Strategies of Development in India Since Indenpendence
India, in August 1947 emerged as an independent nation to abide by its ‘tryst with destiny’. The two major tasks before the government were:
- Socio-economic progress.
Esman describes nation-building as ‘the deliberate fashioning of an integrated political community within the fixed geographic boundaries in which the nation state is the dominant political institution’.1 The related objective of social and economic progress has been defined by Esman as ‘the sustained and widely diffused improvement in material and social welfare’.2
The immensity of the development problems and the urgency of their solution have, in fact, thrust the principal burden of accomplishing development goals upon the state. In the early euphoria of nationalism, the people expect the government to work miracles. The state is expected to bring rapid socio-economic development in almost all sectors within the shortest possible time span, an accomplishment that was gradually achieved in developed countries of the west through private and local initiative over generations. Government sought to achieve growth with social justice, through a system of planned development.
Historical Perspective: A Unique Model of a ‘Mixed’ Economy
Around 1951, when independent India launched on its process of economic planning there were stimulating debates on alternative approaches to development strategies. These included the famous Bombay Plan prepared by prominent industrialists. But the most conspicuous were three streams of thought permeating the Independence movement. One of the streams was that the state will have the most decisive, perhaps a full, say in all economic matters, much in the same mould as the planning experience of the erstwhile Soviet Union during the 20s and 30s. The second approach was to provide support to small and village industries without disturbing the institutional set up in order to achieve village smaraj, on the lines of a typical Gandhian prescription. Finally, there were many who favoured the idea that private enterprises should flourish, since modern industries were established and sustained during the days of the British Raj by Indian industrialists of rare vision and patriotism. If one could have combination of these approaches; clearly, there were more than three choices for independent India to make.3
However, the ultimate framework of planning was based essentially on the famous blueprint prepared by Mahalanobis, which influenced India's path to development for the next four decades. It focused on the need to achieve self-sufficiency in the production of capital goods as the first priority with a view to enhancing the output of consumer goods at a later stage. In the original paper, Mahalanobis presented a two and a four sector model with technical coefficients and a growth path. Questions of resource availability, inflation and employment were neglected.4
The conceptual frame of a mixed economy, based on the co-existence of public and private sectors, side by side has several elements:
- Agriculture was left in the private sector, but it would be strengthened by public investment support in key areas, such as irrigation, research and extension.
- Investment planning, aimed at coordinating large-scale investments in the so-called key sectors of the economy, was adopted.
- A leading role was assigned to investment instruments, aimed initially at conserving foreign exchange; in course of time, they were extended to prevent the growth of the so-called monopoly houses.
- A conscious policy of fostering small and medium industries to help diffuse ownership was incorporated
- The authority of the State was used to regulate-but mostly to discourage-the inflow of private foreign capital while relying on the flow of official development assistance to cover the foreign exchange gap as well as, in part, budgetary deficits.
- A regime of administered prices was adopted in core sectors to regulate both the instabilities and the presumed inequities of the market system. The policy frame aimed at transfer of the commanding heights of the economy to the domain of the State while allowing initiative to the private industrial sector in specified, albeit limited, spheres, and permitted big business to develop if it helped in acquiring technological capacity.5
It is imperative to understand the reasons why India came to embrace its unique concept of mixed economy:
- The experience of the colonial regime, which made economic consolidation and resurgence the topmost priority.
- The immensity of the social responsibilities of the state to deal with problems of poverty, unemployment, population, illiteracy, regional imbalances and so on.
- The inadequacy of existing physical infrastructure (power, roads, railways, ports, telecommunications) for building a modern economy.
- A sense of uncertainty about the efficacy of the free enterprise system in delivering the goods.
- The international economic and political situation which created’ cruel dilemmas about aligning with any dominant ideologically oriented system, be it capitalist or communist.
Planning Process in India
In India, the Planning Commission is at the core of the planning mechanism, formulate, and it supervises the planning mechanism. The Commission is helped and guided by several other organizations involved in policy making, programming and evaluating at the centre and state levels. Basically, Indian plans have a perspective outlook. In the first instance, the Planning Commission formulates basic goals for a period of 20 years. The Commission sets these targets after studying the social, economic and technical conditions and future potential. After attaining approval from the government, broad five-year targets are framed to cover the first stage of the perspective plan. These five-year targets are placed before different working groups of economists, administrators and technical experts. The groups examine the implications of the proposed targets in their respective spheres. They make recommendations, if necessary, to revise the long-term as well as short- term targets. They also specify the programmes and policies to be implemented to realize these targets. On the basis of these recommendations, the Planning Commission prepares a short memorandum on the Five Year Plan and submits it before the Union Cabinet and the National Development Council for approval. After approval, the commission prepares and publishes a Draft Plan, which sets out the objectives of the plan, estimates on resources, and targets to be realized.
The Draft Plan is subject to discussion in both Houses of Parliament. Then, the Planning Commission sends the tentative targets to the central ministries and the states. When the consultations with central ministries are over, the state governments are invited for discussion with the Commission. The final plan is formulated on the basis of proposals by the central and the state governments. The Commission examines the programmes and project for technical and economic consistency. After necessary modifications the final plan is formulated and presented to the Union Cabinet, the National Development Council and the Parliament for final approval. The plan approved by the Parliament is forwarded to different departments for execution.
