(For
Students of (SEPS)
MIXED
ECONOMY
It is the
mixed form of socialistic and capitalistic economy. Certain economic activities
are fully owned and controlled by the government but all the economic
activities are not owned by the Government. Private and public sector both
co-exist in the economy.
We have
adopted mixed economy in India. All the basic industries such as railways, post
and telegraph, defense production, atomic energy etc. are in the public sector.
Industries dealing with consumer goods are in the private sector. Ours is a
welfare state, so the government can nationalize any industry or own any
company in the public interest. Mixed economy reduces inequality of income. Due
to increased expenditure on public utilities and services, economic benefits to
their poor pe9ple are provided.
Advantages
Mixed
economy has got the following advantages:
Rapid economic development
Inmixed economy both private and public sectors work side by side.
The combined efforts lead to rapid economic development. The economic resources
of the economy are used efficiently. Wastages of resources are minimised.
Lesser inequality of income:
Right to
own property is granted. Law of inheritance is also applied, so certain members
of society grow richer and richer. Public sector in the economy tries to
provide economic facility to the general masses. It reduces inequality of
income.
Balanced regional growth:
The
planning commission of the country makes policies for the development!"of
every region of the economy. The government tries to develop all regions and
every section of population.
Freedom to own private property:
Individuals
are free to acquire property and retain in their own names, so the initiative
to work more and earn more is there. It helps in the rapid development of the
economy in the field of agriculture, industry and other services.
Planned development:
The
planning commission is empowered to make effective plans for the development of
the economy. We, in India, have also adopted planned developmental economy and
introduced five year plans.
Public interest:
The public
sector looks into the interest of the general public. The government under this
economy is said to be welfare state. It introduces social insurance schemes,
incurs expenditure and manages economy in the interest of general masses of the
country.
Disadvantages
Inspite of
the above advantages, the mixed economy suffers from the fol lowing weaknesses:
Fear of nationalization:
Private
and public sector coexists. The government has the power to nationalise and own
any industry, so private sector remains under a psychological fear that their
industry may be nationalised or taken over in the public interest.
Inequality of income:
Inspite of
all the efforts of the government to bring equality, rich people grow richer
and the inequality prevails. Economic resources economic developments are
concentrated with certain big industries.
Corruption:
Corruption
is the common feature of mixed economy. Black-marketing, profiteering,
dishonest dealings and corruption is seen both at higher and lower levels.
India’s
Economic Performance, Policies and Prospects
Montek S.
Ahluwalia
The chapters in this volume
provide a comprehensive review of almost all-important aspects of the Indian
economy. They also convey much of the
flavor of the current debate on economic issues in India, with its usual
diversity of views. In this chapter I
propose to examine what this review adds up to in terms of the present state
and future prospects of the Indian economy and the evolution of economic
policies in India.
A
particular objective of this chapter is to provide the total perspective in
which some of the recent initiatives in India’s economic policy need to be
viewed. These initiatives, usually characterized by the catchall phrase “ economic
liberalization”, have been the special focus of international attention
directed at India. They are certainly important, but they must be seen as once
element of the total economic policy package, addressed especially at improving
performance in the industrial sector. Economic policy must also deal with many
other aspects of performance where the key issues do not relate to economic
liberalization. It is also important to
distinguish the Indian policy initiatives form the classical “liberalization packages”
which are ardently advocated in many quarters.
There are important differences in approach and perhaps also in
underlying philosophy and these differences are brought out in this chapter.
Objective of Policy
Both
performance and policy are in some sense best judged in terms of the objectives
of development policy, the more so in an economy in which objectives have been
consciously set in successive national plans. The broad objectives which have
guided India’s development strategy are listed below. Some of them are
obviously common to all developing countries, but others are not so , at least
not to the same extent.
1.
Achievement of a high rate of economic growth leading to a sustained
improvement in the levels of living of the population. This is obviously a
common objective of all developing countries.
2.
Reduction in inequalities and more especially an accelerated effort to
remove poverty at a pace faster than would be achieved solely through the
normal growth process. This objective
too is commonly subscribed to in the plans of many developing countries, though
the importance accorded to it varies, as do the policies adopted in its
pursuit.
3.
Development of a mixed economy with a strong public sector, especially
in key areas of the economy. The creation
of a public sector could be viewed as an instrument for achieving broader
objectives of growth with equity, but India’s development strategy has accorded
such special importance to the public sector that t could properly be described
as an independent objective of policy.
The creation of a public sector was viewed not merely as an instrument
to achieve other objectives. There was a
more basic and widely shared sociopolitical commitment to the creation of a
mixed economy, in which the state has a substantial direct control over
important production sectors.
4.
Achievement of a high order of “self-reliance” has been an important
independent objective. The term itself
is used in tow senses. In one sense,
self-reliance has meant that development must be financed as far as possible
from domestic savings, avoiding excessive dependence upon external
assistance. Self-reliance has also meant
a conscious effort at developing a broad domestic production base and an
indigenous technological capacity, both of which were felt to be essential
requirements for building a strong industrialized economy.
