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GLOBSYN BUSINESS

SCHOOL

STUDY OF THE INDIAN AND CHINA

ECONOMY

PRESENTED BY:

Learning Group 6 (PGPM-11B)

- Vasundhara Kedia

- Sourabh Soni

- Sudeshna Chowdhary

- Niloy Biswas

- Sauryadipta Basu


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STUDY OF INDIANAND CHINA ECONOMY

- Mandeep Pradhan

ACKNOWLEDGMENT

The time spent in the making of this project, as a part of our curriculum requirement of

PGPM course, is invaluable in terms of learning. The application of concepts to the project

added more depth and meaning to the knowledge gained in the classroom.

We wish to extend our gratitude to our faculty guide Prof. S Chatterjee, for guiding us

through the project with ample patience and understanding. We would also like to thank him

for reminding us of the core objectives of the project every time we diverted from it.

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TABLE OF CONTENTS

Abstract

PAGE NO.

1. Introduction 4-6

THE INDIAN ECONOMY

2. Pre colonial, colonial and post-colonial India 7- 15

3. Indian Planning Commission & Liberalisation 16- 20

4. Indias Economic Reforms and Currency Devaluation 21- 29

5. The Five Year Plans In India 30- 56

6. Fiscal Policy of India 57- 63

7. Monetary Policy of India 64- 65

8. Impact of Financial Crisis on Indian Economy 66-68

THE ECONOMY OF CHINA

9. Overview of the China Economy 69

10. Fiscal policy, Monetary policy, Inflation 70-73

11. Contrast between India and Chinas Economy 74-80

ANNEXURE

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1. INTRODUCTION

Indian Economy Overview

Indian economy is growing, despite the economic crisis that engulfed the world, stated MrAnand Sharma, Union Minister for Commerce, Industry and Textiles, Government of India,

while addressing a session at the 11thPravasi Bharatiya Divas 2013. Mr Sharma further

highlighted that the national investment rate is around 33-34 per cent, and is expected to

increase to 36 per cent by the end of 12th Five Year Plan (2012-17).

India has been adjourned the fifth best country in the world for dynamic growing businesses,

as per the Grant Thornton Global Dynamism Index. The index gives a reflection of how

suitable an environment the country offers for dynamic businesses.

Indian tax climate was also considered to be reasonably favourable and India continued to bean attractive investment destination, according to a survey conducted by Deloitte Touche

Tohmatsu Ltd (Deloitte).

Moreover, India was ranked fourth on Ernst & Young's (E&Y) renewable attractiveness

index, second on the solar index, and third on the wind index, as per the latest study by E&Y

and UBM India Pvt Ltd.

The Economic Scenario

India is expected to be the second largest manufacturing country in the next five years,

followed by Brazil as the third ranked country, according to Deloitte.

Some of the other important economic developments in the country are as follows:

The HSBC's Services Purchasing Managers' Index (PMI) touched a 12 month high at

57.5 points in January 2013 as compared to 55.6 in December 2012

The net direct tax collections in India rose by 13.70 per cent to record Rs 368,322

crore (US$ 67.96 billion) during April-December 2012, as compared to Rs 323,956

crore (US$ 59.77 billion) during the corresponding months in 2011

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Indian companies have raised US$ 4.29 billion, through external commercial

borrowings (ECBs) and foreign currency convertible bonds (FCCBs) in October

2012, to fund modernisation, foreign acquisitions, import of capital goods and onward

lending

The total value of private equity (PE) and mergers & acquisitions (M&A) deals in

November 2012 increased five-fold to US$ 10.1 billion, as per a study by Grant

Thornton India. The total value of PE deals in November 2012 rose to US$ 39 billion

from US$ 0.4 billion in November 2011, indicating that PE players preferred

concentrated exposure to their value investments

The cumulative amount of foreign direct investments (FDI) equity inflows into India

were worth US$ 187,804 million between April 2000 to December 2012, while FDI

equity inflow during April 2012 to December 2012 was recorded as US$ 16,946

million, according to the latest data published by Department of Industrial Policy andPromotion (DIPP)

Foreign institutional investors (FIIs) made a net investment of US$ 68.46 million in

the equity market and US$ 14.92 million in the debt market upto February 18, 2013,

according to data released by the Securities and Exchange Board of India (SEBI)

Growth Potential Story

The pharmaceutical market of India is expected to grow at a compound annual growthrate (CAGR) of 14-17 per cent over 2012-16 and is now ranked among the top five

pharmaceutical emerging markets globally

The ready-to-drink tea and coffee market in India is estimated to touch Rs 2,200 crore

(US$ 405.90 million) in next four years, according to estimates arrived at the World

Tea and Coffee Expo 2013

India's IT and business process outsourcing (BPO) sector exports are expected to

increase by 12-14 per cent in FY14 to touch US$ 84 billion - US$ 87 billion, as per

National Association of Software and Services Companies (Nasscom)

Indian manufacturing and natural resources industry plans to spend Rs 40,800 crore

(US$ 7.53 billion) on IT products and services in 2013, a growth of 9.1 per cent over

2012, according to Gartner. The telecommunications category remains the biggest

spending category and it is forecast to reach Rs 13,200 crore (US$ 2.43 billion) in

2013

The semiconductor market is expected to grow from US$ 6.03 billion in 2011 to US$

9.7 billion by 2015. In addition, the local demand and sourcing is estimated to record

US$ 3.6 billion by 2015

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The electronic system design and manufacturing (ESDM) sector of India is projected

to reach US$ 94.2 billion by 2015 from US$ 64.6 billion in 2011, according to a

report by the India Semiconductor Association (ISA) and Frost & Sullivan

The luxury car market of India is set for growth over the medium and long term,

according to Mr Philipp Von Sahr, President, BMW Group India. The market is

about 30,000 cars a year and is rising steadily, Mr Sahr added

The FM radio sector in India is expected to touch the Rs 2,300 crore (US$ 424.35

million) mark within three years of the Phase III licences' roll-out, as per estimates by

Confederation of Indian Industry (CII) and Ernst & Young. The sector is expected to

reach Rs 1,400 crore (US$ 258.30 million) with 245 private FM stations during

2012-13

The US$ 12 billion Indian foundry industry has lined up investments worth Rs 600

crore (US$ 110.70 million) over the next few years as it expands and adapts

environment-friendly measures to garner global market share

Indian infrastructure landscape would attract investments worth Rs 49,000 billion (US$

904.05 billion) during the 12th Five Year Plan period (2012-17), with at least 50 per cent

funding from the private sector, as per Government's projections.

Road Ahead

The Indian economy is estimated to grow at a higher rate of 6.7 per cent in 2013-14 due to

revival in consumption, according to a report by CRISIL. "India's GDP growth in 2013-14

will be supported by the revival of private sector consumption growth aided by higher growth

in agriculture, high government spending and lower interest rates," said Ms Roopa Kudva,

Managing Director and CEO, CRISIL.

"The Indian financial markets have witnessed favouritism among the investing diaspora

compared to its Asian counterparts such as South Korea, Taiwan, Thailand and Indonesia,"

according to a report by Mecklai Financial.

Exchange Rate: INR 1 = 0.01845 as on February 19, 2013

References: Ministry of Finance, Press Information Bureau (PIB), Media Report,

Department of Industrial Policy and Promotion (DIPP)

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Indian Economy before Colonial Period

The earliest known evident civilization which flourished on the Indian soil was the Indus

Valley Civilization. Historians believed that this civilization would have flourished between

the time frame of 2800 BC and 1800 BC. It is evident from the excavated cities and structuresthat the inhabitants of the Indus Valley practiced agriculture, domesticated animals and had

developed trade relationships between different cities. They are also known to have

developed a uniform system of weights and measures. Also, the inhabitants of Indus Valley

were one amongst the very first of people to have developed a network of well planned cities

with their application of urban planning. These planned cities were equipped with the worlds

first urban sanitation systems.

India had been successful to develop international trade since as early as the first century BC.

Historical evidences suggest that the Coromandel, the Malabar, the Saurashtra and

the Bengal coasts were excessively used for the transportation of goods via sea roots from

and towards India. In the ancient times, India conducted international trade mainly with parts

of Middle East, Southeast Asia, Europe and Africa. Overland international trade, conducted

via Khyber Pass, was also prevalent in ancient India.

