The Gist of Yojana: July 2014
Economic growth in india- Performance and prospects
The most comprehensive indicator of economic growth in an
economy is the average annual growth in real Gross Domestic Product (GDP) that
is originating within the geographical boundary and measured at constant base
period prices. It would, therefore, reflect average incremental availability of
goods and services produced domestically in the economy over time. When the
growth of real GDP is adjusted for the population growth, it gives the average
annual growth of per capita real GDP and reflects closely the improvements in
standard of living enjoyed by people in the economy on an average over time.
This is particularly valid for large countries where the cross border flows of
goods and services are limited in relation to the amount produced within the
geographical boundary. These three average annual growth rates in: (i) real GDP,
(ii) population and (iii) per capita GDP (PCI) are very significant parameters
to reflect the performance and prospects of economic development in any country
over fairly long time period.
History of economic growth in India is both interesting and
educative. Comparable time series estimates of real GDP in India can be
stretched back till the year 1900 for meaningful analysis (Sivasubramonian,
2004; and Hatekar & Dongre, 2005). There is considerable research on attempting
periodization of the economic growth history in India to gain insights about
policy regimes and factors determining the performanc of the economy over long
periods of time (Hatekar & Dongre, 2005; Balakrishnan & Parameswaran, 2007; and
Dholakia, 2014). Accordingly, there are five distinct phases so far in the
history of economic growth in India: (i) 1900-1901 to 1950-51; (ii) 1950-51 to
1980-81; (iii) 1980-81 to 1991-92 to 2003-04; (v) 2003-04 to 2011-12.
The growth performance during the first phase when the
country was under the last 50 years of the British rule was the worst during all
the phases so far. Real GDP grew at around 1 percent annually and so did the
population. As a result, the per capita real income almost stagnated for the
first fifty years of the last century in India. Since the last fifty years of
the British rule in the country were perhaps the best perod for the Indian
economy under their rule of about 190 years in terms of development of all
physical and social overhead capital such as railways, ports, schools, colleges,
hospitals, banks and other institutions, it can be safely assumed that the
stagnation of real living standards of people observed during 1900-51 wa perhaps
the phenomenon during the entire period of 190 years of the British rule in the
After achieving independence, it was a major challenge to
break out from such vicious circles of low level equilibrium. Committing
ourselves to achieving self-sufficiency in general and the socialistic pattern
of society by adopting both economic and physical planning through creation of
public sector undertakings and imposing numerous controls, liceses and high
taxes, during the second phase (1950-81) we achieved the break through largely
through public sector interventions.
Although our share in world exports started falling
significantly, the real growth of GDP increased to about 3.5 percent annually
over the 30 years period, 1950-81. Because of a sharp fall in the death rate due
to improved provisioning of primary healthcare infrastructure in the rural
areas, the growth of population also increased substantially to about 2.2
percent annually and the per capita income registered annual growth of meagre
1.2 percent. It marked an increase of about 2.5 percentage points in the annual
growth of real GDP, but only about 1.2 percentage points in per capita real GDP.
The need for reforms in economic policies was duly recognized
in India in the early 1980s, not substantially lagging behind China. Serveral
economic reform measures got initiated during the 1980s with exchange rates
adjusting continually for differences in the inflation rates, change in the
approach of monetary policy to monetary targeting, instituting new institutions
in financial sector, announcement of long-term fiscal policy, reducing quota
requirements in selected commodities, focusing on telecom & information &
technology sector, etc.
The fourth phase saw accelerated pace of implementation of
some systematic economic policy reforms in various segments of the economy such
as fiscal policy, autonomy of the Reserve Bank of India (RBI), commercial
policy, capital markets, aviation sector, banking and insurance sector, etc.
Sequencing of the reforms was meticulously done starting with privatizing
selected sectors by allowing participation by the private sector into those
activities reserved hitherto for only the public sector undertakings,
liberalizing economic activities by abolishing licensing requirements, gradually
reducing protection by cutting tariff rates to integrate domestic economy with
the internationl economy, allowing foreign direct investments in the economy and
finally allowing domestic players to go global and become multinational
companies. The growth of real GDP further increased during this phase to 6
percent and per capita real GDP to more than 4 percent annually.
During the last phase so far covering the period 2003-04 to
2011-12, although no major economic reform took place, the economy was allowed
to consolidate and adjust to the reforms already made initially for 5-6 years.
However, during the last 4-5 years, some reforms got reversed effectively by
introduction of new controls, regulations, approval requirements, bans,
environmental and ecological balance oriented clearances and so on. Favourable
global factors prior to the year 2008 coupled with easy monetary policy and
movement towards fiscal consolidation resulted in high growth.
Prospects For Indian Economic Growth
In the recent past, the best economic performance of the
Indian economy was achieved during the year 2007-08. It is important to note
some relevant parameter values during the year because they have been actually
achieved by the nation in not too distant past and, therefore, can easily be
achieved again. It represents the lower bounderies on the potential existing in
the economy. In 2010-11, we came very close to acheving several of those
parameter values, which indicates the feasibility and practicality of such a
potential existing in the economy at present.
