indian economy-till 2nd stage.pptx

7/29/2019 Indian Economy-till 2nd stage.pptx

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Economic Policies followed by the Indian Govt., from

1950s to the present

I Phase From 1951-52 to 1964-65- avg. annual growth rate

of 4%.

II Phase-1965-81 , growth rate 3.2%

III Phase-1981-90,growth rate of 5%.

IV Phase-1991, continued late, growth Rate-6.5%, nearly 9%

from 2003 onwards except for 2008-09.


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Phase I-(1951-1965)

Nehruvian Socialist rate of growth" is used to referto the low annual growth rate of the economy ofIndia before 1991.

It stagnated at around 3.5% from 1950s to 1980s,while per capita income growth averagedextremely low 1.3% a year.

At the same time, Pakistan grew by 8%, Indonesiaby 9%, Thailand by 9%, S.Korea by 10% and in

Taiwan by 12%.
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Phase I(1951-1965): Takeoff under a Liberal Regime The key element ion Nehrus thinking on trade policy- India

needed to be independent of the world markets, its essential formaintaining political independence.

Instead of import barriers Nehrus philosophy wasinterventionsin production via public sector participation & licensing ofprivate sector investment to progressively align the domesticproduction basket with the consumption basket.

The Discovery of India

The Objective of the country as a whole was the attainment as far aspossible of national self sufficiency . International trade was certainlynot excluded, but we were anxious to avoid being drawn into the

whirlpool of Economic Imperialism.The first charge on the countrysproduce should be to meet the domestic needs of food, raw material &manufactured goods and the surplus production would not be dumpedin the foreign markets rather for exchange of such commodities as wemight require.


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First Election-1952 J.L.N appointed new cabinet-technocrat C.D

Deshmukh- Fin. Minister, T.T. krishnamachari (T.T.K)-

Commerce minister
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First Five Year plan- Progressive liberalization

B.K Nehru quoted (Jt. Sec. In charge of InternationalFinance in the ministry of Finance).

I- TTK was keen to expand investment and the economy, and would notled fears of the depletion of foreign exchange reserves get in the wayof imports.

II Consumer Goods import including items cutlery, hardware,

electric goods, an integral part of the import basket.Presence of imports of household consumer goods is indicative of a

relatively relaxed trade regime.

III- During 1950s established importers who were licensed to importgoods for sale to other buyers were allowed to operate relativelyfree.

Evidences


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Year Exports/GDP Imports/GDP

1950-51 6.1 6.1

1951-52 6.8 8.4

1952-53 5.6 6.8

1953-54 4.7 5.4

1954-55 5.6 6.6

1955-56 5.6 7.1

1956-57 4.7 6.5

1957-58 4.2 7.8

1958-59 3.9 6.1

1959-60 4.1 6.1

1960-61 3.7 6.5

1961-62 3.6 6.0

1962-63 3.5 5.8

1963-64 3.5 5.4

1964-65 3.1 5.11965-66 2.9 5.1

Merchandise Imports and

Exports as Proportions of

the GDP (1950-67)

Morarji Desai as FinanceMinister

T.T krishnamachari
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Restrictions on Imports: Morarji Desai as FM

The policy of benign neglect on the trade policy frontcontinued till the end of 1957.

B.K Nehru quotedThe reserves were by now beginning to

get so low that that threw as a danger of not meeting

obligations.

The First Foreign exchange budget was presented in the

middle of 1958- Morarji Desai had become the Finance

minister.

This was the beginning of Indias turn to a much more

restrictive trade and investing license regime.


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An open Foreign Investment Regime

Both Congress and left Wing party hostile to Future Foreign Investment

in the country. INC advocated the elimination of existing foreign capital

from the key industries. Industrial Policy Regulation (IPR)1948 shared

these sentiments.

It should recognize that participation of foreign capital, industrial

technique & knowledge required for the rapid industrialization but it is

necessary the conditions under which they participate should be carefullyregulated in thenational interest.

Only Concession IPR1948 indirectly made- Govt. would not nationalize

any business holdings & takeover of any foreign firm for 10 years.

Despite of hostility PM J.L.N saw a clear need for foreign investment in

India. He seized the initiative from the opponent and incorporated none

of the restrictive provisions mentioned in IPR in the Foreign Policy

Statement he delivered to the parliament in April 1949.


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An open Foreign Investment Regime contd..

Foreign Policy statement 1949 says:

Govt. would encourage new foreign capital by framing policies toenable foreign capital investment on terms and Conditions that are

mutually advantageous.

