India in TransitionIndia in Transition

PopulationPopulation

Population(m)    1,095Population(m)    1,095 Population growth (’01-05) 1.5%      Population growth (’01-05) 1.5%         Second most populous countrySecond most populous country 81% Hindu, 13% Muslim, 2% Christian, 81% Hindu, 13% Muslim, 2% Christian,

2% Sikh2% Sikh Official Languages: English, Hindi, 14 Official Languages: English, Hindi, 14

others others

GeographyGeography

South AsiaSouth Asia 3,287,590 sq 3,287,590 sq

kmkm 28 States28 States Borders China, Borders China,

PakistanPakistan

HistoryHistory

550 bc independent kingdoms550 bc independent kingdoms Invasions from Central AsiaInvasions from Central Asia 33rdrd century Gupta dynasty “golden age” century Gupta dynasty “golden age” Islamic Invasions Islamic Invasions Mughal DynastyMughal Dynasty European Traders/ColonizersEuropean Traders/Colonizers British Rule (1857)British Rule (1857) Independence 8/15/47Independence 8/15/47

PoliticsPolitics

World’s Largest DemocracyWorld’s Largest Democracy Indian National Congress (INC)Indian National Congress (INC) Emergency Rule (Indira Gandhi ’75-77)Emergency Rule (Indira Gandhi ’75-77) Janata PartyJanata Party Bharatiya Janata Party (1996)Bharatiya Janata Party (1996) INC (2004)INC (2004)

EconomyEconomy

1010thth Largest GNP Largest GNP 44thth Largest GNP (PPP) Largest GNP (PPP) GDP Growth 8.1% 2005(4)GDP Growth 8.1% 2005(4) Per-Capita Income (PPP) $3100Per-Capita Income (PPP) $3100 Agriculture accounts for 21% of GDPAgriculture accounts for 21% of GDP Major Industries include; mining, petroleum, Major Industries include; mining, petroleum,

diamond polishing, films, textiles, IT and diamond polishing, films, textiles, IT and business process outsourcing (BPO) services, business process outsourcing (BPO) services, pharmaceuticals and chemicals, and pharmaceuticals and chemicals, and handicrafts. handicrafts.

Indicative PlanningIndicative Planning

Instituted as a response to perceived Instituted as a response to perceived failures of the market system in attaining failures of the market system in attaining socially desirable objectivessocially desirable objectives

No formal obligation to fulfill objectives of No formal obligation to fulfill objectives of the planthe plan

Authorities rely on ‘indirect government Authorities rely on ‘indirect government levers’ (taxes, subsidies, etc.)levers’ (taxes, subsidies, etc.)

The Lewis two-sector The Lewis two-sector ModelModel

Agricultural Labor is redundantAgricultural Labor is redundant ‘‘Commercial’ sector is efficientCommercial’ sector is efficient Purchasing capital goods results in Purchasing capital goods results in

increased demand for industrial laborincreased demand for industrial labor Agricultural labor becomes more Agricultural labor becomes more

productive and produces a surplusproductive and produces a surplus

The Nehru-Mahalanobis The Nehru-Mahalanobis ApproachApproach

N-M Approach pt. 2N-M Approach pt. 2origins of Indian planningorigins of Indian planning

Didn’t Curb power of wealthy interestsDidn’t Curb power of wealthy interests Mahalanobis’ 2-sector model akin to Lewis’ Mahalanobis’ 2-sector model akin to Lewis’

modelmodel Sought to industrialize the economy by Sought to industrialize the economy by

increasing production of capital goodsincreasing production of capital goods Development economics was dominated by the Development economics was dominated by the

idea of overcoming the ‘savings constraint’idea of overcoming the ‘savings constraint’ Similar in Similar in approachapproach to USSR to USSR Fabian InfluenceFabian Influence Planning Commission Set up in 1950Planning Commission Set up in 1950

Origins of Origins of ImplementationImplementation

Defense of India Act (1939)Defense of India Act (1939) India Act (1946)India Act (1946) Many other acts Many other acts PRIOR PRIOR to independenceto independence War-time controls set up by the BritishWar-time controls set up by the British Suited to regulation and controlSuited to regulation and control Industrial Policy Resolution (1948)Industrial Policy Resolution (1948) Industries Act (1951)Industries Act (1951)

