I. Introduction
India had followed the
system of a control-and-command
economy since 1951,
based on the development
policies as outlined
in its Five-Year Plans1.
This continued for almost
three decades. The principle
objectives, among others,
were: (a) to increase
aggregate consumption,
(b) to reduce unemployment,
(c) to work towards
self-reliance and self-sufficiency
and (d) reduction in
disparities. The priority
of these objectives
changed from plan to
plan. To quote an example,
India's Fifth Five-year
Plan of 1974-79 outlines:
'Removal of poverty
and attainment of self-reliance
are the two major objectives
that the country has
set out to accomplish
in the Fifth Plan. As
necessary corollaries,
they require higher
growth, better distribution
of incomes and a very
significant step-up
in the domestic rate
of saving' (c.f. Government
of India, 1974).
The Indian economy
since 1991 has been
undergoing constant
and drastic economic
reforms. These reforms
have resulted in a shift
from the inward-oriented
policy of the past to
an outward-looking one.
Although this process
of reform had started
in the mid-1980s, it
suffered interruptions
a few times owing to
an over-cautious approach
and several other factors.
It was only in the early
1990s that the process
was accelerated. The
reforms had to take
care of various short-term
macro-economic (particularly
fiscal and external)
imbalances as well as
integrate the domestic
economy increasingly
with the world through
deregulation and competition.
Although the reforms
were driven by a macro
economic crisis, they
have been sustained
for over a decade. The
major emphasis of these
reforms was to attain
higher growth and efficiency.
In a democratic country
with a federal system,
this was sought to be
attained through a wide
consultation process
to achieve social and
political consensus.
The approach to India's
reform program was gradual
and steady rather than
of a 'shock therapy'
as was carried out in
Latin America or in
the East European economies.
The main objective
of this paper is to
review select features
of the present state
of the Indian economy.
Section II of this paper
summarises the changes
in India's development
perspective/strategies.
It also gives a brief
summary of India's economic
reforms during the 1990s.
With the institutions
of structural reform,
the different policies
began to be operated
under the open macro
economic framework.
Section III compares
some select macro economic
indicators like output
growth, composition
of output, saving and
investment rates during
the pre and post reform
period. Section IV gives
a brief summary of changes
in some welfare indicators
like 'people below poverty
line' and 'rate of unemployment'.
Section V reviews the
changes in India's trade
policy reforms and their
implication on India's
imports and exports.
Some select concluding
remarks are given in
Section VI.
II. Development
Policy Perspective
The trend towards a
liberal economic policy
had found its full expression
in the early 1990s with
the Government of India
announcing a series
of packages of stabilisation
and structural policy
reforms. This was certainly
a major departure from
the relatively protectionist
economic policies pursued
till the early 1980s.
Such a break was a result
of a change in the perception
of the economic policy
mind-set in the country.
While the objectives
of self-reliance and
self-sufficiency had
influenced economic
policy formulation in
the 1950s and 1960s,
factors like export-led
growth, improving the
efficiency and competitiveness
of Indian industries
prevailed upon economic
policy-making during
the late 1970s and the
early 1980s. The current
economic policy reforms,
on the other hand, seem
to have been guided
mainly by concerns regarding
the globalisation of
the Indian economy,
improving internal and
external competitiveness,
private sector participation
and removal of inadequacies
or constraints.
Macro stabilisation
policies were achieved
through corrections
in fiscal, financial,
monetary and exchange
rate imbalances, which
were not being sustained.
These policy changes
were accomplished by
structural reforms in
the form of industrial
deregulation, trade
and tariff policies,
increasing opportunities
for foreign direct investment,
public enterprise reforms
and social sector policies.
The main objective of
these reforms was to
re-orient the Indian
economy so as to make
it open to market-driven
forces.
The reforms were carried
out in many segments
of economic activity,
though their coverage
and depth varied from
sector to sector. A
summary of these reforms
is given in Box 1. There
exists significant literature2
to analyse the varied
impact of these reforms
on the Indian economy.