5.
Promotion of balanced regional development, with a narrowing of economic
difference across regions. This has
tended to be viewed not just as matter of promoting economic growth but also
more specifically as a matter of regional balance in the degree of
industrialization.
6.
Finally, these social and economic objectives were to be pursued in the
framework of a constitutional democracy.
These
broad objectives have been evident from the very early stages of Planning in
India. Over time they have taken more
concrete shape as distinct objectives.
It is evident that some of these objectives involve a potential conflict
or trade-off with growth, at least in the short term. The possibility of such trade-offs in the
short run was always consciously recognized, though of course it is always
relevant to ask whether in practice the trade-off was optimized.
How has
the economy performed in terms of these objectives? A summary assessment is offered in the
following sections, focusing especially on recent performance and identifying
some key aspects of policy and future priorities as they emerge from recent
experience.
Growth Performance
The rate
of growth of the economy is the most commonly used measure of overall
performance and it is appropriate to begin with this indicator. Up to about the mid-seventies, India’s trend
growth rate of G.D.P ignoring yearly fluctuations seemed firmly anchored at about
3.5 percent per year, unforgettably characterized by the late professor Raj
Krishna as “ the Hindu rate of growth”. There is clear evidence that the
economy broke through this constraint some time in the mid-seventies. The growth rate over the past ten years or so
averages about 4.5 percent and this is an average over a period in which growth
was accelerating. The underlying growth rate of the economy in the mid-eighties
is nearer 5 percent per year. This is not high compared with growth rates
achieved in earlier decades by the better-performing developing countries. Some
countries have achieved annual growth rates as high as 10 percent over
sustained periods, and many have grown at rates between 6 percent and 7 percent
in the sixties and early seventies. But this comparison is not wholly fair in
assessing recent economic performance in India.
An obvious point which has
to be noted is that India is a relatively large economy and also among the
group of low-income countries of the developing world. The size of the economy
ensures that a process of averaging must be at work. India’s “growth potential”
cannot therefore be presumed to be equal to the fastest-growing developing
countries, but closer to the average. More important, India’s recent
performance should not be assessed by comparing it with growth rates achieved
by developing countries in an earlier period when the international environment
was especially conducive to rapid growth. The growth potential of the
developing world as a whole has slowed down since the mid-seventies, and when
due allowance is made for this factor, India’s recent growth performance and
current growth prospects appear in a much better light.
In the
period up to the mid-seventies India’s growth rate of around 3.5 percent per
year was much lower than the average of about 6.0 percent achieved by the
developing countries as a whole. In the past ten years, however, India’s growth
rate has accelerated, while growth rates in most of the developing world have
decelerated. India’s growth rage in the period 1981-86 was almost 5 percent,
when all developing countries taken together grew by only 2.5 percent.
Admittedly the low growth of developing countries as a group was partly due to
negative growth rates in the oil-exporting countries, but even if these
countries are excluded, the category of non-oil-developing countries shows a
growth of only 3.5 percent per year in this period. In fact, India’s growth
performance in the eighties is exceeded only be some of the fast-growing East
Asian economies and China.
This raises the question
whether the acceleration in growth is a temporary phenomenon or indicative of a
more basic improvement in the economy’s growth potential. The theme explored in
this chapter is that India had indeed experienced a permanent acceleration in
growth, accompanied by an increase in its underlying growth potential. A degree
of structural maturity has been achieved in both agriculture and industry,
which not only has laid the foundation for sustained growth at 5 percent but
also holds out the prospect of higher growth in future. The elements of this
transformation and the policy framework in which it took place are discussed in
the subsequent sections of this chapter.
Turnaround in Agriculture
A key
element in the improvement in aggregate performance was improved performance in
agriculture. This not only contributed directly to faster growth of GDP but
also stimulated industrial growth through well-known linkages between the two
sectors.
Conventional wisdom identifies the beginning of the
Green Revolution with the introduction of the Mexican hybrid wheat in the late
sixties. The new seeds quickly led to increased wheat yields in Punjab, where
agroclimatic conditions were favorable and effective water management was
readily possible. But this was only the beginning of the story. To achieve an
agricultural turnaround, it was necessary to spread the Green Revolution more
widely, both in terms of crops and also in terms of geographical regions. This required
a comprehensive strategy for agricultural change requiring active Government
intervention in many dimensions. It required a sustained effort at expanding
irrigation with a shift from major to medium and minor irrigation. It was
necessary to push the banking system into the rural areas to provide credit for
the purchase of biochemical inputs needed for high-yielding varieties (HYVs).
These measures were accompanied by a policy for providing effective price
support at remunerative prices. It was also necessary to strengthen research to
adapt high-yielding varieties to local conditions and to develop new varieties
continuously. Varietal development is particularly important in the case of
rice, which is grown in widely varying agroclimatic conditions in the Gangetic
basin and which requires a correspondingly larger number of varieties to ensure
suitability in different local conditions.