Planning in India
Soon after Independence, India started its development efforts with the motto ‘Growth with Social Justice’. India stepped into the era of economic planning in 1951, by launching its first Five Year Plan and has completed fifty eight years of economic plan. The planning process has had its occasional inception. After the completion of the Third Plan in 1966, India faced severe hostilities and the Fourth Plan was postponed. From 1966 to 1969, there were three annual plans. With the Sixth Plan, there were two versions, that is, the draft plan 1978–83 by the then Janta Party government and the other by the successor Congress government for the second 1980–85. There was also a two-year break (1990–1992) between the Seventh and Eighth Plans. But, the rapidly evolving political situation forced two annual plans for this period. The time of Indian plans is shown in Table 1.
|Ist plan||April 1, 1951 to March 31, 1956|
|IInd Plan||April 1, 1956 to March 31, 1961|
|IIIrd Plan||April 1, 1961 to March 31, 1966|
|Annual Plan||April 1, 1966 to March 31, 1967|
|Annual Plan||April 1, 1967 to March 31, 1968|
|Annual Plan||April 1, 1968 to March 31, 1969|
|IVth Plan||April 1, 1969 to March 31, 1974|
|Vth Plan||April 1, 1974 to March 31, 1978|
|Annual Plan||April 1, 1978 to March 31, 1979|
|Annual Plan||April 1, 1979 to March 31, 1980|
|VIth Plan||April 1, 1980 to March 31, 1985|
|VII Plan||April 1, 1985 to March 31, 1990|
|Annual Plan||April 1, 1990 to March 31, 1991|
|Annual Plan||April 1, 1991 to March 31, 1992|
|VIIIth Plan||April 1, 1992 to March 31, 1997|
|IXth Plan||April 1, 1997 to March 31, 2002|
|Xth Plan||April 1, 2002 to March 31, 2007|
|XIth Plan||April 1, 2007 to March 31, 2012|
- Government of India Planning Commission, various Five Year Plans.
- Government of India Economic Survey (2006–07)
The First Five Year Plan (1951–56)
While launching the First Plan in 1951, India was beset with problems of influx of refugees as a result of the 1947 partition, severe food shortage and mounting inflation. The plan accorded the highest priority to agriculture and community development. It was a moderate attempt with an expenditure of Rs. 2069 crore. The overall results of the plan were encouraging. National income, over the plan period, increased by about 18 per cent. Food-grains production rose by 20 per cent, and over 16 million acres of land was brought under irrigation. The index of industrial production also went up by 22 per cent. There was considerable improvement in power generation. Though the plan emphasized agriculture, irrigation, power and transport, it also aimed at creating base for more rapid economic and industrial expansion in future years. The plan also laid the foundation for social and institutional reform to accelerate the development process.
The Second Five Year Plan (1956–61)
The Second Plan was formulated and implemented in an atmosphere of economic stability, and confidence brought about by the First Plan. The plan aimed at giving a ‘Big push’ to the economy. Prof. P.C. Mahalanobis, the real architect of the Second plan, was responsible for introducing a clear strategy of development. This strategy emphasized investment in heavy industry to achieve industrialization which was assumed to be the basic condition for rapid economic development. For Jawaharlal Nehru, the Prime Minister of India, the development of heavy industry was synonymous with industrialization. This strategy was carried in such a way that the Plan was to create larger employment opportunities, build a strong capital base and increase productive and technical capacity. The Mahalanobis strategy laid excessive emphasis on heavy industry, and the neglect of the consumer industries and of agriculture, promoted capital intensive rather than labour-intensive investments. Plan also highlighted the key role of the public sector in the development process and the need for a socialistic pattern of society. The plan had a total development outlay of Rs. 4,800 crore. The overall results of the Second Plan were also satisfactory. The plan had a target of 4.5 per cent increase in national income, and was able to realize 4.1 per cent increase.
The Third Five Year Plan (1961–66)
The Third Plan aimed at intensive development leading to a self-reliant and self-generating economy. As a result of the progress achieved during the First and Second Plans, the Indian economy had become much larger in size, and the range of its operations became more dynamic and complex. The plan set the target of an increase in national income of over 5.6 per cent per annum and to sustain this rate of growth in future. It emphasized agriculture development programmes to achieve self-sufficiency in food-grains and to meet industrial and export requirements. The plan had the objective of expanding basic industries to make India self–reliant in future industrial efforts. In the scheme of development during the Third Plan, the first priority necessarily was given to agriculture. The plan had a total outlay of 4600 crore. Of this, 20 per cent was for agriculture and irrigation; and 24 per cent for industry and mining. Social services got a share of 18 per cent. The plan had a targeted growth rate of 5.6 per cent, but was able to realize only 2.5 per cent, that is less than half of the targeted rate.
Annual Plans (1966–69)
In the late 1960's, India came under severe shocks such as hostilities with Pakistan (1965), drought for two successive years (1965 to 1967), devaluation of the Rupee (1966) and severe inflationary pressures. Consequently, the draft outline of the Fourth Plan prepared in 1966 had to be abandoned. Instead, three annual plans (1966–67, 1967–68, 1968–69) were prepared and implemented within the framework of the draft outline of the Fourth Plan. The planning process was resumed when the Fourth Five Year Plan (1969–74) became operational in 1969. The agricultural glut in two consecutive year (1965–1966) and (1966–1967), decline in the rate of growth of industrial production and the inflationary pressure, eroded the resources available for the annual plans. Non-Plan expenditure became high, and at the same time, the government was not in a position to mobilize enough revenue resources. Forced by these circumstances, the government resorted to deficit financing which reached a level of Rs. 676 crore during the period of annual Plans.
The annual plans gave the highest priority to agricultural production and productivity, particularly to schemes that were quick-yielding and could augment production in the shortest possible time. It was during the annual plans that India underwent the ‘Green Revolution’, which actually revolutionized the farm sector and helped it march toward further progress. The plan also gave priority to family planning programmes, and sectors such as industry and mining, transport and communication, and social services.
The Fourth Five Year Plan (1969–74)
The Fourth Plan placed greater emphasis on rapid growth and quick-yielding projects. Policy has shifted from import substitution to export promotion, based on price incentives. The Plan was also plagued by uncertainties of aid. Most of India's foreign aid receipts during 1968–74 went straight back to the donors to defray previous loans with interest. The first two years of the Fourth Plan were quite promising, with record food-grains and industrial production. But, the next three years of the Plan were full of disappointments, with lower production, power shortages, transport bottlenecks and, above all, high inflation. The country had to cope with a huge influx of refugees from Bangladesh and the Indo-Pakistan war of 1971. One policy innovation introduced during this Plan was introduction of rural poverty alleviation programmes. The plan envisaged an outlay of Rs. 24,882 crore. Out of this, Rs 15,902 crore was earmarked for public sector programmes and Rs. 8,980 crore for the private sector. The plan aimed at a growth rate of 5.7 per cent in national income, but could realize only 3.3 per cent.
