Indian Economy ECO413A

Wasim Ahmad

Department of Economic Sciences

Indian Institute of Technology Kanpur

May 22, 2019

India’s growth story since independence

I After independence, the major objectives of India’s economic

policies were self-reliance, social justice and alleviation of
poverty.
I It was decided that these objectives will be achieved through
the democratic framework and a mixed economy.
I Planning Commission was established in 1950 to fulfill these
objectives.
I The First Five Year Plan (1951-56) was designed to increase
the domestic savings for growth and to help the economy
resurrect itself from colonial rule.
I Second five year plan (1956-61) spearheaded the process of
massive industrialization.
I Commanding heights of the economy were entrusted to the
public sector.
India’s growth story since independence

I During 1960s, India had to pass through difficult phases:

I Droughts in 1965-67.
I Cut-off of aid by the US and the World Bank in 1968.
I The ensuing war and later the oil and food price increases in
1973.
India’s growth story since independence

I Indian economy outlined its first industrial policy (1948) with

the major emphasis of import substitution:
I The objectives were:
I A high economic growth rate
I A self reliant economy
I Reduction of foreign dominance
I Building up of indigenous capacity
I Encouraging small scale industry
I Bringing about balanced regional development, prevention of
concentration of economic power
I Reduction of income inequalities and control of economy by
the State
India’s growth story since independence

I The policy makers suggested the need for using a wide variety
of instruments like state allocation of investment, licensing
and other regulatory controls to steer Indian industrial
development on a closed economy basis.
I The idea was to have a trickle down effect on poverty and
social progress of the economy.
I Public sector did not live upto the expectations of generating
surpluses to accelerate the pace of capital accumulation and
help reduce inequality.
I The period from First Five Year Plan (1951-56) to the
Seventh Five Year Plan.(1985-90), is considered as the period
of Licence Quota Raj wherein there was a controlled and
restrictive environment.
Indias growth story since independence

I The Monopolies and Restrictive Trade Practices Act

(MRTP Act) was passed by Parliament of India on 18
December 1969 and came into force from June 1, 1970.
I On the basis of recommendation of Dutt Committee, MRTP
Act was enacted in 1969 to ensure that the operation of the
economic system does not result in the concentration of
economic power in hands of few.
I The act was there to prohibit monopolistic and restrictive
trade practices. It extended to all of India except Jammu &
Kashmir.
India’s growth story since independence

I The aims and objectives of MRTP act were:

I To ensure that the operation of the economic system does not
result in the concentration of economic power in hands of few
rich.
I To provide for the control of monopolies
I To prohibit monopolistic and restrictive trade practices
Indias growth story since independence

I Even before the introduction of MRTP Act, the presence of

monopoly structure and product concentration was the norm
of the market.
I In its report in 1965, the Monopolies Inquiry Commission
had reported that of a total of 1298 products studied by it,
87.7 percent were in the hands of oligopolists, with 437 being
produced by only one firm each and 229 by two firms each.
I Given the extremely diversified and technologically integrated
structure of the business group, a few houses tended to
monopolise most areas through firms under their control.
I The Government’s stated objectives notwithstanding, the
large business houses were able to corner disproportionate
share of licences in all areas of industrial activity.
India’s growth story since independence

I Current Status of MRTP Act:

I This act is not in force in India currently as it was repealed
and was replaced by Competition Act 2002 with effect from
September 1, 2009.
I The MRTP commission was replaced by Competition
Commission of India.
India’s growth story since independence

I The Fifth Plan (1974-79) corrected its course by initiating a

program emphasizing growth with redistribution
I To accelerate the process of production and to align it with
contemporary realities, a mild version of economic
liberalization was started in the mid 1980s.
I Three important committees were set up in the early 1980s
I Narsimhan Committee (1982) on the shift from physical
controls to fiscal controls.
I Sengupta Committee (1984) on the public sector.
I Hussain Committee (1984) on trade policy.
I The result of such thinking was to reorient Indias economic
policies.
I As a result there was some progress in the process of
deregulation during the 1980s.
India’s growth story since independence

I The roots of the liberalization program were started in the

late 80s when Rajiv Gandhi was the Prime Minister of India.
I The Congress govt. started the process of lubricating the
’recovery’ of the late 1970s by not just granting relatively freer
access to imports but also by adoption of a package of policies
that aimed at providing greater flexibility to private sector.
I A number of changes were made in the industrial licensing
system including provision for the delicensing of investments
by MRTP firms if they invested in backward areas and, in
some cases, with stipulated minimum export obligation.
I Several other measures relating to industrial approvals, foreign
collaborations, MRTP and FERA companies, etc. were
announced primarily in 1985 but extended upto 1989 in small
doses.
India’s growth story since independence
Major Liberalization Measures between 1985-1990
I To stimulate industrial growth and simplify industrial
procedures, 25 broad categories of industries were delicensed
in March 1985.
I Three months later, 82 bulk drugs and their formulations were
delicensed.
I In 1988, all industries except for a specified negative list of 26
industries were delicensed.
I This exemption from licensing was, however, subject to a
maximum of Rs 15 crore if the industry is located in a
non-backward area, and Rs 50 crore if it is located in a
centrally declared backward area.