Agricultural policy evolved along these lines in
the seventies, but it took time to have a noticeable impact. Although yields
and production of wheat grew rapidly in Punjab from an early stage, this was
not reflected in a convincing improvement in total agricultural performance
until after the mid-seventies. With the usual lags in availability of data, and
also the fact that it takes time before an upswing can be statistically
established with confidence, there was considerable skepticism about
agricultural performance even in the late seventies. Vaidyanathan found
evidence that Indian agriculture may actually be decelerating, while Srinivasan
cautioned that the Green Revolution was as yet only a wheat revolution.
By the early eighties, however, it became generally
accepted that Indian agriculture had indeed entered a new phase, with a
discernible acceleration in agricultural growth. The compound growth rate of
production for all crops has increased from about 2.5 percent in the period
1950-51 to 1967-68, to about 3 percent after the mid-seventies. The compound
annual growth rate of the index of agricultural production in the more recent
period from 1980-81 to 1985-86 is about 3.2 percent. There is also clear
evidence that agricultural production is becoming less vulnerable to variations
in rainfall, itself an important aspect of agricultural performance.
The rate
of growth achieved is still short of the 4 percent target growth of
agricultural production in the Seventh Five-Year Plan (1985-90) but there are
good reasons to believe that an acceleration to 4 percent growth is possible
because of the structural and institutional changes which have taken place in
the agricultural sector o0ver the past ten years. The institutional system
needed to deliver the necessary inputs has a much wider coverage today than it
did ten years age, but its full potential for increasing yields has yet to be
realized. There has been an impressive increase in irrigation potential with
the addition of about two million hectares of irrigation capacity every year.
However, effective utilization of this capacity has lagged behind because of
insufficient investment in the construction of field channels and drains and
also because of inefficient water management practices. The area covered under
high-yielding varieties shows an impressive increase from about 40 percent in
1980-81 to over 60 per cent in 1986-87, but while area coverage has increased,
yields have not increased as much as could be expected. The banking
infrastructure has also greatly increased its penetration of rural areas and is
well positioned to provide rural credit for large parts of the country. All
these developments constitute a structural transformation in the making-they
have increased the production potential of Indian agriculture in a way which is
not yet fully reflected in actual production.
Average
yields in India are still well below yields achieved by many East Asian
countries, although yields achieved in the best-performing agricultural states
compare favorably. The inter-state variation in yields is a good indicator of
the tremendous scope for further improvement in agricultural production. Rice
yields are 3,200 kilograms per hectare in Punjab and 2,800 kilograms per
hectare in Haryana. By contrast they are only 1,490 kilograms per hectare in
Uttar Pradesh, 1,130 kilograms per hectare in Bihar and 1,560 kilograms per
hectare in West Bengal. The area under rice in these States is very large. Even
modest improvement in yields, narrowing the gap between what has already been
achieved in the most productive areas in the country, could produce a large
impact on overall agricultural growth.
Fortunately there are definite signs that the Green
Revolution is indeed spreading to those areas, and yields are increasing in
Uttar Pradesh and also Bihar. The task of agricultural transformation of these
areas is not easy. It will require a tremendous improvement in the ground level
functioning of the development administration to provide the farmer with the
full package of support needed. But the process has definitely taken off, and
further acceleration can be expected.
Industrial
Performance and Policies
Rapid industrialization has long been viewed as the
key to sustained growth and modernization of the economy. However, industrial
policies were not framed solely by the immediate requirements of growth
maximization. They were also influenced by active Government intervention in
pursuit of some of the other developmental objectives listed earlier in this
chapter.
The results present a mixed picture. In some
respects the industrial sector can be said to have achieved the objectives set
for it. A substantial public sector presence has been created, laying the
foundations for a mixed economy. A high degree of “self reliance” has been
achieved in the sense that a highly diversified industrial base has been
created, catering to the domestic needs of the economy in a very wide variety
of products. The entrepreneurial base of the economy has also been widened
greatly, with the emergence of a number of new large and medium-scale
industrial houses and a profusion of small-scale entrepreneurs. Finally, industrial
has spread into regions where industry did not exist earlier and into which it
probably would not have gone for many more years but for government
intervention.
Against
these achievements there are some obvious shortcomings. Industrial growth has
not been as rapid as was expected. After a promising early period in the
fifties and early sixties, industrial growth slowed down considerably, and from
1964-65 to 1975-76 the index of industrial production showed a growth rate of
only 4 percent per year and value added in industry grew at 3.5 percent per
year. There is evidence of a gradual acceleration after the mid-seventies,
through with considerable year-to-year fluctuations. In the most recent period
1981-82 to 1986-87, the index of industrial production (using the new index
base 1980-81=100) shows an average growth rate of around 7 percent per year
while value added growth is about 6 percent. This is definitely an improvement
on past performance, but it still falls short of what is needed to take the
economy beyond the current 5 percent growth of GDP. For the future, India
should be aiming at an industrial growth rate of around 9 percent to 10
percent, with value added in the industrial sector growing at 8 percent to 9
percent.
