Economic Review
Economic Review


Even 15 years ago, India was described as a slumbering giant, or the caged tiger, with economists making derogatory references to the "Hindu" rate of growth (of 3 per cent a year). Since India stepped into the 1990s with sweeping market reforms, the average rate of economic growth has doubled. Even the nature of the economy has transformed — from primarily being an exporter of textiles and jewellery, India is now best known as an exporter of high-technology software and pharmaceuticals. There is an intimate link between the knowledge-based economy that is sweeping the global economic scene and India — from software to bio-technology, is now at the cutting edge. Real GDP growth rate in 2000-2001 is estimated at 6 per cent compared with a growth rate of 6.4 per cent achieved in 1999-2000 and 6.6 per cent in 1998-1999.

Despite a global slowdown affecting economic growth in the world, India has the distinction of being one of the fastest growing economies in the world.
In the 50 years since India became a republic, national income has increased 6.6 times from Rs 40,454 crore to Rs 2,67,551 crore, a compounded growth rate of 4.1 per cent per annum. The per capita income has increased 2.9 times from Rs 1,127 to Rs 3,212, (and in purchasing power parity terms now stands at a healthy $2390), while the GDP stands at Rs 3,11,766 crore. Inflation has stayed at remarkably low levels, hovering around 4 per cent in 2001.

Currently the fifth largest economy in the world (in purchasing power parity terms), India's economic growth as well as its economic direction have been in two distinct phases — pre-and post-1991.

Until 1991, when India initiated its wide-ranging economic reforms which altered the direction of the Indian economy, for almost half a century, it followed an improvised version of the mixed-economy model, public and private sectors co-existing, but hinged on an extensive planning process. This saw an overwhelming presence of the state in industrialization, while land reforms and the democratic experiment would simultaneously achieve social and political growth, because according to the early leaders of this country, economic growth could only be achieved along with social and political parity.

This period, therefore saw the "temples" of modern India—steel plants, dams and technological and scientific institutions. The Indian economy has grown by about 4.5 per cent per annum on a long-term basis in the second half of the 20th century, but for the most part, it hovered around the 3.5 per cent mark, which came to be known as the "Hindu" rate of growth. Domestic industries were protected through quotas. Industrial development took place in an environment when industrial licensing prevented domestic competition and trade barriers prevented competition from exports.

Although the New Industrial Policy in 1991 incorporated the emerging trends in global economy, yet India continues with it's planning process, recognizing that government support in developing infrastructure and other areas is vital for a thriving economy. The first plan between 1951-56 focussed on agriculture — by improving transport, electricity production and rural extension, to raise income levels. It wasn't until the second plan that the heavy industries began to be set up. India had missed the industrial revolution of the 19th century, and in many areas had to start from scratch. The third plan followed up on the development of basic industries consolidating the growth of previous years.

But drastic reforms had to be undertaken in 1991 because of a balance of payments crisis which called for immediate stabilization measures. Simultaneously, it was also realized that the development strategy followed till then, also called for large-scale changes. It led to the development of a market-friendly system. Except for a few strategic industries the license system was abolished. International trade was liberalized to promote competition and efficiency - by 2001 quotas and quantitative restrictions on imports had been abolished. Foreign investment is actively solicited in almost all sectors of the Indian economy, including the old shibboleths of nationalization like insurance, etc. The easing of constraints led to a steady increase in industrial growth.

The Indian economy has performed well over the past two decades. Average annual real GDP growth accelerated from 5.4 per cent during the 12 year period ending 1991-92 to 6.4 per cent during 1992-93 through 2000- 2001. During this period, it has gone through significant structural change that has been induced by a continuous process of economic reforms. The pace of reform was intensified in the 1990s and the economy has responded well to the new changes that have been introduced in most of the sectors of Indian economy during this period. As a consequence, the economy has also shown a great degree of resilience even in the presence of adversities, such as the East-Asian financial crisis of 1997-98 and the abnormal increase in oil prices more recently.

India was a founding member of the General Agreement of Tariffs and Trade (GATT), the forerunner to the World Trade Organization (WTO). India has always been a strong supporter of international trade, but has emphasized the special concerns and interests of the developing world.

It is considered one of the key voices of developing countries' concerns at international trade forums. South Asia, particularly India, has been one of the key beneficiaries of the expansion in world trade that has followed in the wake of the creation of the WTO in 1995, showing impressive gains in exports and global integration in economic systems.
Rising oil import remains a concern for economic planners, because India is fast emerging as one of the four largest consumers of energy in the new millennium. This has not only led the government to dismantle the administered price mechanism for petroleum products by making prices more compatible with world prices and focus on new exploration and production strategies but also to search for new sources of energy. The former resulted in the NELP (New Exploration and Licensing Policy) initiatives, including the Oil and Natural Gas Corporation (ONGC) investing in exploration rights overseas, from Algeria to Russia and Vietnam. It has prompted the government to diversify energy sources to natural gas, nuclear power and hydro-power as well as non-conventional energy. India is currently negotiating for a natural gas pipeline from Iran, and there are possibilities of importing gas from India's eastern neighbours like Bangladesh.