Later, in medieval times, the Mughal Empire gave way to a centrally administered uniform

revenue policy and political stability in India which in turn lead to the further development of

trade and unified the nation. During this era, India was primarily an agrarian self-

sufficient economy which primarily depended on the primitive methods of agriculture. After

the downfall of the Mughal Empire, theeconomy of India was primarily governed by

the Maratha Empire which then ruled over most parts of India. Later, the Maratha defeat in

the third battle of Panipat disintegrated India into several Maratha confederate states which

raised a widespread political turmoil in the country. The economy of India turned highly

disturbed in most parts of the country during this phase, but some areas gained a local

prosperity too. Later, by the end of eighteenth century, the British East India Companywas

successful in being a part of the Indian political machinery, following which there was a

drastic change in the countrys economic activities and the trade conducted from

the Indian soil.

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Indian Economy during Colonial Period

During the reign of the British East India Company, there was a drastic shift in the

economic activities conducted across the country. More stress was laid on commercialization

of agriculture. This led to a change in the agricultural pattern across the nation. During thisphase of the Indian economy, there was a constant decline in the production of food grains

in the country which resulted to the mass impoverishment and destitution of farmers. Also, in

a short span after this shift of pattern, there were numerous famines raised in the country.

Though, after and during this phase, there was a sharp decline in the economic structure of

the country, but this was also the phase during which some major

and economically important developments took place. These developments include the

establishment of railways, telegraphs, common law and adversarial legal system. Also, it was

during this era that a civil service which essentially aimed to be free from the political

interference was established.

Post-Colonialism: Definition, Development and Examples from India

1. Post-colonialism in general

1.1 Definition

Post-colonialism is an intellectual direction (sometimes also called an era or the post-

colonial theory) that exists since around the middle of the 20 th century. It developed from

and mainly refers to the time after colonialism. The post-colonial direction was created as

colonial countries became independent. Nowadays, aspects of post-colonialism can be found

not only in sciences concerning history, literature and politics, but also in approach to culture

and identity of both the countries that were colonised and the former colonial powers.

However, post-colonialism can take the colonial time as well as the time after colonialism

into consideration.

1.2 Development

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The term decolonisation seems to be of particular importance while talking about post-

colonialism. In this case it means an intellectual process that persistently transfers the

independence of former-colonial countries into peoples minds. The basic idea of this process

is the deconstruction of old-fashioned perceptions and attitudes of power and oppression that

were adopted during the time of colonialism.First attempts to put this long-term policy of decolonising the minds into practice could be

regarded in the Indian population after India became independent from the British Empire in

1947.

However, post-colonialism has increasingly become an object of scientific examination since

1950 when Western intellectuals began to get interested in the Third World countries. In

the seventies, this interest lead to an integration of discussions about post-colonialism in

various study courses at American Universities. Nowadays it also plays a remarkable role at

European Universities.

A major aspect of post-colonialism is the rather violent-like, unbuffered contact or clash of

cultures as an inevitable result of former colonial times; the relationship of the colonial power

to the (formerly) colonised country, its population and culture and vice versa seems

extremely ambiguous and contradictory.

This contradiction of two clashing cultures and the wide scale of problems resulting from it

must be regarded as a major theme in post-colonialism: For centuries the colonial suppressor

often had been forcing his civilised values on the natives. But when the native population

finally gained independence, the colonial relicts were still omnipresent, deeply integrated in

the natives minds and were supposed to be removed.

So decolonisation is a process of change, destruction and, in the first place, an attempt to

regain and lose power. While natives had to learn how to put independence into practice,

colonial powers had to accept the loss of power over foreign countries. However, both sides

have to deal with their past as suppressor and suppressed.

This complicated relationship mainly developed from the Eurocentric perspective from which

the former colonial powers saw themselves: Their colonial policy was often criticised as

arrogant, ignorant, brutal and simply nave. Their final colonial failure and the total

independence of the once suppressed made the process of decolonisation rather tense and

emotional.

Post-colonialism also deals with conflicts of identity and cultural belonging. Colonial powers

came to foreign states and destroyed main parts of native tradition and culture; furthermore,

they continuously replaced them with their own ones. This often lead to conflicts when

countries became independent and suddenly faced the challenge of developing a new

nationwide identity and self-confidence.

As generations had lived under the power of colonial rulers, they had more or less adopted

their Western tradition and culture. The challenge for these countries was to find an

individual way of proceeding to call their own. They could not get rid of the Western way of

life from one day to the other; they could not manage to create a completely new one either.

On the other hand, former colonial powers had to change their self-assessment. This paradoxidentification process seems to be what decolonisation is all about, while post-colonialism is

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the intellectual direction that deals with it and maintains a steady analysis from both points of

view.

So how is this difficult process of decolonisation being done? By the power of language, even

more than by the use of military violence. Language is the intellectual means by which post-

colonial communication and reflection takes place. This is particularly important as most

colonial powers tried to integrate their language, the major aspect of their civilised culture, in

foreign societies.

A lot of Indian books that can be attached to the era of post-colonialism, for instance, are

written in English. The cross-border exchange of thoughts from both parties of the post-

colonial conflict is supported by the use of a shared language.

To give a conclusion of it all, one might say that post-colonialism is a vivid discussion about

what happened with the colonial thinking at the end of the colonial era. What legacy arouse

from this era? What social, cultural and economical consequences could be seen and are stillvisible today? In these contexts, one examines alternating experiences of suppression,

resistance, gender, migration and so forth. While doing so, both the colonising and colonised

side are taken into consideration and related to each other. The main target of post-

colonialism remains the same: To review and to deconstruct one-sided, worn-out attitudes in

a lively discussion of colonisation.

2. The post-colonial experience in India

2.1 History of Indian colonialism

In the 16th century, European powers began to conquer small outposts along the Indian coast.

Portugal, the Netherlands and France ruled different regions in India before the British East

India Company was founded in 1756.

The British colonialists managed to control most parts of India while ruling the key cities

Calcutta, Madras and Bombay as the main British bases. However, there still remained a few

independent regions (Kashmir among others) whose lords were loyal to the British Empire.

In 1857, the first big rebellion took place in the north of India. The incident is also named

First war of Indian Independence, the Sepoy Rebellion or the Indian Mutiny,

depending on the individual perspective. This was the first time Indians rebelled in massive

numbers against the presence and the rule of the British in South Asia. The rebellion failed

and the British colonialists continued their rule.

In 1885, the National Indian Congress (popularly called Congress) was founded. It

demanded that the Indians should have their proper legitimate share in the government. From

then on, the Congress developed into the main body of opposition against British colonial

rule. Besides, a Muslim anti-colonial organisation was founded in 1906, called the Muslim

League.

While most parts of the Indian population remained loyal to the British colonial power during

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the First World War, more and more Muslim people joined the Indian independence

movement since they were angry about the division of the Ottoman Empire by the British.

The non-violent resistance against British colonial rule, mainly initiated and organised by

Mahatma Gandhi and Jawaharlal Nehru, finally lead to independence in 1947.

At the same time, the huge British colony was split into two nations: The secular Indian

Union and the smaller Muslim state of Pakistan. The Muslim League had demanded for an

independent Muslim state with a majority of Muslims.

India became a member of the British Commonwealth after 1947.

2.2 Post-colonial development in India

The Partition of India (also called the Great Divide) lead to huge movements and an ethnicconflict across the Indian-Pakistani border. While around 10 million Hindus und Sikhs were

expelled from Pakistan, about 7 million Muslims crossed the border to from India to Pakistan.

Hundreds of thousands of people died in this conflict. Ever since these incidents, there have

been tensions between India and Pakistan which lead to different wars particularly in the

Kashmir region.

For decades the Congress Party ruled the democratic country which had become a republic

with its own constitution in 1950. In 1977 the opposition gained the majority of votes. In

1984, after the Congress Party had regained the majority, conflicts with the cultural minority

of the Sikhs lead to the assassination of the Indian prime minister Indira Ghandi.

