Indian Economy in Global Scenario

Module 1

Economic Growth and Economic Development

Till the 1960s, the term 'economic development' was often used as a synonym of economic
growth, the measure for the latter being the Rise in per capita GNP in real terms. According to
Kindleberger,"Whereas economic growth merely refers to a rise in output, economic
development implies changes in technological and institutional organization of production as
well as distributive pattern of income." Thus, economic development is a broader concept than
economic growth. Compared to the objective of development, economic growth may be easy to
realize. By larger mobilization of resources and raising their productivity, output levels can be
raised. The process of development is far more extensive. Apart from the rise in output, it
involves changes in the composition of output as well as a shift in the allocation of productive
resources to ensure social justice.

While there can be growth without development, development without growth is unconceivable.
A substantial rise in a country's GNP is required before it can hope to expand its industres and
the services sectors. Nowhere in the world has the occupational distribution of population
changed in the absence of growth.

The New View of Economic Development

During the 1950s and 1960s, while many of the Third World nations did realise the economic
growth targets, the respective levels of living of the masses remained unchanged.

Thus, in the 1970s economic development came to be redefined within the context of a growing
economy. 'Redistribution from growth' became a common slogan.

Seers posed three basic questions about the meaning of development:

What has been happening to poverty?
What has been happening to unemployment?
What has been happening to inequality?
If all three of these have declined from high levels, then beyond doubt this has been a period of
development for the country concerned.
If one or two of these central problems have been growing worse, especially if all three have, it
would be strange to call the result 'development' even if per capita income doubled.

Three Core Values of Development

Sustenance: The life-sustaining basic human needs include food, shelter, health and
protection. When any one of these is absent or in critically short supply, a condition of absolute
'underdevelopment exists.
Self-esteem: A second universal component of good life is self-esteem--a sense of worth and
self-respect-of not being used as a tool by others for their own ends,

Freedom from Servitude_To be Able to Choose: Wealth can enable a person to gain greater
control over nature and his physical environment than they would have if they remained poor. It
also gives them the freedom to choose greater leisure. The concept of human freedom should
encompass various components of political freedom, freedom of expression, political
participation and equality of opportunity.

Human Development Index

Humán Development
The first Human Development Report (HDR) published by the United Nations Development
Programme (UNDP) focused on the new paradigm of development that puts people at the
centre of development.

The concept, developed by Mahbub ul Haq and Amartya Sen, is defined as 'the process of
enlarging people's choices,' emphasizing the freedom to be healthy, to be educated and to
enjoy a decent standard of living.

But it also stressed that human development and well-being went far beyond these dimensions
to encompass a much broader range of capabilities, including political freedoms and human
rights.'

Human Development Index

The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development: a long and healthy life, being knowledgeable and having a
decent standard of living. The HDI is the geometric mean of normalized indices for each of the
three dimensions.

The health dimension is assessed by life expectancy at birth, the education dimension is
measured by mean of years of schooling for adults aged 25 years and more and expected years
of schooling for children of school entering age. The standard of living dimension is measured
by gross national income per capita. The scores for the three HDI dimension indices are then
aggregated into a composite index using geometric mean. The HDI simplifies and captures only
part of what human development entails. It does not reflect on inequalities, poverty, human
security, empowerment.
HDI Dimensions and Indicators

Steps to calculate Human Development Index values

Step 1. Creating the dimension indices Minimum and maximum values (goalposts) are set in
order to transform the indicators expressed in different units into indices between 0 and 1.
These goalposts act as “the natural zeros” and “aspirational targets”, respectively

Step 2. Aggregating the dimensional indices The HDI is the geometric mean of the three
dimensional indices.
Note: Example only for reference. Dont do it for exam. Just remember the formula.
Human development categories

Reasons for India low HDI ranking:

India ranks 132 out of 191 countries in the Human Development Index (HDI)
2021

India’s low ranking reflects in how India does poorly in all the 3 HDI indicators: Some of the
reasons for low HDI ranking are:

