Indian Economy After Liberalisation Full 978-93-8117-614-6 2012 (1)

8/13/2019 Indian Economy After Liberalisation Full 978-93-8117-614-6 2012 (1)

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Indian Economyafter Liberalisation

Performance and Challenges

Edi ted by

Dilip Saikia

SSDN Publishers & Distributors

New Delhi

Published by

Sat parkash Katla

SSDN PUBLISHERS & DISTRIBUTORS

5A, Sahni Mansion, Ansari Road

Daryaganj, New Delhi 110002 (India)

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Indian Economy after Liberalisation Performance and

Challenges

Editor

[All rights reserved. No part of this publication may be reproduced, storedin a retrieval system or transmitted, in any form or by any means,mechanical or photocopying, recording and otherwise, without prior

written permission of the editor and the publisher.]

First edition: 2012

ISBN No 978-93-8117-614-6

PRINTED IN INDIA

Printed at Asian Offset, New Delhi


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Indian Economyafter Liberalisation

Performance and Challenges


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To my dear teacher,

Prof. Madhurjya Prasad Bezbaruah,

who inspires me to reach higher


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Forword

Indias economy after l iberalisation is filled with challenges

and opportunities, which warrants keen introspection into

structure and performance of various sectors alongside its

human face. This collection of papers drafted by young scholars

of the Centre for Development Studies, Trivandrum demonstrates

an exemplary cohesion of issues concerning the economy during

the post-reform era. They address contentious issues like slowing

down of agricultural growth, deviations from the ideal pattern

of inter-sectoral linkages, poverty comparisons and regionalvariations.

While this volume may not be exhaustive in terms of

addressing all possible areas of the economy having the potential

bearing of liberalisation, it undoubtedly deliberates on the

essential domains of the economy with i ts evolving perspective.

Apart from agriculture, industry and services, the content

extends to an understanding of poverty, regional variations

and human development. As such, it serves as an ideal reading

of the liberalised Indian economy in a wide-ranging perspective.

Varying issues and pertinent questions are being addressedwith conceptual justification and empirical exploration, which

makes this volume distinct from others on the same topic.

This collection of research papers, originated as term papers

during the course work of M.Phil course in Applied Economics

at the Center for Development Studies, has undergone substantial

revision to assume its current shape. I ts rigour, veracity, and

analytical strength owes a great deal to the suggestions and

interventions made by the Centres faculty during its presentation

in the seminar. Needless to mention that this initiative of

putting together works of young budding researchers in a

comprehensive volume is enviable on one hand and reassuring

on the other.

I put on record my sincere appreciation for Mr. Di lip Saikia

and the individual contributors to this volume for this remarkablejob, which will encourage peers to make similar attempts at

disseminating their early career works. Finally, it is a dream

come true for a sincere teacher and I wish many more

similar collections of works to take shape in future.

Udaya S. Mishra

Associate Professor

Centre for Development Studies

Trivandrum

(viii)


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Preface

Indias economic reform since 1991 has been catalyst in shaping

the performance of the economy. No doubt the economy has

been brought to a higher growth trajectory, emerged as one

of the fastest growing economies in the world and minimised

many of the apparent inefficiencies that were persistent before

the reform; however, it is overwhelmed by various socio-

economic problems and there are new challenges in the process

and backlashes in various areas, such as growing inequalities,

low levels of employment, and agrarian distress, etc. Thebook provides a comprehensive review of the performance of

Indias economy in the context of two decades of structural

reforms and the growth and development challenges thereof.

I t covers the main features of Indias post-reform economic

development and addresses issues such as sluggish growth

of agriculture, inter-sectoral linkages, poverty, rural

development and human development in the context of the

economic reforms.

The book grew out of a series of term papers carried out

by the authors during the course work of M.Phil Programmein Applied Economics at the Centre for Development Studies,

Trivandrum. I am thankful to the authors for their contribution

and their diligence in revising the chapters according to the

broader theme of the book Their suggestions helped me incalculably

at various stages during editing the book.

The editor and the other authors are all grateful to the

Centre for Development Studies for providing a radiant

academic ambiance and research facilities. Sincere thanks

are due to the concerned faculties under whose able guidance

these studies were formulated and to all the faculties and fellow

students for their insightful comments during the presentation

of the studies. I express my sincere gratitude to Dr . U. S.

Mishra of Centre for Development Studies for his guidance and

encouragement as the Coordinator of M.Phil Programme and

for writing the forward of the book.

I also take this opportunity to record my sincere thanks

to Prof. M. P. Bezbaruah (of Gauhati University) for his

consent encouragement and inspiring me to reach higher. I

also extend my gratitude to the administration of the Insti tute

for F inancial Management and Research (IF MR), Chennai,

where I am currently pursuing PhD programme, for providing

a workable environment and to the faculties and fellow research

scholars of the Institute for exchanging their ideas on diverse

areas.

I am indebted to the SSDN Publishers & Distributors for

publishing the book. Mr. Sat P arkash K atla of the SSDN

Publishers & Distributorsprovided indispensable oversight

for getting the book to publication.

I owe grati tude to my family for the care and support I

received throughout my li fe. Lastly, but not the least, I duly

acknowledge my sincere thanks to all those who helped me

in the course of this work. All may not be mentioned but

none is forgotten.

Needless to say, the views expressed in the book are of

the views of the authors, and do not necessarily reflect the

views of the organisations they belong to and the editor of the

book. Nevertheless the editorial errors are mine.

Dilip Saikia

(x)


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SWATI DUTTAis doing Ph.D in Economics under Madras

University at Institute of Financial M anagement and

Research. She did her M.Phil in Applied Economics from

Center for Development Studies under J awaharlal Nehru

University. Previously she worked as project linked

personnel in the project entitledConstru ction and An alysis

of Regional V ar iat i on of Social D evelopment In dices in

I nd i a, sponsored by Ministry of Statistics and Programme

Implementation, Government of India in Indian Statistical

Institute, Kolkata. Her area of interest is Development

Economics.

KHANINDRA CH. DAS is research scholar at I nstitute for

Financial Management and Research (IFMR), Chennai,

India. H e received Masters Degree in Economics from

Gauhati University, Guwahati and M.Phil in Applied

Economics from Centre for Development Studies,

Trivandrum. His research interests are diverse that include,

among others, Development Economics and International

Trade & Finance. H is recent publications includeRisk

Behaviour of Commercial Ban ks under Reform : The Ind ian

Experience.

KALYANY SANKAR is currently a Project Assistant at Centre

for Development Studies (CDS), Trivandrum. She completed

M.Phil in Applied Economics from Centre for Development

Studies. Her areas of interest are Poverty and Human

Development and worked on the Social and EconomicMobility of Slum Dwellers.

List of Contributors

DILIP SAIKIA is research scholar of Economics at Institute

for F inancial Management and Research, Chennai (I ndia).

He received M.Phil in Applied Economics of J awaharlal

Nehru University from Centre for Development Studies

(CDS), T rivandrum and Masters Degree in Economics

from Gauhati University, Assam. His research interests

include macroeconomics, economic development and trade,

industrial organisation, r egional economics and economic

geography. H is recent books include Ind ust r ia l L ocat ion

under Gl obal isat ion in In dia: E vidence from Unorganised

Manufacturing I ndustriesandAgricultu re-In dustry Li nkages

in In dia: Some Issues and Evid ences.

VACHASPATI SHUKLA is currently research scholar at

Centre for Development Studies (CDS), Trivandrum, India.

He received M.Phil in Applied Economics from Centre

for Development Studies and MA in Economics from

Faculty of Social Science, Banaras Hindu University,

Varanasi. His research interests include labour economics

and human development.

KIRAN KUMAR KAKARLAPUDI is currently doctoral

scholar in E conomics at the Centre for Development

Studies, Trivandrum. He has completed M.Phil in Applied

Economics from Centre for Development Studies during

2008-10 and M.A. in Economics from University of

Hyderabad. His area of interest includes labour economics,

economics of technological change, issues related to

globalisation and inequality. H e is currently working on

implications of technological change on growth and

employment.

(xii)


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3.5 Summary and Conclusion 115

Refer ences 117

4. Agriculture and Industry: Analysing

Linkages for Pre- and Post-reform

Periods in India 122Di l i p Saik ia

4.1 Introduction 122

4.2 Nature of Agriculture-Industry Linkages 123

4.3 A Reprise of Theories 127

4.4 Methodologies of Estimating Sectoral Linkages 131

4.5 Trends of Agriculture-Industry Interlinkages in

I ndia 135

4.6 Conclusion 155

Refer ences 157

Annexur e 4.1 164

Ann exur e 4.2 169

5. Differential Growth of Poor and

non-Poor and I ts Implication on

Poverty Reduction 174

Vachaspat i Shu kla


5.2 Conceptual Framework 176

5.3 An Alternative Way to Measure the

Poverty Reduction 183

5.4 Empirical Evidence from Indian States 185

5.5 Conclusion 191References 193

6. Regional Patterns of Agricultural Growth

and Its Bearing on the Incidence of

Poverty in India 194

Swat i Du t t a


6.2 Literature Review 197

6.3 Objectives 200

6.4 P erformance of I ndian Agriculture 200

Forwor d vi i i

Pr eface ix Cont r i bu tor s xi

L i st of Tables xv i i

L i st of F i gu r es xxi

L i st of Boxes xxi i i

Abbr evi at i ons xxv

1. Introduction: Indias Economy after

Liberalisation 1

Di l i p Saik ia

1.1 Introduction 1

1.2 Indias Performance: 1951-52 to 2009-10 61.3 Overview of the Volume 39

References 44

2. Indias Road to Economic Reforms 47

Di l ip Saik ia and Vachaspat i Shukl a

2.1 Indias Development Strategy in the

Post-Independence Period 47

2.2 Reforms of the 1980s 53

2.3 The Crisis of 1991 57

2.4 Major Reforms of the 1990s 64

2.5 Conclusion 75

Refer ences 77

Ann exur e 2.1 80

3. Agricultural Growth in the Post-reform Era:

A Critical Assessment 81

K i ran Kumar Kaka r l apu r i

3.1 Introduction 81

3.2 Review of L iterature 84

3.3 Sources of Agricultural Growth since

Independence 89

3.4 Factors Affecting Agr icultural Growth 104

(xiv)