Although majority ownership by Indianspreferred- Govt. will notobject to foreign capital having control of a concern for limited

period, if it is found to be of national interest

The findings of a census survey by RBI, 1969, reported :Total firms-827 private firms with foreign partnership of some kind.

Of these 591 had equity participation(262 having majority foreign

holdings), remaining 236-had technical collaboration agreements.


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A Restrictive Industrial Policy Regime Policy toward industry were considerably more restrictive than those toward

trade and foreign investment.

Mahalanobis Model-on which rested the 2nd Five Year Plan suggested growth of

heavy Industries.Question: Who should build the heavy industry?

National independence objective: Country could not rely on foreign firms even if

they are willing to invest in this sector- which they were not in any case.

Resources of Indian private firms were too meager to allow them to fulfill the task.

Public Sector- only viable option.

Flaws with the policy:

1) It underestimated the benefits of foreign trade via. Specialization in products of

comparative advantage.

2) Expansion of its role. Leadership greatly overestimated the role of govt. toefficiently perform a wide variety of functions.

e.g. First Five year plan- few projects- govt. could manage with limited capacity; but

as economy grew larger & complex diseconomies of management grew.


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Role of the Public Sector-1948 Industrial Policy Regulation

1. Industries- State Monopolies. Limited to atomic energy, arms & ammunitions,and railways.

2. Basic Industries in which state would have the exclusive right to new investments,

though it could invite pvt. Sector cooperation if in national interest. 6 industries-Iron & Steel, shipbuilding, Mineral oils, Coal , Aircraft Production&Telecommunication equipment.

3. Industries of National Importance that the state might regulate & license inconsultation with the state governments. 18 industries.

4. All other industries that would be open to the privates sector without constraints.

1956- Industrial Policy Regulation 3 categories of Industry.

1) Schedule A-State Monopolies+ state reserved the right to seek cooperation fromprivate sector.9 industries from (1+2 of IPR 1948)+9 other heavy industries, etc.

2) Schedule B- Open to private sector but state would increasing establish newundertakings in them.12- Minerals& Aluminum and other not included in Schedule1.

3) Schedule C - Industries to be developed principally through initiative & enterprise

of the public sector. The state reserved the right to enter in them as well.


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QUESTION

Why India was able to shift its growth rate from less

than 1 % in the first half of the twentieth century to

4.1% in the first 14 years of the post independence

era?

b bl


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Probable Answers1) At independence, India inherited a largely honest & efficient

bureaucracy & judiciary; strong Political Leadership under Nehru& a vibrant entrepreneurial class.

2) Since Economy was not very complex& no. of projects were small

3) While the general direction of the policy was towards increasedcontrols, especially after mid 1958 but implementation ofcontrols was not as vigorous in the early years as in the later

years.4) Since the foreign investment regime was still relatively open &

the domestic machinery sector still in its infancy, machineryimports were less likely to be denied. Thus entrepreneurs wereable to access the benefits of the innovations embodied in

foreign machinery & management with relative ease.5) Finally growth was sustained by borrowing abroad. But this was

an unsustainable strategy & carried the seeds of crisis. Twoconsecutive droughts-1965-66 and 1966-67 was thrown Indiainto an explicit crisis.


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Indias single most important mistake

India ignored the critical importance ofInternational trade. Rather than turn to outward

oriented policies that exploited the export

potential in labor- intensive products, as Koreadid in early 1960s. India pushed import

substitution deeper and deeper. Moreover ever

tightening licensing policy even hampersdomestic competition as well.


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Phase II(1965-81): Socialism Strikes with a Vengeance1965-1981- avg. GDP growth rate of India plummet to just

2.6% from 4.1% during 1951-1965.

Population growth at 2.3% per annum- per capita incomegrowth of just 0.3%

Growth rate fell in all sectors but industries suffered badly.

Decline in overall growth rate because of:

External Shocks1965-1967,1971-1973(droughts), War-China(1962),Pak(1965,1971)

Reduced flow of External Resources

Further tightening of controlsFailed attempt at liberalization in the early part of phase II.


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Major Factors which caused persistent low growth1) Extensive bureaucratic controls over production, investment and

trade- Licence Permit Raj.

2) Inward looking trade & foreign investment policies.

3) A substantial public sector occupying the commanding heights of theeconomy. Socialistic pattern of society. French word: Dirigisme(statecontrol of economy & Society)

4) Neglect of primary Education, leading to high rates of illiteracy & lowskills among the masses.

Factors attributed to low Industrial Growth Adoption of centralized planning system for allocation of scarce

resources- Mahalonobis model(Inspired by Soviet Russia)

Quantities and prices of goods largely determined by the state & notthe market- Onset of Corruption.