1. Widespread unemployment is the biggest cause of India’s low GNI per capita. The
continuously expanding population of unemployed is another cause of poverty. Job
seekers are increasing in number at a higher rate than the expansion in employment
opportunities. This results in a never ending cycle of increasing unemployment.
2. India’s ineffective economic policies have contributed to the reduction of income
generation by the nation.
3. another cause of poor income generation in India is the unequal distribution of income.
Due to this economic inequality different people in India are receiving different incomes
even though they may be doing the same jobs as others who are receiving a higher
income. This income inequality has also meant that sometimes individuals may receive
no income at all in their respective markets.
4. one of the factors that affect India’s low levels of education includes lack of spending on
education. India has had a long and unwilling thought on spending their money on
education
5. another major cause of the insufficient levels of education in India is the lack of or poor
infrastructure facilities.
6. India’s lack of expenditure on health accounts greatly for poor health within the nation.
Only a minute 3.9% of India’s total GDP has been spent in the health sector.
7. Lack of safe drinking water in India also accounts for their poor levels of health.

Ways to improve India’s HDI ranking

1. Investment hurdles: Overcoming hurdles or limitations in the way of investment in the social
sector is of crucial importance. More investment is needed in areas such as education, health,
infrastructure etc. Along with this, streamlining traditional approach of generating new sources
of revenue generation, steps like rationalised targeting of subsidies, judicious use of revenues
meant for social sector development etc will probably go a long way in meeting the challenges
in this regard.

2. Performance evaluation: Effective performance evaluation of the projects and activities

engaged in the social sector development through innovative methods like outcome budgeting,
social auditing of the programmes and meaningful participation of community members from the
policy-making level to policy evaluation has been known to yield positive results.

3. Reducing Inequality: Inequality in different forms - social, economic and political is the key
factor affecting the ranking in HDI. India, though, has made enormous efforts to remove all kinds
of inequalities but is yet to get desired results. In this regard, rampant corruption in the delivery
of services and lack of coordination between agencies has played a major role which needs to
be corrected on the urgent basis.

4. Governance reforms: Adoption of new managerial techniques along with adherence to the
principals of ‘Good Governance’ will bring about comprehensive reforms thus removing the
impediments afflicting the real development of the country.

5. Innovative solutions: A greater thrust on research and development essential to chalk out
innovative policies and programmes for dealing with new developmental challenges should be
the core area of concern for the government as the task of real growth and challenges demand
innovative and profound solutions.

Sen vs. Bhagwati

Amartya Sen Model:

Sen is a Nobel Prize winner in economics.

● He believes that India should invest more in its social infrastructure to boost the
productivity of its people and thereby raise growth.
● Investing in health and education to improve human capabilities is central to Sen’s
scheme of things. Without such investments, inequality will widen and the growth
process itself will falter.
● Sen said that both growth and welfare programs are needed, and not at the cost of each
other.
● Sen attacked Bhagwati’s arguments by saying that in an under-nourished country such
as India, it was very stupid to focus obsessively on growth.
● Sen had upheld what he calls the “Kerala experience” — high social spending resulting
in growth — as a role model for other states to follow.
Bhagwati Model:
Jagdish N. Bhagwati is a University Professor of Economics, Law, and International
Relations at Columbia University and former Adviser to the Director-General of GATT. In
‘Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for
Other Developing Countries’, Bhagwati and Panagariya hold up growth as the panacea for
all of India’s ills.

● Bhagwati argues that only a focus on growth can yield enough resources for
investing in social sector schemes.
● Bhagwati argues that growth may raise inequality initially but sustained growth will
eventually raise enough resources for the state to redistribute and mitigate the
effects of the initial inequality.
● Bhagwati argued that it is the reforms of 1991 that have made even the lowest
social classes greatly more prosperous today. Hence, those reforms must be
strengthened. Critiquing the critics of India’s growth experience, Bhagwati argued
that a low rank on the human development index (HDI) did not mean much.
● Bhagwati stands for what they called the Gujarat model of development, which he
reckoned was superior to the contrasting Kerala model of development.

Module 2

India’s Economy at Independence

The pre-Independence period was a period of near stagnation for the Indian economy. At the
time of Independence, Indian economy was caught up in a vicious circle of poverty
characterised by one of the lowest per capita consumption and income levels among the
countries of the world.