Against a backdrop
of these factors, the
objectives of the plans
and the strategy of
development have completely
changed in recent years.
At present, the plans
focus on growth targets
per capita income of
GDP, and the development
strategy is to be indirectly
planning to promote
the private sector.
The Tenth Five-Year
Plan of the Government
of India (2002) outlines
the main objective as,
'…. that the tenth
plan should aim at an
indicative target of
8 percent average GDP
growth for the period
2002-07…' However,
it adds: '… that
economic growth cannot
be the only objective
of national planning
and, indeed, over the
years development objectives
are being defined not
just in terms of increase
in GDP or per capita
income but more broadly
in terms of enhancement
of human well being…'
Regarding development
strategy, the role of
the government has drastically
changed, as can be found
in Tenth Five-Year Plan
document. For instance,
'… the public
sector is much less
dominant than it used
to be in many critical
sectors and its relative
position is likely to
decline further as government
ownership in many existing
public sector organisations
is expected to substantially
decline. It is clear
that industrial growth
in future will depend
largely upon the performance
of the private sector
and our policies must
therefore provide an
environment, which is
conducive to such growth.
…' (cf Government
of India, (2002b), Vol.
I, pp 7.)
III. Macroeconomic
Dimensions
Output
| Box
1: Paradigms of
Economic Reforms
in India Since 1991 |
| Pre-Reforms
Period |
Post-Reforms
Period |
| 1.
Quantitative licensing
on trade and industry. |
1.
Abolition of industrial
and trade licensing. |
| 2.
State regulated
monopolies of utilities
& trade. |
2.
Removal of state
monopolies, privatisation
& divestment. |
| 3.
Govt. control on
finance & capital
markets. |
3.
Liberalisation of
financial &
capital markets. |
| 4.
Restrictions on
foreign investment
and technology. |
4.
Liberal regime for
FDI, portfolio investment,
foreign
technology. |
| 5.
Export promotion
and export diversification. |
5.
Import substitution
and export of primary
goods, No import
bias. |
| 6.
High duties &
taxes with multiple
rates. |
6.
Reduction and rationalisation
of taxes and duties
dispersion. |
| 7.
Sector-specific
monetary, fiscal
and tariff policies. |
7.
Sector-neutral monetary,
fiscal and tariff
policies. |
| 8.
End-use and sector-specific
multiple interest
rates. |
8.
Flexible interest
rates without any
end - use or controlled
interest rates sector
specifications. |
| 9.
Foreign exchange
control, no convertibility
of rupee. |
9.
Abolition of exchange
control, full convertibility
on current
account. |
| 10.
Multiple and fixed
exchange rates. |
10.
United and market
determined exchange
rates. |
| 11.
Administered prices
for minerals, public
utilities. |
11.
Abolition of all
administered prices
essential on goods
except for few strategic
sectors. |
| 12.
Tax concessions
on exports and saving..
s |
12.
Rationalisation
of structure, and
concessions being
phased
out. |
13.
Explicit subsidies
on food, fertilizers,
and some
strategic sectors. |
13.
No significant change,
budget subsidies
on LPG essential
items and kerosene
introduced. |
| 14.
Hidden subsidies
on power, urban
transport. |
14.
No significant change. |
| 15.
General lack of
consumer protection
and other rights. |
15.
Acts governing consumer
rights, Intellectual
Property
Rights, independent
other rights regulatory
authorities
and other. |
| 16.
Central planning,
discretionary process
- high. |
16.
Decentralisation,
sound institutional
framework, degree
of
civil service reforms.. |
| 17.
Outdated Companies
Act. |
17.
No change. |
| 18.
No exit policy for
land and labour. |
18.
No change in labour
policy, slow progress
of reforms in
land markets. |
| 19.
Outdated legal system. |
19.