The Fifth Five Year Plan (1974–78)
The Fifth Plan was drafted when India was reeling under severe inflation caused by an unprecedented increase in international oil prices in the wake of the 1973 Gulf crisis. The sharp increase in the prices of food, fertilizers and oil seriously upset the assumption on which the draft plan was framed. The most important objectives of the plan were the removal of poverty and achievement of self-reliance. The strategies related to growth in three leading sectors: agriculture, energy and critical intermediates, and the generation of additional employment opportunities. The plan had a total public sector outlay of Rs. 39,320 crore, earmarking 22 per cent for agriculture and irrigation, 26 per cent for industry and mining, 20 per cent for transport and communication. The plan initially set a target of 5.5 per cent increase in national income. But, the plan could not complete its five years. It was terminated at the end of the fourth year (March 1978) by the newly elected Janata Party government. The initial plan of the Janata government was to introduce the ‘Rolling Plan’, a type of plan that was well executed in China. However, they were satisfied with two annual plans, 1978–79 and 1979–80. The Fifth Plan brought about a five per cent increase in national income.
The Sixth Five Year Plan (1980–85)
The plan was launched with the prime objective of removing poverty, rural development and a balanced regional development. A substantial increase was provided in the plan outlay for the ‘Special Area Programmes’, in keeping with the objective of reducing regional disparities. The plan was formulated against the background of a long-term perspective covering a period of 15 years from 1980–81 to 1994–95. This development perspective aimed at accelerated progress towards the removal of poverty, generation of gainful employment and technological and economic self-reliance. The plan also aimed at speedy development of indigenous sources of energy with emphasis on conservation and efficiency in energy use and development and protection of ecological and environmental assets.
The Sixth Plan envisaged an outlay of Rs. 97, 500 crore, However, the actual expenditure stood at Rs. 109,291.7 crore at current prices. Of the total outlay, 24 per cent was for agriculture and irrigation and 27.8 per cent for industry and mining. The plan achieved an annual growth rate of 5.4 per cent, which was in excess of the targeted rate of 5.2 per cent. Industrial output went up by 5.5 per cent per annum, but was less than the targeted rate of seven per cent. Poverty ratio came down from 48 per cent in 1977–78 to 37 per cent in 1984–85. The aggregate growth target for the plan was achieved mainly because of good agricultural performance and rapid growth in the services sector. The successful implementation of the plan also enhanced India's ability to deal with chronic problems of poverty and under-development.
Seventh Five Year Plan (1985–90)
The Seventh Plan sought to emphasize policies aimed at acceleration of food-grains production, increase in employment opportunities and raise in productivity. The Plan strategy was geared to a direct attack on the problems of poverty, unemployment and regional imbalances. It stressed the need to accelerate the tempo of growth, and it sought to push the process of economic and technological modernization of the economy further ahead. The plan presented a comprehensive strategy for agricultural development, and it set a targeted growth rate of four per cent per year in agricultural production. The plan had an actual expenditure of Rs. 26,295 crore for the development of industries and minerals, and it realized an annual growth rate of 8.5 per cent in the sector. In order to facilitate the growth process, the plan also placed increased emphasis on investment in infrastructure. Nearly 31 per cent of the public sector outlay was meant for energy. The generation of power was expected to grow at an average annual rate of 12.2 per cent over the plan period. The plan, registered an annual average growth rate of 5.8 per cent as against the targeted five per cent. The Seventh Plan also experienced some difficulties. It was faced with increasing strain on balance of payments, budgetary deficits, and price levels. The level of deficit financing was two-and-a-half times greater than expected. Thus, though the Seventh Plan gained growth targets, it generated various stresses and strains on the economy.
The Eighth Five Year Plan (1992–97)
The Eighth Plan was to commence in 1990–91, but could not because of political changes. The newly elected government decided to implement the Eighth plan from April 1, 1992 (there were annual plans for 1990–91 and 1991–92) with a thrust on maximization of employment and social transformation. During that time, the economy was facing severe challenges. First, there were fiscal problems, which posed a severe constraint on the availability of resources. Secondly, India had to roll back public sector investment from those sectors of the economy where the private sector could move in, and also to step up its investments in the social sector. Thirdly, it was to be ensured that the growth process should benefit the poor, and the changed pattern should not stand against them.
Thus, the Eighth Plan had special features that distinguished it from earlier plans. They were:
- The plan was indicative in nature rather than directional.
- It recognized human development as the core of development efforts.
- It attempted to correct the fiscal imbalances from which the Sixth and Seventh Plans suffered.
- It was an integrative plan and so proposed to bring together various department and agencies dealing in rural development such as energy and transport under one roof for coordinated policy formulation and implementation.
- It recognized the importance of people's participation in the process of development by changing the attitude of passive observance and total dependence on the government for development activities.
- The plan was performance oriented.
- The plan paid special attention to employment in rural areas to check migration to urban centres.
The Eighth plan was introduced within the frame work of structural reforms of the 1990s, whereby India made revolutionary changes in its economy. The Plan ended up with an average growth rate of 6.8 per cent per annum, that is, 1.2 per cent higher than the targeted growth rate of 5.6 per cent. The average growth rate during the last three years of the plan was 7 per cent, which placed India among the top ten performers of the world. Plan suffered from some weaknesses. The development achieved in the agriculture sector was less than satisfactory. Agricultural investment and credit availability remained stagnant. The plan failed to achieve the target set for infrastructure facilities like power, transport and communication. The import and export trends were less promising, and so the balance of payment position remained unstable. The plan also experienced an average inflation rate of 8.8 per cent.