Contents


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6.5 Present Scenar io of Pover ty in India 207

6.6 How Increased Agricultural Productivity

Reduces Poverty 211

6.7 Analytical Framework 217

6.8 Results 221

6.9 Conclusion 224

Refer ences 226

7. Access to Finance and Its Association

with Development in Rural India 228

Khan ind ra Ch . Das


7.2 Access to Finance and Development:

A Brief Review 231

7.3 Extent of Inequality in the Access to

F inance from Institutional Sources 2357.4 Association of Inequality in Institutional

Access to F inance and Development 237

7.5 Conclusion 245

References 248

8. Human Development in India:

An Analysis of Inter-state and

Intra-state Convergence/Divergence 251

Kalyany Sankar


8.2 Review of L iterature 2538.3 Data Source and Methodology 258

8.4 Analytical Framework 259

8.5 Results 262

8.6 Conclusion 279

References 282

Annexur e 8.1 286

Annexur e 8.2 288

I n d ex 2 93

(xv)


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List of Tables

1.1 Selected Indicators of Indias Economy:

1950-51 to 2009-10 4

1.2 Indias Growth Performance during

Planning period 9

1.3 Indias Economic Growth during

Pre-independence period 11

1.4 Growth during Selected Pre-reforms periods 13

1.5 Post-reform Growth Performance 18

1.6 Volatility in Growth Rate: Coefficient of

Variation 20

1.7 Contributions to Growth 21

1.8 Combined Deficits of Central and State

Governments 25

1.9 Gross Domestic Saving and Gross Domestic

Capital Formation 28

1.10 Selected Balance of Payments Indicators 29

1.11 Percentage of People below Poverty L ine 33

1.12 Rate of Growth of Organised Sector E mployment 34

1.13 Unemployment Rate (per 1000) according to

Usual Status, Current Weekly Status (CWS)

and Current Dai ly Status (CDS) approach 35

2.1 Selected F iscal I ndicators during the 1980s

(as percentage of GDP) 58

2.2 Selected Balance of Payment (BoP)

Indicators (as percentage of GDP) 61

3.1 Growth Rate in GDP Agriculture and

non-Agriculture before and after

Reforms 923.2 Growth Rate in Output of various Sub-

Sectors of Agriculture 93

3.3 Share of Foodgrain and Non-Foodgrain Crops in

Cropping pattern and Value of Output in

I ndia 95

3.4 Sources of Agricultural Growth in different

Regions of India during 1980s and 1990s 96

3.5 Share of different Commodities in the Sources

of Agricultural Growth in India during 1980sand 1990s 99

3.6 Rate of Growth of Area, Production, Yield and

Area under I rrigation for major Crops percent 102

3.7 Growth Rate in Area, Input Use, Credit and

Capital Formation in Agriculture before and

after Reforms 104

4.1 Sectoral Share Matrices (Production L inkages) 146

4.2 Sectoral Demand Matrices [(I - A)-1] (Demand

Linkages) 152

4.3 Changes in Sectoral L inkages: Summery 154

4.1.A Sectoral share of GDP at factor cost 169

4.2.A Sector-wise Trend Growth Rate of

GDP 169

4.3.A Share of Agro-based and non Agro-based

Industries (Organised Sector) 170

4.4.A Share of Agricultures Final and

Intermediate Consumption 171

(xviii)


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4.5.A Share of Modern and Traditional I nputs

in Agriculture 171

4.6.A Consumption of Fertilisers and Pesticides 172

4.7.A Per H ectare Consumption of Fertil isers and

Pesticides 173

5.1 An I llustration 183

5.2 Number and Proportion of People below

Poverty Line across I ndian States 187

5.3 Decadal Population Growth across India

States 188

5.4 Average Household Size of Poor and non-

Poor across States in 1993-94 192

6.1 Annual Average Growth Rate in Agriculture

and the GDP 201

6.2 Growth Rate of Yields for Foodgrains and

Oilseeds: 1980-1 to 2005-6 202

6.3 Growth Rate of GDP in Agriculture 204

6.4 State-wise Incidence of Poverty 209

6.5 Correlation Matrix among Poverty Head

Count Ratio, Yield and NSDP per worker

in 1994-95 level values 218

6.6 Correlation Matrix among Poverty HeadCount Ratio, Yield and NSDP per worker

in 2004-05 level values 220

6.7 OLS Estimates 1 222

6.8 OLS Estimates 2 223

7.1 Percentage of Rural Households getting

Access to Finance from different Sources

across Asset-holding Classes (All India) 240

7.2 ANOVA Test of Di fference of P ropor tion 241

7.3 Correlation Matrix of Poverty, Li teracy,

Electricity Use, Access and Inequality in

Access to Finance 243

7.4 Classifying Poverty and Inequality in

Access to F inance into Low and H igh 2437.5 Classification of States by Inequality in

Access to Finance and Poverty 245

7.6 Poverty, Inequality, NSDP, Electricity

Usage, L iteracy Rate, 2002 246

8.1 State-wise Literacy Rate, I MR, P roportion

of Households with Safe Water, Electricity

and Toilet Facilities 263

8.2 District-wise Literacy Rate, I Mr,Proportion

of Households with Safe Water,E lectr ici ty and Toi let Faci li ty in Kerala 267

8.3 District-wise L iteracy Rate, IMR and

Proportion of Households with Safe Water,

E lectri city and Toi let Facil ity in Bihar 270

8.4 Sigma- Convergence of SDI 276

8.5 Summary Statistics of all India SDI in 1991

and 2001 277

8.6 Summary Statistics of SDI for Kerala in 1991

and 2001 278

8.7 Summary Statistics of SDI for Bihar in 1991

and 2001 279

(ixx) (xx)


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List of Figures1.1 Annual Growth Rate of GDP and Per

Capita NNP: 1951/52-2009/10 8

1.2 Combined Deficits of Central and State

Governments 24

1.3 Annual Inflation Rate in India in the

Post-reform period 37

2.1 Average Annual Growth Rates of

Non-Oil Merchandise Exports and

Imports 56

2.2 Merchandise Non-oil E xports and Imports

as Percentage of GDP 56

2.3 Annual Inflation Rate 59

2.4 Real Exchange Rate 60

2.5 Indias Foreign Exchange Reserves

(as percentage to GDP) 63

2.1.A E xternal Debt (as percentage to GDP ) 80

2.2.A Indias Current Account (as percentage

to GDP) 80

3.1 Share of different Sources of Growth in

Agriculture in India 97

3.2 Capital Formation in Agriculture 107

4.1 Sectoral Composition of GDP at factor cost 140

4.2 Sector-wise Trend Growth Rate of

GDP 140

4.3 Comparison between different TOT Series 150

4.4 Relative Prices of Agriculture and

Industry 151

4.1.A Agricultures Purchase from non-

Agricultural Sector 173

5.1 Decomposition of total Increase in

Population of non-Poor 191

6.1 Theoretical Framework 219

7.1 Percentage of Rural Household getting

F inance from I nstitutional Sources 238

7.2 Percentage Share of Institutional Agencies

in Cash Debt Outstanding of Rural Households 239

8.1 State-wise Social Development Index,

1991 and 2001 265

8.2 Social Development Index for K erala,

1991 and 2001 268

8.3 Districts with below Bihar State

Average SDI 273

8.4 Districts with above Bihar StateAverage SDI 274

(xxii)


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List of Boxes1.1 Major Econmic Reforms of 1991-93 65

1.2 Construction of Variables and Data Sources 244


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Abbreviations

ADB Asian Development Bank

CAD current account deficit

CDS current daily status

CGE computable general equilibrium

CMIE Centre for Monitoring I ndian E conomy

CPI consumer price index

CRR cash reserve ratio

CSO Central Statical Organisation

CV coefficient of variation

CWS current weekly status

EPW Economic and Political Weekly

FEMA Foreign E xchange Management Act

FER foreign exchange reserveFERA F oreign Exchange Regulation Act

FODI outwar d foreign direct investment

FRBM Fiscal Responsibility and Budget Management

FYP Five Year Plan

GDCF gross domestic capital formation

GDP gross domestic product

HCR head count ratio

HDI Human Development Index

HYV high yielding variety

IEM I ndustrial Entrepreneur M emorandum

IMF International Monetary Fund

IMR infant mortality rate

INC Indian National Congress

IRDP Integrated Rural Development P rogramme

IRRI I nternational Rice Research I nstitute

J GSY J awahar Gram Samridhi Yojana

J RY J awahar Rojgar Yojana

MoU Memorandum of Understanding

MRTP Monopolies and Restrictive Trade Practices

MSP minimum support prices

NF BS National F amily Benefit Scheme

NNP net national product

NOAPS National Old Age Pension Scheme

NREGP National Rural Employment Guarantee

Programme

NRE P National Rural Employment P rogr amme

NSAP National Social Assistance Programme

NSDP net state domestic product

NSS National Sample Survey

POL petroleum, oil, and lubricants

(xxvi)