Low income levels resulted in low levels of saving and capital formation and therefore, low
productivity and low level of income and this vicious circle perpetuated poverty in the country

Further, the size of the market being limited because of low incomes, entrepreneurs had little
incentive for making investments in diversified fields, and therefore, the productivity in the
economy continued to be low thereby perpetuating low incomes and mass poverty.

Characteristics of Indian economy at Independence:

 1. Indian economy at the time of Independence was overwhelmingly rural and agricultural
in character with nearly 85 per cent of the population living in villages and deriving their
livelihood from agricultural and related pursuits using traditional, low productivity
techniques.
2. The backwardness of Indian economy is reflected in its unbalanced occupational
structure with 70 per cent of working population engaged in agriculture. Even with this
large proportion of population engaged in agriculture, the country was not self-sufficient
in food and raw materials for industry.
3. Illiteracy was as high as 84 per cent; majority of children (60%) in the 6-11 age group did
not attend school.
4. Mass communicable diseases were widespread, and in the absence of a good public
health service, mortality rates were very high (27 per thousand).
5. Thus, the economy was faced with the problems of mass poverty, ignorance and
diseases which were aggravated by the unequal distribution of resources between
groups and regions.

The India of 1947, under British rule, showed all the signs of what is today called an
underdeveloped country.

Agricultural Scenario at the time of Independence

Stagnating Agriculture

Colonialism became a fetter on India's agricultural and industrial development. Agriculture

stagnated and even deteriorated over the years, especially during the first half of the 21st
century when the full impact of colonialism began to be felt.

Causes

(i) Regressive Agrarian Structure

The stagnation in agriculture is basically explained by the fact that colonialism transformed the
agrarian structure in India and made it extremely regressive. As is well- know, the zamindars
failed to invest in land and relied on rack renting, while the peasant proprietors fell into the
clutches of the moneylenders and lost control over their lands. Sub infeudation, tenancy,
sharecropping increasingly dominated agriculture.

ii) Internal Drain of Capital

Agricultural surpluses were siphoned from agriculture without any quid pro quo, thereby
subjecting it to an internal drain of capital.
Throughout the 18' and 19 th centuries, high land revenue demand ate into the peasant's
surplus and even his subsistence. But the government spent very little on improving agriculture
as was done, for instance, in Japan. The landlords, old or new, took no interest in agriculture
beyond collecting rent. They found rack-rent and usury far more profitable than making
productive investment in land. The moneylenders and merchants used their increasing share of
agricultural surplus to intensify usury or to take possession of land to become landlords.

iii) Poor Technology

Another reason for the stagnation of productivity in agriculture was the near absence of change
in its technological basis or its productive technique and inputs. the type of equipment used
changed very little till 1941. Modern machinery was conspicuous by its absence.

India’s Industrial Production and its Structure

Another aspect of India's economic backwardness was the state of industry in spite of her vast
industrial resources.

India's Industrial Structure at the time of Independence

The Decline of Traditional Industry and the Development of Modern Industry

1. India, still an exporter of manufactured products at the end of the 18th century, becomes
an importer.

2. The ruin of the traditional trades and crafts was the result of the British commercial
policy.

3. Restrictions were imposed upon Indians exporting to the West, while favours were
granted to British exporters, who flooded the Indian markets. India was buying one
quarter of Britain's cotton exports. All industrial products shared this fate.

4. During the 19 century, industrial development was confined to cotton and jute textiles.

5. The iron and steel industry developed after 1907 while the sugar, cement and paper
industries and a few engineering firms came up in the 1930s. Still, as late as 1946,
cotton and jute textiles accounted for nearly 30 per cent of all workers employed in
factories.'

6. A very important feature of India's industrial structure was the virtual absence of capital
or producer's goods industry. Indian industries had to relv almost wholly on imported
machinery and machine tools.

7. In 1950, India met nearly 90 per cent of its need for machine tools through imports.

8. Similarly, modern banking and insurance were grossly underdeveloped.

Underdeveloped banking and insurance meant that the Indian entrepreneurs could not
 mobilise the available capital. Also, British-controlled banks starved Indian industry of
funds and favoured British-owned and controlled enterprises.

9. It is important to keep in view, in this respect, that foreign investment rarely marked a
transfer of capital to India from abroad.