Another
major shortcoming in India’s industrial sector is its lack of international
competitiveness and consequent poor export performance. Export performance is
obviously important in a situation in which the continued growth and
modernization of the economy requires a substantial inflow of imported capital
goods and other inputs into production. The industrial sector, which absorbs a
large percentage of total resources available to the economy, must be able to
earn the foreign exchange it needs from exports. This has not yet happened to
the extent needed, and one of the major constraints is clearly lack of
competitiveness in terms of both cost and quality.
These
shortcomings of slow industrial growth and a high-cost uncompetitive industrial
sector have been widely recognized in India and have led to critical
reexamination of the industrial policy structure to see what corrective steps
are necessary. The blame for slow industrial growth cannot, of course, be laid
on policy alone. For example, it could be argued that the key to faster
industrial growth lies in a more rapid pace of expansion in agriculture which
would provide the stimulus for faster growth in industry. While this is
undoubtedly true, a consensus has also emerged that the system of regulatory
control that has evolved over time is not conducive to industrial efficiency
and dynamism.
A number
of official reports and academic studies have documented that problems created
by a control system consisting of detailed, often multiple, regulation and
scrutiny. This system has operated in a manner which hampered the ability of
industrial units to take rational investment decisions, limited their ability
to modernize existing capacities and even discouraged expansion of production
beyond licensed capacity. It has also restricted competition which would have
been a spur to improved quality and lower cost. Much of the problem arises
because of the multiplicity of objectives to which industrial policy has been
tailored, each involving an intervention which has an economic cost.
The
catalogue of criticisms of the industrial policy are well-known. The original
rationale for industrial licensing was to direct private investment into
desired areas and also to avoid wasteful overinvestment. In practice, strict
licensing often had the effect of limiting expansion by efficient units or
entry by potential new units on the ground that adequate capacity had already
been licensed. Inefficient producers were therefore effectively shielded from
domestic competition. The objective of limiting concentration of economic power
led to specially strict scrutiny and regulation of the expansion or investment
plans of larger houses, with a view to ensuring that their activities were
restricted to high-priority, technically more difficult industries. Consideration
of maintaining regional balance often led to fragmentation of capacity, with a
consequent loss of economies of sale. There was a tendency to license a larger
number of small units spread over many States, where a single economic-scale
plant would have been more efficient.
These and
other sources of inefficiency undoubtedly contributed to the emergence of a
high-cost industrial structure which slowed growth and reduced export
competitiveness. Such a structure would obviously not have been sustainable in
a more open economy, which allows competition from imports, but the trade
policy permitted very little room for import competition. The objective of
self-reliance should have meant self-reliance with efficiency. In practice,
however, domestic production was protected from external competition with
little regard to domestic resource costs. Protection, which should have been
viewed as giving initial support for infant industries, which would in time
outgrow the need for it, typically continued as an indefinite crutch,
supporting industries whose costs of production were far out of line with
international prices.
These
problems prompted the establishment of various official committees in the early
eighties to examine the structure of industrial and trade policies and make
recommendations for change. On the basis of their recommendations a series of
policy initiatives were taken in 1985 and 1986. The most important of these
were the following:
1.
The coverage of industrial licensing was reduced by delicensing
twenty-five industries and eighty-two pharmaceutical products.
2.
Where licensing remained in operation, procedures were simplified and
industrial licensing was much more liberally operated. Furthermore, greater
flexibility was provided to producers to expand capacity within existing
licensed capacity. Provisions for allowing automatic expansion in licensed
capacity, which existed earlier, were liberalized. For a number of products,
licenses were “broadbanded” so as to cover similar products, thus allowing flexibility
in varying the product mix.
3.
The minimum size of assets beyond which a unit is declared a “large
house” and subjected to specially rigorous scrutiny in licensing was increased
from Rs 200 million to Rs 1,000 million.
4.
Twenty-seven industries were added to the list of industries for which
large houses are exempted from the special scrutiny normally required.
5.
A list of industries was notifies where economies of scale are
important, and for these industries minimum economic scales of plant were specified.
Existing units below these sizes will be allowed to expand freely up to the
minimum economic size, and new units will be licensed only for these of higher
sizes.
6.
A number of items were earlier reserved for production in the
small-scale sector, defined in terms of units with investment in plant and
machinery below Rs 35 lakhs. In many cases, this investment limit was too low
for efficient production of the reserved items. The list of reserved items has
been reviewed, and a number of items have been deleted, or in some cases
redefined, to enable larger-scale investment to be made for the production of a
large number of items.
7.
In the area of trade policy, the Government accepted the principle of
shifting from quantitative controls to tariff controls. Implementation,
however, was left to be determined in the light of practical possibilities.
Some tariff adjustments have indeed been made along these lines.
8.
No major change was made in the degree of import liberalization in 1985
and 1986, but it was reaffirmed that the liberalization that had earlier taken
place over the first half of the eighties would stay in place. The affirmation
that import policy would not be reversed was an important signal in a situation
where the balance of payments was beginning to show strain.
