ECONOMICS. Indian Economy: an overview

Transcription

1 Ecnmic Reference Part 4 BMM / 2017 Editin ECONOMICS Indian Ecnmy: an verview Befre we begin t discuss the Indian ecnmy, a view n prsperity and pverty in the backgrund wuld be helpful. S here is the central questin: What has causes, prsperity r pverty? Very ften yu must have cme acrss textbks explaining the causes f pverty. But that view seems wrng. Material pverty mst definitely is the basic human cnditin in all human scieties, withut exceptin. N sciety started with the things we assciate with material prsperity: whether it be security f life, nt nly frm vilence but als disease t mre material things like cmputers and phnes. Thus, its prsperity that has causes, nt pverty. A gd analgy fr prsperity is that its like pushing the ball uphill. That is, its nly under certain cnditins that prsperity has a chance. Thse cnditins are specializatin and trade. Its nly when individuals can cperate n a large scale via specializatin and trade can they be able t live prsperus lives. All prsperus scieties have these cnditins in cmmn. Whether it be Western Eurpe r United States r Hng Kng, Singapre etc. T sum it up briefly, material prsperity is a bug nt a feature. Its emergent and smething that can hardly be engineered. A Brief histry f the Indian Ecnmy Its been 70 years ( ) since India s independence and this perid can bradly be divided in tw phases n the basis f gvernment s ecnmic plicies: The scialist phase The years frm independence up till the 1990 when the ecnmic plicy was highly statist r scialistic: that is when the gvernment exercised a high degree f cntrl in the ecnmy. The ecnmy was largely clsed t freigners, and the citizens required a lt f permissin (licensing) t start and run a business. In this phase, the perid frm was particularly the mst difficult time fr the cuntry. Yu may realize, these were the Indira Gandhi years. Sme incredibly bad ecnmic plicy was unleashed during this perid like: The Banking, Oil and Cal sectrs were natinalized. That is the firms in these sectrs were captured by the gvernment. Freign investment became much tugher and freign exchange was mre tightly ratined (available). Large scale enterprises gt penalized by law and regulatin. Fr instance, firms with 100 emplyees r mre required gvernment permissin fr layffs. That per capital incme grew by a meager 0.3% in the perid ges n the shw hw difficult the times were and hw damaging the ecnmic plicy was. Overall, this was a perid f lw and vlatile ecnmic grwth. 1

2 Ecnmic Reference Part 4 BMM / 2017 Editin Besides sme bad ecnmic plicy, the perid was als challenging because f wars with Pakistan, il price shcks, drughts and the Emergency rule frm The pening-up phase The years frm 1990 s with majr refrms cming in 1991 (ver 25 years frm nw) triggered by a crises f freign exchange t sme extent but als frm the change in the wrld f ideas. The refrms pened up the ecnmy t citizen s participatin, als allwing participatin f freign investrs and reduced gvernment s rle in many f the sectrs. The last 70 years illustrates the rle ideas play. At the time f independence, after the Secnd Wrld War, tw dminant pwers emerged: The United States with the free market system and Sviet Russia with a scialist system. Jawaharlal Nehru, ur first prime minister, was smewhat impressed by Sviet Russia s scialist mdel. Pstindependence, many industrialist als thught that the gvernment shuld play an imprtant and an active rle in the ecnmy. What fllwed is referred t as Nehruvian Scialism. A rather benign frm f scialism where the state (the gvernment0 played a dminant rle abut the prductin decisins in the ecnmy. The year 1991, when the Indian ecnmy saw its majr ecnmic refrms, was als the year when the Sviet Russia cllapsed. Hw much has the Indian ecnmy prgressed? Just t keep things in perspective, its imprtant t see the lng term changes that the ecnmy has gne thrugh. Cnsidering just three indicatrs listed in the table belw. Life expectancy has increased t 65 years frm 32 years largely because f a decline in infant mrtality rates vertime. Literacy has gne up and s has the rate f ecnmic grwth Life Expectancy 32 years 65 years Literacy 18% 60% GDP grwth 3% 7% The ecnmy is apprximately times bigger in 2017 than what its was in Overall, India is a wealthier and als a much happier natin. Salient Features f Indian Ecnmy Imagine taking a rad trip acrss India: say frm Bmbay t Calcutta. Such a rad trip wuld likely give a gd impressin f the salient features f the ecnmy, amng ther things. Hwever, it might be simpler instead t lk at sme data, mst imprtantly the GDP number t get a sense f what the mst imprtant features f the ecnmy are. A list f sme f these features are as fllws: 1. Lw per capita incme Perhaps the single mst imprtant feature is the lw per capita incme. GDP per capita (per persn) in India is $6,700 per year cmpared t the average wrld GDP per capita f $16,000 per year. Abut 20% f the ppulatin that s abut 25 crre peple - still fall belw the fficially defined pverty line which is at best fixed at the subsistence level. GDP Per Capita India 6,700 Wrld 16, PPP 2

