growth and structural change in india, 1950-2015 and structural change - igidr... · growth and...

Growth and Structural Change in India, 1950-2015

R Nagaraj

Indira Gandhi Institute of Development Research

Mumbai

Indian Economy c. 2015

• 7th largest economy at current exchange rate (at $2 trillion), and 3rd largest at PPP (as per IMF). – As against US $18tn, China $11tn

• Per capita income ranking 145th (with HDI ranking is 135th (HDR 2014).

• What is HDI? based on 3 criteria: (i) Life expectancy at birth,

(ii) mean years of schooling, and (iii) gross national income per capita.

May 19, 2016 "Individual Choices and Collective

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• Per capita income is $1,600, in 2014; Rs. 77,148, or Rs. 6500 per month.

• Domestic oriented economy: Export-GDP ratio 24%; merchandise exports just about 1½% of world trade (as against 18% of world’s population).


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• An agrarian economy with 53% of workforce engaged in agriculture (Table 1); 69% rural.

• India is a service economy by output (55%); a rural and agrarian economy by labour force distribution.

• It means growing inequality between rural and urban.


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Long Term Trends, 1950-15 (1)

• Real annual economic growth: 4.4%, inflation 7%, BOP deficit 1-3% of GDP. – Macro policy is conservative with low inflation,

modest BOP and fiscal deficits, relatively speaking

• Growth mostly financed domestically, GDS now is about 30% GDP, up from <10% in 1951.

• Gradual decline in annual pop. growth rate to 1.6%


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Long Term Trends, 1950-10 (2)

• Household sector is the “surplus” sector financing government and private corporate sectors.

• NRI deposits and private flows finance the BOP. Much discussed FDI (in fresh fixed investment) forms just 1% of GDP, in best of years.

– Lately FDI+FPI are financing BOP deficit significantly.

• India is a story of growth acceleration: No growth during colonial rule; low growth (3.5% pa) up to 1980; growth acceleration thereafter (6% pa); and briefly 9% during the boom last decade.

May 19, 2016

"Individual Choices and Collective

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Initial Conditions, c. 1950

• Population: 350 million, over 70% living off agriculture, in villages.

• Modern sector: port-based export oriented cotton and jute mills, plantation agriculture.

• Pockets of prosperity, amid stagnation during colonial period.

• Modern public administration, spread of education in cities.


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Period of Planning, 1950-80

• 1950-65: Rapid ISI in capital and intermediate goods, with public sector being the biggest “entrepreneur” – Mahalanobis plan.

• Fiscal and physical controls to promote “cottage industries” in consumer goods industries.

• Outcome: industry grew at 7% annually, ended in a BOP crisis with crop failure in mid-1960s.


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Crises and Shocks, 1966-80

• Focus shifted to food self-sufficiency; Import substitution in fertilisers, and fuels.

• From rapid ISI to wider distribution of gains – regional dev., Small enterprises, new entrepreneurs etc.

• Increased controls on investment and output.

• Outcome: food self-sufficiency; Industrial deceleration.


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Creeping Liberalisation, 1980-

• Emphasis on efficient ISI, step up in public investment in infrastructure, gradual opening to foreign capital and technology.

• Step up in agriculture and rural dev. – To spread the benefits of new agriculture technology – HYV seeds, irrigation and fertilisers.

• Outcome: growth accelerated to 5.5%. Industry turnaround, improved agricultural growth, poverty started to decline – for the first time.


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Speeding up of Reforms, 1991-

• Responding to external payment crisis, stabilisation and orthodox reforms were initiated in 1991 – popularly, LPG.

• The pace of it was much faster than in the past, but modest by comparative standard.

• Fiscal conservatism – sought to cut subsidies for the poor and for farmers; steep cut in public investment.

May 19, 2016


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Speeding up of Reforms, 1991-

• Greater openness to foreign capital and technology; Deregulation in industry, trade and finance.

• Outcome: acceleration of growth in 2000s. Faster growth of services and exports, but agriculture suffered; Industry modernized, but growth did not improve; Poverty reduction moderated. Increased agrarian distress – farmers’ suicides, leftwing extremists’ violence.

• Widening inequalities.


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Boom and Bust, 2003-2016

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

GDP growth rate, 2003-2014

GDP growth rate


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GDP Growth, 2003-2014

• GDP Growth, 2003-2016Growth rate 1991-2003 – 5.5% PY,

• 2003-08 – 8.9% PY,

• Deceleration after 2011-12.

• But, official data shows an acceleration:

– from 5.4% in 2012-13 to 7.6% in 2015-16;

• Many doubt this claim, new GDP numbers are widely contested.

May 19, 2016


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Poverty Reduction

• India has more poor people than entire Africa.

• In 2004-05, about 27.5% of Indians or 302 million were poor.

• Abolition of famines; But persistence of malnutrition deaths and widespread deprivation.