We may sum up India's economic profile at the time of Independence as: stagnating per capita
national income, abysmal standard of living: stunted industrial development and the bulk of the
population dependent on stagnating, low-productivity semi-feudal agriculture.!
The end result of colonial underdevelopment was the pauperism of the people especially the
peasantry and the small artisans.

Module 3 and Module 4a)

Evolution of planning

Planning Commission- setup in 1950

To make an assessment of the material , capital and human resources of the country
Formulate a plan for effective and balanced utilization of the country’s resources

The Initiation of the plans

● First Five Year Plan – April 1951 initiated a process of development aimed at raising the
standards of living
● Five year plans as a model of planning borrowed from then USSR
● Opening out new opportunities for richer and more varied life
● The Nehruvian view- Fabian Socialism
● Emphasis on rapid development led by state economic activity and planning
● The chief barrier to accelerated growth then was- Low savings rate

Role of state as visualized in the 50’s

Economic Role
1. Abolition of Zamindari system and implementation of Land reforms
2. Maintenance of law and order
3. Defining and protecting property rights
4. Enforcement of contracts
5. Provision of Basic infrastructure: Elementary education, healthcare, clean drinking water
6. Roads, highways, steel plants, dams to be taken care by government
7. Increased Public expenditure will mobilize idle labour for creating productive assets esp.
roads, irrigation, land improvement, schools, hospitals
 Social Justice
1. Securing to all citizens the right to adequate means of livelihood
2. Preventing concentration of means of production

Commanding Heights of the Economy given to Public Sector

1. The economic model of India gave a pivotal role to public sector which came to
be known as Commanding heights of public sector
2. Extension of public ownership on the means of production
3. Scale of investment efforts in certain key heavy industries was been entrusted to
the public sector like steel, coal, heavy machinery.
4. Public sector through appropriate price policy for its output will generate
investible surplus for further investment
5. Public sector to assume the role of a model employer and its employment and
wage policies will have a moderating influence on policies of private sector
6. The planners and 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.

Periodization of Indian Growth experience (Refer to the periodization table

too)

Period I: Foundational Years (1951-65)

1. Post war reconstruction programmes and development programme was
undertaken just after independence
2. Community development and rural credit cooperatives, Industrial development
banks, IITs and many research establishments
3. Heavy industry oriented strategy was put in place which was also called as
Import substitution based Industrialization strategy -PC Mahalanobis Plan
4. Large investments in public sector
5. Industrial Licensing prevalent- Permit License raj
6. Public sector was given commanding heights in the economy

2nd Five Year Plan (1956-61): PC Mahalanobis Plan

1. He prepared a growth model with which he showed that to achieve a rapid long- term
rate of growth it would be essential to devote a major part of the investment outlay to
build-ing of basic heavy industries.
2. PC Mahalanobis called for an import substitution based strategy.
3. It is a closed economy based model with 2 sectors, one which produced consumer
goods and other investment goods
 4. Mahalanobis identifies the rate of growth of investment in the economy not with the rate
of growth of savings but with the rate of growth of output in the capital goods sector
within the economy.
5. According to Mahalanobis, the rate of economic growth depends upon the capital
formation or real investment. The greater the rate of capital formation, the greater the
rate of economic growth.
6. The fundamental insight of this model was that the greater the proportion of investment
devoted to increasing the capacity of the investment-goods sector, the faster the long-
run growth in consumption and investment. In the strategy based on this model, rapid
long-run growth was to be achieved without much sacrifice of short-run consumption by
concentrating scarce investment in expanding capital goods-producing (and intermediate
goods-producing) heavy industry.
7. Current consumption demand was to be met by employing abundant labour resources to
manufacture consumer goods using labour-intensive methods that required little capital.

Period 2: Crisis years (1965-66 TO 1969-70)

● Sino-Indian War of 1962 exposed weaknesses in the economy and shifted the
focus towards the defence industry and the Indian Army. In 1965–1966, India
fought a War with Pakistan.
● There was also a severe drought in 1965, 1966
● The war led to inflation and the priority was shifted to price stabilisation.
● The main reasons for plan holidays were the war, lack of resources and increase in
inflation.

Other important events during this phase were:

● Focus on agricultural development- Green Revolution
● Continuous investment in heavy industries
● Banking system nationalized in 1969. 14 major banks were nationalised.
● For the first time India resorted to borrowing from IMF. Rupee value devalued for the
first time in 1966.