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PPP purchasing power parity

PSU public sector undertakings

RBI Reserve Bank of India

RDP Rural Development Programme

RLEGP Rural Development and Poverty Alleviation

Programme

SAM social accounting matrix

SDI Social Development Index

SE BI Secur ity and E xchange Boar d of I ndia

SGRY Sampoorna Grameen Rozgar Y ojna

SGSY Swar njayanti Gram Swarozgar YojanaSI A Secretariat of I ndustrial Approvals

SLR statutory liquidity ratio

TFP total factor productivity

ToT terms of trade

TPDS Targeted Public Distribution System

U BSP U rban Basic Services Programme

UPA United Progressive Alliance

UPDS Union Pacific Distribution Ser vices

VAT value added tax

WPI wholesale price index

WSBI World Saving Bank Institutes

WTO World Trade Organisation

(xxvii)


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Introduction 1

1

Introduction: Indias Economyafter Liberalisation

Dil ip Saik ia

1.1. IntroductionIndia had undergone structural changes in policies from

import substitution regime to free market regime in the early

1990s. I t has been two decades since India liberalised its

policies. Therefore, it is now reasonable to review the

performance of I ndias economy during this period, and look

at the future challenges. The stabilisation-cum-structural

adjustment reforms, (see chapter 2 by Saikia and Shukla

for a discussion) have become one of the landmarks for the

recent spate of Indias economic development. Following the

economic reforms, the economy has been performingextremely well and presently the economy is regarded as one

of the fastest growing economies in the world. I t has been

growing at an annual average rate of 6.86 per cent during

the two decades of economic reforms (1992-93 to 2009-10)

as against 4.07 per cent during the four decades prior to the

economic reforms (i.e. 1950-51 to 1991-92). Moreover, the

growth of the economy scaled up particularly after the year

2000, with the growth averaging at an annual rate of 7.32

per cent during 2000-01 to 2009-10 and 8.46 per cent during


16/38

Introduction 32 Indian Economy after Liberalisation

2003-04 to 2009-10. As per World Bank data1India is now

the 10thlargest economy in the world in terms of nominal

Gross Domestic Product (GDP) which stood at US$1377.26

billion in 2009 and the 4th largest in terms of purchasing

power parity (US$ 3808.44 billion in 2009). The countrys

GDP per capita (PPP) recorded at US$ 2,993 (at constant

2005 international dollar) in 2009, as against US$ 1831.66

in 2001 and US$ 1232.19 in 1991.

The success story of the economy is mainly attributed to

the rise in the quantum of investment during this period.

The gross domestic capital formation (GDCF) stood at 36.5

per cent of GDP in 2009-10 as against 26 per cent in 1990-

91 and gross domestic savings stood at 33.7 per cent of GDP

in 2009-10 as against 22.8 per cent in 1990-91 (Table 1.1).

The industry and services sectors continued to fuel the

economic growth. Industrys contribution (including

construction sector) to GDP has steadily increased from

25.92 per cent in 1990-91 to 28.47 per cent in 2009-10, while

services sector continued to contribute about 57 per cent to

GDP in 2009-10. The economy has been doing well in the

external sector, especially in trade, foreign investment, and

accumulating foreign reserves. The volume of exports and

imports recorded at Rs. 845534 crore and Rs. 1363736 crore

respectively and the foreign exchange reserves stood at Rs.

1149650 crore in 2009-10 (Table 1.1). The economy has not

only become a major destination of foreign investment; butalso emerged as one of the emerging source of outward

foreign direct investment (OFDI ). The macro-economic

condition of the economy has been stronger over the period

compared to the pre-reform decade, albeit inflation has been

a major concern from time to time.The social sector

performance has also been impressive during this period.

Birth rate has declined to 22.5 per thousand of population,

death rate declined to 7.3 per thousand of population, life

expectancy at birth increased to 64.1 years and l iteracy rate

increased to 74 per cent in 2009-10 (Table 1.1). The

spectacular performance of the economy in the last two

decades helps in improving the investors confidence and

business environment in India. In this regard The Economist

(2010) quotes, Indian firms are increasingly global and

sometimes world-class. Arcelor Mittal, based in Luxembourg,

is the worlds largest steel firm. Tata Motors, best known for

making cars that cost only $2,000, also owns J aguar and

Land Rover, two luxury brands. Bharti Airtel, a mobile-

phone firm with 140m subscribers in I ndia, is rapidly

expanding into Africa, too.

Thus, we can see that the economy has been doing

superbly since the initiation of the free market principle

through economic reforms in the early 1990s. To summarise

the present scenario of I ndias economy it is worthwhile to

quote Acharya and Mohan (2011), Overall economic growth

has accelerated, inflation has moderated, and financial

stability has been maintained. The fiscal position has

fluctuated, registering periods of both successful

consolidations and backsliding. The economy has seen

substantial opening to the rest of the world as the currency

has become convertible on the current account, and the

capital account has been liberalised subsequently. Theindustrial sector has been deregulated and exposed to

international competition, thereby making it more

competitive. The services sector has exhibited a new vibrancy

in some areas, with the information technology sector showing

the potential of Indian enterprise.

The aim of this book is to uncover some aspects of Indias

development in the post-reform period and highlight on the

future challenges. Before presenting an overview of the

book we briefly review Indias performances in the post-

1. World bank onli ne database available at http://

data.worldbank.org


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Table1.1:Selec

tedIndicatorsofIndias

Economy:1950-51to2009-10

1950-5

1

1960-6

1

1970-7

1

1980-8

1

1990-9

1

2000

-01

2009-1

0

ECONOMIC

INDICATORS

GDP

atfactorcost:atconstant

prices(inRsCr.)%

224786

329825

474131

641921

1083572

1864

300

4493743Q

PercapitaNNPatconstant

Prices(inRs)%

5708

7121

8091

8594

11535

161

72

33731Q

GrossDomesticCapitalFormation

(as%

ofGDP)

8.4

14

15.1

19.9

26.0

24.3

36.5

GrossDomesticSavings

(as%

ofGDP)

8.6

11.2

14.2

18.5

22.8

23.7

33.7

Indexofagriculturalproduction

(Base:1981-82=100)

46.2

68.8

85.9

102.1

148.4

165

.7

179.9

Indexofindustrialproduction

(Base:1993-94=100)

7.9

15.6

28.1

43.1

91.6

162

.6

316.2

WholesalePriceIndex

6.8

7.9

14.3

36.8

73.7

155

.7

130.4

CPIforIndustrialworkers

17

21

38

81

193

44

4

163

Exports(RsCr.)

606

642

1535

6711

32553

203571

845534

Imports(RsCr.)

608

1122

1634

12549

43198

230873

1363736

Foreignexchangereserves

@

(RsCr.)

911

186

438

4822

4388

184482

1149650

SOCIAL

INDICATORS

Population(million)

359

434

541

679

839

1019

1170

AverageAnnualExponential

PopulationGrowth(%)*

1.25

1.96

2.20

2.22

2.14

1.9

3

-

BirthRate(per1000)

39.9

41.7

36.9

33.9

29.5

25.4

22.5

DeathRate(per1000)

27.4

22.8

14.9

12.5

9.8

8.4

7.3

LifeExpectancyatBirth(Years)

32.1

41.3

45.6

50.4

58.7

62.5

64.1

$

(a)Male

32.5

41.9

46.4

50.9

58.6

61.6

64.9

$

(b)Female

31.7

40.6

44.7

50.0

59.0

63.3

62.0

$

LiteracyRatio(%)

18.3

28.3

34.4

43.6

52.2

64.8

74.04#

(a)Male

27.2

40.4

46.0

56.4

64.1

75.3

82.14#

(b)Female

8.9

15.4

22.0

29.8

39.3

53.7

65.46#

No

te:Q-quickestimate;%

Datarelatesto1999-2000pricesupto2000

-01.For2009-10dataarebasedon

new

series

(2004-05)prices;@

Excludinggold,SDRsandReverseTranchePo

sitionattheIMF;#Figuresarefor

2011andtaken

from

Census2011;$Figures

arefor2009andtakenfrom

UNICEFIndiaStatistics;*Figuresarefor

thecensusyear

anddatacollectedfrom

Cens

us2001.Source:EconomicSurvey,2

009-10


18/38


reform period as compared to pre-reform period and look at

the major challenges facing the economy. In the next section

we review Indias growth performance since independence.

Thereafter, we will highlight some of the major challenges

facing by the economy and finally,we will provide an overview

of the book.

1.2. Indias Performance: 1951-52 to 2009-10

I t is relatively a challenging task to review the

performance of Indias economy, since there have been many

well-known studies on the topic that have evaluated Indias

growth story since the independence and specifically after

economic reforms both at macro and micro level in different

dimensions. One way to look at a countrys performance is

to look at the pace of economic growth and its macroeconomic

condition during the period (Acharya and Mohan, 2011). Itwil l provide an aggregate assessment of the overall economic

performance of the economy. Here, we look at Indias growth

performance since 1950-51.

