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CONTEMPORARY INDIAN ECONOMY: A REVIEW OF RECENT TREND AND

DEBATES OVER DEVELOPMENT PARADIGM

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ECO – CENTRIC Journal of Economics: Vol-IX (I) 2012-2013

CONTEMPORARY INDIAN ECONOMY: A REVIEW OF RECENT TREND AND

DEBATES OVER DEVELOPMENT PARADISM

Hemanta Saikia*

Abstract:
From 1990s, India witnessed significant changes in the
macroeconomic policy regime along the neoliberal route which
has resulted in a weakening of the interventions by the State, in
many important economic and social arenas. In this paper an
attempt has been made to highlight the major issues of the present
contemporary Indian economy as well as some recent debates. The
paper highlights that economic growth is not only important from
internal economic and social perspective but also external
economic front. But, full market deregulation is more prone to
external shocks and instabilities of world economy. At the same
time, social improvement and government spending are also not a
free flow mechanism unless guided by proper regulation. So, for
inclusive growth of India, both development paradigms are
important as given by Sen and Bhagwati which should be used
with proper care and national requirements.

*
Dr. Hemanta Saikia is Assistant professor at the Dept. of Economics, Debraj Roy College.
Email: hemantaassam@yahoo.com
ECO – CENTRIC
1. Introduction
India is developing into a framework
of open-market economy and economic
liberalization, including industrial
deregulation, privatization of state-owned
ventures, and reduced controls on foreign
trade and investment, began in the early
1990s and has served to accelerate the
country's growth, which has averaged more
than 7 per cent per year since 1997.
Accelerated economic growth rates and the
presumed progress in poverty reduction are
the key goals of the present Indian
development outlooks. Indian diverse
economy covers traditional farming, modern
agriculture, handicrafts, a wide range of
modern industries, and mass of services.
Slightly more than half of the work forces
are in agriculture, but services are the major
source of economic growth, accounting for
nearly two-thirds of India's output, with less
than one-third of its labor force. In 2010, the
Indian economy rebounded back robustly
from the global financial crisis in large part
because of strong domestic demand and
growth exceeded 8 per cent per year in real
terms (CIA, 2013). However, India's
economic growth began with sluggishness in
2011 because of a tight monetary policy,
intended to address persistent inflation, and
a decline in investment, caused by investor
pessimism about domestic economic
reforms and about the global situation. High
international crude prices have exacerbated
the government's fuel subsidy expenditures,
contributing to a higher fiscal deficit and a
worsening current account deficit. In late
2012, the Indian Government announced
reforms and deficit reduction measures to
reverse India's slowdown. The India's
medium-term growth is positive due to a
young population and corresponding low
dependency ratio, healthy savings and
investment rates, and increasing integration
into the global economy etc. However, India
has many long-term challenges that it has
Journal of Economics: Vol-IX (I) 2012-2013
not yet fully addressed, including poverty,
inadequate physical and social
infrastructure, limited non-agricultural
employment opportunities, inadequate
availability of quality basic and higher
education, and accommodating rural-urban
migration. In the mean time, large sections
of the Indian population continue to suffer,
very acutely, with reference to a whole
range of development deficits. Since the
early 1990s, significant changes in the
macroeconomic policy regime along the
neoliberal trajectory has resulted in a
weakening of the interventions by the State,
in many important economic and social
arenas, and consequently a whole range of
positive impulses have suffered a good deal
(Baruah, 2012). In this paper an attempt has
been made to highlight and discuss the
major issues of the present contemporary
Indian economy as well as some recent
debates.
The economy of India is the ninth-
largest in the world by nominal GDP and the
third-largest by purchasing power parity
(PPP). The country is one of the G-20 major
economies and per-capita income basis,
India ranked 141st by nominal GDP and
130th by GDP (PPP) in 2012, according to
the IMF. India is the 19th-largest exporter
and the 10th-largest importer in the world.
The economy slowed to around 5.0 per cent
for the 2012–13 fiscal year compared with
6.2% in the previous fiscal. On August 22,
2013 rupee hit an all time low of 65.56
against US dollar. In order to control the fall
in rupee, the government introduced capital
controls on outward investment by both
corporate and individuals. In this outlook,
the main objectives of the paper are to
analyze the trend and pattern of Indian
Economy with special reference to recent
development paradigm. The paper is mostly
analytical and based on secondary data
collected from various sources such as CSO,
ECO – CENTRIC
World Bank,, published and unpublished
1.1.Results and Discussion
1.2.1 Economic Growth Rate and
Performance of Indian Economy
The Indian Government has been
rejoicing,, for some time now, the country’s
recent macroeconomic performance, in
particular, high growth rates of the gross
domestic product. An enveloping impression
has been created by the official
Figure1: GDP Growth Rate
Source: World Bank, 2012
The data revealed that the GDP
growth rate of India is at high level during
2005, 2006, 2007, and 2010. The GDP
growth rate of India during 2010 was even
more impressive as India is able maintain a
high rate of growth even through world
economy was facing a global melt down.
The economic privileged within the country
as welll as a very substantial section of the
middle classes have coupled the carnival
sleet India as the new growth ‘miracle’ in
the developing world. As regards the
structure of growth, the most significant
feature of the recent years has been a
striking increase
se in the share of the tertiary
sector. Since the mid-1990s,
1990s, the rate of
Journal of Economics: Vol--IX (I) 2012-2013
papers collected from journals etc.
spokespersons, as well as the media, that the
Indian economy’s progress with respect to
most economic and social indicators has
been a remarkable one since the early 1990s.
If we look at the GDP trend, from 1991
onwards, it is clear that since the economic
liberalization of 1991, India's GDP has been
growing at a higher rate.
growth of services GDP has been
significantly higher than the rate of growth
of overall GDP, and the share of the tertiary
sector in the economy has gone up from
about 41 per cent in 1991 to around 54 per
in 2005-06.
06. In fact, well over 60 per cent of
the incremental growth in GDP since the
mid-1990s
1990s is accounted for by the rate of
growth of the services sector. The
magnitude of the entire increase in the share
of the tertiary sector in the country’s GDP
since the early 1990s is almost equal to the
decline in the share of the primary sector,
and the proportion of the secondary sector
has remained roughly the same during this
period.
ECO – CENTRIC Journal of Economics: Vol--IX (I) 2012-2013