No change. |
After independence,
the output of the Indian
economy (i.e. Gross
Domestic Product or
GDP) stagnated around
an average growth of
3.5 per cent per annum
during three decades,
(i.e. 1950 to 1970).
This is sometimes referred
to as the 'Hindu Rate
of Growth'. This trend
changed in the eighties,
when output growth per
annum was around 5.6
per cent. However, this
growth rate could not
be sustained due to
an accumulation of imbalances
on account of fiscal
and external sectors,
i.e., high fiscal and
current account deficit,
a significant level
of external debt, weakening
of the financial system,
etc. These imbalances
led to unprecedented
external payment crises
in 1991. India's foreign
exchange reserves position
fell to such an extent
that it was unable to
pay for more than two
weeks of imports. All
these led to a significant
fall in India's economic
growth in 1991-92.
As mentioned earlier,
India took a number
of steps towards stabilisation
and structural adjustment,
supplemented by reforms.
These reforms were in
the areas of industry,
trade, exchange rate
management, public finance
and the financial sector.
The reforms were carried
out keeping in view
the priorities of these
sectors. In the industrial
sector, the emphasis
was on removing distortions
in resource allocation
and the improvement
of efficiency. This
included the removal
of industrial licensing,
reduction in the number
of public sector monopolies,
a liberal investment
regime, automatic foreign
investment, the removal
of quantitative restrictions
on imports and a consistent
decline in average and
peak import tariffs,
etc.
These reforms probably
led to the higher growth
performance in the post-reform
era. The overall growth
in the post-reform era
was accelerated by a
relatively higher growth
in the services sector.
To some extent, during
the first phase (1992-93
to 1996-97) the spurt
in industrial activities
and output could also
be noticed. The growth
rate of 6.1 per cent
in real output during
the post-reform period
(i.e. 1992-93 to 2002-03)
was slightly higher
than the pre-reform
decade of the eighties.
In short, the reform
process has helped India's
economy during the 1980s
to grow at a more sustainable
healthy rate. This was
achieved through competitiveness
and efficiency gains3.
In comparison to other
emerging market economies,
India's growth performance
is significantly higher
than a large number
of other countries (Table
1). Similar patterns
were observed in other
sectors such as industry
and services as well.
Although other emerging
markets show industrially-led
growth, India's growth
performance is led by
the service sector.
During the last 8 years
(1995-2002), India's
output (i.e. GDP) has
been growing at a rate
(6.0 per cent per annum),
which is almost double
that of the world output.
It has been probably
growing at a rate which
is higher than that
of all other countries,
except China. In this
context it should be
remembered that the
Indian economy is the
fourth largest in the
world after USA, Japan
and China (measured
in terms of purchasing
power parity adjusted
GDP). The world economies
have improved in the
recent past, particularly
since April 2003. The
growth rate experienced
by India's output, therefore,
is probably the highest
in the emerging markets-
around 8.0 per cent
during 2003-04.
| Table
4: Pakistan's Exports
to India 2000-02
(in thousands of
rupees) |
| Country |
GDP |
Agriculture |
Industry |
Services |
| |
1980-
1990 |
1990-
2000 |
2001 |
2002 |
2003 |
1980-
1990 |
1990-
2000 |
1980-
1990 |
1990-
2000 |
1980-
1990 |
1990
2000 |
Argentina
Brazil
China
India
Indonesia
Malaysia
Mexico
Thailand |
-0.7
2.7
10.1
5.8
6.1
5.3
1.1
7.6 |
4.3
2.9
10.3
6.0
4.2
7.0
3.1
4.2 |
-10.9
1.5
8.0
4.3
3.7
4.1
0.7
5.3 |
-10.9
1.5
8.0
4.3
3.7
4.1
0.7
5.3 |
5.5
1.5
7.5
7.0
3.5
4.2
1.5
5.0 |
0.7
2.8
5.9
3.1
3.6
3.4
0.8
3.9 |
3.4
3.2
4.1
3.0
2.1
0.3
1.8
2.1 |
-1.3
2.0
11.1
6.9
7.3
6.8
1.1
9.8 |
3.8
2.6
13.7
6.4
5.2
8.6
3.8
5.3 |
0.0
3.3
13.5
7.0
6.5
4.9
1.4
7.3 |
4.5
3.0
9.0
8.0
4.0
7.2
2.9
3.7 |
Computed
on the basis of
data from World
Bank (2002), World
Development Indicators
2002
Source: Reserve
Bank of India (2003). |
The changes in sources
of growth as well as
the process have resulted
in significant shifts
in production structure
(Table 2). The services
sector (including construction)
with a high growth rate
has emerged as the largest
sector with more than
a 50 per cent share
in total real output.