Today, apart from the significant economic progress, India is still facing its old problems:

Poverty, overpopulation, environmental pollution as well as ethnic and religious conflicts

between Hindus and Muslims. Additionally, the Kashmir conflict has not come to an end yet,

while both Pakistan and Indian are threatening each other with their arsenals of atomic

weapons.

Concerning post-colonial literature, Edward Saids book Orientalism (published in 1978) is

regarded as the beginning of post-colonial studies. In this book the author analyses how

European states initiated colonialism as a result of what they called their own racial

superiority.

The religious-ethnic conflicts between different groups of people play an important role in

the early years of post-colonialism. Eye-witnesses from both sides of the Indian-Pakistani

conflict wrote about their feelings and experience during genocide, being confronted to blind

and irrational violence and hatred. The Partition is often described as an Indian trauma.

One example for a post-colonial scriptwriter who wrote about this conflict is Saddat Hasan

Manto (1912 1955). He was forced to leave Bombay and to settle in Lahore, Pakistan. He

published a collection of stories and sketches (Mottled Dawn) that deal with this dark era

of Indian history and its immense social consequences and uncountable tragedies.

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Furthermore, there are many different approaches to the topic of intercultural exchange

between the British and the Indian population. Uncountable essays and novels deal with the

ambiguous relationship between these two nations. One particularly interesting phenomenon

is that authors from both sides try to write from different angles and perspectives and in that

way to show empathy with their cultural counterpart.The most famous novelist who wrote about these social and cultural exchanges is Salman

Rushdie. Rushdie, who won the booker prize among various others, was born in India, but

studied in England and started writing books about India and the British in the early eighties.

His funny, brave, metaphoric and sometimes even ironical way of writing offers a multi-

perspective approach to the post-colonial complex. This can be also seen in his book

Midnights Children. In the past, Salman Rushdie was also repeatedly threatened by Irani

fundamentalists because of his critical writing about Muslim extremism in the Middle East.

Another famous post-colonial novel is Heat and Dust (published in 1975) by Ruth Prawer

Jhabvala that contains two plot set in different times: One about a British lady starting anaffair with a local Indian prince in the 1920s, the other one set in the 1970s, featuring young

Europeans on a hippie trail who claim they have left behind Western civilisation and are

trying to some spiritual home among Indian gurus.

Bollywood has become a notorious synonym for the uprising Indian film industry in recent

years. Young Indian scriptwriters have discovered post-colonial issues as themes for their

movies and as a way of dealing with the changeful past of their country.

Concerning the integration of Western values in the Indian population and culture, one can

say that the British influence is still omnipresent in the Asian subcontinent. The reason forthis can be also found in the persistence of the English language.

Many Indians are conversant with the English language, because the British colonialists

intended to export their values and culture by teaching the Indian population their language.

This was regarded as the basic fundament for further education.

What about the relationship between India and the United Kingdom today? It is a special one,

and of course still not without tensions between these two nations that refer to the time of

colonialism which from our retro perspective is not at all so far away.

India has managed to become an independent state with its own political system and is still

working to find its own identity. The longer the process of decolonisation lasts, the more weget the impression that only a middle course between the acceptance of British legacies and

the creation of a new unique Indian self-confidence will be the right way to go for India.

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Indian Economy before Liberalization

After independence, till 1991, the economic policies of India were primarily inspired by the

Soviet economic planning under which a strong emphasis was laid on increasing the domestic

self-sufficiency and reducing the reliance on imports. The economic policies of India duringthis phase were primarily protectionist and marked by excessive economic interventions and

business regulations. Also, during this era the major concern of the government was to

develop large and heavy public sector industries.

The economic planning process during this phase was mainly conducted centrally through

the Five Year Planning process of thePlanning commission. This structure of economic

planning, through Five Year Plans, was analogous to the planning process of the Soviet

Union. Industries like mining, steel, machine tools, insurance, telecommunications and power

plants were effectively nationalized during this era.

The Government of India, under the leadership of Indias first Prime Minister, Jawaharlal

Nehru, along with statistician Prasanta Chandra Mahalanobis formulated an economic

policy which laid a prime focus on the development of heavy industry in country by both the

public and the private sector. However, despite all its efforts, the economy of India was

unsuccessful to grow at pace with other Asian countries for the first three decades after

independence.

Later, in 1965, the advent of Green Revolution in country, triggered by the improved

irrigation facilities, increased use of fertilizers and the introduction of high-yielding varieties

of seeds improved the economic conditions of the country and enabled a better link betweenindustry and agriculture in India.

The economic policies of the colonial rulers were at the centre of a controversy in the late

19th century India. Whereas the colonial administration sought to project its policies as

beneficial to the country, the nationalist writers and sympathetic British commentators

attacked these policies as exploitative and oppressive.

Dadabhai Naoroji, R.C. Dutt and William Digby were some of the famous critics ofgovernment policies. The economic history of India, as we know it, may be said to have

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begun during this period. D.R. Gadgil, Vera Anstey and D.H. Buchanan followed in their

footsteps in taking up the economic history of the colonial period. Jaduanth Sarkar and W.H.

Moreland wrote about the Mughal economy.

In the post-independence period, economic history became an established field of study and

several studies were undertaken on various periods of Indian history covering several aspects

of economy. The emergence of economics as a discipline in the eighteenth century led in due

course to the development of a new branch in history called economic history.

The progenitors of economics were Adam Smith and other classical economists. India was

very much in the vision of the classical economists, a group of thinkers in England during the

Industrial Revolution. They advocated lays faire and minimizing of state intervention in the

economy. Adam Smith, the foremost classical economist, condemned the East India

Company in its new role as the ruling power in India. In his view, the Company's trading

monopoly ran counter to the principle of the freedom of the market.

Economics underwent a theoretical transformation in the early twentieth century under the

influence of John Maynard Keynes, who advocated strategic economic intervention by the

government for promoting welfare and employment. Keynes, too, thought deeply about India

while developing his new economic theories, and his earliest majorwork.

Indian Currency and Finance (London 1913), illustrated his notions of good monetary

management of the economy. It is also noteworthy that the early classical economists, such as

Ricardo, influenced the thinking of a group of Utilitarian administrators who set about

reforming the administration of India in the nineteenth century.

Above all, the influence of Adam Smith is noticeable in the end of the Company's monopoly

by the Charter Acts of 1813 and 1833. Not surprisingly, therefore, historians have paid close

attention to the connection between the evolution of economic thought in England and the

question of reform of the colonial administration in India.

Classical political economy in England laid the foundations for the laissez faire economics of

the Raj in the nineteenth century. Keynesian economics, on the other hand, contained the

germs of the development economics of the mid-twentieth century both types of economics

affected the state and the economy in India, and stimulated debates in the economic history of

India.

For the colonial period, R.C. Dutt's Economic History was followed by a series of works:

D.R. Gadgil, The Industrial Evolution of India in Recent Times (1924); Vera Anstey, The

Economic Development of India (1929); and D.H. Buchanan, and The Development of

Capitalistic Enterprise in India (New York 1934). More recently, there has been a collective

two-volume survey; Tapan Raychaudhuri and Irfan Habib (eds.).

The Cambridge Economic History of India, Vol 1, C.1200 - C.1750 (Cambridge 1982); and

Dharma Kumar, The Cambridge Economic History of India, vol. 2 C.1757 - C.1970

(Cambridge, 1983). Daniel Houston Buchanan, an American author, was of the opinion that

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other worldly values and the caste system inhibited economic development in India. D.R.

Gadgil, who updated his near classic work several times, emphasized, on the contrary, more

strictly economic factors: the difficulties of capital mobilization on account of the absolute

smallness of capital resources in respect to the size of the population, the late development of

organized banking, and the seasonal fluctuations of a monsoon economy.

A dispassionate economist, he did not blame either foreign rule or the Indian social structure

for the absence of an industrial revolution in India; some of the Western contributors to the

second volume of The Cambridge Economic History, on the other hand, showed a disposition

to challenge R.C. Dutt's vision of the negative impact of colonialism, and they dwelt instead

on the technological backwardness of the Indian economy. This, in their view, inhibited

industrial development and capitalist enterprise during the colonial period.

