India's Development Strategy and Growth Performance

abinash phulkonwar

2024-03-28

India's Development Strategy and Growth Performance

Following India’s independence in 1947, the initial years were marked by disruption caused by partition, the drafting a new constitution and the establishing a new government, which were the major concerns of the Indian’s leaders. The first task of the newly formed government was to formulate a development strategy that transformed India's economy from a dismal state to a self-contained one. To achieve this, the government initiated a rapid and balanced process of economic development. To facilitate this endeavour, the government setup planning commission to design, monitor and execute 5 year plans. The initial strategy aimed to establish a “Socialist Pattern of Society,” wherein the government played a leading role in the economy and economic development was a priority of the state.

Post-Independence Development Strategy

Objectives of the development strategy were:

Achievement of a high rate of economic growth, which leads to a sustained improvement of the standard of living of the population.
Reduction in inequalities and an accelerated effort to remove poverty at a pace faster than would be achieved solely through the normal growth process.
Development of a mixed economy with a strong public sector, especially in the key areas of the economy.
Achievement of a high order of self-reliance.
Promotion of a balanced economic development, with narrowing the gaps across regions.
These social and economic objectives were to be pursued in the framework of a constitutional democracy

Modernisation through Industrialisation was the showpiece of India's development strategy. Emphasis was given on state-lead industrialisation, key sectors like mines, coal, iron, steel, machines etc. as well as banking and finance were reserved for the public sector. The 2nd 5 year plan strategy was “machines for producing machines” and focuses on heavy and capital intensive industries. Which are pre-condition for overall economic growth. Along with that, bureaucratic control was also a key aspect of the development strategy during this period.

Another important area of India's development strategy was restriction on international trade and finance due to negative experience during the colonial rule and infant industries.

Agriculture sector was neglected during the early years of planning. But gradually after Indian leaders realised the importance of agriculture and employment provided by the agriculture sector. In 1965 green revolution, emphasised on building physical and institutional structures such as dams, irrigation, markets, roads and programs to educate and train farmers etc.

Thus, the development strategy of the 1950s was an inward-looking, controlled economy, state-lead development, large public sector and a controlled private sector. This was a reversal of colonial rule. Where large amounts of public spending took place to achieve economic development and political stability. International trade and finance was viewed with suspicion.

Contrary to the perception of the policy makers, results of the development strategy were gloomy. GDP growth rate was around 3.6% per annum and per capita income increased around 1.4% per annum for the first 3 decades on average. Despite giving highest priority to the industrial sector, the growth rate was around 5.2% on average from 1951-1980. Agriculture sector performed even worse, with an annual growth rate around 2.5 on average during the same period.

Noticeably the policy makers did not give much attention to the social sector. The literacy rate increased from 18.3% in 1950-51 to 43.6% in 1980-81, life expectancy also rose from 32.1 years to 50.4 years during the same period. But death and birth rate declined from 27.4 to 12.5 death rate, and birth rate from 39.3 to 33.9 during the same period, leading to an increase of population rate from 1.22% to 2.22%.

India's state-lead development strategy faced many criticisms from the beginning. Milton Freadmen, this strategy gave more focus on heavy and capital intensive industries, subsidising labour intensive and cottage industries, maintained that it would waste the capital and labour, and delayed the development of small scale industries.

However, hardly any changes were made, as most of the time Indian National Congress was in power during this period. The party believes Fabian Socialism prevents the government from initialising reforms. For a short period in 1977 Janta party formed the government under PM Morarji Desai. Incorporated many changes from lowering corporate taxes, focus on small scale industries, easing restrictions and controls and expanding capacity. But hardly his government existed for just 2 years, replaced by the Charan Singh government in July 1979. Finally INC came into power again under Indra Gandhi in January 1980. The political instability in the centre didn't allow realising the benefits of the economy and reformulation of the economy.

Reforms of the 1980s

The general wisdom suggested that economic reforms in India began in 1991, but a series of de-regulation and reform measures were initiated from 1980. Following the 1979 second oil crisis, India’s economic situation was deteriorating by the Indra Gandhi return to power in 1980. The Indian government approached the IMF for assistance, and in 1981 IMF sanctioned around $6 billion, which would be disbursed over a 3 year period and in 3 tranches. To comply with the IMF specification, in the 6th five year plan the government promised a series of measures such as fiscal reforms, reductions in import duties, de-licensing of industries, revamp of public sector enterprises, etc. to improve the competitiveness of the economy. By 1984, the economy recovered and the government decided to exit the loan program.