On the other hand, the
share of agriculture
in output has been consistently
declining as compared
to the earlier periods.
| Table
2: India: Sectoral
Composition of Real
Gross Domestic Product |
| Sector |
1950s |
1960s |
1970s |
1980s |
1990s |
2000-
01 P |
2001-
02 * |
2002-
03 # |
1.
Agriculture and
Allied
Activities |
56.1 |
47.8 |
42.8 |
36.4 |
29.1 |
23.8 |
23.9 |
22.1 |
| 2.
Industry |
11.7 |
15.1 |
16.9 |
19.5 |
21.9 |
22.0 |
21.5 |
21.8 |
| 3.
Services |
32.6 |
37.3 |
40.3 |
44.0 |
49.0 |
54.1 |
54.6 |
56.1 |
| 4.
GDP at factor cost |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
| P
Provisional, * Quick
Estimates, # Revised
Estimates |
| Source:
Reserve Bank of
India (2004) |
Savings and
investment
The increasing rate
of real output of a
country demands resource
mobilisation. In this
context it should be
noted that the rate
of gross domestic savings
(as a proportion of
gross domestic product)
has increased from 21
per cent in the pre-reform
period to around 24.0
per cent in the later
half of the post-reform
era (Table 3). It is
also observed that India's
savings rate has fluctuated
significantly from year
to year during both
the pre and post reform
era4.
The sources of gross
domestic savings have
changed significantly
in the recent past.
The household sector
(particularly financial
savings) has significantly
increased its share
in the post-reform period.
The gross domestic savings
in a large number of
East Asian emerging
markets have increased
significantly in the
last 2-3 decades (Table
3). Although India's
savings also increased,
the rate of increase
is significantly lower
than that of East Asian
countries. The declining
trend in India's savings
rate can be attributed,
to a large extent, to
public savings which
have shown a negative
value since 19985.
Notably, the structural
adjustment process has
led to an increase in
demand on investment.
India's investment rate
has comparatively increased
in the post-reform period
as compared to the pre-reform
period. However, it
is relatively low compared
to other countries.
India has to enhance
her savings rate if
the 8 per cent target
of the Tenth Five-Year
Plan is to be achieved.
| Table
3: Savings and Investment
of Select East Asian
Countries and India |
| Sector |
Gross
Domestic Saving |
Gross
Domestic Investment |
| |
1971-80 |
1981-90 |
1991-96 |
1997-2003 |
1971-80 |
1981-90 |
1991-96 |
1997-2003 |
China
Hong Kong
India
Indonesia
Korea, Rep. of
Malaysia
Philippines
Singapore
Thailand |
35.8
28.4
20.5
21.6
22.3
29.1
26.5
30.0
22.2 |
20.8
33.5
21.2
30.9
32.4
33.2
22.2
41.8
27.2 |
40.3
32.8
22.2
30.2
35.2
37.6
16.5
48.1
34.6 |
39.2
32.2
23.5
24.1
31.5
44.7
20.8
47.7
31.8 |
33.9
27.8
20.5
19.3
28.6
24.9
27.8
41.2
25.3 |
30.5
27.2
22.4
29.3
30.6
30.6
22.0
41.7
30.7 |
39.6
30.4
23.6
31.3
37.0
38.8
22.2
35.1
41.0 |
38.0
27.5
24.0
17.5
27.1
27.5
18.3
29.3
24.1 |
| P
Provisional, * Quick
Estimates, # Revised
Estimates |
| Source:
Reserve Bank of
India (2004) |
IV. Social Sector Indicators
In this section we compare
two indicators of social
welfare in the pre and
post reform periods, namely
(1) incidence of poverty
and (2) level of unemployment.