The Ninth Five Year Plan (1997–02)
The Ninth Plan was launched in the 50th year of India's Independence. The people of India had demonstrated their ability to forge a united nation despite its diversity and of their commitment to pursue development within the framework of a vibrant and dynamic democracy. Against such a background the Ninth Plan was formulated with the objective of ‘Growth Social Justice’. The Ninth Plan proposed an investment of Rs. 2,171,000 crore at 1996–97 price. Of the investment, 92.6 per cent was to be met from domestic sources. Investment in the public sector was only 33 per cent.
The growth rate of the economy during the plan years was less than the targeted rate of 6.5 per cent per annum. In 1997–98 the economy experienced a record growth of 6.8 per cent mainly because of the increase in agricultural production. The manufacturing sector, however, continued to perform badly and grew at a marginally below four per cent. The service sector continued to perform well. Four sectors like construction, communication, public administration and other services had performed far better than expected. The growth in other services was mainly because of the development in the software sector. The average annual growth rates were 5 per cent, 6.8 per cent, 5.9 per cent, 6.45 per cent and finally 5.2 per cent as against the average annual growth target of 6.5 per cent. In the agricultural sector, the plan had the target of 234 million tones of food grains but could achieve only 209 million tones. The economy also experienced inflationary trends. But, the overall macro indicators showed an upswing and the ability of the Indian economy to wed up global competition.
The Tenth Five Year Plan (2002–07)
GDP growth in the post-reform period improved from an average of about 5.7 per cent in the 1980s to an average of about 6.5 per cent in the Eighth and Ninth Plan periods, making India one of the fastest growing developing economies with decelerating population growth and literacy, fast-growing knowledge and economy’ all that added silver lining in India's development path. But, even in the midst of these silver linings there is a galaxy of other Indian facts, which pave the way for larger concerns. There are several aspects of development where progress is clearly disappointing.
The incidence of unemployment on Current Daily Status basis is relatively high, at above seven per cent. More than half the children in the age group of 1–5 years age in rural areas are under-nourished. Infant mortality rate has stagnated at 72 per 1,000 for the last several years. As much as 60 per cent of rural households and about 20 per cent of urban households have no taps in their houses. Deterioration in urban environment, increase in slum population and overall alarming population has affected the quality of life of the urban poor. The decline in the juvenile sex ratio over the last decade, visible in the data from Census 2001, is an indication that the constitutional assurance of freedom and equality for women is still far from being fulfilled.
In this background, the tenth plan provides an opportunity at the start of the new millennium to build upon the gains of the past, and also to address the weaknesses that have emerged. The Tenth Plan had targeted an average annual GDP growth rate of 8.1 per cent. This was expected to lay the basis of a growth rate of above 9 per cent during the eleventh plan period. The growth target of the first two years was about seven per cent on an average. The actual performance has been 4.6 per cent in 2002–03 and 8.3 per cent in 2004–05, and an average 6.5 per cent in the first three years, which is below the tenth plan target of 8.1 per cent.
Approach to the Eleventh Five Year Plan (2007–12)
The National Development Council (NDC), the country's highest policymaking body, endorsed the Eleventh Plan document on December 19, 2007. It envisages an average nine per cent GDP growth in the first four years to end the five year period with a growth of 10 per cent during the terminal year 2011–2012.
With an overall investment of 36,000 crore, Gross Budgetary Support has been fixed nearly 115 per cent higher at Rs 10 lakh crore to help states in ushering in inclusive growth through the development of social infrastructure such as health, education and eradication of poverty by generating more jobs. Twenty-seven targets have been proposed at the national level and 13 at the state level with regards to poverty eradication, education, health, status of women and children, infrastructure and environment. The incidence of poverty is to be reduced by 10 percentage point by generating seven crore new jobs, while electricity connection is to be ensured to all villages.
The Eleventh Plan provides an opportunity to restructure policies to achieve a new vision based on faster, more broad-based and inclusive growth. It is designed to reduce poverty and focus on bridging various divides that continue to fragment society. The Eleventh Plan aims at putting the economy on a sustainable growth trajectory with a growth rate of 10 per cent by the end of the plan period. It will create productive employment at a faster pace than before, and target robust agriculture growth at four per cent per year.
With population growing at 1.5 per cent per year, nine per cent growth in GDP would double the real per capita income in 10 years. This must be combined with policies that will ensure that per capita income growth is broad-based, benefiting all sections of the population, especially those who have thus far remained deprived. A key element of the strategy for inclusive growth must be an all out effort to provide the masses access to basic facilities such as health, education, and clean drinking water.
Monitorable Social-economic Targets of the Eleventh Plan
Income and Poverty
- Accelerate growth rate of GDP from eight per cent to 10 per cent, and then maintain at least 10 per cent in the Twelfth Plan to double per capita income by 2016–17.
- Increase agricultural GDP growth rate to four per cent per year to ensure a broader spread of benefits.
Table – 2 Eleventh Plan (2007–2012) Outlay by Heads of Development: Centre, State: Centre, states and Union Terriories, 2007-2008, 2008-2009
Source: Planning Commission
BE Budget Estimates
RE Revised Estimates
Table – 3 Macro-economic Indicators of the Eleventh Five Year Plan
- *GDP growth rate is actual, up to 2005-06; saving rate, investment rate and CAB are actual up to 2004-5
- Government fiscal balance and revenue balance are based on actual (three years for centre and two years for states) and for remaining years RE/BE/projected.
Source: Approach paper Eleventh Plan, Planning Commission
- Create 70 million new work opportunities.
- Reduce educated unemployment to below five per cent.
- Raise real wage rate of unskilled workers by 20 per cent.
- Reduce the head count ratio of consumption poverty by 10 percentage points.
- Reduce dropout rates of children in elementary school from 52.2 cent in 2003–04 to 20 per cent by 2011–12.
- Develop minimum standards of educational attainment in elementary school and, by regular testing, monitor effectiveness of education to ensure quality.
- Increase literacy rate for persons aged seven years or more to 85 per cent.
- Lower gender gap in literacy to 10 percentage points.