Figure: 2 GDP Per Capita, PPP (Constant 2005)

Source: World Bank, 2012

However, in front of GDP per capita rising saving rates, though rising tax
PPP (at Constant 2005 prices), India is far collection rates can also widen the gap. The
behind the as compared to world GDP per rise in consumption is a more gradual and
capita even though it is higher than South steady process, as any sharp changes in
Asian countries during last decades. India's income tends to get adjusted in the saving
per capita income, a measure for measuring rate.
living standard, is estimated to have gone up
11.7 per cent to Rs 5,729 per month in 2012-
2012
13 at current prices, compared with Rs. Rs 1.2.2. External Debt and Fiscal Deficit
5,130 in the previous fiscal. The estimated Government External Debt in India
rate of growth in per capita income
come for the increased to 345819 USD Million in 2012
current fiscal, however, is lower than the from 305931 USD Million in 20112011(Ministry
previous fiscal when it grew by 13.7 per of Finance, Govt., 2012).. India Government
cent. The per capita income at current prices External Debt averaged 140319.65 USD
during 2012-13
13 is estimated to be Rs 68,747 Million from 1990 until 2012, reaching an
as compared to Rs 61,564 during 2011-12,
2011 all time high of 345819.00 USD Million in
showing a rise of 11.7 per cent
ent (CSO,
(CSO 2013). December of 2012 and a record low of
Thus,
hus, even if one goes along the official 75858.00 USD Million in December of
view that during the reform period there has 1990.
been acceleration in the GDP growth rate, it
may still be prudent to hold back on the
judgment that the reform process has taken
the Indian economy to a significantly higher
growth flight. The average growth of
consumption is slower than the average
growth of income, primarily because of
ECO – CENTRIC
Figure 3: India Government External Debt
Source: Ministry of Commerce and Industry
High levels of fiscal deficit relative
to GDP tend not only to cause sharp
increases in the debt-GDP GDP ratio, but also
adversely shape savings and investment, and
consequently growth. The usability of fiscal
policy as a tool of defy cyclical intervention
is also compromised when fiscal deficit is
high and structural in nature. The combined
fiscal deficit of the centre and states stood at
9.3 percent of GDP in 1990-91. 91. There was a
clear improvement in the early nineties.
After falling to 6.26 percent in 1996-97,
1996 the
fiscal deficit to GDP ratio started rising
again and was around 10 percent in 2001-02
2001
and 2002-03.03. Although only marginally
higher than that in 1990-91, 91, this level of
fiscal deficit was qualitatively much
different because it was accompanied by
much higher levels of the debt-GDP
debt ratio,
Figure 4: Inflation
flation Rate in India (Annual Change on Consumer Price Index)
Source: Ministry of Commerce and Industry
Journal of Economics: Vol--IX (I) 2012-2013
the ratio of interest payments to revenue
receipts, and the share of revenue deficit in
fiscal deficit.
1.2.2. Inflation and Indian Economy
The inflation rate in India was
recorded at 5.79 percent in July of
2013(Ministry
Ministry of Commerce and Industry
Industry,
2013). India Inflation Rate averaged 7.72
Percent from 1969 until 2013, reaching an
all time high of 34.68 Percent in September
of 1974 and a record low of -11.31 Percent
in May of 1976. In India, the wholesale
price index (WPI) is the main measure of
inflation. The WPI measures the price of a
representative basket of wholesale goods.
The trend of consumer
sumer price index is given
below.
ECO – CENTRIC
The data revealed that the inflation is
somewhat declining during 2013 which was
high during 2011-2012.
1.2.3. Inequality of Income Growth
Inequality in earnings has doubled in
India over the last two decades, making it
the worst performer on this count of all
emerging economies. The top 10% of wage
earners now make 12 times more than the
bottom 10%, up from a ratio of six in the
1990s. Moreover, wages are not smoothly
spread out even through the middle of the
distribution. The top 10% of earners make
almost five times more than the median
10%, but this median 10% makes just 0.4
times more than the bottom 10%. There
is evidence of growing concentration of
wealth among the elite. The consumption of
the top 20% of households grew at almost
3% per year in the 2000s as compared to 2%
in the 1990s, while the growth in
consumption of the bottom 20% of
households remained unchanged at 1% per
year. In comparison, the income of the
bottom 20% of households in China grew at
double the rate in the 2000s as compared to
the 1990s, while the increase for the top
20% of households was much slower. In
Brazil, household incomes have been
growing faster among the poorest
households than among the richest for the
last two decades. The richest 10% of Indian
society have seen highest growth while the
poorest 10% have seen the slowest increase
in incomes. The remaining 80% of the
Journal of Economics: Vol-IX (I) 2012-2013
people have seen roughly the same levels of
growth ranging between 35% and 40% in
rural areas and between 40% and 50% in
urban areas over 12 years. That means that
for 90% of people, annual growth in income
was just over 3% in rural India, and just over
4% in urban India.
1.2.4. Corruption in India
Corruption in India is a major issue
and adversely affects its economy. In 2005 a
study conducted by Transparency
International in India had found that more
than 62% of Indians had firsthand
experience of paying bribes or influence
peddling to get jobs done in public offices
successfully. In its 2008 study,
Transparency International reports about
40% of Indians had firsthand experience of
paying bribes or using a contact to get a job
done in public office. In 2012 India has
ranked 94th out of 176 countries in
Transparency International's Corruption
Perceptions Index, tied with Benin,
Colombia, Djibouti, Greece, Moldova,
Mongolia, and Senegal. Most of the largest
sources of corruption in India are
entitlement programmes and social spending
schemes enacted by the Indian government;
for examples Mahatma Gandhi National
Rural Employment Guarantee Act and
National Rural Health Mission. Other daily
sources of corruption include India's
trucking industry which is forced to pay
billions in bribes annually to numerous
regulatory and police stops on its interstate
highways.
ECO – CENTRIC Journal of Economics: Vol-IX (I) 2012-2013

