Growth India

8/3/2019 Growth India

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Indias Economic Growth and

Structural Change

From Independence to the Present


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Calculation of Growth Rate

Annual average growth ratePeriod GDP (Rs cr) Y-o-Y

- 100

1 105 0.05

2 110 0.053 140 0.27

4 147 0.05

5 163 0.11

6 167 0.02

7 196 0.178 215 0.10

9 247 0.15

10 260 0.05

11 282 0.08

12 315 0.12

Average annual growth rate 0.10

r = {(GDPt GDPt-1)/GDPt-1}/12


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Calculation of growth rate (contd).

Constant annual growth rate or compound growth rate

Period GDP (Rs cr)

0 100

1 1052 110

3 140

4 147

5 163

6 167

7 196

8 215

9 247

10 260

11 282

12 315

r = (end year/start year)^(t-1)


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Calculation of growth rate (contd)

Exponential growth rate

0

50

100

150

200

250

300

350

0 5 10 15

GDP (Rs cr)

GDP (Rs cr)

Expon. (GDP (Rs cr))

Ln Y = a + rt where r is the growth

rate


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Growth Rates of GDP sectors

-1

0

1

2

3

4

5

6

7

8

1950-60 1960-70 1970-80 1980-90 1990-2000 2000-01 2001-02

Services

Industry

Agriculture


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Phases of Economic Growth

The earlier phase: 1951-80 (3.5% Hindu rate of growth: RajKrishna)

1951-56 3.5% pa actual against a target of2.1% p.a

1956 61 4.2% pa actual against a target of4.5% p.a

1961-66 2.8% pa actual against a target of5.6% p.a


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The early phase

1969-74 3.2%pa

1974-79: 4.7% pa.

1979-80: -5.2%


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Assessment of the Earlier Phase

Impressive compared to the near stagnation of the colonial era.

Better than most newly industrialising countries at the same

stage of development like in Latin America.Better than Africabut worse than East Asia.

But this growth rate was not enough to take the GDP to worldlevels.


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Mahalanobis Strategy

Developing a sound base for initiating the process of longterm growth

Food security (1st Plan), industrial base (2nd Plan)

High priority to industrialisation

Emphasis on development of capital goods industries against

consumer good

Capital goods in the public sector, agriculture and consumergoods in the private sector


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Import Substitution

Arguments for import substitution

Infant industry protectionBalance of payments problem

Demand for industrial goods in anunderdeveloped economy rises faster than foreign

demand for its exportsCreating employment opportunities outside ofagriculture


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Import Substitution (contd)

Objections to Import substitution

Operational problems

Remain dependent on imported inputs, inappropriate

technology and relative factor endowments, duplicatemarket structure and marketing methods of advancedcountries

Discriminate against technological innovations

Development of light consumer goods and discriminateagainst investment goods, no development ofindigenous technology, no emphasis on productivity


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Second Phase

1980-81 to 2004-05: 5.6% p.a

1980-81 to 1990-91: 5.9%p.a

1990-91 to 2004-05: 5.4%p.a

20004-05 to 2006-07: 8%p.a

2007-08 to 2009-10: 7%p.a

In the 1990s and 2000s, growth in the primary andsecondary sectors were slower than in the tertiary sector.

1991 liberalisation did not bring about drasticimprovement in growth


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Structural break in 1980-81

Output per capita, output per worker and total factor

productivity accelerated sharply.

TFP increased from 0.3%p.a in 1960-80 to 2% pa in1980-2000.

Manufacturing and services grew at 6% pa in 1980s and

1990s compared to 2-3% pa in 1960s and 1970s.


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Causes of structural break: Deepak Nayyar

Fiscal expansionism of the 1980s boosted aggregate demand,particularly through salaries of government employees

Public investment increased

Limited liberalisation in external (trade) and internal(delicensing) economy import of capital goods liberalised,

broad-banding reduced industrial licensing

Shift towards the private sector.But the shift was pro-businessrather than pro-competition (FDI not yet opened up)

Social and legal institutions were also in place. Capital goodssector had developed. Science, technology and highereducation had fostered.