9.
A major step was taken towards rationalization of the indirect tax
system in 1986 by introducing a modified value-added tax, covering a wide range
of commodities. The system provides for adjustment of the duties paid on inputs
against the tax due on output. Although tax rates on outputs were
simultaneously raised to avoid any net reduction in effective taxation in the
initial stages, it was nevertheless an important reform. The total burden of
excise taxation on a commodity is now more apparent since earlier-stage duties
are adjusted against the tax. This paves the way for restructuring of indirect
taxation in the future. The Government has indicated that restructuring of
indirect taxes will be attempted industry by industry.
10.
Steps have also been taken to
rationalize the structure of customs duties. The range of variation of tariffs
for capital goods has been reduces. Tariffs were raised on a number of items
earlier allowed at 55 percent duty and lowered on others where the tariff was
101 percent, and all these items now face a uniform duty of 85 percent
(inclusive of a 15 percent countervailing duty which offsets the 15 percent
domestic excise duty on capital goods). In addition, the customs duty structure
for components and raw materials has been both lowered, and rationalized, for
selected sectors. It has also been indicated that such restructuring will
continue to be made sector by sector.
11.
Finally, a number of measures
were taken to improve the competitive position of exporters. The procedures for
giving exporters access to imports at international prices were further
improved in several ways and direct tax incentives for income from exports were
strengthened. Some of these measures are applicable to all exporters, but
others were aimed at particular export sectors. The customs duties on capital
goods for certain industries deemed to have export potential (gems and
jewelery, garments, leather, etc.) were reduced to 35 percent in an effort to
bring the cost of production in these industries more in line with world
prices.
It is too early
to evaluate quantitatively the effect of the 1985 and 1986 measures on actual
industrial performance. However, there is no doubt that they have contributed
to a spurt of investment proposals in these years. The volume of industrial
licenses approved in 1985 and 1986 increased very substantially and there was
also a large increase in industrial investment proposals in the delicensed
category as measured by the number of registrations. Moreover, because of the
more liberal approach to technological modernization and import of capital
goods for this purpose, the more recent investment proposals embody better technology
than has been allowed in the past. Many of them also represent plant sizes
which are nearer to economic levels of scale. The full impact of this
investment boom and the associated qualitative improvements should be evident
in the next few years when the capacities to be created by these investments
come on-stream.
An important
determinant of industrial performance in India is the performance of the public
sector. The creation of a large public sector presence in the Indian economy
was one of the explicit objectives of India’s development strategy and the
success in achieving this objective is evident. Public sector output today
accounts for about 45 percent of the output of the organized industrial sector
and 30 percent of total industrial output. Its alone ensures that an overall
acceleration of industrial growth would require an improvement in public sector
performance. This is all the more so since the public sector occupies a
dominant position in key infrastructure industries such as power generation,
coal, steel and crude oil production, and performance in these areas is crucial
to the general level of industrial efficiency.
There can be no
doubt that very considerable improvement is needed in public sector
performance. The logic of undertaking large investments to create a public
sector with a commanding presence implies that it will generate the necessary
surpluses to be able to replace capital and finance investment for future
growth. The record in this respect has been disappointing. There are heartening
examples of very good performance by individual enterprises, but, equally,
there are many cased of large and chronic loss makers. The overall generation
of resources from this sector is well below the level assumed in the Plan. If
the resources contributed by the oil sector are excluded, the performance of
the other public sector organizations appears in a much poorer light.
There is no easy
solution to the problem of improving public sector performance. Many of the
public sector enterprises suffer from earlier noneconomic decisions, which are
not always the fault of management. No simple formula will overcome these
problems. Many are heavily overmanned, and it is not easy to lay off surplus
labor. Some suffer from wrong technology choices or product mix decisions made
earlier which impose a continuing burden on the enterprise. In some cases,
public sector projects become unviable even before they commence production
because capital costs are allowed to escalate to unreasonable levels on account
of delays in implementation, usually because the unit was short of funds at the
early stages. Still other loss-making enterprises in the public sector are
actually former private sector units which had become financially unviable and
were taken over by the Government only to protect employment. Each of these
pathologies obviously calls for its own solution.
However, a
consensus is emerging on one important issue, and that is the need to give
management autonomy to public sector enterprises as a key requirement for
efficient functioning. There is no inherent reason why a public sector
corporation should be inefficient, if it is run like a corporation. In
particular, it must not be subjected to continuous interference from the
Government or bureaucracy which demoralizes public sector management and
dilutes accountability. Government should set out the corporate objectives of
the enterprise and top management must be given the full degree of autonomy
needed to achieve these corporate objectives. With this autonomy there must
also be accountability. The performance of top management must be judged in
terms of the achievement of agreed objectives. The Sengupta committee, which
examined the functioning of public sector enterprises and submitted its report
in 1985, had recommended that the objective of ensuring autonomy and
accountability could be achieved by introducing a Memorandum of Understanding
(MOU) which would be jointly agreed between the Government and the top
management of the enterprises each year. The MOU would set out the objectives
according to which the management performance would be judged and it would also
specify actions expected by the public sector enterprise from the Government.
