INDIAN ECONOMIC EVOLUTION

BRIEF HISTORY SINCE 1947• After independence India envisaged as socialist inspired

economic model, “USSR” like centralized and nationalized five year plan.

• The "Peruvian Socialist rate of growth" is used to refer to the low annual growth rate of the economy of India before 1991. It stagnated at around 3.5% from the 1950s to 1980s, while per capita income growth averaged extremely low 1.3% a year.

• From FY 1951 to FY 1979, the economy grew at an average rate of about 3.1 per cent a year in constant prices, or at an annual rate of 1.0 per cent per capita. During this period, industry grew at an average rate of 4.5% a year, compared with an annual average of 3.0% for agriculture.

BRIEF HISTORY SINCE 1947• To maintain the rationality in allocation of scarce resources

the PERMIT RAJ was introduced. But after a time period it became an instrument for corruption.

• This Licensing and quantitative restriction were placed on all goods coming into the country which placed serious limitation on private sector companies to do business in India.

• Indian economy was in excessive turmoil by expanding its reach by and issuing 2nd IPR in 1956, government had control of 12 more sectors including banking, insurance, fertilizer by issuing more complex licenses.

BRIEF HISTORY SINCE 1947• During this period most private sector companies were regulated

by government with regard to their location, production levels, and employment rules.

• Throughout the 1960 and 1970,inefficency, slow growth, technological stagnation were hall marks of Indian economy which led to the devaluation of Indian rupee upto 56%.

• The war with Pakistan and china derailed our growth rate, along with the famine in 1965-66 pushed us to the edge of bankruptcy.

• In 1980 the public debt has significantly increased as a result of subsidizing the sick units of public sector companies.

ECONOMIC LIBERALISATION IN 1990

• India started having balance of payments problems since 1985, and by the end of 1990, under the leadership of PV Narshima Rao it was in a serious economic crisis. The CAD was about 3% of GDP.

• The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports

• It had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). Most of the economic reforms were forced upon India as a part of the IMF bailout

ECONOMIC LIBERALISATION IN 1990

• After two government fell due to unrest , the collapse of soviet union being a primary reason. The new elected Prime minister Narshima Rao faced a severe balance of payments.

• Under the pressure of IMF and leadership of FM Man Mohan Singh, India took systematic approach to improve national efficiency and removing barriers to growth.

• Indian Govt. reduced tariffs and taxes, encouraged foreign investment, eliminated numerous licensing requirements, and improve fiscal discipline.

• Between 1993-94 and 1996-97, India experienced a growth rate of 7.1%

LATER REFORMS• The Bharatiya Janata Party (BJP)-Atal Bihari

Vajpayee administration surprised many by continuing reforms, when it was at the helm of affairs of India for five years.

• The BJP-led National Democratic Alliance Coalition began privatising under-performing government owned business including hotels, VSNL, Maruti Suzuki, and airports, and began reduction of taxes, an overall fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.

LATEST REFORMS• Towards the end of 2011, the Congress-led UPA-2 Coalition

Government initiated the introduction of 51% Foreign Direct Investment in retail sector. But due to pressure from fellow coalition parties and the opposition, the decision was rolled back. However, it was approved in December 2012

• In the early months of 2015, the second BJP-led NDA Government under Narendra Modi further opened up the insurance sector by allowing up to 49% FDI. This came seven years after the previous government attempted and failed to push through the same reforms and 16 years after the sector was first opened to foreign investors up to 26% under the first BJP-led NDA Government under Atal Bihari Vajpayee's administration

LATEST REFORMS• The second BJP-led NDA Government also opened up the coal

industry through the passing of the Coal Mines (Special Provisions) Bill of 2015. It effectively ended the Indian central government's monopoly over the mining of coal, which existed since nationalization in 1973 through socialist controls. It has opened up the path for private, foreign investments in the sector, since Indian arms of foreign companies are entitled to bid for coal blocks and licences, as well as for commercial mining of coal. This could result in billions of dollars investments by domestic and foreign miners. The move is also beneficial to the state-owned Coal India Limited, which may now get the elbow room to bring in some much needed technology and best practices.

IMPACT ON ECONOMY POST REFORMS

• The combined fiscal deficit of the central and state governments was successfully reduced from 9.4 percent of GDP in 1990-91 to 7 percent in both 1991-92 and 1992-93 and the balance of payments crisis was over by 1993.

• However the public savings deteriorated steadily from +1.7 percent of GDP in 1996-97 to –1.7 percent in 2000-01. This was reflected in a comparable deterioration in the fiscal deficit taking it to 9.6 percent of GDP in 2000-01. Not only is this among the highest in the developing world, it is particularly worrisome because India’s public debt to GDP ratio is also very high at around 80%.