I Government announced in 1988 that industrial licences will be

automatically endorsed at the maximum production achieved
by any industrial unit between April 1, 1988 and March 31,
1990.
India’s growth story since independence
Major Liberalization Measures between 1985-1990

I For the delicensed industries, only registration with

(Secretariat of Industrial Approvals) was required.
I To faciltate expeditious decisions, powers were delegated to
the Administrative Ministries in a number of areas in 1986.
I In 1986, undertakings which had obtained export orders were
permitted to manufacture concerned item without obtaining
industrial licence, provided the entire production was exported.
I The validity of registrations granted by technical authorities
like DGTD (Director General, Technical Development) was
increased from 2 to 3 years in 1987.
I Overseas companies were allowed, in 1987, to submit
applications for foreign collaborations and other approvals in
their own names.
India’s growth story since independence
Major Liberalization Measures Since July 1991
I All industries delicensed in 1991 except for 18 industries.
These industries requiring a licence relate to defence
production, strategic concerns, environmental or ecologically
sensitive areas.

I Three more industries passenger cars, white goods, and raw

hides and skins, leather and patent leather were delicensed in
April 1993. Now, only 15 industries require licence.

I The number of industries for which minimum economic

capacity is prescribed increased to 120 in 1991.

I All existing units are exempted from licensing for substantial

expansion.

I Foreign equity participation raised to 51% from 40% in 34

industries.
India’s growth story since independence
I Source: Aggarwal and Whallay (2013) ”The 1991 reforms,
Indian economic growth and social progress”, NBER
WORKING PAPER SERIES
India’s growth story since independence
India’s 1991 crisis?

I Two sources of external shocks contributed the most to

India’s large current account deficit in 1990/91.
I First: Middle East crisis in 1990 when Iraq attacked Kuwait
on oil dispute. US favored Kuwait.
I Oil market was badly affected

I In 1990/91, import bill increased from USD 2 billion to USD

5.7 billion as a result of both the spike in world prices
associated with the Middle East crisis and a surge in oil import
volume, as domestic crude oil production was impaired by
supply difficulties.

I Export market was also badly hit because of collapse of USSR

(a major trading partner of India).
India’s growth story since independence
India’s 1991 crisis?

I Second, weak export market for Indian products:

I The weak economic outlook of all the trading partner worsened
the crisis risk.
I The world growth declined steadily from 4.5 percent in 1988 to
2.5 percent in 1991.
I The decline was even greater for U.S. growth, Indias single
largest export destination.
I U.S. growth fell from 3.9 percent in 1988 to 0.8 percent in
1990 and to 1 percent in 1991.
I Consequently, India’s export volume growth slowed to 4
percent in 1990/91.
India’s growth story since independence
India’s 1991 crisis?
I Third, Rising political uncertainty:
I After a poor performance in the 1989 elections, the previous
ruling party (Congress), chaired by Rajiv Gandhi (the son of
former Prime Minister Indira Gandhi), refused to form a
coalition government.

I Janata Dal, formed a coalition government, headed by V.P.

Singh.
I However, the coalition became embroiled in caste and religious
disputes and riots spread throughout the country.

I Singhs government fell immediately after his forced resignation

in December 1990.
I A caretaker government was set up until the new elections that
were scheduled for May 1991.

I Rajiv Gandhi assassination on May 21, 1991, further worsened

the economic conditions.
India’s growth story since independence
India’s 1991 crisis?

I Fourth, Loss of investor confidence:

I The widening current account imbalances and reserve losses
contributed to low investor confidence, which was further
weakened by political uncertainties and finally by a downgrade
of Indias credit rating by the credit rating agencies.

I The current account deficit increased from Rs. 11,350 crore in

1989-90 to Rs. 17,350 crore in 1990-91.
India’s growth story since independence
Post-1991 Reform Measures

I Reforms measures were introduced in July 1991 which were

mixture of macroeconomic stabilization and structural
adjustment.