As an experiment, the system of MOUs is being implemented for six major public
sector enterprises beginning in 1987.
It is important
to note that the “privatization” which is often recommended as the answer to
public sector inefficiency is not on the agenda. Proponents of privatization
obviously regard the public sector as inherently inefficient. No such
assumption underlies the policy reform being attempted in India. On the
contrary, the basic approach is that a public sector enterprise can be as
efficient as any other corporate sector unit can be made to approximate the
relationship between shareholders and a corporation.
The policy
initiatives described above for improving industrial performance involve a
considerable measure of deregulation and therefore may be called economic
liberalization but they obviously differ in important respects from the usual
liberalization packages often prescribed for developing countries and also
undertaken in some cases (though with varying success). The familiar
liberalization package focuses heavily on foreign trade liberalization and rationalization
of protection. The usual formula is to recommended a first stage consisting of
a switch from quantitative to tariff controls, followed by a phased reduction
in both the variation in degrees of protection across sectors and also the
average level of protection. The whole process is usually expected to be
underpinned by an exchange rate depreciation. Often it includes a conscious
policy of privatization of the public sector to overcome problems of public
sector inefficiency. The differences in the Indian case are evident. Indian
policy reform has focused much more on domestic industrial liberalization
rather than foreign trade liberalization.
There is considerable internal deregulation aimed at strengthening the
more efficient domestic firms and encouraging them to invest and expand. This
is expected to inject much more competition into the system, creating
incentives for reducing costs. The internal liberalization has been accompanied
by a policy of maintaining a sufficiently open access to imports to permit
modernization and technological upgrading in Indian Industry, which again will
reduce costs and promote international competition. As far as foreign trade
liberalization is concerned, a broad direction has been given about the
desirability of switching from quantitative controls to tariffs, but the
movement in this area is limited and certainly does not include imports of
final consumer goods. However, significant tariff rationalization measures have
been implemented in several sectors.
Finally, there is no question of privatization of the public sector. The
focus is on management and institutional reform of the public sector to improve
its efficiency.
An important
feature of the process of policy reform under way in India is that it is gradualist.
The system is being subjected to much stronger pressures for efficiency and
modernization, but at a controlled pace. The rationale for this gradualist
approach lies in the perception that the system should be subjected to pressure
commensurate with its ability to respond. Pressures beyond this point is only
disruptive.
Financing
Development
An important
aspect of performance, which has a direct bearing on the longer-term growth
potential of the economy, is the ability to mobilize resources for investment.
India’s recent performance in this dimension is commendable. The rate of gross
domestic investment in the economy, which increased only marginally from 17
percent in 1960-61 to 18 percent in 1970-71, then increased sharply thereafter
to reach 24.7 percent in 1980-81. It has stayed at that level in the eighties.
This investment rate is not high compared with rates achieved in the more
rapidly growing middle-income countries, but it is much higher than the rates
achieved in all the other low-income countries except China. What is more, the
high rate of investment is being financed almost entirely from higher domestic
savings, testifyi9ng to the success of self-reliance in this sense of the term.
The gross domestic savings rate, which was 17 percent in 1970-71, had increased
to 23 percent by 1985-86.
There is
certainly need and scope for further increased the rate of savings and thereby
also the rate of investment. But the levels already achieved, and their evident
sustainability, reflect on important structural transformation in the economy
in terms of its resource mobilization capability. Even if the investment rate
is only maintained at around 24-35 percent, it should be possible not only to
maintain the present 5 percent growth rate, but perhaps even to achieve some
further acceleration. This is because all available evidence suggests that the
incremental capital-output ratio is higher in India than in other countries.
This points to the scope for increased efficiency in resource use, a
possibility which is confirmed by recent studies of total factor productivity
such as Ahluwalia and Goldar which show slower growth in these indices of
industrial productivity in India compared with other developing countries.
An important
feature of the increase in the aggregate savings rate is that it has occurred
entirely because of the rapid growth in private household savings as a percent
of GDP. The ratios of private corporate sector savings and public sector
savings to GDP have remained more or less constant at 2 percent and 3 percent
of GDP respectively, while private sector savings increased from 12 percent of
GDP in 1970-71 to 18 percent of GDP in 1985-86. This rapid growth reflects the
cumulative impact of a conscious policy of giving strong incentives for private
household savings, especially in the form of financial assets. Following nationalization of the Indian
commercial banks in 1969 (foreign banks were not nationalized) there was a
massive expansion of the banking system spreading bank branches to all parts of
the country, including also rural areas. The spread of bank branches definitely
helped to mobilize private savings for investment in the organized sector.
Interest rate policy was also geared to encourage household savings and for the
past ten years or so, rates paid on term deposits with banks and other
government-sponsored small savings schemes have yielded positive real rates of
return for savers, especially for maturities of three years and above. More
recently positive real rates of return have been available even for shorter
maturities.