In 2007-08, the Indian economy clocked the growth of 9.3
percent in real GDP at factor cost, exports growth of 29 percent in dollar
terms, inflation rates of 4.7 percent (Wholesale Prices) & 6.2 percent (consumer
prices), foreign exchange reserves of $ 310 billion equivalent, average exchange
rate of Rs. 40.3 per dollar, current account deficit of only 1.3 percent of GDP,
combined fiscal deficit of 4 percent of GDP, combined revenue deficit of 0.2
percent of GDP and primary surplus of 0.9 percent of GDP. Thus, the year 2007-08
was outstanding in all relevant performance parameters except consumer
The performance of the economy slipped on all these
parameters sharply after the year 2007-08. International developments in terms
of financial & confidence crisis of 2008, increase in commodity prices including
oil prices, Eurozone sovereign debt crisis, etc. Led almost all developed
economies into severe recession and most of the developing economies to a
significant slowdown. Both fiscal and monetary boosts were provided all over
with a significant collaborative effort to emerge out of such a slump. Indian
economy could fast recover and emerged out of the slowdown initially in terms of
regaining the growth momentum, but failed to reign in the inflation, twin
deficits on fiscal & current account, steep depreciation of the currency and
loss in foreign exchange reserves.
India is among the few economies currently in the world
enjoying the demographic dividend. The proportion of population in the
employable age group of 20 years to 65 years is on the rise in the country and
is likely to continue rising till about 2027-28 as per the UN projections.
Thereafter it may stabilize for a while and then start falling. To attain the
current level of the ratrio, it may take another 15-20 years because the life
expectancy in the country is also likely to rise in the meantime, but the
further rise would be necessarily slower as we achieve higher levels. Since the
dependency ratio would be falling in the country till 2027-28, domestic savings
rate is most likely to rise further to reach the levels already reached in
south-east Asia of 40-42 percent of GDP. If the efficiency of capital resources
is maintained with the ICOR staying at 4.1, this in itself would generate an
annual growth rate of 10 percent of real GDP. This is purely domestically funded
growth potential. We expect that such a high growth momentum is most likely to
attract huge foreign investment in search of better returns and dynamic markets.
Similarly our companies would reach out to foreign destinations to expand their
markets. If we assume a net inflow of only 2 percent points, it would push our
annual growth potential upward to 10.5 percent over a fairly long period unto
Population growth rate is likely to slow down considerably
and would be about annual 1 percent on average. Then the per capita real GDP is
likely to grow at around 9 percent annually. This is a mind-boggling scenario
where the per capita real income would be doubling very 8 years. The
availability of goods and services would be increasing at an unprecedented rate
and so would be the consumption of people.With such a high speed of expansion in
the consumption basket, the consumption pattern would be changing drastically
and rapidly. The basket would be highly diversified and ever changing. Rate of
product obsolescence and depreciation would be very high. Preserving goods would
not be found viable and feasible.
In such a dynamic and fast pace of economic growth,
entrepreneurship and diversity of consumption would require considerable
resources devoted to research and development. This would require qualitatively
a much superior human resource development strategy. For a business enterprise,
to survive and maintain one’s relative position, rapid growth in labour
productivity, technological improvements and emphasis on exclusive products
would be the key. Emphasis and reliance on the private sector participation is
likely to address most of these concerns as a part of their self-interest.
Productive employment and empowering education : an agenda for india’s youth
“A man educated at the expense of much labour and time.. may
be compared to one... expensive machine... The work which he learns to
perform... over and above the usual wages of common labour will replace the
whole expenses of his education” (Adam Smith, 1904,p.101) “The most
valuable of all capital is that invested in human beings” (Alfred Marshall, 1961
 edition, p.564).
At least since 1776, economics has placed a premium on
education.It was one of the central pillars of Adam Smith’s work and was
underscored in good measure by the leading economist of the 19th century, Alfred
Marshall. It is one of the sharpest ironies of modern economic history that the
pre-eminent growth models of the 20th century, including those in the
Harrod-Domar and neoclassical traditions, diluted if not eliminated the emphasis
on human capital.
Empirical research accompanying this theoretical
re-orientation came in thick and fast. Almost first off the block, Barro (2001)
showed that for a sample of almost 100 countries over the period 1965 to 1995
that educational attainment had a strongly significant impact on the growth of
per capita GDP. In particular, this human capital variable had a stronger impact
than traditional investment conceived of as net accrual of capital. An
additional year of schooling leads to an increase of 0.44 percent in the growth
rate of per capita GDP1 and investment in education has a social rate of return
of 7 percent.
The “empirics” of economic growth rapidly became a key area
of research and the consensus in favour of the imprtance of education for
hastening economic growth remained a dominant theme. The basic message is clear.
Adam Smith and Alfred Marshall were right: from the point of view of medium to
long term economic growth, investment in education is at least as important as
investment in capital.
After India’s independence, the process of planning for
economic development largely reflected the above-mentioned disregard for human
capital accumulation and concentrated largely on issues of capital, labour and
to a lesser extent, technology.
India’s Demographic Dividend
While quantitative estimates of rates of return to investment
in education are unavailable, in view of the burgeoning youth population of
India, the social rate of return likely to be higher than 7 percent estimated by
Barro (2001), and last well into the future.
Table 1 summarizes the much discussed demographic dividend
India currently enjoys. It compares India’s current position and potential with
that of China, other countries that had similar (to India’s) per capita GDP in
Purchasing Power Parity dollars in 2009, the world and some major country
In 2012, 65 percent of India’s population was in the working
age group 15-64. Given the current population trends, this proportion is likely
to surpass that of China. Also, India already has the smallest dependency ratio
(old as percentage of working age population), which implies that, over time, if
the youth is productively engaged, India’s private financial savings and
physical capital investment are likely to boom.