I The measures had short-and long-term objectives. The

stabilization was necessary in the short term to restore
balance of payments equilibrium and to control inflation.

I For long-term, structural measures were introduced at

different institutions levels such as banking, financial and
other segments of the economy.
India’s growth story since independence
Post-1991 Reform Measures

I Fiscal Measures: To restore fiscal discipline, government

chalked out plans to reduce the fiscal deficit from 8.4% in
1990-91 to 6.5% by 1991-92.

I Some of the important measures included in the budget of

1991-92 were reduction in fertilizer subsidy, abolition of
subsidy on sugar, disinvestment of a part of the government’s
equity holdings in select public sector undertakings, and
acceptance of major recommendations of the Tax Reforms
Committee headed by Raja Chelliah.
India’s growth story since independence
Budget deficit measures

I Budget deficit = total expenditure - total revenue

I Revenue deficit = revenue expenditure - revenue receipts
I Fiscal deficit = total expenditure - total revenue receipts
except borrowings
I Primary deficit = Fiscal deficit - interest payments
I Effective revenue deficit = Revenue Deficit - grants for the
creation of capital assets
I Monetized fiscal deficit = that part of the fiscal deficit
covered by borrowing from the RBI.
India’s growth story since independence
Post-1991 Reform Measures

I Fiscal consolidation and reforms

I The Central Government’s fiscal deficit, having fallen from 6.6
percent of GDP in 1990-91 to a low of 4.1 percent in 1996,
rose steadily to 6.1 percent in 2001-02.

I Two task forces, one each on direct and indirect taxes, both
chaired by Vijay Kelkar, recommended measures for
simplification and rationalization of the tax system.
reports were submitted in December 2002.

I Major recommendations included raising the exemption limit of

personal income tax, rationalization of exemptions, widening
the indirect tax base.
India’s growth story since independence
Post-1991 Reform Measures
I Fiscal consolidation and reforms
I Downsizing of government staff.
I The Fifth Pay Commission had recommended in 1977 a
reduction in the size of government by a third.

I The Expenditure Reforms Commission under the

Chairmanship of Shri K.P. Geetha Krishnan, in its report in
2000, had scaled back this target to a 10 percent reduction in
size (relative to January 1, 2000) by 2004-05 and a freeze in
the creation of new positions for two years.

I The widespread use of Voluntary Retirement Scheme (VRS)

was recommended by the Commission.

I A Fiscal Responsibility and Budget Management Bill was

introduced in Parliament in 2000 and it was passed by
parliament as an act in 2003 (FRBMA).
India’s growth story since independence
Post-1991 Reform Measures

I Banking and financial sector reforms

I The recommendations of Narasimham Committee Report
(1991) were implemented.

I The requirements of Statutory liquidity ratio (SLR) and the

cash reserve ratio (CRR) were reduced.

I It was proposed to cut down the SLR from 38.5 percent to 25

percent within a time span of three years.

I Similarly, it was proposed that the CRR brought down to 10

percent (from the earlier 25 percent) over a period of four
years.
India’s growth story since independence
Post-1991 Reform Measures

I Banking and financial sector reforms

I Interest rate liberalization measures takes in the forms of
lesser regulations on interest rate structure of short and long
term deposits.
I Discretionary lendings were discouraged.
I Deposits with shorter maturities were introduced.
I To promote healthy competitions, private sector banks were
promoted and licensing norms were revised.
I Banks were given freedom to relocate branches and open
specialized branches.
India’s growth story since independence
Post-1991 Reform Measures

I Capital market reforms

I The Securities Exchange Board of India (SEBI) which was set
up in 1988 was given statutory recognition in 1992 on the
basis of recommendations of the Narasimham Committee.
India’s growth story since independence
Post-1991 Reform Measures

I Over the period 1991-2011, the economy grew at an average

annual rate of 6.8 percent.

I GDP grew a little over 6 percent in the 1990s but accelerated

to slightly over 7 percent in the first half of the 2000s and
then further to a little over 8 percent in the period after 2006.

I The post reforms churn very quickly corrected itself and the
economy appeared to be on a high growth path by the middle
of the 1990s, but the acceleration in growth was hit in the
second half of the 1990s.
India’s growth story since independence
Post-1991 Reform Measures

I There were number of factors for this: the Asian crisis,

post-nuclear test sanctions, stalling of reforms after 1995 and
rising fiscal deficits from 1996 were all contributory factors.