IMPACT ON ECONOMY POST REFORMS

• To increase the public savings The Advisory Group on Tax Policy for the Tenth Plan recently made a number of proposals for modernizing tax administration, including especially computerization, reducing the degree of exemption for small scale units and integration of services taxation with taxation of goods (Planning Commission, 2001a).

• Post the reforms Indian entrepreneurs were encouraged by loosening restriction on the import technology and absence of taxes on software exports, Indian entrepreneurs began building there own IT firms, including such notable firm as WIPRO,TATA CONSULTANCY SERVICES,INFOSYS. The total valuation of the Indian IT firms is around $10billion.

INDUSTRIAL POLICY REFORMS• Industrial policy has seen the greatest change, with most central

government industrial controls being dismantled. The list of industries reserved solely for the public sector -- which used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications and telecom equipment, minerals, oil, mining, air transport services and electricity generation and distribution

• Industrial licensing by the central government has been almost abolished except for a few hazardous and environmentally sensitive industries.

• The requirement that investments by large industrial houses needed a separate clearance under the Monopolies and Restrictive Trade Practices Act to discourage the concentration of economic power was abolished and the act itself is to be replaced by a new competition law which will attempt to regulate anticompetitive behavior in other ways

TRADE POLICY REFORMS• Import licensing was abolished relatively early for capital goods

and intermediates which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime.

• Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1, 2001, almost exactly ten years after the reforms began, and that in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the United States.

• the weighted average import duty rate declined from the very high level of 72.5 percent in 1991-92 to 24.6 percent in 1996-97. However, the average tariff rate then increased by more than 10 percentage points in the next four years.

FOREIGN DIRECT INVESTMENT• The policy now allows 100 percent foreign ownership in a large

number of industries and majority ownership in all except banks, insurance companies, telecommunications and airlines

• Indian companies have upgraded their technology and expanded to more efficient scales of production. They have also restructured through mergers and acquisitions and refocused their activities to concentrate on areas of competence.

• Industrial growth increased sharply in the first five years after the reforms, but then slowed to an annual rate of 4.5 percent in the next five years. Export performance has improved, but modestly.

FOREIGN DIRECT INVESTMENT• The share of exports of goods in GDP increased from 5.7 percent

in 1990-91 to 9.7 percent, but this reflects in part an exchange rate depreciation.

• One reason why export performance has been modest is the slow progress in lowering import duties that make India a high cost producer and therefore less attractive as a base for export production.

• Inflexibility of the labor market is a major factor reducing India’s competitiveness in exports and also reducing industrial productivity generally, The increased competition in the goods market has made labor more willing to take reasonable positions, because lack of flexibility only leads to firms losing market share.

REFORMS IN AGRICULTURE• The index of agricultural prices relative to manufactured

products has increased by almost 30 percent in the past ten years (Ministry of Finance, 2002, Chapter 5). The share of India’s agricultural exports in world exports of the same commodities increased from 1.1 percent in 1990 to 1.9 percent in 1999, whereas it had declined in the ten years before the reforms.

• The main reason why public investment in rural infrastructure has declined is the deterioration in the fiscal position of the state governments and the tendency for politically popular but inefficient and even iniquitous subsidies to crowd out more productive investment

REFORMS IN AGRICULTURE• In recent years, support prices have been fixed at much higher

levels, encouraging overproduction. Indeed, public food grain stocks reached 58 million tons on January 1, 2002, against a norm of around 17 million tons! The support price system clearly needs to be better aligned to market demand if farmers are to be encouraged to shift from food grain production towards other products.

• Development of a modern food processing sector, which is essential to the next stage of agricultural development, is also hampered by outdated and often contradictory laws and regulations. These and other outdated laws need to be changed if the logic of liberalization is to be extended to agriculture.

INFRASTRUCTURE DEVELOPMENT• Independent statutory regulators have been established to set

tariffs in a manner that would be perceived to be fair to both consumers and producers. Several states are trying to privatize distribution in the hope that this will overcome the corruption which leads to the enormous distribution losses.

• Telecommunication has been much better.Teledensity, which had doubled from 0.3 lines per 100 population in 1981 to 0.6 in 1991, increased sevenfold in the next ten years to reach 4.4 in 2002

• Two private sector domestic airlines, which began operations after the reforms, now have more than half the market for domestic air travel.

INFRASTRUCTURE DEVELOPMENT• In the case of ports, 17 private sector projects involving port

handling capacity of 60 million tons, about 20 percent of the total capacity at present, are being implemented.

• Indian road networks are now on growth phase and new initiative with PPP model is being implemented for development of road network.