• Poverty measured by calorie norm, roughly equal to $1.25 a day. If it is $2 a day, poverty climbs to probably 70% of the population.


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Poverty Reduction

• Income poverty has declined since late 1970s; The rate of decline decelerated after the liberal reforms of 1991 (Fig 6)

• Poverty more in rural areas, and concentrated in a few large states of north and eastern India – south and western India are better off.

• Poverty reduction has barely improved food consumption.

• Poverty reduction has had extremely limited impact on people’s health outcomes.


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Inequality (1)

• Measurement problems:

– No income data available; Consumption as a proxy has problem as consumption of the rich is not adequately captured in surveys.

• So, I present inequality by broad structural features and between capital and labour.

• By all measures inequality has increased in the last 3 decades. (Figures 2-5).


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Inequality (2)

• Economic inequality in India is suppose to be moderate – higher than east Asia, and lower than LA.

• But educational inequality in India is said to be worse than the income inequality in LA (Pranab Bardhan).

• If one take note of (age-old) social inequality, India is probably no better than LA.


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Social Policy and Security

• Constitutionally mandated positive discrimination in public employment and higher education for the socially excluded.

• Social security only for organised sector, which accounts for 8% of workforce – practically none for the rest.

• Health and education record modest in comparative perspective, but rising gradually – wide variations across regions and between town and country (Figure 1).


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Understanding Indian Experience

• Growth acceleration with macro stability – with growing inequalities

• Modest record in poverty reduction and limited social development.

• Creation of a nation state out of a civilizational state – with deepening democracy, in a highly heterogeneous society.


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Economy and Democracy

• Fractious democracy exasperates collective action problems, limiting public investments with positive externality.

• Yet, democracy places premium on low inflation and macroeconomic stability. – As 9/10th of workforce has no indexation.

– Indigenous capitalist class demands stability and protection from external forces.

• Deepening democracy compels public spending on redistributive policies, limiting market oriented reforms.


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India at Cross Roads

• Option 1: to follow the orthodox (neo-liberal, free-market) policy agenda to integrate with the world markets – as urged by international institutions. Actively followed in India currently.

• Option II: strengthen redistributive polices to address growing inequality, poverty and social backwardness. – Recent advances in rural employment guarantee act along

with right to information act are powerful instruments for advancing the second option.


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Thank You


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GDP and Workforce Distribution


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1983

1993-94

2009-10

% GDP

%

Workforc

e

%

GDP

%

Workforc

e

%

GDP

%

Workforc

e

Agricul

ture

40.0

68.5

30.0

64.0

14.6

53.2

Industr

y

24.3

13.8

25.2

14.9

28.3

21.5

Service

s

35.7

17.6

48.8

21.1

57.1

25.3

India's GDP and GDP Capita, 1901 to 2013-14

1.00

2.00

3.00

4.00

5.00

6.00

7.0019

00-0

1

19

04-0

5

19

08-0

9

19

12-1

3

19

16-1

7

19

20-2

1

19

24-2

5

19

28-2

9

19

32-3

3

19

36-3

7

19

40-4

1

19

44-4

5

19

48-4

9

19

52-5

3

19

56-5

7

19

60-6

1

19

64-6

5

19

68-6

9

19

72-7

3

19

76-7

7

19

80-8

1

19

84-8

5

19

88-8

9

19

92-9

3

19

96-9

7

20

00-0

1

20

04-0

5

20

08-0

9

20

12-1

3

Lo

g o

f V

alu

es

GDP GDP Per Capita


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Physical Quality of Life Index


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Table 9: Physical Quality of Life Index, 1951 to 2011

13.2

24.7

33.0

51.4

61.7

69.876.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

1951 1961 1971 1981 1991 2001 2011

Year

Ind

ex

PQLI

Inter-regional Inequality


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Rural-Urban Inequality


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Figure 2.8: Rural to urban per capita NDP, 1970-71 to

2004-05

0

10

20

30

40

50

1970-71 1980-81 1993-94 1999-00 2004-05

Year

Perc

enta

ge

Rural to Urban Per Capita Income

Inequality between Formal and Informal Sectors


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Figure 2.10: Ratio of unorganised to organised sector NDP per capita,

1983 to 2004-05

18.7

15.9 14.9

9.4

6.6

0

5

10

15

20

1983 1987-88 1993-94 1999-00 2004-05

Year

Per

cent

Ratio of unorganised to organised sector NDP per capita

Wage and Profit Share


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Figure 2.11: Wage and profit shares in private corporate sector, 1985-86 to

2007-08

0

5

10

15

20

25

30

35

40

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Year Ending

Per

cent of G

VA

Wage share Profit share

Figure 6


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Figure 2.6: Head count ratio of poverty, 1983 to 2004-05

0

10

20

30

40

50

Rural Urban Total

Per

cent of P

opula

tion

1983 1993-94 2004-05

growth and structural change in india, 1950-2015 and structural change - igidr... · growth and...

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