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THE INDIAN PLANNING COMMISSION

HISTORY

The Planning Commission was set up by a Resolution of the Government of India in March1950 in pursuance of declared objectives of the Government to promote a rapid rise in thestandard of living of the people by efficient exploitation of the resources of the country,increasing production and offering opportunities to all foremploymentin the service of thecommunity. The Planning Commission was charged with the responsibility of makingassessment of all resources of the country, augmenting deficient resources, formulating plansfor the most effective and balanced utilisation of resources and determining priorities.Jawaharlal Nehru was the first Chairman of the Planning Commission.The first Five-year Plan was launched in 1951 and two subsequent five-year plans wereformulated till 1965, when there was a break because of the Indo-Pakistan Conflict. Twosuccessive years of drought, devaluation of the currency, a general rise in prices and erosion

of resources disrupted the planning process and after three Annual Plans between 1966 and1969, the fourth Five-year plan was started in 1969.The Eighth Plan could not take off in 1990 due to the fast changing political situation at theCentre and the years 1990-91 and 1991-92 were treated as Annual Plans. The Eighth Planwas finally launched in 1992 after the initiation of structural adjustment policies.For the first eight Plans the emphasis was on a growing public sector with massiveinvestments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, theemphasis on the public sector has become less pronounced and the current thinking on

planning in the country, in general, is that it should increasingly be of an indicative nature.

FUNCTIONS

The 1950 resolution setting up the PlanningCommission outlined its functions as to:a. Make an assessment of the material, capital and human resources of the country,

including technical personnel, and investigate the possibilities of augmenting such ofthese resources as are found to be deficient in relation to the nations requirement;

b. Formulate a Plan for the most effective and balanced utilisation of country'sresources;

c. On a determination of priorities, define the stages in which the Plan should be carriedout and propose the allocation of resources for the due completion of each stage;

d. Indicate the factors which are tending to retard economic development, anddetermine the conditions which, in view of the current social and political situation,

should be established for the successful execution of the Plan;

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e. Determine the nature of the machinery which will be necessary for securing thesuccessful implementation of each stage of the Plan in all its aspects;

f. Appraise from time to time the progress achieved in the execution of each stage ofthe Plan and recommend the adjustments of policy and measures that such appraisalmay show to be necessary; and

g. Make such interim or ancillary recommendations as appear to it to be appropriateeither for facilitating the discharge of the duties assigned to it, or on a considerationof prevailing economic conditions, current policies, measures and development

programmes or on an examination of such specific problems as may be referred to itfor advice by Central or State Governments.

EVOLVING FUNCTIONS

From a highly centralised planning system, the Indian economy is gradually moving towardsindicative planning where Planning Commission concerns itself with the building of a longterm strategic vision of the future and decide on priorities ofnation. It works out sectoraltargets and provides promotional stimulus to the economy to grow in the desired direction.

Planning Commission plays an integrative role in the development of a holistic approach tothe policy formulation in critical areas of human and economic development. In the socialsector, schemes which require coordination and synthesis like rural health, drinking water,rural energy needs, literacy and environment protection have yet to be subjected tocoordinated policy formulation. It has led to multiplicity of agencies. An integrated approachcan lead to better results at much lower costs.

The emphasis of the Commission is on maximising the output by using our limited resources

optimally. Instead of looking for mere increase in the plan outlays, the effort is to look forincreases in the efficiency of utilisation of the allocations being made.

With the emergence of severe constraints on available budgetary resources, the resourceallocation system between the States and Ministries of the Central Government is understrain. This requires the Planning Commission to play a mediatory and facilitating role,keeping in view the best interest of all concerned. It has to ensure smooth management of thechange and help in creating a culture of high productivity and efficiency in the Government.The key to efficient utilisation of resources lies in the creation of appropriate self-managedorganisations at all levels. In this area, Planning Commission attempts to play a systemschange role and provide consultancy within the Government for developing better systems.

In order to spread the gains of experience more widely, Planning Commission also plays aninformation dissemination role.

India-Liberalization in the Early 1990s Growth since 1980

Increased borrowing from foreign sources in the late 1980s, which helped fuel economicgrowth, led to pressure on the balance of payments. The problem came to a head in August1990 when Iraq invaded Kuwait, and the price of oil soon doubled. In addition, many Indianworkers resident in Persian Gulf states either lost their jobs or returned home out of fear fortheir safety, thus reducing the flow of remittances (see Size and Composition of the Work

Force, this ch.). The direct economic impact of the Persian Gulf conflict was exacerbated bydomestic social and political developments. In the early 1990s, there was violence over two

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domestic issues: the reservation of a proportion of public-sector jobs for members ofScheduled Castes (see Glossary) and the Hindu-Muslim conflict at Ayodhya (see PublicWorship, ch. 3; Political Issues, ch. 8). The central government fell in November 1990 andwas succeeded by a minority government. The cumulative impact of these events shookinternational confidence in India's economic viability, and the country found it increasingly

difficult to borrow internationally. As a result, India made various agreements with theInternational Monetary Fund (IMF--see Glossary) and other organizations that includedcommitments to speed up liberalization (see United Nations, ch. 9).

In the early 1990s, considerable progress was made in loosening government regulations,especially in the area of foreign trade. Many restrictions on private companies were lifted,and new areas were opened to private capital. However, India remains one of the world'smost tightly regulated major economies. Many powerful vested interests, including privatefirms that have benefited from protectionism, labor unions, and much of the bureaucracy,oppose liberalization. There is also considerable concern that liberalization will reinforceclass and regional economic disparities.

The balance of payments crisis of 1990 and subsequent policy changes led to a temporarydecline in the GDP growth rate, which fell from 6.9 percent in FY 1989 to 4.9 percent in FY1990 to 1.1 percent in FY 1991. In March 1995, the estimated growth rate for FY 1994 was5.3 percent. Inflation peaked at 17 percent in FY 1991, fell to 9.5 percent in FY 1993, andthen accelerated again, reaching 11 percent in late FY 1994. This increase was attributed to asharp increase in prices and a shortfall in such critical sectors as sugar, cotton, and oilseeds.Many analysts agree that the poor suffer most from the increased inflation rate and reducedgrowth rate.

Data as of September 1995

The rate of growth improved in the 1980s. From FY 1980 to FY 1989, the economy grew atan annual rate of 5.5 percent, or 3.3 percent on a per capita basis. Industry grew at an annualrate of 6.6 percent and agriculture at a rate of 3.6 percent. A high rate of investment was amajor factor in improved economic growth. Investment went from about 19 percent of GDPin the early 1970s to nearly 25 percent in the early 1980s. India, however, required a higherrate of investment to attain comparable economic growth than did most other low-incomedeveloping countries, indicating a lower rate of return on investments. Part of the adverseIndian experience was explained by investment in large, long-gestating, capital-intensive

projects, such as electric power, irrigation, and infrastructure. However, delayed

completions, cost overruns, and under-use of capacity were contributing factors.

Private savings financed most of India's investment, but by the mid-1980s further growth inprivate savings was difficult because they were already at quite a high level. As a result,during the late 1980s India relied increasingly on borrowing from foreign sources (see Aid,this ch.). This trend led to a balance of payments crisis in 1990; in order to receive newloans, the government had no choice but to agree to further measures of economicliberalization. This commitment to economic reform was reaffirmed by the government thatcame to power in June 1991.

India's primary sector, including agriculture, forestry, fishing, mining, and quarrying,

accounted for 32.8 percent of GDP in FY 1991 (see table 17, Appendix). The size of theagricultural sector and its vulnerability to the vagaries of the monsoon cause relatively large

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fluctuations in the sector's contribution to GDP from one year to another (see Crop Output,ch. 7).

In FY 1991, the contribution to GDP of industry, including manufacturing, construction, andutilities, was 27.4 percent; services, including trade, transportation, communications, real

estate and finance, and public- and private-sector services, contributed 39.8 percent. Thesteady increase in the proportion of services in the national economy reflects increasedmarket-determined processes, such as the spread of rural banking, and government activities,such as defense spending (see Agricultural Credit, ch. 7; Defense Spending, ch. 10).

