the viability of free markets • Free trade would probably have led to exploitation by stronger foreign countries • Exports were seen as a drain of resources from the country.

  3. Post-independence economy • Foreign Investment was seen as foreign domination. • The quickest path to economic development was seen to be rapid industrialization, which would probably not happen without government intervention • Capital goods and heavy industry were seen as particularly needed. • Planning was needed to ensure industrial growth and the concomitant agricultural and service growth, as well as employment growth

  4. Objectives • The broad objectives were: • Rapid growth in production with a view to achieving a higher level of national and per-capita income. • Full employment • Reduction of inequalities in income and wealth • Socialistic pattern of society with a democratic framework, based on equality and justice and absence of exploitation.

  5. Policy Measures for Industrial Development • Trade and Regulatory Regimes designed to shield industrial producers from competition • High tariffs • Industrial licensing of production and investment • Monopoly and Restrictive Trade Practices (MRTP) Act • Foreign Exchange Regulation Act (FERA) • Export Restrictions

  6. Industrial Policy • Directed allocation of subsidized credit through the commercial and developmental banking system • Administered interest rates and financial institutions required to lend for specific purposes at the administered rates. • Fixed, overvalued exchange rates; this ensured cheap imports for the government.

  7. Industrial & Agricultural Policy • Price control for many products • Rigid labor laws that made it difficult to lay off workers. • Direct public investment in industrial activities. • Management of the agricultural sector to ensure reasonable supplies of food grains, edible oils, sugar and cotton to the domestic market.

  8. Agricultural Policy • Procurement prices were fixed, which , in times of surplus, worked as a minimum support price. • At times of deficit, the government mandatorily procured a part of the grain at the procurement price and distributed it to poorer people through ration shops. • Fertilizer, irrigation, power and credit were subsidised for the agricultural sector.

  9. Agricultural and Fiscal Policy • The need to mop up excess production led to trade restrictions. • Quantitative restrictions on exports and imports, through licensing • Canalization – the use of a single parastatal for imports and exports; the use of minimum export prices. • High income tax rates

  10. Social Policies • Higher education was emphasized (IITs and IIMs) • Growth-oriented strategy as a means of mitigating poverty and unemployment. • However, structural inequalities in land ownership, availability of water, access to credit etc. led to growth without income and employment growth for poorer people.

  11. Social Policies • Land reform; however, it required the cooperation of the states, which was not always forthcoming for political reasons. • Alleviation of poverty through special programs and policies, such as asset creation programs, employment generation programs, minimum needs programs. • Intervention programs to solve the problems of malnutrition and hunger.

  12. Did the policies work? Industry • Industry grew 6% p.a. between 1951 and 1989 • There was little competition; hence there was little R&D. • The capital-input ratio went up considerably; total factor productivity dropped. Capacity utilization fell. • Deeply entrenched interest groups.

  13. Agricultural Progress • Between 1950 and 1980, food grain production increased by 2.8% p.a., due primarily to productivity gains and multiple cropping. • But, investment growth slowed. • R&D suffered, development of irrigation lagged behind plan targets. • There was a substantial rise in subsidies for food and fertilizer and for credit, water and electricity. • India became more or less self-reliant, but at great cost.

  14. Social Progress • From 1970-88, the proportion of population below poverty dropped from 46.17% to 37.76% in urban areas and from 58.75% to 48.69% in rural areas. • Average life expectancy improved from 32.1 in 1950-51 to 58.7 in 1990-91. The death rate dropped from 27.4 to 12.5 during the same period. • Literacy was 52.2% in 1990-91 compared to 18.33% in 1950-51. • But compared to other developing countries, this was not good.

  15. The crisis and the change • A massive rise in the government deficit spilled over to the current account deficit because it was financed by external debt. • External shocks, such as increased oil prices, decreased access to concessionary loans from abroad • Structural rigidities in the Indian economy made Indian products non-competitive, globally.

  16. The solution • A twofold solution: • Make the economic structure more competitive • Contain the government deficit • Effects: • Structural Change and • Fiscal stabilization.

  17. Initial Reforms • Trade policy reforms have done away with most quantitative restrictions and reduced tariff levels • Industrial policy has removed barriers to entry and limits on growth in the size of firms • Regimes for foreign investment and foreign technology have been liberalized considerably • Domestic tax structure has been rationalized. • The financial sector is being deregulated.

  18. Second-generation reforms • Privatization of public sector undertakings • Very slow, but steady. BHEL • Exit policy for labor • Reforms of the agricultural sector • Reforms of the state government

  19. GDP from 50-51 to 2008-9

  20. GDP: Post Liberalization

  21. Industrial Production

  22. Growth in Industrial Production Atul Kohli, “Politics of Economic Growth in India, 1980-2005,” Economic and Political Weekly, April 2006, pp. 1251-1259 and 1361-1370

  23. Changes post-1991 • Disparity in growth across states • Move towards service sector • Lack of industrial growth • Income inequalities • High poverty in the rural sector – farmer suicides • Continued casteism, gender inequality, communal unrest

  24. Change in the structure of the economy Source: Table 3, Components of Gross Domestic Product, Handbook of Statistics on the Indian Economy

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