Table: 1 Index Trends In Major States by Respective Anti-Corruption Effort

State 1990–95 1996-00 2001–05 2006–10
Bihar 0.41 0.30 0.43 0.88
Gujarat 0.48 0.57 0.64 0.69
Andhra Pradesh 0.53 0.73 0.55 0.61
Punjab 0.32 0.46 0.46 0.60
Jammu & 0.13 0.32 0.17 0.40
Kashmir
Haryana 0.33 0.60 0.31 0.37
Himachal 0.26 0.14 0.23 0.35
Pradesh
Tamil Nadu 0.19 0.20 0.24 0.29
Madhya Pradesh 0.23 0.22 0.31 0.29
Karnataka 0.24 0.19 0.20 0.29
Rajasthan 0.27 0.23 0.26 0.27
Kerala 0.16 0.20 0.22 0.27
Maharashtra 0.45 0.29 0.27 0.26
U.P 0.11 0.11 0.16 0.21
Orissa 0.22 0.16 0.15 0.19
Assam 0.21 0.02 0.14 0.17
West Bengal 0.11 0.08 0.03 0.01
Source: CMS, India Corruption Study report 2010

CMS India claims in its 2010 India
Corruption Study report that socio-
economically weaker section of the Indian
society is most adversely affected by
government corruption-these include the
rural and urban poor. The study additionally
claims that corruption perception nationwide
has decreased between 2005-2010. Over the
5-year period, significantly more number of
people from the middle class as well as the
poorest segments of Indian society surveyed,
in all parts of the India, claimed government
corruption had dropped over time, and they
had lesser direct experiences with demands
for bribes. The table1 compares the
perceived anti-corruption effort across some
of the major states in India. A rising index
implies higher anti-corruption effort and
falling corruption. According to the table1,
the states of Bihar and Gujarat have
experienced significant improvements in
their anti-corruption efforts, while the
conditions have worsened in the state of
Assam and West Bengal. Consistent with
the results in this table, in 2012, a BBC
News report claimed the state of Bihar has
transformed in recent years to become the
least corrupt state in India.
1.2.5. DECLINING DOLLAR VALUE
AGAINST RUPEE
In recent past, declining rupee has
created concern in the Indian economy. In
the second week of June 2013, it came close
to breaching the psychological barrier of Rs
60 to the dollar, and there is fear that even
this may not be a real bottoming out for its
value. Of course those who are directly
affected by the lower value of the rupee are
concerned such as importers, those wishing
to travel abroad or spend on foreign
education, and so on. But the rupee’s decline
affects everyone in the economy, because it
feeds directly and indirectly into general
inflation, which is a continuing problem
ECO – CENTRIC
even as output growth decelerates, and
therefore hits common people hard. The
rupee’s recent decline has been against all
the major currencies, not just the US dollar –
and in fact the decline has been even sharper
relative to the British pound and the
Japanese yen and in recent past, the Indian
rupee has been depreciating faster than the
currencies of most other emerging markets,
Figure: 5 Exchange Rates of Currencies
120
100
80
60
40
20
Source: Reserve Bank of India
The dollar index has been rising on
signs of growing economic momentum and
the dollar is high across the board including
the rupee. At the same time, rising deficit is
bad for India as it exposes the economy to
the risk of sudden stop and reversal of
capital flows. In case of an event shock, for
example if the U.S. Fed withdraws its bond
buying programme, there might be sudden
outward flow of money, leaving India
scrambling for dollars. The slowdown in the
Indian economy has made the current
situation even more volatile because the
government is unable to generate heavy
capital inflow. India's current account deficit
was equivalent to a record 6.7 per cent of
gross domestic product in December, 2012.
Journal of Economics: Vol-IX (I) 2012-2013
and is the worst performer among major
Asian currencies.
US Dollar
Pound Sterling
Euro
Japanese Yen
Oil imports consume he largest part
of the foreign exchange reserves. A
depreciating rupee is bound to offset the
decrease in the international prices of
commodities such as oil. As can be seen
from the figure below although the oil price