- Increase the percentage of persons going to higher education from the present 10 per cent to 15 per cent by the end of the plan.
- Reduce Infant Mortality Rate (IMR) to 28 and Maternal Mortality Ratio (MMR) to 1 per 1,000 live births.
- Reduce total fertility rate to 2.1.
- Provide clean drinking water for all by 2009 and ensure that there are no slip backs by the end of the plan.
- Reduce malnutrition among children of age group 0–3 to half its present level.
- Reduce anemia among women and girls by 50 per cent by the end of the plan.
Women and Children
- Raise the sex ratio for age group 0–6 to 935 by 2011–12 and to 950 by 2006–17.
- Ensure that at least 33 per cent of the direct and indirect beneficiaries of government schemes are women and girl children.
- Ensure that all children enjoy a safe childhood, without compulsion to work.
- Ensure electricity connections to all villages and BPL households by 2009 and round-the-clock power by the end of the plan.
- Ensure all-weather road connections to all habitations with population of 1,000 and above (500 in hilly and tribal areas) by 2009, and ensure coverage of all significant habitation by 2015.
- Provide broadband connectivity to all villages by 2012.
- Provide homestead sites to all by 2012 and step up the pace of house construction for rural poor to cover all the poor by 2016–17
- Increase forest and tree cover by five percentage points.
- Attain WHO standards of air quality in major cities by 2011–12.
- Convert urban wastewater by 2011–12 to clean river waters.
- Increase energy efficiency by 20 percentage points by 2016–17.
The Indian economy has emerged with remarkable rapidity from the slowdown caused by the global financial crisis of 2007–09. With growth in 2009–10 now estimated at 8.0 per cent by the Quick Estimates released on 31 January 2011 and 8.6 per cent in 2010–11 as per the Advanced Estimates of the Central Statistics Office released on 7 February 2011, the turnaround has been fast and strong. Growth is strong in 2010–11 with a rebound in agriculture and continued momentum in manufacturing, though there was a deceleration in community, social, and personal services, reflecting the base effect of fiscal stimulus in the previous two years. It was composed of growth of 5.4 per cent in agriculture, growth of 8.1 per cent in industry and a decelerated growth of 9.6 per cent in services as against 10.1 per cent in 2009–10 (Table 4) On the demand side, the GDP at constant prices (2004–05) at market price is estimated to grow by 9.7 per cent.
Economic Crisis of 1990–91 and Reforms
The economic development in India over the period of four decades (1950–1990) has been summarized by Jagdish Bhagwati in following words:
- high growth rates.
- openness to trade and investment.
- a promotional state.
- social expenditure awareness.
- confidence that poverty would be seriously dented by growth.
- macro stability.
- optimism; and hence.
- The admiration of the world.
But we ended in the 1980s with:6
- low growth rates.
- closure to trade and investment.
- a license-obsessed, restrictive state.
- inability to sustain social expenditures.
- loss of confidence in the efficacy of growth in reducing poverty.
- macro instability, indeed crisis.
- pessimism; and therefore.
- marginalization of India in world affairs.
Excessive State intervention through an elaborate system of controls and circuitous procedures have caused serious economic distortions and inhibited the growth impulses. The industrial policy of the government is said to have degenerated into ‘overprotection’. The high protection walls both in terms of tariffs and direct controls through an elaborate physical import control regime and tight controls on allocation of foreign exchange have sapped the competitive potential of Indian industry, and led to creation of a high cost economy. The enlargement of controls over the industrial sector had the effect of distorting the market signals and contributing to several micro-economic inefficiencies.7 Bhagwati and Srinivasan have described vividly how these micro-economic inefficiencies have caused macro-economic inefficiencies resulting in an unsustainable fast growth of budget deficits.8 A case-by-case discretionary system of bureaucratic controls and periodic exemptions through notifications have added to the transaction costs, turning the industry less competitive. Controls have also helped to open the flood gates for corruption, generating black money and the scams of the hawala market.9
The crisis had been simmering since the mid-1980s, with government relying heavily on domestic and foreign borrowings. The aftermath of the conflict in the Middle East (the Iraqi invasion of Kuwait) and the resultant steep rise in oil prices, dealt a major blow to macroeconomic management. All these events culminated in a crisis of high fiscal deficit, escalating inflation and setback to balance of payments, leading to a rapid depletion of foreign exchange reserves.
The political and administrative control of the public sector has become financially unviable. Total public sector borrowing increased to nine per cent of the GDP by 1990. Thus, the public sector which was supposed to generate resources for the growth of the rest of the economy gradually became a net drain on the society as a whole.10
Thus, the ratio of the central government's fiscal deficit to GDP reached an all-time high of 8.3 per cent in 1990–91; the rate of inflation touched a peak of 17 per cent in August 1991; and forex reserves dropped to a meager one billion dollars by March 1991, sufficient to meet only about two weeks of imports. India was at the edge of a precipice; it could have even become a defaulter in meeting its international financial commitments.
In the wake of the acute economic crisis of 1991, the Government of India moved swiftly to evolve economic reform measures, based on liberalization. The wide-ranging reform package included consistent and coordinated measures to reduce protection and improve the competitive potential of both pubic and private sector industries. The reforms were aimed at macro-economic stabilization and Structural Adjustments in various sectors of the economy. The objective of the reforms was to evolve an industrial and trade policy framework which would promote efficiency in the economy and increase its international competitiveness. The clear objectives are; to deregulate the economy, to reduce the role of the public sector, to unleash private initiative and enterprise, to accelerate economic growth, to meet the challenges of global competitiveness and of course to ensure social equity and justice. It marked a paradigmatic shift from the Nehruvian model of development pursued since independence.
- Abolition of industrial licensing except in nine industries.
- Exclusive public sector reservation limited to four industries against seventeen previously.
- Drastic dilution of legislation such as the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA).
- Automatic approval for foreign direct investment (FDI) up to 51 per cent equity in fifty-one, and up to 74 per cent in nine specified industries.
- Foreign Investment Promotion Board specially constituted to promote FDI in areas of strategic importance and requiring large investments.