Period 3: Turbulent years (1970-71 TO 1979-80)

● Fourth Plan mainly focussed on Food security to end the dependence on PL-480 program.
● The slogan of ‘Garibi Hatao’ brought poverty alleviation to centre-stage in Indian politics.
● Middle years between 1965-66 and 1979-80 were the ones when Indian development
performance was at its worst
 ● Low growth rates despite high levels of investment
● Foreign exchange shortages because of increased prices of oil due to the 1973 oil shock
(Yom Kippur War).
● Political instability- National Emergency declared from 1975-77
● Poorly managed public investment programme
● By 1970-71, Green Revolution had stabilized.

Period 4: The transitional years (1980-81 to 1990-91)

○
● Internal liberalisation relating to Relaxation of Industrial licensing. There was an easing
access for imported capital inputs.
● Expansionary macroeconomic policies like tax reductions led to an increase in aggregate
demand which in turn stimulated an increase in the rate of growth of output.
● Liberalising capacity restrictions.
● Trade liberalisation with some deregulation of industrial policies
● Significant increase in public investment which contrbuted to increase in aggregate demand.
Also, new infrastructure was created.
● There was a shift towards pro-business orientation rather than a pro-market orientation. Pro-
business orientation is the one that focuses on raising the profitability of companies. It tends
to favor producers. Pro market orientation more-so favors consumers.
● Entrepreneurial talents and managerial capabilities were fostered. Science and technology
was accorded a priority. Capital goods sector was established

Period 5: The reform years (1991-92 to 2002-03)

● No viable relationship with the international economy

● Industry highly protected
● Exports didn’t take off despite rupee devaluation
● CRISIS OF 1991
● Reforms introduced by the Rao government

` The economic crisis of 1991

● Large trade deficit
● Large Fiscal deficit
● The situation became so serious that the Indian foreign exchange reserves could barely
finance three weeks’ worth of imports while the government came close to defaulting on its
financial obligations
● Global credit rating agencies downgraded India’s credit rating
● No option left with the government except mortgaging the country’s gold

The Hindu rate of growth refers to the lower annual growth rate of the economy of India before the
economic reforms of 1991, which stagnated around 3.5% from 1950s to 1980s.
Causes of 1991 Macroeconomic Crisis in India

External Causes

1. Dissolution of Soviet Union

To earn foreign exchange, India needs to have sufficient exports to the global economy.
Since 1960s, India depended heavily on Soviet Union for exporting its goods due to failure in
developing good economic relations with the US and Europe.
However, in the late 1980s, Soviet Union started to break (dissolution of Soviet Union) and by 1991
it was split into 15 nations (naming a few Russia, Kazakhstan, Ukraine).

2. Gulf War
Iraq and Kuwait were major suppliers of Oil.
The Gulf crisis began with the invasion of Kuwait by Iraq at the beginning of August 1990. Crude oil
prices rose rapidly thereafter–from USD 15 per barrel in July 1990 to USD 35 per barrel in October
1990.
The Gulf War made it necessary to buy oil from the spot market led to destruction of India’s oil
imports and prices were doubled (Oil Price Shock). A sharp rise in the imports of oil and petroleum
products accounted for rise in trade deficit.

3. Loss of Investors’ Confidence

The widening current account deficits and reserve losses contributed to low investor confidence,
which was further weakened by political uncertainty. This was aggravated by the downgrade of
India’s credit rating by credit rating agencies.

4. Slow Growth of Important Trading Partners

The deterioration of the current account was also induced by slow growth in economies of important
trading partners like USA.

Internal Causes

1. Fiscal Indiscipline:
The Economic Survey (1991-92) had categorically remarked that:
“Throughout the eighties, all the important indicators of fiscal imbalances were on the rise. Gross
fiscal deficit of the Central Government has been more than 8 percent of GDP since 1985 – 86, as
compared with 6 percent in the beginning of 1980s and 4 percent in the mid – 1970s.”

2. Political Uncertainty and Instability

In the late 1980s India’s political system was imploding. Within a span of one and half years there
were three coalition governments and three Prime Ministers. This led to delay in tackling the ongoing
balance of payment crisis, and also led to a loss of investor confidence.