Despite a sometimes disappointing rate of growth, the Indian economy was transformedbetween 1947 and the early 1990s. The number of kilowatt-hours of electricity generated, forexample, increased more than fiftyfold. Steel production rose from 1.5 million tons a year to14.7 million tons a year. The country produced space satellites and nuclear-power plants, andits scientists and engineers produced an atomic explosive device (see Major ResearchOrganizations, this ch.; Space and Nuclear Programs, ch. 10). Life expectancy increasedfrom twenty-seven years to fifty-nine years. Although the population increased by 485million between 1951 and 1991, the availability of food grains per capita rose from 395grams per day in FY 1950 to 466 grams in FY 1992 (see Structure and Dynamics, ch. 2).

However, considerable dualism remains in the Indian economy. Officials and economistsmake an important distinction between the formal and informal sectors of the economy. Theinformal, or unorganized, economy is largely rural and encompasses farming, fishing,forestry, and cottage industries. It also includes petty vendors and some small-scalemechanized industry in both rural and urban areas. The bulk of the population is employed inthe informal economy, which contributes more than 50 percent of GDP. The formal

economy consists of large units in the modern sector for which statistical data are relativelygood. The modern sector includes large-scale manufacturing and mining, major financial andcommercial businesses, and such public-sector enterprises as railroads, telecommunications,utilities, and government itself.

The greatest disappointment of economic development is the failure to reduce moresubstantially India's widespread poverty. Studies have suggested that income distributionchanged little between independence and the early 1990s, although it is possible that the

poorer half of the population improved its position slightly. Official estimates of theproportion of the population that lives below the poverty line tend to vary sharply from yearto year because adverse economic conditions, especially rises in food prices, are capable of

lowering the standard of living of many families who normally live just above thesubsistence level. The Indian government's poverty line is based on an income sufficient toensure access to minimum nutritional standards, and even most persons above the povertyline have low levels of consumption compared with much of the world.

Estimates in the late 1970s put the number of people who lived in poverty at 300 million, ornearly 50 percent of the population at the time. Poverty was reduced during the 1980s, and inFY 1989 it was estimated that about 26 percent of the population, or 220 million people,lived below the poverty line. Slower economic growth and higher inflation in FY 1990 andFY 1991 reversed this trend. In FY 1991, it was estimated that 332 million people, or 38

percent of the population, lived below the poverty line.

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Farmers and other rural residents make up the large majority of India's poor. Some own verysmall amounts of land while others are field hands, seminomadic shepherds, or migrantworkers. The urban poor include many construction workers and petty vendors. The bulk ofthe poor work, but low productivity and intermittent employment keep incomes low. Povertyis most prevalent in the states of Orissa, Bihar, Uttar Pradesh, and Madhya Pradesh, and least

prevalent in Haryana, Punjab, Himachal Pradesh, and Jammu and Kashmir.

By the early 1990s, economic changes led to the growth in the number of Indians withsignificant economic resources. About 10 million Indians are considered upper class, androughly 300 million are part of the rapidly increasing middle class. Typical middle-classoccupations include owning a small business or being a corporate executive, lawyer,

physician, white-collar worker, or land-owning farmer. In the 1980s, the growth of themiddle class was reflected in the increased consumption of consumer durables, such astelevisions, refrigerators, motorcycles, and automobiles. In the early 1990s, domestic andforeign businesses hoped to take advantage of India's economic liberalization to increase therange of consumer products offered to this market.

Housing and the ancillary utilities of sewer and water systems lag considerably behind thepopulation's needs. India's cities have large shantytowns built of scrap or readily availablenatural materials erected on whatever space is available, including sidewalks. Such dwellingslack piped water, sewerage, and electricity. The government has attempted to build housingfacilities and utilities for urban development, but the efforts have fallen far short of demand.Administrative controls and other aspects of government policy have discouraged many

private investors from constructing housing units.

Liberalization in the Early 1990s

Increased borrowing from foreign sources in the late 1980s, which helped fuel economicgrowth, led to pressure on the balance of payments. The problem came to a head in August1990 when Iraq invaded Kuwait, and the price of oil soon doubled. In addition, many Indianworkers resident in Persian Gulf states either lost their jobs or returned home out of fear fortheir safety, thus reducing the flow of remittances (see Size and Composition of the WorkForce, this ch.). The direct economic impact of the Persian Gulf conflict was exacerbated bydomestic social and political developments. In the early 1990s, there was violence over twodomestic issues: the reservation of a proportion of public-sector jobs for members ofScheduled Castes (see Glossary) and the Hindu-Muslim conflict at Ayodhya (see Public

Worship, ch. 3; Political Issues, ch. 8). The central government fell in November 1990 andwas succeeded by a minority government. The cumulative impact of these events shookinternational confidence in India's economic viability, and the country found it increasinglydifficult to borrow internationally. As a result, India made various agreements with theInternational Monetary Fund (IMF--see Glossary) and other organizations that includedcommitments to speed up liberalization (see United Nations, ch. 9).

In the early 1990s, considerable progress was made in loosening government regulations,especially in the area of foreign trade. Many restrictions on private companies were lifted,and new areas were opened to private capital. However, India remains one of the world'smost tightly regulated major economies. Many powerful vested interests, including private

firms that have benefited from protectionism, labor unions, and much of the bureaucracy,

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oppose liberalization. There is also considerable concern that liberalization will reinforceclass and regional economic disparities.

The balance of payments crisis of 1990 and subsequent policy changes led to a temporarydecline in the GDP growth rate, which fell from 6.9 percent in FY 1989 to 4.9 percent in FY

1990 to 1.1 percent in FY 1991. In March 1995, the estimated growth rate for FY 1994 was5.3 percent. Inflation peaked at 17 percent in FY 1991, fell to 9.5 percent in FY 1993, andthen accelerated again, reaching 11 percent in late FY 1994. This increase was attributed to asharp increase in prices and a shortfall in such critical sectors as sugar, cotton, and oilseeds.Many analysts agree that the poor suffer most from the increased inflation rate and reducedgrowth rate

INDIA'S ECONOMIC REFORMS

The reform process in India was initiated with the aim of accelerating the pace of economicgrowth and eradication of poverty. The process of economic liberalization in India can betraced back to the late 1970s. However, the reform process began in earnest only in July1991. It was only in 1991 that the Government signaled a systemic shift to a more openeconomy with greater reliance upon market forces, a larger role for the private sectorincluding foreign investment, and a restructuring of the role of Government.The reforms of the last decade and a half have gone a long way in freeing the domesticeconomy from the control regime. An important feature of India's reform programme is thatit has emphasized gradualism and evolutionary transition rather than rapid restructuring or"shock therapy". This approach was adopted since the reforms were introduced in June 1991in the wake a balance of payments crisis that was certainly severe. However, it was not a

prolonged crisis with a long period of non-performance.The economic reforms initiated in 1991 introduced far-reaching measures, which changedthe working and machinery of the economy. These changes were pertinent to the following:

Dominance of the public sector in the industrial activity

Discretionary controls on industrial investment and capacity expansion

Trade and exchange controls

Limited access to foreign investment

Public ownership and regulation of the financial sector

The reforms have unlocked India's enormous growth potential and unleashed powerfulentrepreneurial forces. Since 1991, successive governments, across political parties, havesuccessfully carried forward the country's economic reform agenda.

Reforms in Industrial Policy

Industrial policy was restructured to a great extent and most of the central governmentindustrial controls were dismantled. Massive deregulation of the industrial sector was donein order to bring in the element of competition and increase efficiency. Industrial licensing

by the central government was almost abolished except for a few hazardous andenvironmentally sensitive industries. The list of industries reserved solely for the publicsector -- which used to cover 18 industries, including iron and steel, heavy plant andmachinery, telecommunications and telecom equipment, minerals, oil, mining, air transportservices and electricity generation and distribution was drastically reduced to three: defense

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aircrafts and warships, atomic energy generation, and railway transport. Further, restrictionsthat existed on the import of foreign technology were withdrawn.