Figure 1.1 presents the annual growth of GDP and per

capita Net National Product (NNP) for the period 1951-52

to 2009-10. From the figure it is hard to characterise Indias

economic growth during this period, though it is clear that

there were very few years in the first three decades when

the growth rate exceeded 5 per cent. None of the Five Year

Plans, during the first three decades, recorded an average

annual growth rate of over 5 per cent and the decadal

average growth rate hardly exceeded 4 per cent per annum

(Table 1.2). The growth that picked up from 3.5 per cent per

annum during the First Five Year Plan (FY P) to 4.3 per cent

per annum during the Second FYP came to a halt during

the Third FYP as growth rate dropped to 2.88 per cent per

annum, which slowly bounced back during the Fourth and

Fifth FYPs. The performance of industrial sector was average

during the period except during the Fourth FYP, while

agriculture sector performance was poor and service sector

grew at an average rate. Looking at the decadal annual

average growth rate there was continuous decline in each

decade compared to previous decade for overall GDP and

well as sectoral GDP. Further, there were four years when

GDP growth recorded negative rates: 1957-58, 1965-66,

1972-73 and 1979-80. The result was a much slower growth

of 3.6 per cent per annum during the first three decades of

planned development, what is often referred as the Hindu

Rate of Growth.2However, this 3.6 per cent growth rate

during the first three decades was four times greater than

the 0.9 per cent estimated for the period 1900-46 during the

British rule (Table 1.3), though the post-independence

growth was far below potential and much less than the 7-

8 percent rates being achieved in some countries of East Asia

and Latin America (Acharya, 2008). Singh (2009) remarked,Using the colonial period as a benchmark, India certainly

has done well. I ts GDP growth and improvements in human

development indicators were both well above the earlier

era Infrastructure investment was greater than before,

industries were developed in support of modernisation goals,

and higher education, in particular, grew dramatically

also sustained relatively low inflation rates On the other

hand, as early as the 1960s, several East Asian countr ies

began to outstrip Indias economic performance. (emphasis

added). Another feature of the pre 1980s growth was high

volatili ty in growth rates as we can see from Figure 1.1. Thevolatility was highest during the 1970s compared to the

previous two decades and agriculture growth remained

highly volatile during the entire period (Table 1.6).

2 The Hindu rate of growth, as Basu (2007) noted, is the tongue-

in-cheek expression coined by the Indian economist, the late

Raj K rishna, to capture the frustrations Indias planners faced

with growth.


19/38


Source:Basedondatafrom

Ec

onomicSurvey2011

Note:Dataareat1999-00seriesupto2004-05,afterwhichat

2004-05series.

Ta

ble1.2:IndiasGrowthPerformanced

uringPlanningperiod

(percen

tagepery

ear

)

GDP

Pr

imary

Seco

ndary

Tra

de,

Financ

ing,

Pu

blic

Ho

tels,

Insurance,

Adm

inistra

tion,

Transpor

t&

Rea

les

tate,&

De

fense

Commun

ica

tion

Bus

iness

an

do

ther

Serv

ices

FirstPlan(1951-56)

3.58

2.92

6

.12

4.66

3.12

2.98

SecondPlan(1956-61)

4.28

3.46

6

.50

6.12

2.82

4.32

ThirdPlan(1961-66)

2.88

-0.02

6

.90

5.64

3.30

5.80

AnnualPlans(1966-69)

4.03

4.33

3

.97

3.90

3.13

4.33

FourthPlan(1969-74)

3.26

2.70

3

.34

3.84

3.98

4.28

FifthPlan(1974-79)

4.80

3.64

6

.38

6.86

5.30

3.60

AnnualPlan(1979-80)

-4.90

-12.20

-3.50

-0.40

1.00

7.30

SixthPlan(1980-85)

5.60

5.94

5

.08

5.44

7.36

4.90

SeventhPlan(1985-90)

5.66

3.40

6

.36

6.48

9.96

6.86

AnnualPlans(1990-92)

3.35

1.50

3

.30

3.85

8.50

3.50

EighthPlan(1992-97)

6.56

4.68

7

.74

8.74

6.96

5.64

NinthPlan(1997-2002)

5.52

2.60

4

.34

7.96

8.02

7.66

TenthPlan(2002-2007)

7.78

2.68

9

.72

11.18

9.80

5.20

EleventhPlan(3Years)#

8.03

2.27

7

.70

9.40

11.20

10.47

Figure1.1:Annu

alGrowth

RateofGDP

and

Pe

rCapitaNNP:1951/52

2009/10


20/38


Table 1.3: Indias Economic Growth during Pre-

independence period

(percent age per year )

Year GDP Popu l at i on Per Capi ta GD P

1900-29 0.9 0.5 0.4

1930-46 0.8 1.3 -0.5

1900-46 0.9 0.8 0.1

Source: Sivasubramonian (2000), cited in Acharya (2007)

The gloomy performance of the economy during the first

three decades was mainly due to the development strategyadopted by the policy makers during this period (Singh,

2009). I t is well known that India had followed an inward-

looking development strategy with import-substitution policy,

restrictions on exports, and many industries were reserved

for the public sector until the early 1980s. (These policies

have been discussed in Chapter 2 of this book.) The

restrictions on trade and international investment did not

allow the economy to enjoy the benefit of trade as an engine

of growth, whi le some East-Asian economies such as South

Korea and Taiwan had benefited from opening their economy.

Krueger (2008) pointed out three policies, viz. a neglect of

infrastructure, higher regulations in the labor market, and

the license raj that deterred the growth during this period.

However, growth rate picked up during early years of

the 1980s. The Sixth and Seventh FYPs recorded over 5.5

per cent annual average growth rate and a decadal growth

rate of 5.4 per cent (Table 1.2). The growth of agriculture

sector was impressive compared to the earlier three decades,

while industry continued to grow above the average andDecadalAverageGrowth

1951-52to1960-61

3.93

3.19

6.31

5.39

2.97

3.65

1961-62to1970-71

3.78

2.58

5.61

5.01

3.43

5.30

1971-72to1980-81

3.17

1.95

3.96

4.86

4.09

3.98

1981-82to1990-91

5.40

3.83

5.97

5.90

9.09

5.91

1991-92to2000-01

5.60

2.90

5.75

7.69

7.84

6.50

2001-02to2009-10

7.64

2.90

8.28

10.37

9.99

6.83

Note:

*Upto

2004-05thedataisin1999-00series,afterthatitisin2004

-05series

#Forthefirstthreeyearsof11thP

lan

(2007-08to2009-10)

Source:Calculatedbasedondatafrom

EconomicSurvey2011T

able1.2:(Contd.)

(

percen

tagepery

ear

)

GDP

Pr

imary

Seco

ndary

Tra

de,

Financ

ing,

Pu

blic

Ho

tels,

Insurance,

Adm

inistra

tion,

Ttanspor

t&

Rea

les

tate,

De

fense

Commun

ica

tion

,&B

us

iness

an

do

ther

Serv

ices


21/38


service sector picked up. However, the growth during the

second half of the 1980s was more pronounced compared to

the first half (Table 1.4). Dur ing 1981-82 to 1985-86 growth

recorded at 4.92 per cent per annum, which jumped to 5.88

per cent per annum during 1986-87 to 1990-91.The

interesting part of the decade was the exceptionally high

growth rate of 7.2 per cent per annum during the three

years period between 1988-89 and 1990-91, which is also

coincide with the crisis period due to which Panagariya

(2005) remarked, [...] any explanation of growth in the

1980s must explain the exceptionally high growth during

1988-91. Panagariya further noted some facts of Indias

growth during the 1980s [] the earliest break in the

growth rate occurs in 1977-78 [] though the average growth

rate over a whole decade hit the 5 per cent mark for the

first time during 1980-90, year-to-year growth during thisperiod exhibited considerable fragility [] the average of

the growth rates over the ten-year period spanning from

1978-79 to 1987-88 was an unimpressive 4.1 per cent []

the economy was still on the Hindu growth path. Even the

average of growth rates during the seven-year period from

1981-82 to 1987-88 [recorded] at 4.8 percent [] I t is only

when we include the ultra-high growth rates [7.6 per cent]

of the last three years of 1980s that the average growth rate

from 1981-82 to 1990-91 jumps to 5.6 percent [...] Without

these three years, there would be no debate on growth

during 1980s versus 1990s. (emphasis added).

However, there have been diverse explanations about

the acceleration of growth during the pre-reform period. For

instance, DeLong (2003) pointed out that the post-1984

reforms was responsible for growth acceleration, whereas

Table 1.4: Growth during Selected Pre-reform

periods


Year GDP Pr imary Secondary Trade, Financing, Publi c Hotel s, I n su rance, Admi n i st ra -

Transpor t Real t i on D efense

& Commu ni - est at e,& a nd ot her

cation Business Services

1981-82 5.60 5.10 7.50 6.20 8.10 2.10

1982-83 2.90 0.40 0.50 5.40 9.50 7.70

1983-84 7.90 9.70 8.70 5.10 9.80 3.70

1984-85 4.00 1.60 4.50 4.80 7.50 6.90

1985-86 4.20 0.60 4.20 7.90 9.80 5.70

1986-87 4.30 0.30 5.10 6.00 10.50 7.50

1987-88 3.50 -1.20 5.80 5.30 7.30 7.20

1988-89 10.20 15.70 8.20 5.80 9.80 6.00

1989-90 6.10 1.60 8.50 7.40 12.40 7.90

1990-91 5.30 4.50 6.70 5.10 6.20 4.40

1951-52 to

1980-81 3.63 2.57 5.29 5.09 3.50 4.31

1981-82 to1985-96 4.92 3.48 5.08 5.88 8.94 5.22

1986-87 to

1990-91 5.88 4.18 6.86 5.92 9.24 6.60

1988-89 to

1990-91 7.20 7.27 7.80 6.10 9.47 6.10

Note: Up to 2004-05 the data is in 1999-00 series, after that it is in 2004-

05 series

Source: Calculated based on data from Economic Survey 2011


22/38


Rodrik and Subramanian (2004) argued that the transition

to a higher growth path had been achieved more than a

decade earlier; not 1984 as argued by De-Long but 1980,

the year Mrs. Gandhi came back to power. Bhalla (2011b),

on the other hand, remarked that [] 5 percent per annum

growth in I ndia prior to the 1980s wasnt that unusual;

several times the two-year growth average [] had exceeded

5 percent in the period prior to the 1980s [...] the conclusion

about a large accelerationor breakout in GDP growth seems

to be based on a comparison of 1980s vs. 1970s. But for

most countri es, 1970s is a bad benchmark and most

countries would anyway show a marked acceleration in the

1980s [...] GDP growth in the 1950s and 1960s averaged 4

percent; the 1970s average was only 2.8 percent. So the real

acceleration in the 1980s is about 1.7 percentage point

(emphasis added).