3. Balance of Payments Crisis (Rise in External Debt)

In the second half of the 1980s, the current account deficit was showing a rising trend and was
becoming unsustainable. An important issue was the way in which this deficit was being financed.
The current account deficit was mainly financed with costly sources of external finance such as
external commercial borrowings, NRI deposits, etc.

Economic Reforms of 1991

Components of Economic reforms

1. Fiscal Stabilization
2. Internal Stabilization
3. Integration with World Economy

A. Macroeconomic Stabilization: Demand-side Management

Short-term and Medium-term measures
Intended to correct lapses and return the economy to
a. Low and stable inflation
b. Sustainable B.O.P.
c. Fiscal Discipline

Measures of Stabilization:
1. Fiscal Correction
a. Reduction in Govt’s non-planned expenditure
b. Reduction in Govt Grants
c. Reduction in Subsidies on many items
2. Reforms in the Tax Structure (Based on the recommendations of the Chelliah Committee
following reforms were implemented in the New Economic Policy)
a. Rationalization of the income tax structure and reducing the maximum income tax rate from 51%
to 30%
b. Rationalization of Custom Duties and lowering the peak tariff rates to around 50% that prevailed in
most other countries
c. Reduction in Subsidies on food, fertilizer and exports (unpopular decision due to vote bank politics
and strong farmer lobby)
d. Reduction in corporate profit tax to attract more investments particularly FDI.
3. Improvement in B.O.P. Position
4. Control of Inflation

B. Structural Adjustment Programme: Supply-side Management

Long-term measures
Intended to remove bottlenecks of growth path of an economy such as
a. Abolishing controls
b. Eliminate Bureaucratic Hurdles and Red-tapism
c. Efficient and Transparent Decision-making process

Policies of Structural Reforms (LPG Programme):

1. LIBERALIZATION
Removing all unnecessary controls and restrictions such as permits, licenses, quantitative
restrictions, quotas, etc.
Reduction in government regulation and state intervention
Allowing unfettered operation of market forces in determining economic processes and resource
allocation

I. Industrial Sector Reforms (New Industrial Policy, 1991)

a. Abolition of Industrial Licencing for all projects except for 5 industries(Alcohol,Cigarettes,

Hazardous Chemicals, Electronic Aerospace and defence equipment, Industrial explosives).

b. Contraction of Public Sector and reduction of reservations reduces from 17 to 2 industries

(defence equipment, atomic energy generation).

c. Reforms in the small scale industries (SSI) with increase in the investment limit to 1 crore.

d. Relaxations in the MRTP Act with scrapping of threshold limit of assets and no requirement of
prior approval from the govt. for investment in delicensed industries.

II Trade reforms

A. Significant role for foreign investments and technology- Foreign investment limits in banks
raised to around 50%

B. Tariffs- Tariffs were as high as 80% before the reforms. In a phased manner the average
tariffs have been brought down to 9% by 2015.

C. Decanalization- "canalization" of imports, i.e. the exclusive importation of certain goods

through designated government agencies. Public sector undertakings were no longer a
“canal” or an intermediary for sourcing commodities from abroad. An importer could now
direct source steel/aluminium/ironore or any other commodities directly from foreign
producers.

III. Financial Sector Reforms ( Shift in the role of the RBI from a regulator to a facilitator of financial
sector- facilitate free play of market forces and allowing commercial banks to decide their interest
rate structure-competition prevailed with liberalization.)

a. Reduction in CRR from 15% to 3-5% and SLR from 38.5% to 25% to increase availability of
funds with commercial banks to advance more credit formation.

B. Deregulation of interest rates by RBI

c. FIIs such as merchant bankers, mutual funds and pension funds were allowed to invest in Indian
Financial markets.
d. Encouragement of Private Sector banks both Indian as well as foreign

E. Banking system was reconstituted - International ,National, Rural banks, Local Banks

III. Capital Market Reforms

1. Stock Market has been made a statutory body. SEBI that was established in 1992 had
defined responsibilities for regulating, developing and encouraging capital market operations.

2. Dematerialization of shares was introduced after the reforms.Dematerialisation is the

process by which a client can get physical certificates converted into electronic balances.