Reforms in Trade Policy

It was realized that the import substituting inward looking development policy was no longersuitable in the modern globalising world.Before the reforms, trade policy was characterized by high tariffs and pervasive importrestrictions. Imports of manufactured consumer goods were completely banned. For capitalgoods, raw materials and intermediates, certain lists of goods were freely importable, but formost items where domestic substitutes were being produced, imports were only possible withimport licenses. The criteria for issue of licenses were non-transparent, delays were endemicand corruption unavoidable. The economic reforms sought to phase out import licensing andalso to reduce import duties.Import licensing was abolished relatively early for capital goods and intermediates which

became freely importable in 1993, simultaneously with the switch to a flexible exchange rateregime. Quantitative restrictions on imports of manufactured consumer goods andagricultural products were finally removed on April 1, 2001, almost exactly ten years afterthe reforms began, and that in part because of a ruling by a World Trade Organizationdispute panel on a complaint brought by the United States.

Financial sector reforms

Financial sector reforms have long been regarded as an integral part of the overall policy

reforms in India. India has recognized that these reforms are imperative for increasing theefficiency of resource mobilization and allocation in the real economy and for the overallmacroeconomic stability. The reforms have been driven by a thrust towards liberalizationand several initiatives such as liberalization in the interest rate and reserve requirements have

been taken on this front. At the same time, the government has emphasized on strongerregulation aimed at strengthening prudential norms, transparency and supervision to mitigatethe prospects of systemic risks. Today the Indian financial structure is inherently strong,functionally diverse, efficient and globally competitive. During the last fifteen years, theIndian financial system has been incrementally deregulated and exposed to internationalfinancial markets along with the introduction of new instruments and products.

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Devaluation of the Rupee: Tale of Two Years, 1966 and 1991

Since its Independence in 1947, India has faced two major financial crises and twoconsequent devaluations of the rupee. These crises were in 1966 and 1991 and, as we plan toshow in this paper, they had similar causes. Foreign exchange reserves are an extremelycritical aspect of any countrys ability to engage in commerce with other countries. A largestock of foreign currency reserves facilitates trade with other nations and lowers transactioncosts associated with international commerce. If a nation depletes its foreign currencyreserves and finds that its own currency is not accepted abroad, the only option left to thecountry is to borrow from abroad. However, borrowing in foreign currency is built upon theobligation of the borrowing nation to pay back the loan in the lenders own currency or insome other hard currency. If the debtor nation is not credit-worthy enough to borrow from

a private bank or from an institution such as the IMF, then the nation has no way of payingfor imports and a financial crisis accompanied by devaluation and capital flight results.The destabilising effects of a financial crisis are such that any country feels strong pressurefrom internal political forces to avoid the risk of such a crisis, even if the policies adoptedcome at large economic cost. To avert a financial crisis, a nation will typically adopt policiesto maintain a stable exchange rate to lessen exchange rate risk and increase internationalconfidence and to safeguard its foreign currency (or gold) reserves. The restrictions that acountry will put in place come in two forms: trade barriers and financial restrictions.Protectionist policies, particularly restrictions on imports of goods and services, belong tothe former category and restrictions on the flow of financial assets or money acrossinternational borders are in the latter category. Furthermore, these restrictions on

international economic activity are often accompanied by a policy of fixed or managedexchange rates. When the flow of goods, services, and financial capital is regulated tightlyenough, the government or central bank becomes strong enough, at least in theory, to dictatethe exchange rate. However, despite these policies, if the market for a nations currency istoo weak to justify the given exchange rate, that nation will be forced to devalue its currency.That is, the price the market is willing to pay for the currency is less than the price dictated

by the government.

The 1966 Devaluation

As a developing economy, it is to be expected that India would import more than it exports.Despite government attempts to obtain a positive trade balance, India has had consistent

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balance of payments deficits since the 1950s. The 1966 devaluation was the result of the firstmajor financial crisis the government faced. As in 1991, there was significant downward

pressure on the value of the rupee from the international market and India was faced withdepleting foreign reserves that necessitated devaluation. There is a general agreement amongeconomists that by 1966, inflation had caused Indian prices to become much higher than

world prices at the pre-devaluation exchange rate. When the exchange rate is fixed and acountry experiences high inflation relative to other countries, that countrys goods becomemore expensive and foreign goods become cheaper. Therefore, inflation tends to increaseimports and decrease exports. Since 1950, India ran continued trade deficits that increased inmagnitude in the 1960s. Furthermore, the Government of India had a budget deficit problemand could not borrow money from abroad or from the private corporate sector, due to thatsectors negative savings rate. As a result, the government issued bonds to the RBI, whichincreased the money supply. In the long run, there is a strong link between increases inmoney supply and inflation and the data presented later in this paper support this link.

As the following tables show, growth of M1 and M2 were quite high during the 1960s andinflation was similarly high. Through restrictions on currency trading and convertibility aswell as export subsidisation and quantitative restrictions on imports, India was able tomaintain its unjustified exchange rate while experiencing inflation until 1966 when it faced asevere shortage of foreign reserves.

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As India continued to experience deficits in trade and the government budget, the countrywas aided significantly by the international community. In the period of 1950 through 1966,foreign aid was never greater than the total trade deficit of India except for 1958.

Nevertheless, foreign aid was substantial and helped to postpone the rupees final reckoninguntil 1966. In 1966, foreign aid was finally cut off and India was told it had to liberalise itsrestrictions on trade before foreign aid would again materialise. The response was the

politically unpopular step of devaluation accompanied by liberalisation. When India still didnot receive foreign aid, the government backed off its commitment to liberalisation.According to T N Srinivasan, devaluation was seen as capitulation to external pressurewhich made liberalisation politically suspect (Srinivasan, pp 139).

Two additional factors played a role in the 1966 devaluation. The first was Indias war withPakistan in late 1965. The US and other countries friendly towards Pakistan, withdrewforeign aid to India, which further necessitated devaluation. In addition, the large amount ofdeficit spending required by any war effort also accelerated inflation and led to a further

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disparity between Indian and international prices. Defence spending in 1965/1966 was24.06% of total expenditure, the highest it has been in the period from 1965 to 1989(Foundations, pp 195). The second factor is the drought of 1965/1966. The sharp rise in

prices in this period, which led to devaluation, is often blamed on the drought, but in1964/1965 there was a record harvest and still, prices rose by 10% (Bhatia, pp 35). The

economic effects of the drought should not be understated, but the data show that the droughtwas a catalyst for, rather than a direct cause of, devaluation.

Indias system of severe restrictions on international trade began in 1957 when thegovernment experienced a balance of payments crisis. This crisis was caused by a currentaccount deficit of over Rs 290 crore which necessitated India lowering its foreign exchangereserves (RBI Bulletin, July 1957, pp 638). The large current account deficit was largely aresult of the Second Five-Year Plan which mandated higher imports, especially of capitalgoods. Exports in the year 1956-1957 stagnated while imports increased by Rs 325 croresfrom the previous year. Another factor behind the current account deficit was the increase infreight costs due to hostilities in West Asia. Unlike in 1966 and 1991, India did not explicitlydevalue the rupee but instead accomplished what Srinivasan refers to as a de factodevaluation by imposing quantitative restrictions (QRs) on trade rather than imposing highertariffs.

The government used the method of QRs with varying levels of severity until the Import-Export Policy of 1985-1988. Periodically, when import prices reached a premium, thegovernment would impose import tariffs in order to absorb the gains accruing to foreignexporters as a result of Indias import quotas. The second step the government took awayfrom free trade came in 1962 when India began to subsidise exports in an effort to furthernarrow its consistent current account deficit. As import prices rose, the government began to

impose tariffs to increase its revenue. Ultimately, in July 1966 India was forced by economicnecessity to devalue the rupee and attempt to liberalise the economy to attract foreign aid.The drought of 1965/1966 harmed reform efforts as feeding those in drought-affected areastook political precedence over liberalising the economy.

According to T N Srinivasan, the policies of export subsidisation and import tariffs adoptedby the government between 1962 and 1966 were a de facto devaluation. Since they madeimports more expensive and exports cheaper, these policies reduced some of the pressure onIndias balance of payments. Following the 1966 devaluation, the government initiallyliberalised its trade restrictions by reducing export subsidisation and import tariffs. Theseactions counteracted the devaluation to some extent but even taking these policies into

consideration, there was still a net devaluation and, as the trade data above show, thedevaluation did stimulate exports. In the resulting backlash against economic liberalisation,quantitative restrictions and export subsidies returned, albeit at lower than pre-1966 levels.