This acceleration in growth was mainly due to a series

of deregulation measures initiated during the mid 1980s by

the Rajiv Gandhi government in the areas of industrial and

trade policies and fiscal reforms (see Chapter 2 by Saikia

and Shukla), along with a number of initiatives such as a

step-up in public investment, better agricultural performance,

etc. (Acharya, 2008). According to Panagariya (2005) two

major factors are responsible for the growth in the 1980s,

First, liberalisation played a significant role. On the external

front, policy measures such as import liberalisation, exportincentives, and a more realistic real exchange rate

contributed to productive efficiency. On the internal front,

freeing up of several sectors from investment licensing

reinforced import liberalisation and allowed faster industrial

growth. Second, both external and internal borrowing

allowed the government to maintain high levels of public

expenditures, and thus, boost growth through demand.

J oshi and Little (1994) attributed this growth to the fiscal

expansion financed by external and internal borrowing,

whereas Ahluwalia (2002) remarked that growth of the

1980s was unsustainable and was fuelled by a buildup of

external debt that culminated in the crisis of 1991. Like

Ahluwalia, many others also argued that the fiscal profligacy

in terms of huge unproductive expenditure in areas like

defense spending, interest payments, and subsidies, etc.

through mounting external borrowing led to the 1991 crisis

(see among others, DeLong, 2003; Panagariya, 2004a,b;

Basu and M aertens, 2007; Bhalla, 2011b). To quote Basu

and Maertens (2007), By the late 1980s, even though the

country was growing fast, it was beginning to borrow heavily

from its future, which makes us believe that the growth

impulse of the 1980s would not have been sustainable

without sharp changes in policy. The fiscal deficit was

growing, international debt was reaching record levels, and

the debt-service ratio had become untenable. The meltdownhappened in 1990/1. As Saikia and Shukla discussed in

Chapter 2 of this book, following a rising current and trade

account deficit and mounting external debt and debt servicing

burden, along with the Gulf War of 1990 and the consequent

oil price hike Indias balance of payments (BoP) tapped into

crisis in 1990-91. Under such situation India adopted a

series of stabilisation-cum-structural adjustment reforms

under the leadership of Pr ime Minister P. V. Narasimha Rao

and his Finance Minister Manmohan Singh (see Chapter 2

for the changes in policy under reforms).

The economy responded quickly and positively to the

policy changes after stagnation in 1991-92. The growth

jumped to 5.4 per cent in 1992-93 and then averaged above

7.4 per cent for three consecutive years 1994-95 to 1997-

98 (Table 1.5) and 6.56 per cent per annum during the 8 th

FYP (Table 1.2). The performance of all the three sectors

(agriculture, industry and services), especially agriculture

sector, were noticeable during the 8thFYP, as all the sectors

grew faster than the pre-reform period. However, growth


23/38


declined noticeably to 5.52 per cent during the 9thFYP and

then increased to 7.78 per cent during 10thFYP and 8.03

per cent during the first 3 years of 11thFYP (Table 1.2). The

average annual growth rate recorded 6.86 per cent during

the entire post-reform period, with 5.60 per cent during the

first post-reform decade (1991-91 to 2000-01) and 7.64 per

cent during the second decade (2001-02 to 2009-10). I t can

be seen from Table 1.5 growth has accelerated during the

first five years of economic reforms, it declined in the next

five years before it picked up to 8.5 per cent in 2003-04 and

then continued to acclerate. Thus, we have three sub-periods

in the post-reform period: (a) the first period 1992-93 to

1996-97 accounted an annual growth rate of 6.56 per cent,

(b) the second period 1997-98 to 2002-03 where growth rate

declined to 5.52 percent and (c) the third period 2003-04 to

2009-10, which recorded an annual growth rate of 8.46 percent.

Thus, regarding Indias post-reform growth there are

three puzzles, and thereby, debate in the literature. Firs t,

what cause Indias growth to accelerate immediate after

reforms; second, what cause Indias growth to decelerate

during 1997-98 to 2002-03 after having an accelerated

growth rate in the first five years of economic reforms, and

t h i r d, what caused the growth rate to sharply accelerate

after 2003-04. There have been a corpus of literature dealing

with these issues (among others, Ahluwalia, 2002; Basu andMaertens, 2007; Panagariya, 2004a, 2004b, 2005; Acharya,

2007; Bhalla, 2011b), but they differ in opinions. Acharya

(2007) listed out a number of factors that contributed to the

acceleration of growth during 1992-93 to 1996-97: (a)

productivity gains resulting from deregulation of trade,

industry and finance, especially in industry and some services

sectors; (b) the surge in export growth at about 20 percent

per year for three successive years beginning 1993-94,

attributable to the substantial devaluation in real effective

terms in the early nineties and a freer policy regime for

industry, foreign trade and payments; (c) the investment

boom of 1993-96 that exerted expansionary effects on both

supply and demand, especially in industry; (d) the success

in fiscal consolidation, which kept a check on government

borrowings and facilitated expansion of aggregate savings

and investments; (e) improvement in the terms of trade for

agriculture resulting from a combination of higher

procurement prices for important crops and reduction in

trade protection for manufactures; (f) availabil ity of capacity

in key infrastructure sectors, notably power; and (g) a buoyant

world economy which supported expansion of foreign trade

and private capital inflows.

The slowdown of growth during 1997-98 to 2002-03 has

been treated seriously, by among others, Ahluwalia (2002),

Basu and Maertens (2007), and Bhalla (2011b). Ahluwalia

(2002) invalidated the possibility of the impact of the

slowdown of World economic growth in the second half of

the 1990s by saying that Indias dependence on the world

economy is not large enough for this to account for the

slowdown. But he has not provided any conclusive

explanation for the same; rather he remarked that Critics

of liberalisation have blamed the slowdown on the effect of

trade policy reforms on domestic industry []. However, the

opposite view is that the slowdown is due not to the effects

of reforms, but rather to the failure to implement the reformseffectively. For Acharya (2007), the factors that contributed

the deceleration of growth include: (a) the significant

worsening of the fiscal deficits, mainly due to large public

pay increases following the Fifth Pay Commission; (b) the

consequent decline in public savings, (c) slackening of

economic reforms after 1995 as coalition governance became

the norm, (d) significant slowdown in agricultural growth,

(e) a marked downswing in the industrial cycle, and (f) an

increasingly unsupportive international economic


24/38


Table 1.5: Post-reform Growth Performance


Year GDP Pr imary Secondary Trade, Financing, Publi c

Hotel s, I n su rance, Admi n i st ra -

Transpor t Real t i on D efense

& Commu ni - est at e,& a nd ot her


1991-92 1.40 -1.50 -0.10 2.60 10.80 2.60

1992-93 5.40 6.20 3.60 5.60 5.40 6.00

1993-94 5.70 3.20 6.30 6.90 11.20 4.50

1994-95 6.40 5.10 9.30 9.90 3.90 2.30

1995-96 7.30 -0.20 12.20 13.20 8.10 7.30

1996-97 8.00 9.10 7.30 8.10 6.20 8.10

1997-98 4.30 -1.60 3.10 7.50 11.70 8.30

1998-99 6.70 6.00 4.30 7.60 7.80 9.70

1999-00 6.40 2.70 4.70 8.20 9.20 11.50

2000-01 4.40 0.00 6.80 7.30 4.10 4.70

2001-02 5.80 5.90 2.80 9.20 7.30 4.10

2002-03 3.80 -5.90 6.90 9.40 8.00 3.90

2003-04 8.50 9.30 7.80 12.00 5.60 5.40

2004-05 7.50 0.80 10.50 10.70 8.70 6.80

2005-06 9.50 4.60 10.70 12.20 12.70 7.00

2006-07 9.60 4.60 12.70 11.60 14.00 2.90

2007-08 9.30 5.50 10.30 11.00 11.90 6.90

2008-09P 6.80 0.00 4.70 7.50 12.50 12.70

2009-10Q 8.00 1.30 8.10 9.70 9.20 11.80

1992-93 to

2009-10 6.86 3.14 7.34 9.31 8.75 6.88

Post-reform Sub-periods (Average)

1992-93 to

1996-97 6.56 4.68 7.74 8.74 6.96 5.64

1997-98 to

2002-03 5.23 1.18 4.77 8.20 8.02 7.03

2003-04 to

2007-08 8.88 4.96 10.40 11.50 10.58 5.80

2003-04 to

2009-10 8.46 3.73 9.26 10.67 10.66 7.64

Note: Up to 2004-05 the data is in 1999-00 series, after that i t is in

2004-05 seri es.