In 1984, Rajib Gandhi followed a series of measures. The emergence of this reforms were mainly due to following reasons:

By the 1970s, industrialists found that regulations were counterproductive and started pressing the government for the relaxation of controls.
The improved export performance and remittances from overseas workers in the Middle East had led to the accumulation of a comfortable level of foreign exchange reserves, which lent confidence to policymakers and bureaucrats who had lived in the perpetual fear of a balance of payments (BoP) crisis

Although many critics of the government said that reforms were half-hearted and introduced quietly, it doesn't mean that reforms were marginal. Major reforms announced during this period were:

Reintroduction of the Open General Licensing list of 1976.
Declined the share of canalised imports.
Introduction of several export incentives between 1985-86 and 1989-90.
Significant relaxation of industrial controls and introduction of related reforms such as increase in de-licensing, introduction of broad banding, relaxations in capacity control, increased the asset limit for MRTP companies from Rs. 200 million to Rs. 1,000 million, complete abolition of price and distribution controls on cement and aluminium, and tax reforms
Introduction of a realistic exchange rate.

The impact of the first wave of reforms was felt immediately. Growth rate increased from 5.88% in 1986-87 to 7.2% between 1988-89 and 1990-91, compared to 4.92% between 1981-82 and 1985-86. The first half of 1980s imports increased at 7.1% per annum and in the second half it increased at 12.3% per annum. The share of non-oil imports to GDP in 1976-77 was at 5.1%, which decreased to 4.8% in 1984-85. However, in the second half it increased to 6%. There was a significant increase in industrial productivity in the manufacturing sector during the second half of 1980s compared to first half of 1980s and second half of 1970s.

The Crisis of 1991

After the Rajiv Gandhi government in 1989, India faced a political instability with 2 governments being formed and dissolved in a 2 year period. The instability came to an end after PM Narasimha Rao formed the government in 1991. By this time India encountered a severe balance of payment crisis.

India’s balance of payment crisis was solely due to political instability, surely political instability makes it worse. It was a decade-long macroeconomic mismanagement during the 1980s that caused the economic crisis. During this time the government borrowed huge amounts of money from abroad and huge government expenditures were made. Bulk of the expenditures were coming from defence spending, interest payments and subsidies etc. the investment to GDP ratio has increased steadily in the public sector in the 1980s. From 1980-1985 it was around 18.6%, in 1990-91 it grew to wapping 23%. With that, the government revenue grew at a marginal rate, and the fiscal deficit grew from 8% of GDP between 1980-85 to 10.1% of GDP in 1990-91. The fiscal deficit was mainly financed by the public borrowing and borrowing from the RBI. India’s internal-debt-GDP ratio went up from 35.6% of GDP in 1980-81 to 53.5% of GDP in 1990-91. Debt servicing in terms of interest payment went up from 2% of GDP to 4% of GDP in the same period.

The wapping fiscal deficit and pumping money by the government fuelled the inflation in the economy especially in the late 1980s. Inflation rate grew from 4.4% from 50s-80s to 10.73% by 1990-91. The hike in the inflation rate impacted the exchange rate, it reached its minimum level by the second quarter of 1991. Deprecation of the exchange rate had a direct impact on the trade and current account of India. Although exports grew at a faster rate than imports. By the end of 1990 exports growth had fallen to 4%. But the difference between export and import remains huge. Exports account for around 2.5% of GDP, whereas imports account for around 3% of GDP throughout the 1980s. The gap was mainly financed by external borrowing, resulting in external debt rising from $35 billion in 1984-85 to $69 billion by the end of 1990-91. External debt to GDP ratio rose from 17.7% to 24.5% in the same period. Quality of these debts also deteriorated. The share of non-concessional debt increased from 42 percent to 54 percent, average maturity of debt declined from 27 years to 20 years.

Thus, the fiscal debt started with unproductive government expenditure and external borrowing led to huge public debt, with debt servicing in terms of interest payment accounts for a large portion of revenue, resulting in a steady increase in the current account deficit throughout the 1980s. The current account deficit to GDP ratio went up from 1.5% in 1980-81 to 2.78% in 1984-84 to 3% in 1990-91.

With the rising current account deficit and political instability, result in loss investors confidence and the downgrade of India’s credit rating by credit rating agencies. Which makes the situation much worse. Foreign Exchange Reserve had fallen from $1.2 billion in January 1991 to less than half by June 1991. The foreign exchange reserve to GDP ratio had fallen sharply and reached close to 0.25% by mid of 1991. Which was hardly enough to finance 3 weeks imports of India and the government just a week ahead of default.

Economic Reforms

To tackle the crisis, the newly formed government approached the IMF for a $1.8 billion bailout loan. The IMF agreed to provide assistance with a condition of liberalising the economy. The government agreed as it had no other choice. PM Narasimha Rao along with the finance minister Dr. Manmohan Singh initiated the “stabilisation-cum-structural” reforms process in July 1991. The stabilisation process mainly involves short-term monetary and fiscal policies to manage the demands. The objectives of stabilisation process were:

Bring the inflation under control through restrictive monetary policies.
Correct the balance of payment usually through devaluation of exchange rates accompanied by import liberalisation.
Check the fiscal deficits by curbing government spending, particularly the non-development expenditure.