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The 1991 Devaluation

1991 is often cited as the year of economic reform in India. Surely, the governmentseconomic policies changed drastically in that year, but the 1991 liberalisation was anextension of earlier, albeit slower, reform efforts that had begun in the 1970s when Indiarelaxed restrictions on imported capital goods as part of its industrialisation plan. Then theImport-Export Policy of 1985-1988 replaced import quotas with tariffs. This represented amajor overhaul of Indian trade policy as previously, Indias trade barriers mostly took theform of quantitative restrictions. After 1991, the Government of India further reduced trade

barriers by lowering tariffs on imports. In the post-liberalisation era, quantitative restrictionshave not been significant.

While the devaluation of 1991 was economically necessary to avert a financial crisis, theradical changes in Indias economic policies were, to some extent, undertaken voluntarily bythe government of P V Narasimha Rao. As in 1966, there was foreign pressure on India toreform its economy, but in 1991, the government committed itself to liberalisation andfollowed through on that commitment. According to Srinivasan and Bhagwati,

Conditionality played a role, for sure, in strengthening our will to embark on the reforms.But the seriousness and the sweep of the reforms demonstrated that the driving forcebehind the reforms was equally our own conviction that we had lost precious time and thatthe reforms were finally our only option (IESI, pp 93).

In 1991, India still had a fixed exchange rate system, where the rupee was pegged to thevalue of a basket of currencies of major trading partners. At the end of 1990, theGovernment of India found itself in serious economic trouble. The government was close todefault and its foreign exchange reserves had dried up to the point that India could barelyfinance three weeks worth of imports. As in 1966, India faced high inflation, largegovernment budget deficits, and a poor balance of payments position.

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Indias balance of payments problems began in earnest in 1985. Even as exports continued togrow through the second half of the 1980s, interest payments and imports rose faster so thatIndia ran consistent current account deficits. Additionally, the governments deficit grew toan average of 8.2% of GDP. As in 1966, there was also an exogenous shock to the economythat led to a sharp worsening of the already precarious balance of payments situation. In thecase of the 1991 devaluation, the Gulf War led to much higher imports due to the rise in oil

prices. The trade deficit in 1990 was US $9.44 billion and the current account deficit was US$9.7 billion. Also, foreign currency assets fell to US $1.2 billion (RBI Bulletin, September91, pp 905). However, as is the case with the Indo-Pakistan war of 1965 and the droughtduring the same period, Indias financial woes cannot be attributed exclusively to events

outside of the control of the government. Since the Gulf War had international economiceffects, there was no reason for India to be harmed more than other countries. Instead, itsimply further destabilised an already unstable economic situation brought on by inflationand debt. In July of 1991 the Indian government devalued the rupee by between 18 and 19

percent. The government also changed its trade policy from its highly restrictive form to asystem of freely tradable EXIM scrips which allowed exporters to import 30% of the valueof their exports (Gupta, pp 73-74).

In March 1992 the government decided to establish a dual exchange rate regime and abolishthe EXIM scrip system. Under this regime, the government allowed importers to pay forsome imports with foreign exchange valued at free-market rates and other imports could be

purchased with foreign exchange purchased at a government-mandated rate (RBI Bulletin,January 1994, pp 40). In March 1993 the government then unified the exchange rate andallowed, for the first time, the rupee to float. From 1993 onward, India has followed amanaged floating exchange rate system. Under the current managed floating system, theexchange rate is determined ostensibly by market forces, but the Reserve Bank of India playsa significant role in determining the exchange rate by selecting a target rate and buying andselling foreign currency in order to meet the target. Initially, the rupee was valued at 31.37 toone US dollar but the RBI has since allowed the rupee to depreciate against the dollar (RBIBulletin, November 1994, pp 1485).

What Went Wrong

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Clearly, there are many similarities between the devaluation of 1966 and 1991. Both werepreceded by large fiscal and current account deficits and by dwindling internationalconfidence in Indias economy. Inflation caused by expansionary monetary and fiscal policydepressed exports and led to consistent trade deficits. In each case, there was a large adverseshock to the economy that precipitated, but did not directly cause, the financial crisis.

Additionally, from Independence until 1991, the policy of the Indian government was tofollow the Soviet model of foreign trade by viewing exports as a necessary evil whose sole

purpose was to earn foreign currency with which to purchase goods from abroad that couldnot be produced at home. As a result, there were inadequate incentives to export and theIndian economy missed out on the gains from comparative advantage. 1991 represented afundamental paradigm shift in Indian economic policy and the government moved toward afreer trade stance.

It is easy in retrospect to fault the governments policies for leading to these two majorfinancial crises, but it is more difficult to convincingly state what the government shouldhave done differently that would have averted the crises. One relatively non-controversialtarget for criticism is the tendency of the Indian government since Independence towardslarge budget deficits. Basic macroeconomic theory tells us that the current account deficit isroughly equal to the sum of government and private borrowing. Given the fact that thehousehold saving rate in India is quite high, most of the blame for Indias balance of

payments problems must rest with the government for its inability to control its ownspending.

By borrowing from the Reserve Bank of India and, therefore, essentially printing money, thegovernment could finance its extravagant spending through an inflation tax. Additionally, thelarge amounts of foreign aid that flowed into India clearly did not encourage fiscal or

economic responsibility on the part of the government. In 1966, the lack of foreign aid toIndia from developed countries could not persuade India to liberalise and in fact furtherencouraged economic isolation. In 1991, on the other hand, there was a political will on the

part of the government to pursue economic liberalisation independent of the threats of aidreduction. These two financial episodes in Indias modern history show that engaging ininflationary economic policies in conjunction with a fixed exchange rate regime is adestructive policy. If India had followed a floating exchange rate system instead, the rupeewould have been automatically devalued by the market and India would not have faced suchfinancial crises. A fixed exchange rate system can only be viable in the long run when thereis no significant long-run inflation.

Chronology of Indias exchange rate policies

1947 (When India became member of IMF): Rupee tied to pound, Re 1 = 1 s, 6 d, rate of28October, 1945 18 September, 1949: Pound devalued; India maintained par with pound 6 June, 1966: Rupee is devalued, Rs 4.76 = $1, after devaluation, Rs 7.50 = $1 (57.5%) 18 November, 1967: UK devalued pound, India did not devalue August 1971: Rupee pegged to gold/dollar, international financial crisis 18 December, 1971: Dollar is devalued

20 December, 1971: Rupee is pegged to pound sterling again 1971-1979: The Rupee is overvalued due to Indias policy of import substitution

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23 June, 1972: UK floats pound, India maintains fixed exchange rate with pound 1975: India links rupee with basket of currencies of major trading partners. Although the

basketis periodically altered, the link is maintained until the 1991 devaluation. July 1991: Rupee devalued by 18-19 %

March 1992: Dual exchange rate, LERMS, Liberalised Exchange Rate ManagementSystem March 1993: Unified exchange rate: $1 = Rs 31.37 1993/1994: Rupee is made freely convertible for trading, but not for investment purposes

THE GOALS OF FIVE YEAR PLANS

A plan should have some clearly specified goals. The goals of the five year plans are:growth, modernisation, self-reliance and equity. This does not mean that all the plans havegiven equal importance to all these goals. Due to limited resources, a choice has to be madein each plan about which of the goals is to be given primary importance. Nevertheless, the

planners have to ensure that, as far as possible, the policies of the plans do not contradictthese four goals. Let us now learn about the goals of planning in some detail.

Growth: It refers to increase in the countrys capacity to produce the output of goods andservices within the country. It implies either a larger stock of productive capital, or a largersize of supporting services like transport and banking, or an increase in the efficiency of

productive capital and services. A good indicator of economic growth, in the language of

economics, is steady increase in the Gross Domestic Product (GDP). The GDP is the marketvalue of all the goods and services produced in the country during a year. You can think ofthe GDP as a cake: growth is increase in the size of the cake. If the cake is larger, more

people can enjoy it. It is necessary to produce more goods and services if the people of Indiaare to enjoy (in the words of the First Five Year Plan) a more rich and varied life.