I The major sectors that were leading India’s march towards a

high growth economy in the early 2000s were construction,
transport, storage, communication, and financial and business
services which also included IT.
India’s growth story since independence
Post-1991 Reform Measures

I Import licensing was abolished

I Tariff rates were brought down substantially from a weighted
average rate of 72.5 percent in 1991-92 to 24.6 percent in
1996-97.
I It was revised again to 35.1 percent in 2001-02.
I Part of this increase was in response to the abolition of most
quantitative restrictions (QRs) in 2000-01.
India’s growth story since independence
Post-1991 Reform Measures

I The exchange rate was unified and a system of managed float

was introduced in 1992-93.

I The rupee was made convertible for current account

transactions in 1994.

I External debt was particularly well managed, with short-term

debt reduced substantially from 1.9 percent of GDP in 1991
to 0.6 percent of a much larger GDP in 2002.

I Total external debt to GDP fell from 28.7 percent of GDP to

20.9 percent of GDP during the same period.
India’s growth story since independence
Post-1991 Reform Measures

I Foreign exchange reserves, which had fallen to a dangerously

low level of less than USD 1 billion, and not enough to cover
two weeks worth of imports at the height of the
macroeconomic crisis in 1991, is estimated at USD 79 billion,
enough to cover nearly 18 months of imports at the end of
May 2003.
India’s growth story since independence
Post-1991 Reform Measures
India’s growth story since independence
Post-1991 Reform Measures
I Source: 25 years of the Open Era: Reviewing Indias
post-liberalisation economy, HT, July 2016
Indias growth story since independence
Post-1991 Reform Measures
Indias growth story since independence
Post-1991 Reform Measures

I The communications sector gained from the more open

policies of the government and regulatory body TRAI.
I The construction sectors growth was boosted by housing and
highway construction, an outcome of lower interest rates,
income tax incentives, government investment in roads under
PMGSY and Golden Quadrilateral Programme, among
others
I Development in financial markets in the mid and later 1990s
included the entry and strengthening of two major
institutions.
I First, the establishment of an independent regulator i.e. SEBI
I Second, IT enabled trading facility by NSE
I The spread of electronic communications technologies also had
its secondary impact on the financial sector (ATMs and offsite
trading terminals being just two examples)
Indias growth story since independence
Post-1991 Reform Measures

I In the 1990s, the IT sector finally come onto its own, both as
an exporter and as an employment generator.
I In this regard, the pivotal role of NASSCOM is highly
appreciated
I Some important decisions pertinent to IT sector growth were:
I Low tariff on imports of IT hardware, greater depreciation of
hardware and software and at the same time ensuring that the
industry built for itself a set of quality standards that were in
sync with those operating internationally.
Indias growth story since independence
Post-1991 Reform Measures

I Focus on manufacturing sector

I The first and deeper set of reforms industrial delicensing and
relaxation in bottlenecks to international and domestic
investment as well as in international and domestic trade
occurred specifically for releasing the manufacturing sector
from the stronghold of government intervention.
I But the manufacturing sector growth could not take off.
I The popular discourse has identified labour laws, others
mention inspector raj and yet other lacks of FDI.
I At the same time, some sector were still doing good. Like for
example, automobile mobile manufacturing sector being one
example.
I The lagging sectors were forestry and logging, agriculture
including livestock and mining and querying.
Indias growth story since independence
Post-1991 Reform Measures
Indias growth story since independence
Current Economic Outlook

I According to IMF: In India, growth is projected to pick up to

7.3% in 2019 (2019-20) and 7.5% in 2020, supported by the
continued recovery of investment and robust consumption
amid a more expansionary stance of monetary policy and
some expected impetus from fiscal policy.

I Goods and Services Tax (GST) collection in March rose

15.6% from a year ago to hit Rs. 1.06 trillion, the highest
since the new indirect tax system took effect on 1 July 2017.

I Average monthly GST revenue during August-March 2017-18

was Rs. 89,885 crore. This rose to Rs.98,114 crore during
April-March 2018-19.
Indias growth story since independence
Current Economic Outlook
Indias growth story since independence
Current Economic Outlook
I India received $79 million in remittances from its diaspora in
2018 possibly due to financial help following the Kerala floods,
the World Bank said Monday. India was followed by China at
$67 billion, Mexico $36 billion and the Philippines $34 billion.

I According to OECD, Indias monetary policy to be loosened

somewhat as headline inflation remains well below target and
inflation expectations are adjusting down.

I Indias retail inflation was 2.92% in April 2019 due to a spike

in food prices.
I The Reserve Bank of India, which had cut interest rates by
0.25% in April 2019. OECD estimates 2.9-3% retail inflation
during April to September 2019 because of lower food and
fuel prices and expectation of a normal monsoon.
Thanking you!