- Substantial opening up of infrastructure to domestic private sector and foreign direct investment.
- Rupee devaluation of 20 per cent in early July 1991, and a gradual changeover to market-determined exchange rate.
- Full current account convertibility of the rupee in August 1994.
- Progressive deregulation of deposit and lending rates of banks.
- Sharp reductions in the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) allowing banks greater freedom into deployment of lendable resources.
- Promoting integration of the money and foreign exchange markets.
- Strengthening the banking system through (a) capital adequacy; (b) prudential norms of accounting; and (c) greater autonomy and freedom to banks.
- Allowing the setting up of private sector banks and foreign banks.
- Major capital market reforms including: (a) free pricing of equity; (b) allowing for-eign institutional investors (FIIs) entry to portfolio investment; (c) allowing the corporate sector to access Global Depository Receipts (GDRs)/External Commercial Borrowings (ECBs), etc.
- Establishment of SEBI (Security and Exchange Board of India).
Rationalization and Simplification of the Tax System
- Personal income tax: top rate reduced from 56 per cent in 1990–91 to 30 per cent.
- Corporate tax: (a) domestic companies from 51.75 per cent to 35 per cent; and (b) foreign companies from 74.75 per cent to 48 per cent.
- Excise Duty: Fewer product classification/fewer rates: range 8 per cent to 18 per cent; in a few cases going up to 30 per cent.
- Across-the boards extension of Modified Value-Added Tax (MODVAT).
- Gradual shift towards VAT.
- Customs Duty: Sharp rationalisation and remarkable reduction in customs tariff.
- Long-term Export–Import (EXIM) policy; phasing out of (a) quantitative restrictions; (b) discretionary controls; and (c) canalized items of trade, etc.
- Maximum rate reduced from 300 per cent to 40 per cent. Most rates now range from 10 per cent to 25 per cent.
- Trade weighted rate 27 per cent.
Major reforms were implemented in infrastructure such as telecommunication, telecom equipment manufacturing industry, road transport, highway development and shipping. The reforms implemented in telecommunications included value added services like cellular mobile phones, radio paging, electronic mail etc. which were opened up to the private sector. Foreign equity participation was permitted to provide basic telecom services and the Telecom Regulatory Authority of India (TRAI) was set up. The telecom equipment manufacturing industry was deregulated in 1991 with automatic approval of foreign equity up to 51 per cent of total equity. Insurance sector was also opened up allowing foreign equity participation. Insurance Regulatory Authority of India (IRAI) was set up to regulate insurance sector. The road sector was declared an industry to facilitate borrowing on easy terms ands permit floating of bonds. The government announced a policy to encourage private sector participation, levying user fee, and construction of BoT basis for highway development.
Impact of Economic Reforms
Growth and Structural Change
The trends in growth rate of the pre-reform decade (1980s) and post-reform period, is provided in Table 5. During the 1980s and the 1990s, the annual average growth was about 5.8 per cent. But the pattern of growth was different in the two decades. In the 1980s, the annual growth rate was below five per cent in three years and below four per cent in two years. But during the 1990s, except for two years, the rate of growth was more than five per cent. This indicates that the economy achieved a more steady and sustained growth rate during the post-reform period compared to the earlier period. During the present decade, the economy achieved a high rate of growth of 8.5 per cent in 2003–04 and 7.5 per cent in 2004–05.
Source: Economic Survey 2004–05 and 2006–07
A sector-wise growth rate of the decades 1980s and 1990s give us an idea about the changes that have taken place in different sectors of the economy. Table 6 gives a sectorwise growth rate of the Indian economy since 1980–81.
Agriculture and allied sectors provide more than half of the total employment and nearly one fourth of the national income (GDP). Trends in annual growth rate of agriculture during the 1980s show that the sector registered a marginal or negative growth rate only in three years. On the other hand, during the 1990s, the sector witnessed negative or marginal rate of growth in four years. The index of agricultural production shows that the performance of agriculture was better during the pre-reform decade compared to the post-reform decade (1990s) (Table 6).
Trends in the growth rate of the secondary sector comprising manufacturing, construction, electricity, gas and water supply show that the sector achieved an annual average growth rate of 6.64 during the 1980s and 5.91 in the 1990s (Table 6). The sector achieved a steady growth rate during the 1980s compared to the 1990s. However, the secondary sector registered a higher growth rate during the first half of the present decade. The rate of industrial production was lower in the 1990s compared to the earlier period. However, the rate of industrial production witnessed a rise since 2002–03. During the post-reform period, the industrial sector underwent rapid structural and technological changes with the introduction of a number of new products. The tertiary sector comprising trade, hotels, transport and communication, financing, insurance, real estate, and other services witnessed the highest growth rate in the post-reform period compared to pre-reform period (Table 6).
Economic growth resulted in structural changes of the economy. The broad change in the composition of sectoral shares of the Indian economy since 1980–81 is given in Table 7. During the 1980s, the major change was a decline in the share of the primary sector on the one hand and an increase in the share of the secondary and the tertiary sector on the other. During the 1990s, there was a rise in the share of tertiary sector, the share of the secondary sector remained constant. During the first half of this decade, the only sector that witnessed an increased in the share was the tertiary sector. The share of the tertiary sector increased to 54 per cent of the GDP. Thus, the broad structural change was a steady fall in the primary sector share, a rise and subsequent stagnation of the secondary sector share and a steady rise in the tertiary sector share.
Source: Economic Survey 2004–05 and 2006–07.
The basic determinants of the growth of an economy are the rate of saving and investment. The domestic savings in India comprises of household sector, private corporate sector and public sector. Compared to the 1980s, the rate of domestic savings and capital formation were higher during the 1990s and the first half of the present decade. In the case of domestic savings, the household sector and the private corporate sector registered a rise. The only sector that registered a fall in savings was the public sector. Thus, the achievement of a fairly good rate of growth of the economy during the post-reform period may be attributed to better domestic savings and capital formation.