The GDP of a country is derived from the different sectors of the economy, namely theagricultural sector, the industrial sector and the service sector. The contribution made byeach of these sectors makes up the structural composition of the economy. In some countries,growth in agriculture contributes more to the GDP growth, while in some countries thegrowth in the service sector contributes more to GDP growth (see Box 2.4).

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Modernisation: To increase the production of goods and services the producers have toadopt new technology. For example, a farmer can increase the output on the farm by usingnew seed varieties instead of using the old ones. Similarly, a factory can increase output byusing a new type of machine. Adoption of new technology is called modernisation.However, modernisation does not refer only to the use of new technology but also to changes

in social outlook such as the recognition that women should have the same rights as men.

In a traditional society, women are supposed to remain at home while men work. A modernsociety makes use of the talents of women in the work place in banks, factories, schoolsetc. and such a society will be more civilised and prosperous.

Self-reliance: A nation can promote economic growth and modernisation by using its ownresources or by using resources imported from other nations. The first seven five year plansgave importance to self-reliance which means avoiding imports of those goods which could

be produced in India itself. This policy was considered a necessity in order to reduce ourdependence on foreign countries, especially for food. It is understandable that people whowere recently freed from foreign domination should give importance to self-reliance.Further, it was feared that dependence on imported food supplies, foreign technology andforeign capital may make Indias sovereignty vulnerable to foreign interference in our

policies.

Equity: Now growth, modernisation and self-reliance, by themselves, may not improve thekind of life which people are living. A country can have high growth, the most moderntechnology developed in the country itself, and also have most of its people living in poverty.It is important to ensure that the benefits of economic prosperity reach the poor sections aswell instead of being enjoyed only by the rich. So, in addition to growth, modernisation and

self-reliance, equity is also important: every Indian should be able to meet his or her basicneeds such as food, a decent house, education and health care and inequality in thedistribution of wealth should be reduced.

ACHIEVEMENTS OF FIVE YEAR PLANNING

1) Increase in National Income:

During planning period national income has increased manifold. The average annualincrease in national income was registered to be 1.2 percent from 1901 to 1947.

This increase was recorded to be 3 percent in two decades i.e. 1950-70. Moreover, averageannual growth rate of national income was 4 per cent in 1970-80 which, further, increased to5 percent in 1980-90. From 1980-81 to 2000-01, it increased to 5.8 per cent. Thus, a rise innational income has been key indicator for economic development of India.

2. Increase in Per Capita Income:

Before independence, increase in per capita income was almost zero. But after the adoption

of economic planning in free India, per capita income has continuously been increased. Inthe first plan, it raised .by 1.8 per cent and in Second Plan, it was 2.0 per cent.

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During Third Plan, it declined to (-) 6.8 per cent. In Three annual plans, growth of per capitaincome was registered at 1.5 per cent.

In Fourth Plan, it came down to 1.0 per cent. In Fifth Plan, it was 2.7 per cent. During Sixthand Seventh Plan, it was 3.2 per cent and 3.6 per cent respectively. In Eighth Plan, it rose to

4.6 per cent. In 2000-01, its rise was registered at 4.9 at 1993-94 prices.

3. Development in Agriculture:

Agricultural productivity has also marked an upward trend during the plan period. Theproduction of food grains which has 510 lakh tonnes in 1950-51 increased to 1804 lakhtonnes in 1990-91 and further to 212.0 million tonnes in 2000-01.

Similarly, the production of cotton which was 21 lakh bales in 1950-51 was expected to be10.1 million bales in 2000-01. In the same period, the production of sugarcane was expectedto be 300.1 lakh tonnes in 2000-01 against the 69 lakh in 1950-51.

Thus, agriculture production during planning period has increased. During the entireplanning period, growth rate of agricultural production remained 2.8 per cent per annum.

However, use of chemical fertilizer, better seeds, irrigation and improved methods ofcultivation has increased productivity per hectare and per worker many times. Thisdevelopment has laid the foundation of green revolution and other institutional changes inagriculture sector.

4. Development of Industry:

In the first five year plan much of the capital was invested to develop the industry and

defence. About fifty percent of the total outlay of the plan was invested for theirdevelopment.

As a result, industrial production increased to a great extent. For instance, the production ofcotton cloth which was 4210 million sq. meters in 1950-51 increased to 18989 million sq.metres in 1999-2000.

The production of finished steel increased to 31.1 million tonnes in 2001-02 from 10 lakhtonnes in 1950-51. In the same fashion, the production of coal was recorded to be 3226million tonnes in 2001-02 against the 323 million tonnes in 1950-51.

5. Development of Transport and Communication:

During the planning period, much attention has been paid towards the development oftransport and communication. In the first two plans, more than one-fourth of the total outlaywas invested on the development of transport and communication.

In 1990-91, the total length of roads increased to 1024.4 thousand kms from 157.0 thousandkm. However, further it increased to 1448.6 thousand km in 1998-99. In order to encouragetrade goods rail was developed.

6. Self Reliance:

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During the last four decades, considerable progress seems to have been made towards theachievement of self reliance. We are no longer dependent on other countries for the supplyof food grains and a number of agricultural crops.

In the same fashion, we have made substantial investment in basic and heavy industries. We

are in a position to produce all varieties of basic consumer goods.

7. Employment:

During the planning period, many steps have been taken to increase the employmentopportunities in the country. In the first five year plan employment opportunities to 70 lakh

people were provided.

In the fourth and fifth plans about 370 lakh persons got employment. In the seventh five yearplan, provisions have been made to provide employment to 340 lakh people.

8. Development of Science and Technology:

In the era of planning, India has made much progress in the field of science and technology.In reality, the development is so fast that India stands third in the world in the sphere ofscience and technology. Indian engineers and scientists are in a position that they canindependently establish any industrial venture.

9. Capital Formation:

In India due to the development of agriculture, industry and defence, the rate of capitalformation has also increased. In 1950-51, the rate of capital formation was 11.5 percent.

The rate of capital formation during Second, Third and Fourth plan was 12.7 per cent, 13.5per cent and 14.5 per cent respectively. It was 24.1 per cent in seventh plan and 26 per centin Eighth plan and 24 percent in Ninth Flan.

10. Social Services:

Social services, like, education, health and medical facilities, I family planning and the likehave also expanded considerably.

As a result of these services: (i) Death rate reduced from 27 per thousand in 1951 to 8 per

thousand in 2000-01. (ii) Average life-expectancy increased from 32 years in 1951 to 638 in2000-01. (iii) Several deadly diseases like malaria etc. have been eradicated, (iv) Thenumber of school going students has increased three-fold and that of collegiate five-foldsince 1951. The number of annual admissions to degree courses in Engineering Collegesincreased from 7100 in 1950 to 1, 33,000 and the number of universities increased from 27to 254 by now. (v) A chain of National Laboratories and Research Centers has been set upacross the country. (vi) Number of hospital-beds, doctors, nurses, medicines and family

planning clinics and medical facilities has greatly increased. Number of hospitals anddispensaries has increased to 68396. Now there is one doctor per 5.2 per ten thousand.

WEAKNESS OF FIVE-YEAR PLAN

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The weakness of five year plan is as follows:

1. Stagnant Economy:

When India was freed, it had deep marks of stagnation. During the phase of forty years of

economic planning, its growth rate is zero or near zero.

According to one estimate, growth of national income was about 1.15 per cent during 1950to 1980 per year and growth of per capita income was at less than 0.5 percent.

Similar trend has been noticed after the adoption of plans. This fact is also reflected from thenational income by industrial origin. The occupational structure also provides gloomy

picture as more than 70 per cent people are still engaged in agriculture sector.

2. Poverty:

These five year plans have miserably failed to make a dent on poverty as 40 per cent of

population is still in tight grip of poverty. Poverty is greatly responsible for poor diets, lowhealth and poor standard of living.

A proportion of the population has to go even without the most essential needs of daily

eco final draft

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