per barrel has fallen however the
depreciating rupee has not given any respite
to the importer as they actually have to shell
out more money in order to purchase the
same quantity of oil. Take for instance crude
oil imports. Brent crude oil price was
$118.46 per barrel on April 2011 when
exchange rate for the rupee was Rs 44.4 to a
dollar. On November, oil price had gone
down to $109.03 per barrel and exchange
rate was Rs 52.7 to a dollar. Thus, because
ECO – CENTRIC
of the rupee depreciation not much benefit
can be derived out of the lower oil price.
1.2.6. Amartya Sen and Gajdish
Bahagwati Debate on Growth Paradigm
Inclusive growth basically means
broad based growth, shared growth, and pro-
poor growth. It decreases the rapid growth
rate of poverty in a country and increases the
involvement of people into the growth
process of the country. Inclusive growth by
its very definition implies an equitable
allocation of resources with benefits
incurred to every section of the society. But
the allocation of resources must be focused
on the intended short and long term benefits
of the society such as availability of
consumer goods, people access,
employment, standard of living etc. It sets a
direct relationship between macro and micro
determinant of the economy and its growth.
To maintain rapid and sustainable growth is
some time very difficult because resources
are misplaced during the allocation and may
give rise to negative externality such as rise
in corruption which is major problem in
developing nations. But however it has
created an environment of equality in
opportunity in all dimension of livelihood.
Such as employment creation, market,
consumption, production, and has created a
platform for people who are poor to access
good standard of living.
In the process of inclusive growth,
war of words between two of India’s most
prominent economists has been dominating
the country’s newspaper in recent past.
These two economists are Nobel Prize
winning economist Amartya Sen and
Jagdish Bhagwati, professor of law and
economics at Columbia University in New
York. In the social spending corner, Sen,
says that economic growth must accompany
social improvement and government must
spend money on education, healthcare and
food subsidy programs. While over in the
Journal of Economics: Vol-IX (I) 2012-2013
free market corner is Bhagwati, who argues
that India should focus entirely on economic
growth through market deregulation which
will automatically lead to improved lives for
the poorest. According to him growth has
made redistribution feasible, not the other
way round. On the other hand, Sen argued
that economic growth is very important as a
means for better lives but it has to be
combined with devoting resources to
remove illiteracy, ill health, under nutrition
and other deprivations. In the long run, if
India raises the quality of education and
healthcare and improves the productivity of
its citizens; the country could be a good
place to invest. It is difficult to regain the
high growth without an educated and
healthier labor force.
The economists described the
Gujarat model as a metaphor for a primarily
growth and private entrepreneurship driven
development and the Kerala model for a
primarily redistribution and state-driven
development. The Bhagwati duo argues that
whatever Kerala had achieved was thanks to
a growth-oriented approach. They suggest
that Kerala's high social indicators have
much less to do with the so-called Kerala
model, and more to do with global trade,
growth-oriented policies and private-sector
participation. However there is a difference
between level of change and rate of change.
Professor Bhagwati focuses more on rates of
change, while Sen argues that levels matter.
For Gujarat some recent rates of change
look impressive, as it is on a small base,
while for Kerala even incremental changes
on high levels are impressive. So, Gujarat
paradigm of development is ‘growth
oriented’, while Kerala's model is ‘human
development-led growth’. The Infant