The PlansThe Plans

11stst plan (’51-56) – Not so ambitious plan (’51-56) – Not so ambitious 22ndnd plan (’56-61) – Inspired by Mahalanobis, plan (’56-61) – Inspired by Mahalanobis,

move towards industrial growthmove towards industrial growth 33rdrd plan followed by one year plans – no plan followed by one year plans – no

significant changesignificant change 44thth plan (’69-74) -- based on input-output model plan (’69-74) -- based on input-output model 55thth plan – 7 plan – 7thth plan – included concerns for the plan – included concerns for the

redress of povertyredress of poverty

GDP growth (1960-2004)GDP growth (1960-2004)

1979

1988

1991

The CrisisThe Crisis

In 1990-91 gross fiscal deficit reached In 1990-91 gross fiscal deficit reached 8.4% of GDP8.4% of GDP

Inflation peaked at almost 17%Inflation peaked at almost 17% External debt reached 23% of GDPExternal debt reached 23% of GDP Low foreign exchange reservesLow foreign exchange reserves Resulted in $2.3bn loan from IMFResulted in $2.3bn loan from IMF

The ReformsThe Reforms

Consisted of decontrol of private Consisted of decontrol of private investment, opening the economy to investment, opening the economy to foreign trade and foreign investment, foreign trade and foreign investment, financial sector reforms, etc.financial sector reforms, etc.

Controls on Private Controls on Private InvestmentInvestment

Removal of industrial licensingRemoval of industrial licensing Allowance of private companies into Allowance of private companies into

industries once reserved for the stateindustries once reserved for the state Little done about small-scale sector rulesLittle done about small-scale sector rules Little done about state-level controlsLittle done about state-level controls

Openness to TradeOpenness to Trade

Lowering of Import TariffsLowering of Import Tariffs Domestic v. external liberalization – Domestic v. external liberalization –

gradual approachgradual approach Lowering of quantitative restrictionsLowering of quantitative restrictions Devaluation of Rupee 20:1-31:1 from Devaluation of Rupee 20:1-31:1 from

’91-’93’91-’93

Trade (% of GDP) ’80-’04Trade (% of GDP) ’80-’04

Foreign direct Foreign direct investmentinvestment

Price ControlsPrice Controls

Hydrocarbon pricesHydrocarbon prices Electricity prices (not changed)Electricity prices (not changed)

Labor Market ControlsLabor Market Controls

• Still in effectStill in effect

Public Sector ReformsPublic Sector Reforms

Outright privatization was eschewed in Outright privatization was eschewed in favor of more ‘cautious’ reformfavor of more ‘cautious’ reform

Partial PrivatizationPartial Privatization Board for Industrial and Financial Board for Industrial and Financial

ReconstructionReconstruction Allowance of Private Investment in Allowance of Private Investment in

InfrastructureInfrastructure

Financial SystemFinancial System

Banking ReformBanking Reform Capital Market ReformCapital Market Reform

Inflation (annual %)Inflation (annual %)19981991

East Asian ‘Miracle’ East Asian ‘Miracle’ economieseconomies

Stable business environmentStable business environment Fiscal policies aimed at equityFiscal policies aimed at equity Pro-export exchange ratesPro-export exchange rates Progressive liberalization of the financial Progressive liberalization of the financial

sectorsector Minimal price distortionsMinimal price distortions EducationEducation

Indian Reforms in Indian Reforms in comparisoncomparison

Macroeconomic stabilizationMacroeconomic stabilization More rigid Labor MarketsMore rigid Labor Markets Education is not compulsoryEducation is not compulsory

ConclusionConclusion

Reforms were largely successfulReforms were largely successful Fail to address underlying problemsFail to address underlying problems Gains are not widespreadGains are not widespread Much remains to be doneMuch remains to be done

QuestionsQuestions

What are the effects of government What are the effects of government policies towards children in terms of policies towards children in terms of economic growtheconomic growth

What role does primary education play in What role does primary education play in attracting investment to labor-intensive, attracting investment to labor-intensive, unskilled industriesunskilled industries