On the other hand, structural adjustment was combined with the supply side of the economy and long term economic growth through efficiency, competitiveness, and productivity.

These reforms covered the areas of industrial licensing, foreign trade, foreign investment, exchange rate management, tax reforms and financial sector reforms. The rationale behind these policies has been to achieve a high and sustainable economic growth, making India’s economy more competitive and market oriented.

Major Economic Reforms of 1991

Industrial

Abolition of industrial licensing.
Sharp reduction of industries reserved for the public sector.
Abolition of separated permission needed for MRTP companies.
Freer access to foreign technology.
Items reserved for small scale industries gradually reduce.

External Sector

Devaluation and transition to a market determined exchange rate.
Phased reduction in import licensing (quantitative restrictions).
Phased reduction of peak custom duties.
Policies to encourage direct and portfolio foreign investment.
Monitoring and controls over external borrowing, especially short term.
Build up Foreign Exchange Reserves.
Amendment in foreign exchange management act, to reduce trade restriction,

Financial Sector

Phasing in of Basle prudential norms.
Reduction of reserve requirement for banks (CRR and SLR).
Gradually freeing up the interest rates.
Legislative empowerment of SEBI.
Establishment of National Stock Exchange.
Abolition of government control over capital issues.
Elimination of prior approval of RBI for larger lonas.
More liberal licensing for private banks.
Freer expansion of foreign banks.

Public Sector

Disinvestment programme begun.
Greater autonomy and accountability for public enterprises.

Fiscal

Reduction of fiscal deficit.
Launching of reforms for major tax reforms.

Agriculture

More lucrative procurement price for cereals(grains).
Reduction in protection to the manufacturing sector.

Post-Reforms Performance of the Economy

The economy is performing extremely well after the reforms.

Economic:

Nominal GDP reached $1.37 trillion in 2009(9th largest in the world) and purchasing power parity $3.8 trillion (4th largest) in 2009.
Per capita (ppp) reached $2993 in 2009 compared to $1232.19 in 1991.
Among the fastest growing economies in the World.
Annual growth rate was around 6.86% from 1992-2009. Compared to 5.4% in the 1980s. Recording 8.46 percent growth rate during 2003-04 to 2009-10.
Industry’s contribution to GDP increased from 25.92% in 1991-92 to 28.47% in 2009-10.
Service sector accounts for 57% of GDP at the same time.
The growth rate of sales has increased from 14% of GDP during 1990-91 to 1999-00 to 14.6% during 2000-01 to 2006- 07.
Gross profit and profit after tax has increased from 12.5% to 20% and 11.8% to 35.6% during the same period.
Economy has achieved remarkable success in savings and capital formation (regarded as one of the drivers of India’s recent growth story). Savings accounts of 26% of GDP in 1990-91 to 36.5% in 2009-10. Capital formation accounts for 22.8% in 1990-91 to 33.7% of GDP in 2009-10.
The combined fiscal deficit of centre and state has decreased to 4.09% and revenue receipts to 0.19% of GDP in 2007-8, compared to 9.41% and 4.19% respectively in 1990-91.

Social:

Significant decline in poverty. 1983 -> 44.5% to 1993 -> 36% to 2004-05 -> 27.5%.
Significant decline in birth and death rate, increased in life expectancy, literacy rate, and human development.

External Sector (trade):

India’s external trade has increased both in terms of volume and share in GDP and total in world trade. Exports increased from $22.9 billion in 1991 to $319.29 billion in 2010. Imports increased from $22.9 billion to $429.75 billion during the same period.

Foreign Investment (to and from India):

Emerges as a major destination of foreign investment and major source of outward foreign direct investment. The FDI to and from increased to $167 billion and $79 billion in 2009 from $173 million and $113 million in 1991.
Accumulated a sizable foreign exchange reserve from $5.8 billion in 1991 to $309.7 billion in 2007-08 and then $279 billion in 2009-10.

The spectacular performance of the economy and initiation of business friendly policies improves the investors confidence and thereby, business culture in India. The number of investor intention has increased in licensed and delicensed sectors, registered in international entrepreneurs memoranda during august 1991 to september 2011 accounted for 91,853 proposed investment of Rs. 8,968,742 crore.

There is no doubt that India has achieved fabulous growth in the post-reform period. But India also face many challenges in the same period ranging from sluggish growth in agriculture sector, urban centric growth, gainful employment creation, development of human capital, achieving social and gender equity, income and regional inequality, macroeconomic management in fiscal and monetary sides, developing physical infrastructure, coping with international uncertainty etc. There are many areas where reforms are not adequate and there by performance and hence, further reforms are required. As Mohan remarks we still have miles to go, still a quarter of a billion people lives under poverty, 27% of poverty rate is too high.

References

Saikia, D. (n.d.). (PDF) India's Development Strategy and Growth Performance. ResearchGate. Retrieved March 29, 2024, from https://www.researchgate.net/publication/256094204_India's_Development_Strategy_and_Growth_Performance

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