This favorable
interest rate policy was reinforced by fiscal incentives for savings built into
the direct tax structure which provide deductions from taxable income of the
interest earned on a wide range of financial instruments. For certain types of
long-term savings instruments, a deduction is aloes allowed for a part of the
amount invested. These incentives, which have been steadily strengthened and
expanded in the past ten years, have had the effect of raising the effective
pretax return on eligible financial investments. They certainly encouraged the
flow of savings into these investments and on the whole probably also
stimulated total savings.
The
institutional mechanisms for mobilizing household savings for productive
investment have been further strengthened in the eighties by the remarkable
development of the domestic capital market. Until about 1980 the volume of
funds sought to be raised directly from the capital market through equity and
bonds was only about Rs 500 crores per year. By 1986-87 this had increased more
than tenfold.
This is an
impressive rate of expansion by any standard and is indicative of a structural
transformation taking place in an important area, which would have very
important implications for mobilizing capital and allocating it efficiently.
The process is as yet far from complete. The capital market remains thin and
vulnerable to manipulation. It lacks adequate depth in terms of the existence
of large numbers of active participants, including institutional investors. It
is also inadequately regulated in terms of rules for full disclosure and
restrictions on trading malpractices, including, in particular, insider
trading. These limitations are fully recognized and a number of initiatives
have been taken to overcome these problems. The Unit Trust of India, until now
the only mutual fund operating in India, and hitherto a conservative
income-oriented operation at that, floated a second fund aimed at capital
appreciation. The State Bank of India is to float a second mutual fund to
complete with the Unit Trust. The term lending financial institutions, which
upto now have played only a limited role in the capital market, have been more
active in it in the past two years. The 1986 and 1987 budgets liberalized the
treatment of long-term capital gains on sale of shares so that the maximum tax
on capital gains on shares is only 20 percent for shares held for more than one
year. The Government also proposes to set up a National Securities and Exchange
Board which will serve as an agency supervising the functioning of the stock
markets and setting clear rules on issues such as disclosure, insider trading,
etc, to protect the investor. It will also serve as a forum for the development
and implementation of ideas aimed at developing a healthy capital market.
In the area of
resource mobilization therefore, the economy has shown a reasonably good
performance with important structural changes taking place which have
strengthened its capability to mobilize and allocate resources efficiently. The
principal weak area has been the generation of investable surpluses form the
public sector. This weakness has been widely recognized and it is to be hoped
that the various measures being taken to improve public sector performance will
correct this problem.
Equity and Social Justice
Considerations of equity
and social justice have been extremely important in India’s development
objectives and policies and any evaluation of performance must include these
dimensions also. This is not an easy task because of the multidimensional
nature of the equity and social justice objective. The concern with income
inequality and the need to increase incomes and levels of living for the
poorest sections of the population is the most commonly discussed aspect of
this objective. However, there are several other dimensions also, which call of
distinct policy interventions. These include provision of basic or “minimum
needs” for the build of the population (not just the poor) relating to health,
education, drinking water and sanitation, removal of social disparities arising
from caste, providing equality of opportunity at various levels of education to
promote vertical mobility, and reduction in regional disparity, avoiding
concentration of economic power within the private sector. A quantitative
assessment of progress in each of these dimensions is beyond the scope of this
chapter, but some broad features of performance and policies can be documented.
A major problem in
assessing performance in reducing inequality is the lacj of reliable time
series data on the distribution of income. The only robust conclusions which
can be asserted is that the distribution of income in India , as measured by
the usual indicators of inequality, is among the more equal in the developing
world. There is also no evidence of any increase in income inequality over
time. Data on the distribution of consumption are more readily available and
these show a decline up to the mid-seventies followed by a period in which
there is year-to-year fluctuation but no trend.
Success in reducing poverty
is in many respects more important than trends in relative inequality, and this
subject has been extensively investigated in the Indian literature, especially
in the context of rural poverty, which is the bulk of the problem. A broad
consensus is emerging. Studies have shown that up to about the mid-seventies
the percentage of the rural population living below the poverty line has
fluctuated over time, but without any underlying trend. The percentage appears
to have increased in years of poor agricultural performance (allowing for
appropriate lags) and to have declined in response to good agricultural
performance. It has also been argued that the behavior of prices and inflation
has an important impact on the extent of poverty with rising prices being
associated with an accentuation of poverty.
Although a clear trend does
not emerge from the available data up to the mid-seventies, the more recent
performance is more encouraging. There was perceptible drop in the late
seventies in the percentage of population living below the poverty line and
this appears to have continued into the eighties. The Planning Commission has
estimated that the percentage of the rural population in poverty declined by 10
percent points in the Sixth Five-Year Plan period (1980-85) from 47 percent to
37 percent.
The pattern of no trend up
to the mid-seventies followed by an improvement can be attributed to two
factors. One is probably the acceleration in agricultural and nonagricultural
growth which took place from the mid-seventies onward.