3 Ecnmic Reference Part 4 BMM / 2017 Editin 2. Slw but cnsistent grwth In the scialist phase frm (40 years), the ecnmy gt 5 times bigger whereas pst refrms, frm (21 years) the ecnmy grew 4 times bigger. Overtime, the ecnmy has emerged t be mre diversified mre s because f the ecnmic refrms. 3. The structure f ecnmy Of the three majr sectrs: Agriculture, Manufacturing and Services, a little less than half the labur frce is still engaged in agriculture which cntributes nly 17% t GDP. The number f peple engaged in agriculture has declined vertime but the decrease has been slw. The share f GDP frm services have grwn rapidly hwever the manufacturing sectr has remained stagnant. Services make up a little mre than half the GDP, with 31% f the labur frce emplyed. % f labur frce % share f GDP Agriculture 47% 17 Industry 22% 28 Services 31% The urban-rural divide Only a third f India s ppulatin (33%,) live in the urban areas. This again is a natural cunterpart t the where peple are engaged, the ecnmic structure f the ecnmy. Peple in cities, even when cities verflw with slums have higher incme, and better access t health and educatin. Rural India is a very different stry than urban India. 5. Differences acrss States India s GDP per capita is arund 100,000 rupees a year. Hwever, the ecnmic scene is highly variable acrss states. Sme states have a mre vibrant ecnmy. Generally, there is a kind f Nrth Suth divide, with the nrthern state ecnmies being less vibrant cmpared t the suthern states. 6. Heavy presence f gvernment enterprises acrss sectrs Despite ecnmic refrms, state enterprises are nt nly present but very ften dminate in many f the sectrs f the ecnmy. Besides the dminant psitin f gvernment cmpanies in banking and insurance, gvernment has its presence in aviatin, telecmmunicatins, capital gds, engineering, shipping etc. India in the Wrld Ecnmy Here is an verview f hw India fits in the wrld ecnmy: 1. The wrld GDP is 75.5 trillin dllars and India s GDP is 2.2 trillin dllars. That is India makes up abut 2 t 2.5% f the wrld ecnmy. 2. India s share in wrld exprts and imprts is in the range f 1.5% t 2.5%. 3. While the wrld ecnmy has been grwing at an average rate f 3% per year, the Indian ecnmy is grwing at twice the pace at an average rate f 7% per year. Wrld India % f Wrld GDP Exchange Rate (trillin USD) Exprts billin USD 15, Imprts billin USD 15, Real GDP grwth rate - 3% 7% 3

4 Ecnmic Reference Part 4 BMM / 2017 Editin Ecnmic Refrms The Indian ecnmy saw sme significant ecnmic refrms in 1991 but the prcess f ecnmic refrms had begun sner in the 1980 s. What are ecnmic refrms? Ecnmic refrms are a set f changes in gvernment plicy that is expected t mve the ecnmy twards its prductive ptential. We can think f the prductive ptential f an ecnmy thrugh the prductin pssibility frntier (PPF). The PPF curve describes the maximum utput that can be prduced in the ecnmy in a tw gds setting. An ecnmy can be said t be prducing the maximum utput pssible if its n the frntier curve. Fr instance it culd be at pint A r B in the graph belw. Off-curse there are trade-ffs: prducing mre f ne gd implies prducing less f the ther. Als, prductin that is, beynd the PPF curve, such as reaching pint D is impssible. (By definitin, PPF describes the maximum prductin pssible.) The ecnmy can als be at pint C thugh, which means that the prductin is way belw what is pssible and that atleast mre f ne gd can be prduced withut giving up the ther. But why wuld an ecnmy end up at pint C? It culd; because f distrtins f incentives and institutins by sub-ptimal (pr) gvernment plicy. The purpse f ecnmic refrms are t mve the ecnmy twards the frntier, twards its ptential, r in terms f the graph abve, frm pint C t A r B. Ecnmic refrms make the prductin prcess mre cmpetitive and efficient typically by remving r lwering barriers t entry and exit, remving price cntrls and strengthening prperty rights. Fr instance, allwing freign cmpanies t explit market pprtunities in the ecnmy brings in mre cmpetitin, that is ultimately beneficial fr the citizens. The 1991 Ecnmic Refrms in India Sme ecnmic refrms in India were intrduced in the 1980 s but the mre significant refrms that brke frm the past came in year 1991 (The New Ecnmic Plicy f 1991) triggered smewhat by the freign exchange crises. Fr the mst parts the refrms liberalized markets and helped India grw. 4