P-Provisional estimate; Q- Quick estimate

Source: Based on data from Economic Survey 2011

environment, which includes the Asian financial crisis of1997-98, rising energy prices and the global recession of

2001. Bhalla (2011b), on the other hand, pointed out the

mindset of the Indian politicians and policymakers towards

the acceleration of GDP growth to above 7 per cent per

annum: In the mindset of the Indian politicians, and most

policy makers, it was inconceivable that the Indian economy

could grow at East Asian growth rates; [] the 7 plus

percent growth rate was considered as an overheating phase

deserving a strong policy response. [] When this acceleration

coincided with global and domestic inflation, the RBI panicked

and tightened monetary policy to an unprecedented degree.Further, the RBI did not cut interest rates in response to

the decline in worldwide, and domestic, inflation in the mid

to late 1990s. By keeping deposit rates at high double digit

levels, and inflation collapsing, the RBI ensured that real

rates reached double digit levels. This caused the growth to

collapse [] (emphasis added).

Whatever the reasons of acceleration during 1992-93 to

1996-97 and the deceleration during 1997-98 to 2002-03,


25/38


sectors growth as compared to 1980s. This suggests that

though the overall growth was more consistent in the 1990s,

the sectoral growth was less consistent in the 1990s compared

to the 1980s. These observations are consistent with that of

Ahluwalia (2002), Panagariya (2005), Acharya (2007), Basu

and Maertens (2007), and Bhalla (2011b). These authorsargued that growth in the 1980s was not sustainable, since

it relied too much on deficit financing and excessive foreign

borrowing, and finally, culminated in the crisis of 1991;

whereas growth of the 1990s has been sustainable, as it was

accompanied by remarkable external stability despite the

East Asian crisis. Bosworth et al. (2007), as quoted by Basu

and Maertens (2007), observed that the pre-1980 growth

was mainly associated with an increase in factors, whereas

the post-1980 growth has been associated with some increase

in factors, but more importantly an increase in total factorproductivity (see Table 1.7).

Table 1.7: Contributions to Growth

(in annual percentage rate of change)

Years Output Employ- Out- Contr i bu t i on of-

men t pu t

per Ph ysi cal L an d Ed ucat i on F actor

w or ker capi tal pr odu -

ct iv i ty

196073 3.3 2.0 1.3 1.1 -0.2 0.1 0.2

197383 4.2 2.4 1.8 0.9 -0.2 0.3 0.6

198393 5.0 2.1 2.9 0.9 -0.1 0.3 1.7

199399 7.0 1.2 5.8 2.4 -0.1 0.4 2.8

19992004 6.0 2.4 3.6 1.2 0.1 0.4 2.0

19602004 4.7 2.0 2.6 1.2 -0.1 0.3 1.2

196080 3.4 2.2 1.3 1.0 -0.2 0.2 0.2

19802004 5.8 1.9 3.8 1.4 0.0 0.4 2.0

Sour ce: Bosworth et al. (2007, Table 3); cited in Basu (2007, Table 4)

3 The coefficient of variation (CV) measures the variation of a

variable and is defined as the standard deviation divided by

mean. A higher value of the CV means that there is more

variation in the variable.

Table 1.6: Volatility in Growth Rate: Coefficient

of Variation3

Year GDP Primary Secondary Trade, Financing, Publi c

Hotel s, I n su rance, Admi n i st ra -

Transpor t Real t i on D efense & Commu ni - est at e,& a nd ot her


1951-52

to 1960-61 0.707 1.368 0.666 0.384 0.356 0.230

1961-62

to 1970-71 0.915 2.629 0.492 0.334 0.277 0.216

1971-72

to 1980-81 1.367 4.343 0.977 0.585 0.681 0.351

1981-82

to 1990-91 0.409 1.482 0.412 0.165 0.305 0.326

1991-92

to 2000-01 0.337 1.267 0.600 0.354 0.368 0.464

2001-02

to 2009-10 0.252 1.519 0.381 0.149 0.288 0.498

Source: Based on data from Economic Survey 2011

the post-reform period performance is more sustainable as

compared to that of the 19980s. Looking at Figure 1.1 one

can understand that the volatility was higher during the1980s as compared to the 1990s. This is further confirmed

by the coefficient of variation of decadal growth in the 1980s

and 1990s as shown in Table 1.6. However, 1990s

experienced higher volatility in the industry and services


26/38


The momentum of growth picked up in 2003-04 and

since then the economy has not looked back. The growth

rate thrice crossed 9 per cent mark (years 2005-06, 2006-

07 and 2007-08) and has not dropped below 7.5 per cent

until 2008-09 when the global financial crisis hit the economy

(but still managed a comfortable growth rate of 6.8 percent). With the impressive growth of secondary sector

(including industry, construction and water supply,

electricity and gas) and services sector, GDP growth

averaged at 8.88 per cent during the five years before the

crisis (2003-04 to 2007-08) and 8.46 per cent during the

entire post 2003-04 period (2003-04 to 2009-10) including

the period of global financial crisis; despite the gloomy

performance of the agriculture sector (though the sector

started with an impressive growth rate of 9.30 per cent in

2003-04). Regarding the sources of the latest economic surgeBhalla (2011b) remarked that [the high growth] was

preceded by a decline in real interest rates of around 600

basis points [] in a matter of four years (1999 to 2002).

However, many commentators, and analysts, believe that

the recent high growth has been a consequence of

overheating, and not because of a structural shift in the

economy; []. Some others believe that the recent

acceleration was part of a global phenomena of a rising

tide lifting all boats; all emerging economies grew faster,

and India was part of this upliftment (emphasis added).

On the other hand, Acharya (2007) suggested seven majoringredients of the recent surge in economic growth: (a) the

momentum of a quarter of a century of strong economic

growth, (b) a much more open economy to external trade

and investment, (c) a growing middle class fuell ing domestic

consumption, (d) the demographic dividends of a young

population, (e) strong companies in a modernised capital

market, (f) some recent economic reforms, and finally, (g)

a supportive international economic environment.

There have been many positive features of Indias post-

reform performance apart from the recent surge of economic

growth. One of the urgent priorities of the policy makers at

the start of economic reforms was to reduce fiscal deficit, as

fiscal profligacy was seen as the major cause of BoP crisis

in 1991 (Ahluwalia, 2002). The combined fiscal deficit of thecentral and state governments was successfully reduced to

7 per cent of GDP in 1991-92 and 1992-93 from 9.41 per

cent in 1990-91 (Figure 1.2). The primary deficit came down

from 5.02 percent of GDP to 2.27 per cent and revenue

deficit came down from 4.19 per cent to 3.35 per cent during

the same period.

The intensive effort by the government kept the fiscal

deficit at a manageable level of 6.47 and 6.28 per cent per

cent of GDP respectively in 1995-96 and 1996-97, and an

average of 6.98 per cent of GDP between 1991-92 and 1996-

97 (Table 1.8). However, the increase in public pay since

1996-97 along with low revenue buoyancy and weak

expenditure control policies reversed the fiscal position and

for 4 consecutive years between 1998-99 and 2002-03 fiscal

deficit recorded above 9 per cent of GDP. For the five years

period between 1998-99 and 2002-03 fiscal deficit averaged

at 9.42 per cent of GDP, while primary deficit and revenue

deficit averaged at 3.52 and 6.62 per cent. However, due to

governments sustained efforts at fiscal consolidation after

2002-03, fiscal deficit reduced to 4.09 per cent in 2007-08and revenue deficit to 0.19 per cent during the same. The

five years period between 2003-04 and 2007-08 averaged

fiscal deficit at 6.31 per cent and revenue deficit averaged

at 2.73 per cent, whereas between 2005-06 and 2007-08 the

fiscal position was even better with fiscal and revenue deficits

averaged at 5.31 and 1.39 per cent respectively. However,

both the fiscal and revenue deficits shot up during 2008-

09 and 2009-10 (Figure 1.2).


27/38


Table 1.8: Combined Deficits of Central and State

Governments (as % of GDP)

Gross Gross Revenue

fi scal pr im ar y defi ci t

defi ci t defi ci t

5 years average

1981-82 to 1985-86 7.18 4.60 0.92

1986-87 to 1990-91 9.11 5.21 3.11

1991-92 to 1995-96 7.12 2.19 3.53

1996-97 to 2000-01 8.24 2.84 5.42

2001-02 to 2005-06 8.29 2.20 5.19

2006-07 to 2009-10 6.77 1.57 2.61

Selected periods

1991-92 to 2000-01 7.68 2.52 4.47

2001-02 to 2009-10 7.61 1.92 4.04

1991-92 to 1996-97 6.98 2.03 3.54

1997-98 to 2004-05 8.74 2.88 5.84

1998-99 to 2002-03 9.42 3.52 6.62

2003-04 to 2007-08 6.31 0.63 2.73

2005-06 to 2007-08 5.31 -0.06 1.39

2008-09 to 2009-10 8.81 3.71 4.47

Source:Handbook of Statistics on Indian E conomy, 2010-11

Figure1.2:CombinedDeficitsofCentralandStateGovern

ments

Source:HandbookofStatisticsonIndianEconomy,2010-11


28/38


Another area where the economy has achieved

remarkable success in the post-reform period is the level and

composition of savings and capital formation. The gross

domestic capital formation increased from 22 per cent of

GDP in 1991-92 to 35.8 per cent in 2009-10 (Table 1.9). The

increase in capital formation was more pronounced in thepost 2002-03 periods, whereas in the 1990s and initial

years of 2000s capital formation fluctuated around 24 per

cent. This increase is mostly contributed by the private

capital, which increased from 18.6 per cent in 2002-03 to

24.9 per cent in 2009-10, whereas public sector capital

increased from 6.1 per cent to 9.2 per cent during the same

period. This increase in capital formation is accompanied by

substantial increase in domestic savings, which increased

from 21.5 per cent of GDP in 1991-92 to 26.3 per cent in

2002-03 and then to 33.7 per cent in 2009-10. The householdsector is the largest single component of domestic savings,

which share rising from 15.8 per cent in 1991-92 to 23.5 per

cent in 2009-10. The private corporate sector savings has

steadily increased in the post 2003-04 periods, with its

share rising from 4 to 8.1 per cent between 2002-03 and

2009-10. The public sector savings in India has been very

small and it was negative between 1998-99 and 2002-03.