In the earlier period,
overall growth, and especially agricultural growth, was so low that after
allowing for population growth, there was only a very modest growth in per
capita incomes. Per capita income in the rural areas probably grew at no more
than 0.5 percent per year up to the mid-seventies. With per capita incomes
growing so slowly it is not surprising that rural poverty was not much reduced.
In the second period, growth in rural per capita incomes was definitely higher.
If more rapid growth in nonagricultural income earned by rural households is
allowed for, the growth in per capita incomes in rural areas in the more recent
period could well be in the range of 1.5 percent or so. These growth rates are
still only modest, but they represent a definite improvement on the earlier
pattern. The regional pattern of growth in the eighties also indicates a shift
which would have helped reduce poverty. There is an acceleration in growth in
some old the very areas where poverty has been most concentrated, e.g., Uttar
Pradesh and Bihar.
These developments suggest
that the twin strategy of relying on accelerated growth, especially in
agriculture, together with special programs aimed at directly helping
households below the poverty line, can produce significant results in a
reasonable period of time. The Planning Commission has estimated that the
percentage of the population below the poverty line will have declined to 25
percent by 1989-90. the next decade should see a further sharp decline if not
virtual eliminated in poverty as measured by the standard that has been used thus
far.
As noted above, progress in
other dimensions of equity and social justice is not so easily documented
because of lack of data. But there is no doubt that there has been commensurate
growth in most of the other indicators of minimum needs and living standards
also. Perhaps the most important recent initiative in this area is the
announcement of a New Education Policy aimed at upgrading the quality of
education at all levels and accelerating the spread of education. A beginning
in implementing this policy is being made in 1987-88 with a massive increase of
almost 120 percent in Central Government expenditure on educational programmes.
The special focus on education, including adult education, has direst relevance
not only for productivity of the labor force but also for equity and poverty
removal.
Conclusion
It is appropriate to
conclude this overview of India’s economic performance and policies with a
summary assessment of prospects. The past record shows an economy which has
gained in strength and structural maturity in many dimensions. It has certainly
emerged from the pattern of sluggish growth evident up to the mid-seventies, to
a much better performance subsequently, especially in the most recent years. A
growth rate of 5 percent is now definitely sustainable and could even be
bettered in future if the considerable unutilized potential built up form past
investment in the economy is effectively exploited. There is considerable scope
for reaping such benefits both in agriculture and in industry, with present
levels of the rate of investment or modest improvements therein. The policy
initiatives being taken in the industrial sector will help to bring about this
outcome.
Management of the balance
of payments will remain an important problem especially if the objective is to
achieve a balance which can finance the sort of growth in imports that is
needed to sustain technological modernization in increasing numbers of sectors
of the economy. This points to the extreme importance of exports in the years
on the industrial front and the changes made in policies towards exporters
should help to strengthen India’s export capability.
A major factor which will
help stimulate virtuous cycles in the Indian economy in future is the expected
slowdown in the rate of growth of population. With population growing at over 2
percent per year., much of the growth in production in the past has been
absorbed by rising population. However, the prospect oaf a decline in the rate
of growth in population is now at hand. Although fertility levels are
declining, the age composition is such that the child-bearing population is
expected to increase, and this will affect declining fertility foe some time.
Nevertheless, the rate of growth of population is likely to slow down form 2.2
percent expect a faster deceleration.
The combined effect of a
modest acceleration in economic growth and a gradual decline in population
growth would put the economy on a much faster pace of per capita income growth
than experienced in the past.
Notes
1.
T.N. Vaidyanathan,
"Performance and Prospects of Crop Production in India," Econony
and Political Weekly, Special Number 1977.
2.
T. N. Srinivasan,
"Trends in Agriculture in India 1949-50—1977-78," Economic and
Political Weekly, Special Number 1979.
3.
Rs 1 lakh - Rs 100,00.
4.
Isher J. Ahluwalia, Industrial
Growth in India: Stagnation since the Mid-Sixties, (New Delhi: Oxford
University Press, 1985.)
5.
B.N. Goldar,
"Productivity Factor Use Efficiency in Indian Industry" (Paper
presented at a Seminar on Indian Industrialisation at the Centre for
Development Studies, Trivandrum. June 9-12, 1987.)
6.
Rs 1 crore — Rs 10 million.
7.
S.D. Tendulkar,
"Economic Inequalities and Poverty in India: An Interpretative
Overview," in The Development Process of the Indian Economy, edited
by P. R. Brahamananda and V. R. Panchmukhi (New Delhi: Himalaya Publishing
House, 1987).
8.
M. S. Ahluwalia.
"Rural Poverty, Agricultural Production and Prices: A Reexamination,"
in Agricultural Change and Rural Poverty: Variations on a Theme by Dharm
Narain, edited by John W. Mellor and Gunvant M. Desai (Baltimore, Md.: John
Hopkins University Press, 1985).
9.
Tendulkar, "Economic
Inequalities and Poverty in India."
*****
