INDIAN

ECONOMY IN
GLOBAL
SCENARIO
Lecture 8
PERIODIZATION OF INDIAN
GROWTH
PERIODIZATION OF INDIAN
GROWTH – 1950S
First 3 FYP
 Period up to drought and war -1965-66
 Govt launched rural credit cooperatives, IITs, industrial and import licensing
 Import substituting heavy industry
 Large investment in steel and machine building
 Major power and river projects development
PERIODIZATION OF INDIAN
GROWTH – 1960S
 Agricultural development – Green revolution
 Liberalization of licensing for agri-related industries
 Investment in fertilizers
 Increase in subsidy burden with growth of food and fertilizer
 By 1970-71 the growth from green revolution stabilized
PERIODIZATION OF INDIAN
GROWTH – 1970S
 Prime Minister Indira Gandhi – Garibi hatao
 Poverty alleviation more important than growth
 MRTP (Monopolistic and Restrictive Trade Practices in 1969) Act was tightened
 Nationalization of banks 1969 – differential interest rates
 Oil crisis – 1973-74
https://history.state.gov/milestones/1969-1976/oil-embargo#:~:text=During%20the%201973%20Arab%2DIsraeli,the%20post%2Dwar%20peace%20negotiati
ons

 Janta Party government

 Political instability – hindered long-term growth
 Continued with poverty alleviation with employment orientation
PERIODIZATION OF INDIAN
GROWTH - 1970S
 Between 1965-66 to 1979-50 – one of India’s worst performances
 Low growth rates despite high levels of investment
 Public investment programmes were poorly managed
 Inefficiencies
 Input bottlenecks
 Forex shortages
PERIODIZATION OF INDIAN
GROWTH - 1980S
 Congress returns to power – poverty alleviation
 But changed attitude towards private sector
 Pro-private
 Pro-market

 1985-86 budget the tax collection increased but public exp also increased
 Deficit increased from 7.5% in 1980 to 9.9% in 1986
1980S – INDIA’S
TURNAROUND
 One of the top 9 rapidly growing countries
 Before the BoP crisis of 1991
 Large scale macro economic reforms
 Gradual liberalization
WHY WAS INDIA’S GROWTH
STORY DIFFERENT FROM EAST
ASIA
 No industrial policy for targeting specific industries
 Service sector lead to the increase in growth rates
 Financial services, tourism, hotels, restaurants
1980S - REASONS FOR INDIA’S
TURNAROUND
 Change in attitude towards favoring the private sector
 Pro-business policies rather than pro-competition – favour incumbents in formal industrial
sectors
 India was far away from income possibility curve
 Internal liberalization – relaxing of industrial licensing
REASONS….
 Expansionary macroeconomic policies increased AD, => growth in output
 Increase in public exp (new infrastructure)  increased AD
 Helped in alleviating supply constraints

 Trade liberalization and de-regularaization of industrial polices

 Increased productivity
THEN WHY DID INDIA HIT THE
CRISIS
 India had not built up a viable relationship with international market
 Industries remained protected – some MRTP constraints and licensing were eased in 1985
 Exports did not increase despite devaluation of rupee
 Oil price hikes – gulf wars
 Inability to go to IMF
 Political instability – VP Singh and Rajiv Gandhi
 VP Singh’s govt dissolved in 1990
2003-2008: HIGH GROWTH
YEARS
Demand side factors
 Unpresented inflow of foreign private capital
 Upturn in world trade
 Technological change in communication
 Deregularisation of financial sector in the USA – outsourcing industry increased India’s exports
of services
 Export led growth – export to GDP ratio increased by 6%.

Supply side factors

 Expansion of bank credit
2003-08: ISSUES WITH THE
HIGH GROWTH
 Narrow base: automobiles and outsourcing
 Investment was skewed towards capital-intensive manufacturing
 Power generation improved but not enough to reverse the long-term decline
 Modernization of national highway network but the rural road connection was poor
 Share pf construction sector declined. Residential construction declined
 No employment growth between 2004-05 to 2009-10, the financial crisis hit the labour-
intensive industries.
 Female labour force participation declined
2003-08: ISSUES WITH THE
HIGH GROWTH
 Despite high saving rate – it was a debt-led growth, financed by bank credit and boost from
the surge in foreign capital
 Rapid monetary expansion, inflationary pressures, real exchange rate appreciation, widening
CAD