However, there has been steady increase in the public sector

savings from 1.1 per cent to 5 per cent between 2003-04 and

2007-08, but it declined to 0.5 per cent in 2008-09 and then

increased to 2.1 per cent in 2009-10.

The performance of the economy in the external sector

is also satisfactory in the post-reform period. Considering

the current account balance, which is the single most widely

monitored indicator of a nations external balance position

(Acharya, 2008) Indias external balance position has been

comfortable throughout the post-reform period (1991-92 to

2009-10), with highest surplus of 2.3 per cent of GDP in

2003-04 and lowest deficit of 2.9 per cent in 2009-10 (Table

1.10). At the same time the ratio of merchandise trade to

GDP steadily increased from 14.8 per cent in 1991-92 to 22.5

per cent in 2000-01 and then 36.7 per cent in 2009-10.

However, the gap between exports to GDP and imports to

GDP increased substantially from -1.0 per cent in 1991-92

to -2.7 per cent in 2000-01 and then -8.9 per cent in 2009-10. Some other aspects of I ndias post-reform BoP position

are- steady rise in net invisibles, increase in current account

balance, increase in foreign exchange reserves and relatively

steady exchange rate (Table 1.10). The ratio of net invisibles

to GDP increased from 0.7 per cent in 1991-92 to 7.4 per

cent in 2008-09 (though it declined to 6 per cent in 2009-

10), of which half of the share came from software exports

in the later period. The economy experienced a steady surge

of foreign capital in the post-reform period, especially after

2002-03, with foreign investment to GDP ratio increasedfrom 1.2 per cent in 2002-03 to 4.9 per cent in 2009-10. With

a steady current account balance during this period, the

improvement in the current account balance led to increase

the foreign exchange reserves. These reserves increased

from US$ 42.28 billion in 2000-01 to US$ 309.72 billion in

2007-08 and then declined to US$ 279.06 in 2009-10. This

amount of reserves is sufficient to cover the imports

requirement of the country for about 11.2 months in 2009-

10. However, this capital surge and the consequent

accumulation of foreign exchange reserves poised

macroeconomic challenges for the country, especially in theareas of exchange rate, convertibility of BoP accounts and

monetary policies (see Acharya, 2008).


29/38


Table 1.9: Gross Domestic Saving and Gross

Domestic Capital Formation

(as % of GDP)

Years Gross Domest i c Sav ing Gross Domest i c Cap i t a l Fo rma t i on

H ouse Cor por at e P ubl ic T ot al P ubl ic P ri va te V al ua- T ot al

hold sector sector sector sector bles

sector

1950-51 5.7 0.9 2.0 8.6 2.9 7.4 - 10.3

1960-61 6.5 1.6 3.1 11.2 7.2 7.2 - 14.4

1970-71 9.5 1.5 3.3 14.2 6.7 8.9 - 15.6

1980-81 12.9 1.6 4.0 18.5 8.9 9.6 - 18.5

1990-91 18.4 2.7 1.8 22.8 10.0 14.2 - 24.2

1991-92 15.8 3.1 2.6 21.5 9.5 12.5 - 22.0

1992-93 16.4 2.7 2.2 21.2 9.1 14.7 - 23.8

1993-94 17.3 3.4 1.2 21.9 8.8 12.5 - 21.2

1994-95 18.6 3.5 2.3 24.4 9.3 14.2 - 23.5

1995-96 16.9 5.0 2.6 24.4 8.2 18.4 - 26.6

1996-97 16.0 4.5 2.2 22.7 7.5 14.6 - 22.1

1997-98 17.7 4.3 1.8 23.8 7.1 16.8 - 23.9

1998-99 18.8 3.9 -0.5 22.3 7.0 15.6 - 22.6

1999-00 21.1 4.5 -0.8 24.8 7.4 17.9 0.8 26.1

2000-01 21.6 3.9 -1.8 23.7 6.9 16.6 0.7 24.2

2001-02 22.1 3.4 -2.0 23.5 6.9 16.7 0.6 24.2

2002-03 22.9 4.0 -0.6 26.3 6.1 18.6 0.6 25.2

2003-04 24.1 4.6 1.1 29.8 6.3 19.6 0.9 26.8

2004-05 23.6 6.6 2.3 32.4 7.4 23.8 1.3 32.5

2005-06 23.5 7.5 2.4 33.5 7.9 25.2 1.1 34.3

2006-07 23.2 7.9 3.6 34.6 8.3 26.4 1.2 35.9

2007-08 22.5 9.4 5.0 36.9 8.9 28.1 1.1 38.0

2008-09P 23.8 7.9 0.5 32.2 9.5 24.6 1.3 35.4

2009-10Q 23.5 8.1 2.1 33.7 9.2 24.9 1.7 35.8

Note: Up to 2004-05 the data is in 1999-00 series, after that it i s in 2004-

05 series P-Provisional estimate; Q- Quick estimate

Source: E conomic Survey, 2011

Table1

.10:SelectedBalanceofPaymentsIndicators

(Percen

tageo

fGDP

atcurre

ntmar

ke

tpr

ices

)

1990-9

1

1991-9

2

1992-9

3

1993-9

4

1994-9

5

1995-9

6

1996-9

71997-9

8

19

98-9

9

1999-0

0

Exports

5.8

6.9

7.3

8.2

8.3

9.1

8.8

8.7

8.2

8.3

Imports

8.8

7.9

9.6

9.7

1

1.1

12.3

12.6

12.5

11.4

12.3

TradeBalance

-3.0

-1.0

-2.3

-1.5

-

2.8

-3.2

-3.8

-3.8

-3.2

-4.0

NetInvisibles

-0.1

0.7

0.6

1.0

1.8

1.5

2.6

2.4

2.2

2.9

CurrentAccountBalance-3.0

-0.3

-1.7

-0.4

-

1.0

-1.6

-1.2

-1.4

-1.0

-1.0

ForeignInvestment

0.0

0.1

0.2

1.5

1.5

1.4

1.6

1.3

0.6

1.2

Foreign

Exchange

Reserves(US$billions)

5.83

9.22

9.83

19.25

25.19

21.69

26.42

29.37

3

2.49

38.04

Importcoverof

Reserves(inmonths)

2.5

5.3

4.9

8.6

8.4

6.0

6.5

6.9

8.2

8.2

ExchangeRate

(Rs/US$)

17.94

24.47

30.65

31.37

31.40

33.45

35.50

37.17

4

2.07

43.33


30/38


No doubt that I ndias economy has achieved fabulous

growth in the post-reform period, especially in the first

decade of the 21stcentury, emerged as one of the fastest

growing economies in the world and substantially managed

her external as well as internal balances; but the

performance of the economy has been debated throughoutthe period (even before reforms) in some areas such as

poverty and inequality, human development, agriculture

growth, employment, inflation management, and so on.

Reduction of poverty and inequality has been one of the

oldest agenda of planning in I ndia. The post-reform period

witnessed significant decline in poverty and at a faster rate

than the 1980s (Ahluwalia, 2002). Table 1.11 reports the

percentage of population below poverty line by both the

planning commission estimates based on the Lakdawala

Committee method (for 1951-52 to 2004-05) and the new

Tendulkar committee estimates (for 1993-94 and 2004-05).

The poverty estimates of the Tendulkar committee are

higher than the planning commission estimates, but both

the estimates show decline in poverty. However, the pace

of reduction is very slow; from 36.0 to 27.5 by the planning

commission estimates and from 45.3 to 37.2 by the Tendulkar

committee estimates between 1993-94and 2004-05. The

estimates by Abhijit Sen (2010), as quoted by Ahluwalia

(2011), showed that poverty has declined from 37% in 2004-

05 to 29% in 2007-08, which is much more than the 11th

FYPs target of reducing poverty by 2 percentage points per

year. Another estimate by C. Ravi reported the percentage

of population below poverty line at 32 per cent in 2009-10

(cited in Ahluwalia, 2011). Though these estimates showed

decline in poverty in the post-reform period, poverty in

absolute term remained at a higher level, with about 303

million population living below the poverty line. Further,

there have been substantial differences across the states in

poverty reduction. This is, further, fuelled by increased

Table1.1

0:Contd

...