• Some exorbitant reforms have been taken in railways sector, The Expert Group on Indian Railways (2002) recently submitted a comprehensive program of reform converting the railways from a departmentally run government enterprise to a corporation, with a regulatory authority fixing the fares in a rational manner

FINANCIAL SECTOR REFORMS• Measures for liberalization, like dismantling the complex

system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities.

• Measures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision.

• Measures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. These steps have produced some positive outcomes.

FINANCIAL SECTOR REFORMS• The government has announced its intention to reduce its equity share

to 33-1/3 percent, but this is to be done while retaining government control. Improvements in the efficiency of the banking system will therefore depend on the ability to increase the efficiency of public sector banks.

• The government has recently introduced legislation to establish a bankruptcy law which will be much closer to accepted international standard. This would be an important improvement but it needs to be accompanied by reforms in court procedures to cut the delays which are a major weakness of the legal system at present.

• An important recent reform is the withdrawal of the special privileges enjoyed by the Unit Trust of India, a public sector mutual fund which was the dominant mutual fund investment vehicle when the reforms began

FINANCIAL SECTOR REFORMS• Reforms implemented in the stock market include establishment of a

statutory regulator; promulgation of rules and regulations governing various types of participants in the capital market and also activities like insider trading and takeover bids; introduction of electronic trading to improve transparency in establishing prices; and dematerialization of shares to eliminate the need for physical movement and storage of paper securities.

• The insurance sector (including pension schemes), was a public sector monopoly at the start of the reforms. The need to open the sector to private insurance companies was recommended by an expert committee (the Malhotra Committee) in 1994, but there was strong political resistance. It was only in 2000 that the law was finally amended to allow private sector insurance companies, with foreign equity allowed up to 26 percent, to enter the field

PRIVATISATION• the government adopted a limited approach of selling a minority

stake in public sector enterprises while retaining management control with the government, a policy described as “disinvestment” to distinguish it from privatization. The principal motivation was to mobilize revenue for the budget, though there was some expectation that private shareholders would increase the commercial orientation of public sector enterprises.

• In 1998, the government announced its willingness to reduce its shareholding to 26 percent and to transfer management control to private stakeholders purchasing a substantial stake in all central public sector enterprises except in strategic areas.

CONCLUSION

• The industrial and trade policy reforms have gone far, though they need to be supplemented by labor market reforms which are a critical missing link.

• The logic of liberalization also needs to be extended to agriculture, where numerous restrictions remain in place

• Reforms aimed at encouraging private investment in infrastructure have worked in some areas but not in others. The complexity of the problems in this area was underestimated, especially in the power sector.

CONCLUSION• Progress has been made in several areas of financial sector

reforms, though some of the critical issues relating to government ownership of the banks remain to be addressed.

• However the slow pace of implementation has meant that many of the reform initiatives have been put in place recently and their beneficial effects are yet to be felt.

• Both the central and state governments are under severe fiscal stress which seriously undermines their capacity to invest in certain types of infrastructure and in social development where the public sector is the only credible source of investment.

GDP GROWTH FROM 1950-1989

1950-51

1953-54

1956-57

1959-60

1962-63

1965-66

1968-69

1971-72

1974-75

1977-78

1980-81

1983-84

1986-870

50,000100,000150,000200,000250,000300,000350,000400,000450,000

GDP IN CRORES

GDP IN CRORES

REAL GDP GROWTH RATE

1950-51

1953-54

1956-57

1959-60

1962-63

1965-66

1968-69

1971-72

1974-75

1977-78

1980-81

1983-84

1986-87

6.00

4.00

2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

GROWTH YOY

GROWTH YOY

GDP GROWTH FROM 1990- 2015

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

2014-20150

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000GDP

GDP

GDP GROWTH RATE 1990-2015

1989-90

1991-92

1993-94

1995-96

1997-98

1999-2K

2001-02

2003-04

2005-06

2007-08

2009-10

2011-12

2013-14 0.00

2.00

4.00

6.00

8.00

10.00

12.00GDP YOY

GDP YOY

CONTRIBUTION OF DIFF SECTORS TO GDP

1950-51

1953-54

1956-57

1959-60

1962-63

1965-66

1968-69

1971-72

1974-75

1977-78

1980-81

1983-84

1986-87

1989-90

1992-93

1995-96

1998-99

2001-02

2004-05

2007-08

2010-11

2013-14 0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

AGRICULTUREMININGMANUFACTURINGSERVICES

FOREIGN EXCHANGE RESERVE

1950-51

1953-54

1956-57

1959-60

1962-63

1965-66

1968-69

1971-72

1974-75

1977-78

1980-81

1983-84

1986-87

1989-90

1992-93

1995-96

1998-99

2001-02

2004-05

2007-08

2010-11

2013-14 0

50000

100000

150000

200000

250000

300000

350000FOREIGN EXCHANGE(IN CR)