 FDI rose from 0.6% of GDP in 2003-04 to 2.8% of GDP in 2008-09

 Only 40% went in avenues that could generate growth

 60% of the FDI contributed very little to technology and long-term growth
 Short-time horizons and entered in land, property and stocks
2003-08: AFTERMATH
 With the slowdown in external markets, contraction of investment demand, adverse
macroeconomic conditions
 corporate debt burden was huge,
 banking sector’s NPA rose denting its profitability and lending capacity

 Since the global financial crisis - the growth rates of GDP fell in 2008-09 fell to 6.8%
 Contra-cyclical measures helped the economy recover
 8% in 2009-10
 8.6% in 2010-11
 The average of 11th FYP was around 8.2% (despite the crisis)
DECELERATION SINCE 2011
 Average growth 8.3% from 2004-05 to 2011-12
 Fell 4.6% from 2012-13 to 2014-15
 Lower than 5% growth in GDO in 2013-14 and 2014-15
 Domestic structural constraints and inflationary pressures – led to slowdown
 Slowdown in manufacturing – only 0.2% in 2012-13 and 2013-14
 Real GDP
 10.4% in 2010
 7% in 2011
 5.6% in Q1 of 2012
DECELERATION SINCE 2011
 The decline in growth accompanied by slowdown in investment
 Decline in growth of output was greater than decline in investment

2007-08 2013-14
Investment 38.1% of GDP 32.3% of GDP
GDP Around 8% 4.7%

 ICOR of 4, should have yielded 8% growth in 2013-14

 The rise is ICOR due to –
 Projects were not completed on time
 Lack of complementary investments
 Non-availability of critical input
DECELERATION SINCE 2011
 India’s ranking dropped in global competitiveness Index by World Economic Forum slipped
five positions
 RBI couldn’t lower interest rates to increase I as the inflation was high
STRUCTURAL CONSTRAINTS
Rate of fixed investment was around 30% of GDP and less than 5% growth. WHY?
1. Difficulties in taking quick decisions – affected ease of doing business
Project delays – insufficient complementary investment

2. Ill-targeted subsides – cramped public Invt – distort allocation of resources

3. Low manufacturing base (capital goods) – low value addition

- Growth and exports could be facilitated by easier access to credit, simplified procedure, to reduce the
transaction cost
STRUCTURAL CONSTRAINTS
Rate of fixed investment was around 30% of GDP and less than 5% growth. WHY?
4. Large informal sector – inadequate absorption in formal sector - Inadequate skills

5. No robust growth in agriculture – difficult to sustain overall growth – low agricultural

productivity

6. high food inflation to be tackled – shortage of storage and processing - inter-state

movement of agricultural produce
REVISION OF BASE YEAR
 Base year revised on 30 January 2015 from 2004-05 to 2011-12
 The GDP at constant prices in 2012-13 and 2013-14 was revised to 5.1% and 6.9%
 From 4.7% and 5% as per the old estimates in May 2014
DECELERATION DESPITE THE
REVISION
 Arvind Subramanian (then the Chief Economic Advisor in MoF) – found that the new series
overestimated the annual GDP growth by 2.5 percentage pints
 The strong majority in Lok Sabha – was estimated to revive growth in pvt invt, but didn’t
happen – despite the pro-investor statements
 GFCF under UPA was 32.9% in 2007-08 and fell to 31.3% in 2013-14
 But under NDA it was only around 28.1%

 Twin balance sheet problems: corporates had too much debt and banks had large NPAs
 REVISION
 GDP will now be measured in market prices rather than factor cost
 Sector-wise estimate of GVA will now be given in basic prices rather than factor cost
 Basic price = Factor cost + Production taxes – Production subsidy
REVISION
 Comprehensive inclusion of corporate sector both in manufacturing and services by
incorporation with the Ministry of Corporate Affairs (MAC21) – now accounts for activities
other than manufacturing
 Improved coverage of activities by local bodies and autonomous institutions
 Improved coverage of financial sector – inclusive of information from accounts of stock
brokers, asset management companies and regulatory agencies like SEBI
GST AND DEMONETIZATION
GST
 The introduction of this comprehensive system was particularly remarkable in a diverse and
federal country like India where multiple tax laws were consolidated into a single system
The taxpayer base has witnessed a remarkable increase, surging from 63.9 lakh in 2017 to
approximately 1.40 crore in Jul 2023
https://economictimes.indiatimes.com/news/economy/policy/6-years-of-gst-indias-unprecedented-indirect-tax-reform-that-dared-to-revolutionise-the-economi
c-landscape/articleshow/101411150.cms?from=mdr

 Small business had some difficulties to comply with complex procedure

GST AND DEMONETIZATION
Demonetization
 Hit the informal sector hard
 In Nov 2016
 Curtail counterfeit money