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

72007-0

8

20

08-0

9

2009-1

0

Exports

9.9

9.4

10.6

11.0

1

2.1

13.0

13.6

13.5

15.6

13.9

Imports

12.6

11.8

12.7

13.3

1

6.9

19.4

20.1

21.0

25.4

22.8

TradeBalance

-2.7

-2.4

-2.1

-2.3

-

4.8

-6.4

-6.5

-7.5

-9.8

-8.9

NetInvisibles

2.1

3.1

3.4

4.6

4.4

5.2

5.5

6.2

7.4

6.0

CurrentAccountBalance-0.6

0.7

1.2

2.3

-

0.4

-1.2

-1.0

-1.3

-2.4

-2.9

ForeignInvestment

1.5

1.7

1.2

2.6

2.2

2.6

3.1

5.0

1.7

4.9

Foreign

Exchange

Reserves(US$billions)

42.28

54.11

75.43

112.96

14

1.51

151.62

199.18

309.72

251.99

279.06

ImportcoverofReserves

(inmonths)

8.8

11.5

14.2

16.9

1

4.3

11.6

12.5

14.4

9.8

11.2

ExchangeRate

(Rs/US$)

45.68

47.69

48.40

45.95

44.93

44.27

42.25

40.26

4

5.99

47.42

Source:HandbookofStatisticson

IndianEconomy,2010-11


31/38


differences across the states in terms of growth and

development. The post-reform period witnessed significant

increase in inter-state and intra-state inequality in terms

of rate of economic growth, level of income and level of

industrialisation. Ahluwalia (2011) observed that the inter-

state Gini coefficient of GSDP growth increased from 0.145in 1980-81 to 0.17 in 1992-93 and then 0.22 in 2001-02 and

0.25 in 2008-09. Thus, the increase in inter-state inequality

was much faster in the 1990s compared to 19980s, but it

has stabil ised in the 2000s. In recent years, intra-state

inequality is seen as another critical form of inter-regional

inequality, which hinders achievement of inclusive growth,

the high profile objective of the 11thFYP.

Inequali ty among different sections of the population

has also remained a major issue over the years. Ahluwalia

(2011) found that consumption inequality (measured by

Gini coefficient) modestly increased in the urban areas

between 1993-94 and 2009-10, where in the rural area it

increased between 1993-94 and 2004-05 and then declined

in 2009-10. The caste and social group based inequality has

received a new momentum in recent years. Thorat (2010),

as quoted by Ahluwalia (2011), showed that the percentage

of the SC/ST and Muslim minority population in poverty is

much higher than for the population as a whole, though the

reduction in the percentage in poverty for these groups is

roughly comparable to that for the population as a whole.There are more issues associated with the inclusive growth

debate in India, for instance gender inequality, inter-personal/

group/caste and inter-regional inequality in access to basic

services such as education, finance, health care, safe drinking

water, sanitation, etc. These issues should be addressed with

care as they are sensible and improvements on these areas

not only represent welfare gain, but also social development.

Table 1.11: Percentage of People below Poverty

Line

Year Ru r al U r ban A l l I nd i a

1951-52 47.4 35.5 45.3

1977-78 53.1 45.2 51.3

1983 45.7 40.8 44.5

1993-94 37.3 32.4 36.0

2004-05 28.3 25.7 27.5

1993-94* 50.1 31.8 45.3

2004-05* 41.8 25.7 37.2

* Tendulkar Estimates. The remaining are the Planning Commissionestimates based on official poverty line.

Source: Planning Commission, Government of India

One of the key strategies for achieving inclusive growth

has been generation of productive and gainful employment.

The 11th FY P aims at generating 58 mil li on work

opportunities and bring the unemployment rate to 4 per

cent by the end of the plan.4 Looking at the growth of

organised sector employment, it is observed that employment

growth has decelerated in the reforms period. The organised

sector employment grew at 1.2 per cent per annum during1983 to 1994, which decelerated to 0.05 per cent during

1994 to 2008 (Table 1.12). The decline is mainly due to the

severe deceleration of public sector employment growth,

which averaged at -0.65 per cent during 1994 to 2008 as

against 1.53 per cent during 1983 to 1994. However, the

private organised sector experienced significant increase in

4 Economic Survey- 2010-11, Government of India, Chapter 12,

pp. 291-331.


32/38


employment growth from 0.44 per cent during 1983 to 1994

to 1.75 per cent during 1994 to 2008, so that the overall

employment during the post-reform period recorded a positive

growth (though very small). However, the organised sector

accounted for only 15 per cent of employment in India, and

the remaining 85 per cent engaged in informal sector(including agriculture).

Table 1.12: Rate of Growth of Organised Sector

Employment

(per cent per annum )

Sect or s 1983-1994 1994-2008

Public Sector 1.53 -0.65

Private Sector 0.44 1.75

Total Organised 1.20 0.05

Source: Economic Survey, 2010-11

As per National Sample Survey (NSS) data on the basis

of current daily status about 24 mill ion work opportunities

were created between 1993-94 and 1999-00, which increased

to 47 million between 1999-00 and 2004-05; and thus an

acceleration of employment growth rate from 1.25 per cent

per annum during 1993-94 to 1999-00 to 2.62 per cent

during 1999-00 to 2004-05. The 64thround of NSS surveyreported creation of about 4 million work opportunities

during 2004-05 to 2007-08. However, the unemployment

rate (per 1000) has steadily increased between 1993-94 and

2004 in both the rural and urban areas in terms of all the

three concepts of employment (Usual, CWS and CDS), though

it marginally declined in 2007-08 (Table 1.13). This is mainly

because of the faster rate of labour force growth compared

to the growth in work opportunities in the 1990s and the

first decade of the 2000s. The unemployment rate is high

in terms of CDS approach being it the broadest approach,

which implies a higher degree of underemployment in the

economy.

Table 1.13: Unemployment Rate (per 1000) accordingto Usual Status, Current Weekly Status (CWS) and

Current Daily Status (CDS) Approach

Rur al U r ban

U su a l CWS CDS U su al CWS CDS

64thRound (2007-08)

Male 23 41 85 40 47 69

Female 19 35 81 66 65 95

Person 22 39 84 45 50 74

60th round (2004)

Male 24 47 90 46 57 81

Female 22 45 93 89 90 117

Person 23 46 91 53 64 88

55thround (1999 2000)

Male 21 39 72 48 56 73

Female 15 37 70 71 73 94

Person 19 38 71 52 59 77

50th round (1993-94)

Male 20 30 56 45 52 67

Female 14 30 56 83 84 105

Person 18 30 56 52 58 74

43rd round (1987-88)

Male 28 42 46 61 66 88

Female 35 44 67 85 92 120

38th round (1983)

Male 21 37 75 59 67 92

Female 14 43 90 69 75 110

Sour ce: NSSO E mployment-Unemployment Survey, various rounds


33/38


Another weak spot of I ndias economic performance in

the post-reform period is the inflationary pressure in the last

couple of years. Though a modest rate of inflation is tolerable

and may even be necessary to accommodate relative price

changes, inflation beyond this level- usually put at 5 to 6

per cent by the government and 4 to 5 per cent by theReserve Bank of India- is regressive and distortionary

(Ahluwalia, 2011). Without looking at the issues related to

measurement of inflation in I ndia, we have reported three

available series of inflation namely GDP deflator, wholesale

price index for all commodities (WPI AC) and consumer

price index for industrial workers (CPI IW) for the period

1991-91 to 2010-11 in Figure 1.3. I t is obvious that the

annual inflation has been steadily declining during 1991-

92 to 1999-00 and then it fluctuated within a comfort zone

of around 5 per cent til l 2008-09. However, in the last twoyears, inflation has been well above the comfort zone. The

GDP deflator, which is perhaps the best measure of overall

inflation, averaged at 4 per cent during 2000-01 to 2008-

09 and then jumped to 7.5 and 9.6 per cent respectively in

2009-10 and 2010-11. Similarly, CPI (AC) reached double

digit level during 2009-11 and WPI (AC) shot up to 8.2 per

cent in 2010-11 from 4.6 per cent during 2000-01 to 2008-

09. The high rates of inflation in food prices, especially

vegetables, fruits, milk, eggs, etc., have been a matter of

special concern in the last couple of years. According to

Acharya (2008) the factors that contributed to the favourableinflationary situation until 2008-09 include- low world

inflation (until 2008), more liberal Indian foreign trade

policies, alert and anticipatory monetary policy, declining

fiscal deficits and downward revision of inflationary

expectations; which have turned sharply adverse since March

2008 and giving rise inflationary pressure in the last two

years.Figure1.3:AnnualInflation

RateinIndiainthePost-reform

period

Source:HandbookofStatisti

csonIndianEconomy,2010-11

No

te:WPI(AC)-WholesaleP

riceIndex(AllCommodities),CPI

(IW)-ConsumerPriceIndex(Indust

rial

Workers)


34/38


The economy has confronted with many other challenges

since the initiation of reforms in the early 1990s (or even

before), which have been discussed in well referred sources

(see Ahluwalia, 2002 & 2011; Acharya, 2008; Bhalla, 2011a

& 2011b; Singh, 2009; Kelkar, 1999). In discussing Indias

development strategies, Singh (2009) pointed out thatdevelopment of human capital, reduction of income and

regional inequality, achieving social and gender equity,

improving agricultural productivity, developing physical

infrastructure, macroeconomic management on the fiscal

and monetary sides, etc. are the major future challenges of

Indias economy. Acharya (2007 and 2008) listed a number

of risk factors and key issues for I ndias sustainable future

growth, which include: restoring fiscal balance, infrastructure

bottlenecks, labour market rigidities, weak performance of

agriculture, pace of economic reforms,

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