FOREIGN EXCHANGE(IN CR)

INDIA’S POPULATION GROWTH

19551960

19651970

19751980

19851990

19952000

20052010

20142015

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000POPULATION

POPULATION

POPULATION GROWTH RATE

19551960

19651970

19751980

19851990

19952000

20052010

20142015

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Series 1

Series 1

INDIA’S EXTERNAL DEBT

19911993

19951997

19992001

20032005

20072009

20112013

050

100150200250300350400450500

IN $ BILLION

IN $ BILLION

INDIA’S IMPORT AND EXPORT

1949-50

1953-54

1957-58

1961-62

1965-66

1969-70

1973-74

1977-78

1981-82

1985-86

1989-90

1993-94

1997-98

2001-02

2005-06

2009-10

2013-14 0

100000

200000

300000

400000

500000

600000

ExportsImports

INFLATION

1957-58

1960-61

1963-64

1966-67

1969-70

1972-73

1975-76

1978-79

1981-82

1984-85

1987-88

1990-91

1993-94

1996-97

1999-2K

2002-03

2005-06

2008-09

2011-12

2014-15

-10

-5

0

5

10

15

IN %

IN %

GROWTH OF IIP YOY

1981-82

1983-84

1985-86

1987-88

1989-90

1991-92

1993-94

1995-96

1997-98

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-2013

2014-2015-2

0

2

4

6

8

10

12

14Series 1

Series 1

CURRENT ACCOUNT BALNCE

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20122014

-100

-80

-60

-40

-20

0

20Current account balance(in billion)

Current account...

CURRENT ACCOUNT DEFICIT WRT TO GDP

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

2014-15

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Series 1

Series 1

EXCHANGE RATE (USD)

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

2014-150.0000

10.0000

20.0000

30.0000

40.0000

50.0000

60.0000

70.0000

EXCHANGE RATE(INR)

EXCHANGE RATE(INR)

LITERACY GROWTH RATE

1951 1961 1971 1981 1991 2001 20110

10

20

30

40

50

60

70

80

IN%

IN%

LITERACY RATE STATE WISE

Jammu & Kash

mir

Punjab

Uttarakh

andDelhi

Uttar Prad

eshSik

kim

Nagala

nd

Mizoram

Meghala

ya

West Benga

l

Odisha

Madhya

Pradesh

Daman

& Diu

Mahara

shtra

Karnata

ka

Laksh

adweep

Tamil N

adu

Andaman

& Nicobar

Islands

0

20

40

60

80

100

1951196119711981199120012011

LITERACY RATE STATE WISE

Mizoram

Meghala

ya

West Benga

l

Odisha

Madhya

Pradesh

Daman

& Diu

Mahara

shtra

Karnata

ka

Laksh

adweep

Tamil N

adu

Andaman

& Nicobar

Islands

0102030405060708090

100

1951196119711981199120012011

EMPLOMENT STATUS(RURAL FEMALE)

July 2011-Ju

ne 2012

July 2007-Ju

ne 2008

July 2004-Ju

ne 2005

January

-Dece

mber 2003

July 2001 -Ju

ne 2002

July 1999-Ju

ne 2000

January

-Dece

mber 1997

July 1994-Ju

ne 1995

January

-June 1993

July-Dece

mber 1991

July 1989 -Ju

ne 1990

January

-Dece

mber 1983

0100200300400500600700800900

1000

primary sectorssecondary sectorsTertiary sectors

EMPLOYMENT STATUS(RURAL MALE)

July 2011-Ju

ne 2012

July 2007-Ju

ne 2008

July 2004-Ju

ne 2005

January

-Dece

mber 2003

July 2001 -Ju

ne 2002

July 1999-Ju

ne 2000

January

-Dece

mber 1997

July 1994-Ju

ne 1995

January

-June 1993

July-Dece

mber 1991

July 1989 -Ju

ne 1990

January

-Dece

mber 1983

0100200300400500600700800900

PRIMARY SECTORSECONDARY SECTORTERTIARY SECTOR

EMPLOYMENT BY SECTORS

Agricu

lture

Manufac

turing

Mining

Electrici

ty, Gas

& Wate

r ...

Constructi

on

Servi

ces

0.00

50.00

100.00

150.00

200.00

250.00

300.00

Employment (in millions) 1999-2000Employment (in millions) 2004-05Employment (in millions) 2009-10