The trends in per capita income at constant prices showed that the rate of growth of per capita income during the 1990s was higher than the 1980s. During the first half of this decade, the per capita income at constant prices increased by 22 per cent. The overall increase in per capita income at constant prices suggests that the rate of growth was higher during the post-reform period compared to the earlier period (Table 8).
|Year||Per capita income (Rs.) at current prices||Per capita income (Rs.) at constant prices|
Source: Economic Survey 2004–05 and 2006–07.
According to NSSO surveys (National Sample Survey Organisation), the total employment increased from 239.57 million (person year) in 1983 to 315.84 million in 1993–94 and 336.75 million in 1999–2000. Between 1983 and 1987–88, the annual growth of employment was in the range of 2.73 per cent. The agriculture sector witnessed a growth of 1.64 per cent, the secondary sector 5.56 per cent and the tertiary sector 3.91 per cent during this period. The trends in the growth rate continued during 1987–88 to 1993–94. During this period, while the agriculture sector registered a higher growth, there was a fall in the growth rate of the secondary sector. The trend in the growth of employment continued without much change in the tertiary sector (Table 8).
During the post-reform period, especially between 1993–94 and 1999–2000; there was a fall in the growth rate of employment. The annual growth rate of employment declined to 1.1 per cent. The agriculture sector remained stagnant with zero growth of employment during the period. The secondary sector registered a growth of 3.05 per cent. On the other hand, there was an increase in all the sub-sectors of the tertiary sector with the only exception being community, social and personal services. Thus, the trends in the growth of employment during the 1980s and the 1990s showed that the rate of growth was lower in the post-reform period.
Thus economic reforms have accelerated a process of structural change indicating a fall in the share of agricultural employment and a rise in secondary and tertiary employment.
The expert group of the Planning Commission (1993) had fixed a monthly per capita total expenditure of Rs. 89.45 (rural) and Rs. 117.64 (urban) for 1983 as the poverty line, which was the official poverty line of India for 1983. At this level of per capita total expenditure, it is expected that a person will get the required per capita daily intake of 2,400 calories in rural areas and 2,100 calories in urban areas, According to this norm, the people below the poverty line in rural areas were 45.7 per cent and urban areas 40.8 per cent (Table 9). There was a continuous decline in poverty during the 1980s and 1990s based on the official poverty line. But a notable development was that the poverty declined at a higher rate during the 1990s. This suggested that the reforms have initiated widespread changes in employment and income generation resulting in a larger reduction of poverty in 1990s. According to the estimate of 1999–2000, the percentage of people below the poverty line in rural and urban areas was 27.1 per cent and 23.6 per cent respectively. The poverty line in 1999–2000 was based on a monthly per capita total expenditure of Rs. 327.65 (rural area) and Rs. 454.11 (urban areas). The poverty line has a number of limitation and it does not capture ill health, low educational attainments geographic isolation, ineffective access to law, caste and gender-based disadvantages, low income, dependence of debt, and ignores structural inequalities and other factors that generate, sustain and reproduce poverty.
Note: Not all indicators were available for all countries: Caution should thus be used in cross-country comparisons.
** Data refer to the most recent year available during the period specified. Figures in parentheses in Column 2 give ranking among 169 countries
Source: HDR 2010.
The multidimensional poverty index (MPI) indicates the share of the population that is multi-dimensionally poor adjusted by the intensity of deprivation in terms of living standards, health, and education. According to this parameter, India with a poverty index of 0.296 and poverty ratio of 41.6 per cent (in terms of PPP) and 28.6 per cent (national poverty line) is not favourably placed with countries like China and Srilanka.
Retrospect & Prospects
The main objective of state-centered economic policy during the plan period was economic growth, and the economic policies were geared to fostering this objective. Agriculture was consistently neglected and the rural sector, based on peasant agriculture, was deprived of development fund in favour of industrial development in the urban areas. The paramount importance of agriculture to the socio-economic development of the country can hardly be overemphasized. Agriculture offers employment to over 52 per cent of the working population; and contributes about 18 per cent of the GDP. Development has been equated with industrialization, imported consumption patterns and life-styles, and provision of educational, health and other public services with an urban bias at the cost of the real needs and potentialities of the neglected and impoverished rural majority.
Plans have failed because of defective and half-hearted implementation efforts, lack of cohesion with social factors and the impediments imposed by political and economic factors. Development plan targets and investment possibilities in the country have been too ambitious and unrealistic. It is further complicated by the centralized character of Indian planning which ignores the fact that each area has its own individuality, potentiality and needs. Besides the towering personality of Nehru and the ruling Congress party's long dominance in the country, a high propensity for centralization in the public domain was reinforced by a bureaucratic tradition which relied upon uniformity, cohesion, decision-making through a string of committees, and an inward looking mind-set. L.K. Jha, the then Secretary to the Prime Minister, observed,
‘Centralization has been of the failings of the Indian administrative system. Despite the tremendous increase in the size of the government… the number of point at which effective and critical decisions are taken are extremely limited. The worst victim of the centralization psychosis, which affects many government departments, is the public sector.’11
National development plans failed not only in achieving a large number of important planned targets, but also promoted an undesirable style of development. The style of development pursued since independence has led to lopsided growth in almost every economic and social sectors resulting in unequal distribution of its benefits among the various sections of the society. Despite more than six decades of planned economic development, a large part of the population, particularly segments like landless agricultural labourers, marginal farmers, SCs, STs, and OBCs, suffers social and financial exclusion.
The structural change that occurred during the post-reform period has been a decline of the primary sector and the emergence of the tertiary sector as the dominant sector. Steady increase in gross domestic savings and capital formation has accelerated the investment process of the economy. The most significant achievement of reform has been the steady and sustained improvement in the balance of payment position and accumulation of foreign exchange reserves.