Figure 1 gives the
percentage of the Indian
population living in
poverty during 1973-74
to 1999-2000 and a projection
for 2006-07 as given
in the Indian Tenth
Five-Year Plan document6.
It shows that the percentage
of population living
in poverty fell sharply
from 56 per cent in
1973-74 to 26 per cent
in 1999-20007. The number
of poor people declined
steadily from 321 million
in 1973-74, to 240 million
in 1999-2000. In India,
the poverty lines are
described as permitting
a calorie intake of,
say, 2400 calories in
rural areas and 2100
calories in the urban
areas.
One can see from this
figure that the rate
of decline of India's
poverty was higher when
the growth rate was
high. Apart from an
increase in the GDP
growth, a number of
other factors have probably
affected the decline
in poverty rate. There
is a controversy over
the declining rate of
population below the
poverty line being inconsistent
overtime. In fact, quite
a few studies show that
the number of people
below the poverty line
(in percentage) increased
immediately after the
reforms (i.e. 1992-94)
and then led to a significant
decline in recent years8.
It is very difficult
to measure the impact
of the reforms on the
rate of employment (or
unemployment) in a country
like India where available
information is sketchy.
It is probably due to
the fact that more than
90 per cent of India's
employment is in the
unorganised or informal
sector. Even if some
data is available, it
is not comparable over
time due to definition,
coverage and other factors.
Recently a report of
a special group of Government
of India (2002c) has
attempted to generate
some numbers on a comparable
basis9.
The report summarises:
'…the unemployment
rate in India has increased
significantly since
1993-94 and was above
7.3 per cent in 1999-2000
compared to 6.0 per
cent in 1993-94 on Current
Daily Status basis…
. The present rising
unemployment is primarily
an outcome of a declining
job creating capacity
of growth, observed
since 1993-94. The employment
growth fell to 1.07
per cent per annum (between
1993-94 and 1999-2000)
from 2.7 per cent per
annum in the past (between
1983 and 1993-94) in
spite of acceleration
in GDP growth from 5.2
per cent between 1983
and 1993-94 to 6.7 per
cent between 1993-94
and 1999-2000. It means
that the capacity of
job creation per unit
of output went down
about three times compared
to that in the 1980s
and early 1990s.' Table
4 gives the rate of
employment and unemployment
in the pre and post-reforms
period for select years.
The possible factors
for this declining rate
of employment growth
in recent years, have
been identified as follow:
(i) Employment in the
public sector was negative.
(ii) The organised sector
employment generating
capacity was negligible.
(iii) The pattern of
growth is not favourable
to labour intensive
sectors.
(iv) Shedding of excess
labour to make different
sectors competitive.
(v) Definition of 'small-scale
sectors' changes over
time.
Table
4: India: Past and
Present Macro Scenario
on Employment
and Unemployment
(CDS Basis) (Person
years) |
| |
(Million) |
Growth
per annum (%) |
| |
1983 |
1993-94 |
1999-2000 |
1983
to 1993-94 |
1993-94
to 1999-2000 |
| |
All
India |
|
|
| Population |
718.20 |
894.01 |
1003.97 |
2.00 |
1.95 |
| Labour
Force |
261.33 |
335.97 |
363.33 |
2.43 |
1.31 |
| Workforce |
239.57 |
315.84 |
336.75 |
2.70 |
1.07 |
|