Industrial Licensing System- pvt. Sector investment highly regulated.Prime Objective- To reduce monopoly power of big companies bycontrolling their size.

Protection of small scale Industry.

Political decisions about location of plants -Balanced RegionalGrowth


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Foreign trade and Investment(A)Policy of Import substitution.

High Import Barriers

Protection of Domestic industry

Administered foreign exchange

No incentives for exports.

Indias share in world exports declined from about 2% in 1950 to 0.4%

in 1980. exports/GNP ratio remained stagnant around 1%.

(B) The combination of industrial licensing& controls at home with

imports and exchange controls externally effectively cut off all

sources of competition. Discouraged entrepreneurship.

(C) The restrictions on incoming direct foreign investment also

reduced the absorption of new technology from this source.

Th P bli S t


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The Public SectorSocialistic Pattern of Society- dominance of Public sector.

Industrial policy Resolution 1956- so many industries under govt.

The inefficiency of the public sector hampered the growth of private

industry also.(availability of electric power)

Public sector employed 70% of the workers in the organized

sector.(Protective labor laws- led to further inefficiencies)

Problems: Overstaffing, Indiscipline- No accountability.

Average return on Investment in the public sector-2.5%. Most of the

profits acme from the oil companies. Most other public sector

companies were losing money eg. SAIL

h li i l


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The political Context

Nehru died in may 1964.

Lal Bahadur Shastri succeeded him as PM.

He was keen on agriculture rather than heavy industries.

He laid the foundation of Green revolution.

He also created some of the key institutions in agriculture(AgriculturePrice Commission, FCI, National dairy Development Board-1965)
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His tenure was cut short by his untimely death in Jan. 1966-

Tashkent, Uzbekistan.

Indira Gandhi succeeded Shastri and served as

Indias PM until her assassination on October 31, 1984, except

between Mar. 1977 & Jan. 1980(?)

Indira Gandhis policies were influenced by 2 factors:

1) Indira Gandhis relationship with the U.S.2) Bosses within the congress party( Morarji Desai).
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Relationship with the United states

India dependent on imports of food grains from USA under PL 480to avoid starvation.

President Johnson threatened to cut off shipments because Indiadid not support in Vietnam war.

Indias sovereignty was being threatened.

U.S forced devaluation of the Indian currency in 1966.

India devalued rupee in June 1966at the recommendation ofWorld Bank, made on behalf of the Aid India Consortium(of whichUS was the most influential member)

The World bank promised India to provide$900 mn. Non project

aid for several years but under pressure from President Johnsonthe aid fell after one year.

Devaluation turned out to be a failure.

The entire episode strengthened the Socialist convictions of Mrs.Gandhi& decided not to count on U.S. aid & support in future.

S lit i C t d f th hift t l ft


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Split in Congress party and further shift to left

Split with Right Wing people- a reduced role for the public sector &

greater reliance on private Enterprise and foreign capital.

Mrs. Gandhi 10 point programme- Wide range policy changesincluding:

Nationalization of Banks& general Insurance companies,

Ceilings on urban Property & income,

Curbs on business monopolies & concentration of economic

power

Public distribution of food grains

Rapid implementation of land reforms,

Provision of house sites for the rural poor,

Abolition of princely privileges, etc.

1971- War with Pakistan- U.S sided with Pakistan & Soviet Union

with India. This further strengthened Mrs. Gandhis socialisticagendas.

Economic Fail re & Emergenc R le
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Economic Failure & Emergency Rule

Indira Gandhis popularity- short lived.

Reasons: Droughts in 1971-72 & 1972-73.

First Oil Price Shock-1973- Yom Kippur war.

Result: High InflationOpposition party up in arms.

June 1975- Allahabad High court found Indira Gandhi guilty

of fraud in her march 1971 elections.

Opposition organized mass rallies strikes, asked for her

resignation.

E d l d
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Emergency declared.

D l d f h l ti i M 1977
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Declared fresh elections in Mar. 1977

Indira Gandhi lost the election. Janata party inCoalition came in power.

1980- returned in power.1984- Assassination

l i f d
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Strangulation of Industry Monopolies Restrictive Trade Practices (MRTP)-1969

Increasingly tighter restriction on foreign investment and Foreign

Firms

Foreign Exchange Regulation Act-1973

Introduction of the policy reserving certain products for small-

scale entreprises-1967.

Tightening of the Licensing regulations through the Industrial

Licensing policy -1970.

indian economy-till 2nd stage.pptx

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