However, the reforms have not achieved the desired results on some fronts like reduction of unemployment and poverty, rural development, improvement in the condition of the rural and urban poor, expansion of public services, infrastructure development, etc. The growth in speculative investments in stocks, real estate, gold and other assets created unhealthy and undesirable social effects. Some of the policies pursued in agriculture had adversely affected the interests of small and marginal farmers and resulted in the suicides of a large number of farmers in different parts of the country. The reforms have also marginalized the poor sections of society like landless agricultural labourers, marginal farmers, tribal people, workers in informal sectors, and workers solely dependent on agriculture and allied activities. Likewise, the policies have failed to improve public education, health services, public utilities, and in strengthening the network for the public distribution system.
Note: Refers to an earlier year than specified.
Figures in parentheses in Column 2 give ranking among 169 countries.
Source: HDR 2010.
In terms of gender equality index (GEI), India with an index value of 0.748 ranks 122 out of a total of 168 countries in 2008. The GEI captures the loss in achievement due to gender disparities in the areas of reproductive health, empowerment, and labour force participation with values ranging from 0(perfect value) to 1 (total inequality). The GEI index value of 0.748 indicates a higher degree of gender discrimination in India compared to countries like China (0.405) and Srilanka (0.5999). According to Human Development Report 2010, the HDI for India was 0.519 in 2010 with an overall global ranking of 119 (out of 169 countries) compared to 134 (out of 182 countries) in 2007.
The concepts like economic fundamentals, economic reforms, and globalization need to be defined in different ways for the different countries situated at various levels of development and in varied socio-economic settings. The fundamentals for the Indian economy should be considered in terms of the facilities for education, health service, infrastructure, empowerment of women, population control, and such other social aspects of development. The absence of favourable initial conditions in terms of education, health and other characteristics would adversely affect the ability to take advantage of the emerging trend of globalization and liberalization. The policy system should attend to these fundamentals which are germane to the Indian system rather than considering only the fundamentals universally defined by the foreign institutions and scholars.
Although national development planning has failed to achieve its basic objectives, but there is no reason to be pessimistic. India remains well-endowed in both natural and human resources and it is believed that adoption of the unified approach to development analysis and planning will go a long way in solving some of the basic socio-economic problems the country is faceing today.
Planning needs to be accommodated into federal democracy. If it fails to take into account the legitimate role of states in the economy, future plans are likely to encounter obstacles and be embroiled in political controversies. Broad Planning decisions will, henceforward, no longer be the decisions of the Central government alone. They will emerge from bargaining between the Union and State Government. There is a growing recognition that the relative roles of the Central and state governments in the economy should also be redefined. The Centre should confine its role to macro-economic management, creation of a legal framework and the movement of goods, services and people, leaving implementation to the states. With the introduction of economic reforms, there will probably be wider and more intensive consultations between government and the private sector. The gap in the available resources could possibly be met by a tailor-made Public-Private Partnership (PPP) mode of funding without diluting the regulatory oversight of the government. Private sector participation in social sectors, such as health and education, sometimes referred to as public-social–private partnership (PSPP), could be one of the possible alternatives for supplementing the ongoing efforts of the government.
Attempts should be made in term of taking a realistic account of available resources, avoiding the attitude of ‘overplanning’, more as a political move of raising false expectations among the masses, concerted efforts toward reforming of procedure to achieve responsive action and initiative at each point of implementation, better co-ordination with numerous public and private agencies, and finally, creating a sense of confidence among people for whole planning system, and its acceptance by them through eliciting public cooperation and support at every level of plan formulation and implementation. Plan should focus exclusively on expansion of primary education, health programmes, drinking water availability and infrastructure facilities, as these hold out the best hope for avoiding the fritting away of scarce resources, which has long remained the bane of planning in India.
India is a country in transition. It has yet to complete its democratic experiment as the internal pressures from powerful socio-economic forces continually seek to dislodge it from its democratic path. The colonial legacy, social diversity, poverty and illiteracy coupled with the peculiarity of the political process stand in the way of universalization of the benefit of governance. India is a soft state.12 Far from divesting or downsizing, the first and foremost task before India is to create a proper functioning democratic administrative state.
On 19 April 1996, United Nations General Assembly session on Public Administration and Development adopted GA Resolution 50/225, which:13
- Reaffirmed that democracy and transparent and accountable governance and administration in all sectors of society were indispensable foundation for social and people-centered sustainable development.
- Recognized that there was a need for public administration systems to be sound, efficient and equipped with the appropriate capacities and capabilities.
- Reaffirmed that governments in all countries should promote and protect all human rights and fundamental freedoms, including the right to development.
The new economic reforms have redefined the relative roles of the market and the government. While the reform programme envisages huge inflow of direct foreign capital into many sectors, there is no getting away from the state still having to assume the major responsibility for a quick amelioration of poverty and expansion of basic facilities. There could, therefore, be no conflict between objective laid down for economic reforms programme and those for social welfare, which still remains as the exclusive domain of state. Only a strong active state can promote social justice, ensure universal access to quality services, and safeguard the rule of law and respect for human rights in the terms of Resolution 50/225.
Hence, the key to development is ‘good governance’. Reforms in government should not just be confirmed to the public or civil service, but should include all other branches of government, and should be matched also by like reforms in all social sectors and development instrumentalities. The World Bank also stressed the need to establish a better system of governance for Third World, especialy ‘sub-Saharan Africa.’14 States in the Third World should promote the rule of law, political pluralism and administrative accountability.15
It is unfortunately true that government had lost a great deal of its credibility. The most vital task is to restore it, and this requires an efficient, honest transparent and democratic governance. The programme of poverty alleviation, removal of inequality, illiteracy and ignorance, family planning, management of scarce resources, meeting challenges of, ecological imbalance and problems of pollution, social cost of liberalization, privatization and globalization have been identified as the challenges to be met to promote speedy development. The accumulating and overall impact of all these new phenomena on the broad spectrum of society have led to emergence of problems such as innumerable forms of crimes, deviance, terrorism and violence endangering the unity and integrity of the nation. The crisis of confidence, faith and values, and threats of internal violence and external pressures have to be tackled by the administration as India's tryst with destiny continues even today.