Realization of higher growth was important to raise the standard of living of various sections of people, making a substantial impact on the removal of mass poverty. The deregulation process has removed entry barriers for foreign businesses and has increased liberalization. Unlike some other countries India has resisted outright privatization and closure of unviable public sector industrial units, in view of the social upheavals it might cause. Therefore, the Disinvestment Commission was set up to divest the government of its equity in many enterprises by either strategic sales or minority holdings.

It is now believed that government should get out of the business of production and enhance its presence and performance in the provision of public goods. Government, with its elaborate bureaucratic structures, multiple layers of accountability and complex crosschecks, is unsuited to the demands of commercial production in a competitive, fast growing economy. Privatization will allow Government's capital expenditure to be allocated to public goods and basic infrastructure that is not commercially viable. A significant portion of Central capital expenditure could be reallocated this way, if all public sector units producing private goods are sold to the public. The funds received from privatization would also help in reducing the public debt incurred for setting up these units and will put the debt-GDP ratio on a sustainable path. Most importantly, privatization would enable the competitive public enterprises to function effectively once again and would help them in contributing to the national economy.

The tempo of economic reforms has been sustained through the 1990s. Major fiscal reforms were undertaken for broadening the income-tax base and streamlining the excise and customs duty structures. There were reforms in foreign investment and trade policy spheres also. Reforms in public sector enterprises are underway for reducing pressures on public finances, increasing the efficiency of public sector operations and reducing the Incremental Capital Output Ratio (ICOR). Strengthening of legal, institutional and regulatory frameworks in insurance, banking, capital markets, power and telecom are being undertaken for inducing greater private investment in infrastructure. The Union Budget for 2000-01 announced various measures for further deepening of the capital markets and financial sector and allowed private entry in insurance and provident funds.

India's heart lives in its villages. Agriculture and allied activities make the single largest contribution to the GDP i.e., 27 per cent of the total, providing employment to 65 per cent of the workforce and contributes 18.5 per cent to the total export. The agriculture sector has grown at an annual rate of 3.9 per cent. Since the stress has been on food crops (especially grain) rather than cash crops, India in 2000 became the second largest producer of wheat and rice in the world. India is also the second highest producer of fruits and vegetables in the world, producing 65 per cent of the world's mangoes and 11 per cent of the world's bananas.

This is also why rural development is a priority sector for the government aiming to remove poverty and bring in quick socio-economic progress. This is being done through development programmes that cater as much to drought-prone and desert regions as to areas susceptible to floods. The land reform policy adopted since independence aims at restructuring agrarian relations to achieve an egalitarian structure by eliminating exploitation in land relations and enlarging the land base of the rural poor.
Although India's domestic market is one of the largest in the developing world, there is now a greater emphasis on external trade, its exports registering a growth of 13.2 per cent (in dollar terms) in 2000. Exports have also diversified in recent years to include, plantations, marine products, electronic goods, gems and jewellery, chemicals, textiles, handicrafts and carpets.

But the biggest has been the growth of software industry and software exports, which touched over 50 per cent for the past couple of years. Since the new millennium opened with a global economic slowdown, India too has understandably been affected. But growth m software exports promises to cross 30 per cent in 2001 and Indian software industry is on track to achieve a $50 billion exports target by 2008. Some of the high-growth software industry segments are IT-enabled services, which include business process outsourcing and call centre businesses which have clocked impressive growth rates of 70 per cent. This is the new frontier for Indian exports — technology and knowledge-based products and services, which include software, drugs and pharmaceuticals and human-resources based services, for instance in the hospitality, nursing and education sectors. This service sector performed exceptionally well in 1999- 2000. Average growth rate of trade, hotels, transport and communications, improved from 7.1 per cent in 1998-99 to 8 per cent in 1999-2000 and that of financial, real estate and business services accelerated from 8.4 per cent to 10.1 per cent over the same period.
A new breed of skills has come to exist in the areas of technology and management which simply did not exist in 1990. While this is epitomized in the remarkable success of Indian firms in the area of information technology (IT), the extent of change is evident far beyond IT firms: the standards of efficiency among India's firms are unrecognizably different than a decade earlier.

In external trade relations, during 1999- 2000, India's trade with countries m ASEAN and East Asia region at $9,032 million grew at 14 per cent, India's exports to these countries is now growing at 31 per cent. While India's balance of trade with the West Asia region is not in its favour, due to the large amounts of crude oil that India imports, its exports to this region touched $4 billion m 1999. India's trade with the former Soviet Union was considerable, but in the past few years, its bilateral trade with Russia has dwindled, although it still counts for 80 per cent of India's total trade with countries of this region. The US is India's largest single trading partner, its exports in 1999-2000 grew at a clipping 20 per cent, whereas imports have grown at 8 per cent. The European Union is collectively the largest trading partner, accounting for 28 per cent of India's total exports and 29 per cent of her imports m 1999- 2000. In view of the many changes that have taken place, it is now quite possible for the Indian economy to attain an even higher growth path. However, crucial action is required m a number of key areas m order to obtain the full benefits of the reforms carried out so far. If these measures are accomplished in an organized manner in the near future, it is quite likely that, many of the latent energies that are yet to be released in the country would become apparent and a higher level of economic activity would emerge.