IV. Foreign Exchange Reforms

a. Devaluation of Indian rupee against foreign currencies increased foreign exchange inflow
b. Determination of exchange rates was free from government control, exchange rates were market
determined; Current Account Convertibility i.e. current account transactions without prior permission
from the RBI

2. PRIVATIZATION (Increasing role of the private sector with change in ownership resulting in a
change in management)
Disinvestment - sale of a part of equity holdings held by the government in any PSU to private
investor. This is done to provide fiscal support to the government and improve the efficiency of public
enterprise.

3. GLOBALIZATION (Integrating the domestic economy with the world economy, i.e. growing
economic interdependence among countries with regard to technology, capital, information, goods,
services, etc.)
EXIM Policy 1992 seeks to achieve globalization through:
a. Liberalization of Import licensing - most imports were put under the Open General License (OGL)
where automatic permission is granted to import goods.
b. Rationalization of Tariff structure - reduction in the tariff rates to increase India’s export
competitiveness.
c. Foreign exchange management reforms –
Rupee value was determined by market forces
Free convertibility of rupee was allowed in the current account of B.O.P.

Changing role of state in the post reform period:

1. Govt in the past took to many responsibilities imposing severe strains on its limited financial
and administrative capabilities but the situation has changed dramatically. India now has a
strong and vibrant private sector.
2. Industrial growth in the future will depend largely on performance of the private sector.
 3. Govt. now has a minimalistic role where it’s focus should be on social sectors like healthcare,
education, infrastructural development, rural infrastructure.
4. Govt’s role is more of a regulator and a facilitator.
5. The transition of the Indian economy from a planned economy to a market based economy
has seen role of planning undergo a change both in terms of priorities as well as instruments.

Period 6: 2003-2008 The best phase in growth

1. Annual average growth stood at 8.5%
2. From 2003 onwards, India enjoyed a boom in growth till recession of 2008
3. Sharp rise in investment rate
4. Inflow of foreign private capital
5. Outsourcing industry boosted India’s service exports
6. Export led growth
7. Expansion of bank credit
8. Incremental output coming only from a few capital intensive industries like
automobiles
9. Marginal rise in infrastructure
10. Rise in domestic savings rate
11. Debt led growth – financed by bank credit
12. Rapid monetary expansion- inflationary pressures- exchange rate
appreciation- widening CAD
13. Growth in Corporate savings from 4% of GDP in 90’s to 8.8% of GDP in 2007-
08
14. Investment increased from 16.5% to 28.1% of GDP by 2007-08

Dark spots in the best phase of growth:

1. Most incremental output came from a few capital-intensive industries like

automobiles and a few services like outsourcing and telecoms.
2. Incremental investment was skewed in favor of capital and skill intensive
manufacturing.
3. Financial crisis hit employment in labour intensive manufacturing. There was
a distinct decline in female labour force participation rate.
4. It was a debt-led growth financed by increasing bank credit to the private
corporate sector.

What are the Structural Constraints?

1. Difficulties in taking quick decisions on project proposals have affected the ease
of doing business. This has resulted in considerable project delays and insufficient
complementary investments.
2. Ill-targeted subsidies cramp the fiscal space for public investment and distort
allocation of resources.
3. Low manufacturing base especially of capital goods a d low value addition in
manufacturing. Manufacturing growth and exports in India suffer from complex
procedures, difficulty in accessing credit, and escalated transaction cost.
4. Presence of a large informal sector and inadequate labour absorption in the
formal sector. This is due to absence of requisite skills.
5. Sustaining high economic growth is difficult without robust agricultural growth.
Low agricultural productivity is hampering this.
6. Structural factors engendering continued high inflation. Issues related to
significant
Presence of intermediaries in different tiers of marketing
Shortage of storage and processing infrastructure
Inter-state movement of agricultural produce

Reasons for slowdown of Indian economy post 2013

1. The implementation of goods and services tax (GST) was said to have
severely disrupted small-scale businesses as they struggled to comply with
the requirements of data that it imposed
2. Demonetisation of 500 and 1000 rupee notes in 2016 had caused GDP to fall
by 2 percentage points in one quarter
3. A third reason put forward for the slowdown is the reluctance of the
government to embrace major reforms in its first term. These include labour
reforms, privatisation, administrative and judicial reforms.
4. The trigger for the slowdown was the collapse of ILFS in September 2018.
Which prompted that there were serious issues in the NBFCs in India.
5. Onset of COVID-19 pandemic since 2020
6. Russia Ukraine conflict and rise in global commodity prices.