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Assessment of growth over the decades

GDP has grown over the decades except in the 1970s

Agriculture has witnessed large decadal variations; 1970s saw a sharpdeceleration followed by a marked recovery in the 1980s

Manufacturing grew in the 1950s and 1960s from a low base becauseof focus on capital goods sector. There was marked stagnation fromthe mid 1960s and recovered in the 1980s. Industrial reforms in 1991resulted in pick up of growth but the east Asian crisis in 1997 and thedotcom boom bust in 2000 led to deceleration.

Services began to grow from the 1980s but decelerated in 1999-2000following the dotcom boom bust


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Structural change in GDP

Share of industry and services have grown while share of

agriculture has declined

Share of services has grown from the 1980s, particularly since

the 1990s.

Growth in services has given more resilience to the economy

and less cyclical as agricultural growth.

Share of industries has increased less than services. Since the

1990s, it has been stagnant.


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Reasons for services growth

Income elasticity of demand for services grows faster than thedemand for goods and commodities as income grows

Technical and structural changes in an economy make it more efficient

to contract out services that were earlier produced by industry outsourcing or splintering of industrial activity.

Economic reforms industrial reforms led to greater demand ofproducer services; financial reforms led to greater financial services

IT era

Growing external demand for services exports


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Occupational structure

2%

1%

2%4%

3%

73%

15%

Occupational sector - 1961

Professional & technical workers

Administrative, executive & managerial workers

Clerical workers

Sales workers

Service workers

Agricultural workers

Manufacturer workers


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Occupational structure (contd.)

4%2%

3%

7%

3%

63%

18%

Occupational structure, 1993-94



Clerical workers

Sales workers

Service workers




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Occupational structure (contd.)

4%3%

3%

7%

4%

59%

20%

Occupational structure, 1999-2000



Clerical workers

Sales workers

Service workers




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Savings and Investment

Gross domestic savings as % of GDP has increased from 9.6% in1950 to 35% in 2000.

Gross domestic investment as % of GDP has increased from

10.8% to 36% over the same period.

But, savings-investment gap increased to -8.2% of GDP in 1990-91 led to financial crisis. Growing fiscal deficits, mainly on accountof deterioration of public sector savings, over the 1970s and

1980s, financed by increasing SLR, led to inflationary pressures. Atthe same time, growing fiscal deficits spilled over to the externalsector and the large current account deficit led to the financialcrisis of1990-91.


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Public sector savings

Fiscal Responsibility and BudgetManagement (FRBM) Act,2003

Revenue augmenting strategy moderating tax rates,expanding the tax base, removal of exemptions, improvementin tax administration

Total expenditure of the centre declined from 17% to 14.1%

but capital outlay increased from 1.2% to 1.6%.

Savings of non-departmental undertakings increased since1990s


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Private savings

Corporate tax rate has come down, peak customs duty on non-

agricultural products have come down.Monetary policy has ledto reduction in nominal interest rates. All these have improvedentrepreneurial activity.

Profit after tax has seen large increases.

Debt-equity ratios have come down. Higher retained earningsand finance availability from banks and capital markets havereduced financing requirement from the government.

Improved corporate performance has resulted in more thandoubling of private corporate sector savings, from 1% in the1950s to 1.7% in the 1980s to 3.8% to the 1990s to 8% now.


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Household savings

Continuous increase in total and financial savings of the

household sector.

Spread of bank branches, post office savings and capital markets

have mobilised financial savings.

Household credit has also grown in the recent times with

private sector banks, followed by public sector banks,

introducing retail credit for housing, vehicles and consumerdurables. These have increased household financial liabilities. As

a result, net household financial savings have increased

marginally in the current decade.


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Financial sector reforms

Introduction in auction of government securities, deregulation of

interest rates, reduction in monetisation of fiscal deficits, market

determined exchange rates, current account convertibility,

deregulation of the equity market

Monetary policy through indirect market-based instruments

Both public and private investment have increased: Crowding-in

effect of public investment

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Growth India