mortality rates (IMR) of both Gujarat and
India are very high and Kerala has made
remarkable progress in bringing it down.
Rural IMR of Gujarat, which was below all
India, has now caught up and converged
ECO – CENTRIC
with all-India levels in an era of faster
economic growth. However both Bhagwati
and Sen have not paid enough attention to
key flaws in India's record in implementing
government programmes(Ullekh NP, ET
Bureau, 2013). Management and
institutional performance are areas ignored
by Sen. High expenditure in India is an
unwise option. India is country where public
delivery mechanisms have not worked well
and to compare this system with countries in
Asia as such as Korea, Taiwan etc. Besides,
Sen hasn't delved deep into issues related to
labour reforms or financing of political
parties, issues that are crucial in determining
the way our democracy functions.
Amid raging debate over growth
models suggested by economists Amartya
Sen and Jagdish Bhagwati, Finance Minister
P Chidambaram endorsed both of them
saying they were equally important and
emphasized the need to combine passion for
growth with compassion for the poor. India
can never be a truly happy prosperous
country unless our passion for growth is
combined with compassion for the poor. A
large number of people in this country are
poor. While Sen's model for growth
advocates that India should invest more in
its social infrastructure, the model put forth
by Bhagwati argues that mere focus on
growth can yield enough resources for
investing in social sector schemes. A most
constructive economic policy is incomplete
without the element of compassion. There
should be passion for growth and equally
support Sen's model which says there should
be compassion for the poor. Bhagwati model
will never be complete unless
complemented with Sen's model.
Economic growth is a process and
the ultimate aim of the process is
development and upliftment of the society.
So, definitely, growth must be inclusive and
consider poorest of the society. However,
there are several model of inclusive growth
Journal of Economics: Vol-IX (I) 2012-2013
process. If we compare, Bhagwati and Sen
Model, we can say that Bhagwati model is
growth oriented capitalist model of growth
and want to achieve inclusiveness by
adopting a free market oriented approach as
is attempted by India from 1991 even
though inclusive growth was not the prime
objective at that time. We can say that
Bhagwati want to redistribute income by
free market mechanism and has more faith
in market framework. On the other hand,
Sen consider social improvement and
government spend education, healthcare and
food subsidy programs etc. which implies a
mixed mechanism or a regulative framework
which formulate base of inclusive growth.
Now, the question is which is right or
supportive for Indian economy. There are
two fronts: one is external front and one is
internal from which one can say
inclusiveness and exclusiveness. To become
a strong economy in external front with
market competitiveness, we need high
growth rate, the fruit of which can be
achieved by poor only at long run. But there
may be the problem of deprivation, poverty,
inequality in short run. So, there is dilemma
of growth oriented development paradigm.
On the other hand, the rural development
process in India is not free from hassle.
Corruption and long chain of distribution are
the main problems in government spend
education, healthcare and food subsidy
programs. Public distribution which is
unless free from corruption creates the
environment of social inequality. Resources
are wasted and no positive results can be
found especially where there is a large
informal sector. It is like carrying a bucket
of water with a hole at bottom. However, no
one may deny development of human
resources as well as social sector in India. It
is a short run process and it is somewhat
direct process of getting inclusive growth.
But, there are some wastage of money and
growing seeds of corruption unless rural
 ECO – CENTRIC Journal of Economics: Vol-IX (I) 2012-2013

