The Gist of Yojana: July 2014

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 country.

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 inflation.

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 2050.

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[1776],p.101) “The most valuable of all capital is that invested in human beings” (Alfred Marshall, 1961 [1890] 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 groups.

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.

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