Demand and Supply shocks during COVID 19

A demand shock is a sudden unexpected event that dramatically increases or

decreases demand for a product or service, usually temporarily. A positive demand
shock is a sudden increase in demand, while a negative demand shock is a decrease in
demand. Either shock will have an effect on the prices of the product or service.
 1. Increase in demand of sanitizers, masks, PPE kits is a positive demand shock.
2. Increased demand of OTT and gaming platforms, laptops, computers,
headphones and mics for video conferences is a positive demand shock
3. Negative demand shock is decrease in purchases of durables like cars, jewllery,
luxury goods

A supply shock is anything that reduces the economy's capacity to produce goods and
services, at given prices.
1. Lockdown measures preventing workers from doing their jobs can be seen as a
negative supply shock.
2. Non essential goods and services like garments, electronic items, stationery,
gyms, restaurants werent allowed to operate leading to negative supply shock.
3. Positive supply shock is increase in home delivery services of food, essentials,
medicines and other goods.
4. Online education platforms is a positive supply shock

Declining Relevance of Planning Commission

● In the post liberalization period, the concept of planning has undergone a shift
● Move towards the era of indicative planning
● Blend of private and public has tilted in favour of private sector
● Diminishing role of Public Sector however, critical role played in the infrastructure sector
● Requirement of a broad framework to address basic issues confronting the economy and
long-term issues.
● Holistic view required for policy formulation regarding issues of energy, transport, water,
environment.
● Faster rate of growth with equity demands serious considerations

Difference between Niti Aayog and Planning Commission

Planning Commission was an advisory body, and so is Niti Aayog.

Difference between them are as follows:

1. The Planning Commission had powers to allocate funds to ministries and states; this function
will be now of finance ministry. Niti Aayog is essentially a think tank and a truly advisory
body.
2. The role of states in the planning commission era was limited. The states annually needed
to interact with the planning commission to get their annual plan approved. They had some
limited function in the National Development Council. Since Niti Aayog has all chief ministers
of states and administrators of UT in its Governing Council, it is obvious that states are
expected to have greater role and say in planning/ implementation of policies.
 3. The top down approach is reversed in Niti Aayog. It will develop mechanisms to formulate
credible plans to the village level and aggregate these progressively at higher levels of
government.
4. Cooperative/Competitive Federalism ,also called marble cake federalism, is an important
feature of Niti Aayog which was not the approach of Planning commission.
5. While the planning commission formed Central Plans, Niti Aayog will not formulate them
anymore. It has been vested with the responsibility of evaluating the implementation of
programmes. In this way, while Niti Aayog retains the advisory and monitoring functions of
the Planning commission, the function of framing Plans and allocating funds for Plan
assisted schemes has been taken away.

Inter- regional disparities in growth and development

● Before 1980- Growth rate of states mediocre but uniform

● Variation in performance of states in the post reform period
● In 90s, Gujarat grew by 7.6% and Bihar by 1.6%
● Low growth rates in- Bihar , UP, Odisha
● Acceleration of growth in – Gujarat, Maharastra, West Bengal, Tamil Nadu, Madhya Pradesh

Gujarat and Maharashtra as miracle growth economies because of the following reasons:
•Pre existing capabilities
•Liberalization
•Decentralization of economic power

1. What was this pre-existing capability? It turns out that this capability was something more
than a state's level of development or educational level or geography. It is best captured by
how diversified a state's manufacturing base was. This diversified base is probably a proxy
for some generalized capability_-human capital, entrepreneurial spirit, organisational capital
that could exploit a favorable economic environment.
2. Greater economic decentralization meant states could differentiate themselves, not least in
their ability to attract private-sector investment.
3. Liberalization: This was, of course, facilitated by the gradual dismantling of the industrial
licensing system that used regional equity as one of the primary criteria guiding industrial
investments. Further contributing to differentiation over this period was the rising trend in
private investment, as well as the falling trend in public investment, with private investment
likely to be more sensitive to differences in policies across states.