people are paid directly and linking them

with modern technology and providing Ullekh NP, ET Bureau (2013) ‘Amartya Sen
social awareness. vs Bhagwati: Who is right in the debate on
Gujarat-Kerala growth models?’, Economic
1.3. Conclusion
Times; Ullekh NP, ET Bureau Jul 28, 2013,
From the above analysis, it is clear
that India is able to achieve a robust growth 06.55AM IST
especially after the post reform era. The per
capita GDP growth rate of India is also
enhancing over the years; but if we compare
the world per capita GDP growth rate to
Indian scenario, it is very low. Growing ***************
fiscal deficit, inflation and corruption are the
main problem of Indian Economy. Looking
at these problems with growing income
inequality, India is following inclusive
growth model which is also full of
contradiction and debates. However, growth
is not only important from internal economic
and social perspective but also external
economic front. But in this process, full
market deregulation is more prone to
external shocks and instabilities of world
economy. At the same time, social
improvement and government spend are also
not a free flow mechanism unless guided by
proper regulation. So, for inclusive growth
of India, both development paradigms are
important and should be mixed with proper
care and national priority.

References:
Baruah Joydeep (2012) ‘Inclusive Growth
under India's Neo-liberal Regime: Towards
an Exposition’ Online at http://mpra.ub.uni-
muenchen.de/47248/ MPRA Paper No.
47248, posted 29. May 2013 13:24 UTC

Central Investing Agency (2013) ‘The world

fact’, Washington, D.C.
URL
https://www.cia.gov/library/publications/the
-world-factbook/fields/2116.html; visited on
15-08-2013 time 05:37 pm

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