5 Ecnmic Reference Part 4 BMM / 2017 Editin Sme f the imprtant features f the refrm were: 1. On the dmestic frnt: The refrms liberalized 18 industries that were until then slely under public sectr that means individuals culd nt enter the industry - while leaving nly three sectrs - defense, nuclear energy and railways exclusively fr the public sectr. 2. On the glbal frnt: The Refrms mved the Indian ecnmy twards freer trade and be mre integrated in the glbal ecnmy. The refrms lwered tariffs (taxes paid when smething is imprted). Tariffs came dwn frm an average rate f ver 70% in 1991 t 25% in Tariffs 70% 25% 100% Freign Direct Investment was allwed: That is freign businesses were allwed t set up cmpanies barring a few sectrs like banks, telecm, insurance, airlines. Spending freign exchange n inputs became much easier. Perhaps, mst imprtantly these refrms invlved a new visin fr India and a new sense f what the Indian ecnmy will be, that is mre glbalized, freer, mre liberalized and mving away frm the ntins f self-reliance and tpdwn planning. Hwever, large parts f the Indian ecnmy still have very high levels f regulatin, price cntrls, bureaucracy and crruptin. Fr instance, the banking sectr is dminated by public sectr banks. Thus its hardly the case that these refrms brught India t be any kind f a free market ecnmy. What are the challenges facing the Indian ecnmy? Challenges facing the Indian ecnmy Please dn t frget: Ecnmies dn t face challenges, peple d. The ecnmy is just made up f peple. Perhaps the single biggest challenge that the Indian ecnmy faces is sustaining a high rate f ecnmic grwth fr a sufficient length f perid. Its nly ecnmic grwth that can lift the 25 crre peple that fall belw the pverty line. And since the pverty line is fixed at the subsistence level, the scpe fr reducing human misery is even mre. A lt f factrs influence ecnmic grwth hwever. One can easily draw up a lng list f challenges facing the Indian ecnmy that might lk like: 1. Imprving the quality f educatin 2. Building infrastructure 3. Making gvernment mre efficient 4. Financial Inclusin etc. etc. But the single biggest challenge ne can pssibly argue is: Making agriculture mre efficient As we discussed abve, a little less than half the ppulatin is still engage in agriculture but the sectr just adds abut 15% t the GDP. The sectr is plitically pwerful just because f the number f peple invlved and highly inefficient t. 5

6 Ecnmic Reference Part 4 BMM / 2017 Editin Ecnmic refrms have largely bypassed the sectr. The gvernment intervenes readily with price supprts f all kinds and debt waivers. There are massive barriers t entry and exit. Land titling is inadequate at best. Hwever these are hard and time cnsuming refrms but perhaps the mst imprtant. Internatinal Institutins Internatinal c-peratin calls fr internatinal institutins. There are many internatinal institutins f which we discuss nly three: WTO, IMF and Wrld Bank 1. Wrld Trade Organizatin (WTO) The WTO was established in 1995 as a frum fr negtiating and standardizing the rules fr internatinal trade. At its heart are the WTO agreements, negtiated and signed by the bulk f the wrld s trading natins and ratified in their parliaments. The gal is t ensure that trade flws as smthly, predictably and freely as pssible. Fr instance, if the Indian representatives thinks that the United States is unfairly subsidizing its dmestic sugar prductin then it can express its disapprval the WTO frum. 2. Internatinal Mnetary Fund (IMF) While the WTO has t d with the rules f internatinal trade the IMF is cncerned with stability f internatinal financial system and mnetary c-peratin fr the smth functining f internatinal trade. The IMF was established in 1944, (alng with IBRD/Wrld Bank) t prevent cuntries frm resrting t cmpetitive devaluatin, als called currency wars. IMF helps cuntries in making macrecnmic adjustments and lends t cuntries that are facing a freign exchange crises. Fr instance, when India didn t have sufficient freign exchange in 1991, IMF gave India a lan n cnditins f carrying ut sme macrecnmic refrms. 3. Wrld Bank The institutin that has cme t be knwn as the Wrld Bank was set up in 1944 (alng with the IMF) as the Internatinal Bank fr Recnstructin and Develpment (IBRD) after Wrld War 2 t rebuild war ravaged Germany, Japan and ther cuntries (Ntice the wrd recnstructin befre develpment). IBRD later came t be knwn as the Wrld Bank. Wrld Bank in its current avatar, is a grup f 5 entities, each with sme fcus n develpment and pverty alleviatin. The Wrld Bank grup institutins finance develpmental prjects that are expected t have an impact n lwering pverty acrss the wrld. They prvide lw cst lan assistance in sectrs like health, infrastructure, envirnment r any ther sectr thught t be imprtant fr pverty alleviatin alng with plicy advice. 6