Effects
 GDP growth in that quarter fell to 5.7% from 7.9% in previous year
 All sectors suffered, except agriculture and public administration
 Sharp deceleration in manufacturing sector
GDP AND GVA GROWTH IN 2018-19 AND
2019-20
 GDP in the first half of 2019-20 (Q1 and Q2) was less than the second half of 2018-19 (Q3
and Q4)
 Industry and services declined
GDP GROWTH IN 2018-19 AND 2019-20
 In 2019-20: Real fixed investment was low as low growth in real consumption
 However cons. started picking due to jump in govt cons. And rise in pvt. cons.
 Net exports was less negative
 Exports declined less
 Imports declines a lot, as slow growth in GDP and softer crude oil prices
Source: https://www.statista.com/chart/27000/brent-crude-barrel-price-timeline/
WHY THE DECELERATION IN
2019-20?
 Theory: Higher fixed investment => higher GDP growth => high consumption growth
 When the cycle moves slowly
 Declining rate of investment
 Slower growth with a lag (3-4 yrs)
 Deceleration in growth of consumption

 Investment decline since 2011-12 and

plateaued since 2016-17

 Deceleration in GDP growth since 2017-18
WHY WAS INVESTMENT LOW?
 Drop in fixed investment by households from 14.3% in 2009-14 to 10.5% in 2014-19
 Fixed Invt. in public sector declined from 7.2% to 7.1%
 Stagnation in private corporate investment around 11.5%
REVIVING INVESTMENTS
 Strong public sector investment is a catalyst for private Invt
 Discussion between government and industrialists to understand bottlenecks
NEED FOR FASTER GROWTH
 Rapid growth of GDP required for broad-based development

GDP Growth should be inclusive

1. Inclusive expansion in total income and production will raise the living standards of poor
directly – Agriculture and MSMEs – more employment and income opportunities

2. Higher revenues help to finance projects like PMGSY, MGNREGA, NRHM, mid day meals
etc.
 GROWTH AND STRUCTURAL
CHANGE
 From 1951-2000:
 Share of agri declined from 53% to 22%
 Share of industries increased from 16% to 27%
 Share of services increased 30% to 50%

 No growth in industry share after 1980s

 The fall in agri is met by rise in services
STAGES OF GROWTH
 In line with Kangsamut (2001) – 123
countries 1970-89

 For the current 2024 fiscal year, low-income

economies are defined as those with a GNI per capita
of $1,135 or less in 2022; lower middle-income
economies are those with a GNI per capita between
$1,136 and $4,465; upper middle-income economies
are those with a GNI per capita between $4,466 and
$13,845; high-income economies are those with a GNI
per capita of $13,846 or more.

Source:
https://datahelpdesk.worldbank.org/knowledgebase/articles/90
6519-world-bank-country-and-lending-groups#:~:text=For%2
0the%20current%202024%20fiscal,those%20with%20a%20G
NI%20per
SECTORAL GROWTH TRENDS
 Agri declined
 Mining and quarrying declined
 Manufacturing gain and then fell
 Services are rising
 Communication
 Banking
 Insurance
 Real estate
INTER-REGIONAL DISPARITY IN
GROWTH AND DEVELOPMENT
 Prior to 1980, the growth rate of Indian states were low but relatively uniform
 Adjusting for population growth – in 1980s MP had a growth rate of 2.1% and Rajasthan had
growth rates of 4% - ratio 1:2
 In 1990s, it ranged from a low of 1.1% in Bihar to 7.6% in Gujarat – ration 1:7

 In 1990s, the growth decelerated in poor states like Bihar, UP, Orissa etc. and rich states like
Punjab and Haryana
 The growth accelerated in states like Gujarat and Maharashtra, WB, TN, MP etc
GROWTH IN STATES
 Kerala: achievements in human development but underperformance in economic growth
 Gujarat and MH: miracle growth.. WHY?
 Conducive environment to benefit from the new policies

 Every state’s growth rate in 2003-09 was more than preceding

 J&K and Assam suffered due to insurgencies, except these, all big states and Delhi grew more
than 6%
 Poorest states have shown the highest growth rates – Rajasthan, Orissa, Bihar
DIFFERENCES IN STATES
SINCE 1980S
1. Pre-existing capabilities: something more than the level of development, edu or geography
 How diversified the manufacturing base was – mix of human capital, entrepreneurial, organizational
capital

2. Economic decentralization and liberalization: ability to attract pvt-Investment with the

gradual dismantling of licensing system.
 Before 1980s, the centre decided for states – e.g. how much electricity to provide and where
 Later state policies also become important