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India in Transition

India in Transition. Population. Population(m)    1,095 Population growth (’01-05) 1.5%        Second most populous country 81% Hindu, 13% Muslim, 2% Christian, 2% Sikh Official Languages: English, Hindi, 14 others. Geography. South Asia 3,287,590 sq km 28 States

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India in Transition

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  1. India in Transition

  2. Population • Population(m)    1,095 • Population growth (’01-05) 1.5%       •  Second most populous country • 81% Hindu, 13% Muslim, 2% Christian, 2% Sikh • Official Languages: English, Hindi, 14 others

  3. Geography • South Asia • 3,287,590 sq km • 28 States • Borders China, Pakistan

  4. History • 550 bc independent kingdoms • Invasions from Central Asia • 3rd century Gupta dynasty “golden age” • Islamic Invasions • Mughal Dynasty • European Traders/Colonizers • British Rule (1857) • Independence 8/15/47

  5. Politics • World’s Largest Democracy • Indian National Congress (INC) • Emergency Rule (Indira Gandhi ’75-77) • Janata Party • Bharatiya Janata Party (1996) • INC (2004)

  6. Economy • 10th Largest GNP • 4th Largest GNP (PPP) • GDP Growth 8.1% 2005(4) • Per-Capita Income (PPP) $3100 • Agriculture accounts for 21% of GDP • Major Industries include; mining, petroleum, diamond polishing, films, textiles, IT and business process outsourcing (BPO) services, pharmaceuticals and chemicals, and handicrafts.

  7. Indicative Planning • Instituted as a response to perceived failures of the market system in attaining socially desirable objectives • No formal obligation to fulfill objectives of the plan • Authorities rely on ‘indirect government levers’ (taxes, subsidies, etc.)

  8. The Lewis two-sector Model • Agricultural Labor is redundant • ‘Commercial’ sector is efficient • Purchasing capital goods results in increased demand for industrial labor • Agricultural labor becomes more productive and produces a surplus

  9. The Nehru-Mahalanobis Approach

  10. N-M Approach pt. 2origins of Indian planning • Didn’t Curb power of wealthy interests • Mahalanobis’ 2-sector model akin to Lewis’ model • Sought to industrialize the economy by increasing production of capital goods • Development economics was dominated by the idea of overcoming the ‘savings constraint’ • Similar in approach to USSR • Fabian Influence • Planning Commission Set up in 1950

  11. Origins of Implementation • Defense of India Act (1939) • India Act (1946) • Many other acts PRIOR to independence • War-time controls set up by the British • Suited to regulation and control • Industrial Policy Resolution (1948) • Industries Act (1951)

  12. The Plans • 1st plan (’51-56) – Not so ambitious • 2nd plan (’56-61) – Inspired by Mahalanobis, move towards industrial growth • 3rd plan followed by one year plans – no significant change • 4th plan (’69-74) -- based on input-output model • 5th plan – 7th plan – included concerns for the redress of poverty

  13. GDP growth (1960-2004) 1988 1991 1979

  14. The Crisis • In 1990-91 gross fiscal deficit reached 8.4% of GDP • Inflation peaked at almost 17% • External debt reached 23% of GDP • Low foreign exchange reserves • Resulted in $2.3bn loan from IMF

  15. The Reforms • Consisted of decontrol of private investment, opening the economy to foreign trade and foreign investment, financial sector reforms, etc.

  16. Controls on Private Investment • Removal of industrial licensing • Allowance of private companies into industries once reserved for the state • Little done about small-scale sector rules • Little done about state-level controls

  17. Openness to Trade • Lowering of Import Tariffs • Domestic v. external liberalization – gradual approach • Lowering of quantitative restrictions • Devaluation of Rupee 20:1-31:1 from ’91-’93

  18. Trade (% of GDP) ’80-’04

  19. Foreign direct investment

  20. Price Controls • Hydrocarbon prices • Electricity prices (not changed) Labor Market Controls • Still in effect

  21. Public Sector Reforms • Outright privatization was eschewed in favor of more ‘cautious’ reform • Partial Privatization • Board for Industrial and Financial Reconstruction • Allowance of Private Investment in Infrastructure

  22. Financial System • Banking Reform • Capital Market Reform

  23. Inflation (annual %) 1998 1991

  24. East Asian ‘Miracle’ economies • Stable business environment • Fiscal policies aimed at equity • Pro-export exchange rates • Progressive liberalization of the financial sector • Minimal price distortions • Education

  25. Indian Reforms in comparison • Macroeconomic stabilization • More rigid Labor Markets • Education is not compulsory

  26. Conclusion • Reforms were largely successful • Fail to address underlying problems • Gains are not widespread • Much remains to be done

  27. Questions • What are the effects of government policies towards children in terms of economic growth • What role does primary education play in attracting investment to labor-intensive, unskilled industries

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