CoNTENTs

Preface. .......23

SncrroN - I
Basic fssues in Econornic Deueloprnent

1. Economic Development and

- Introduction
- \Vhat does Deuehpment Mean
- Economic Growth and Economic Deaelopment
- Tbe New View of Econornic Deuelopnent
.
Development as a Multi_dimensional process
.
Three Core Values of Development
- Deaelopment, Freedom and Opportanities
- Human Deuelopmmt
. Sustainable Human Development
. tVhat Makes Development
Unsustainable?
. Policy for Sustainable Development
- Human Deuelopment Index
ent
Global Snapshot

. India-A Globdisation Success Story with a Mixed

Record on Human Development
- National Human Deueloltrnent fuport - 2001
. Indicators
- State of Human Detelopment in India
. State Level

Contd

J
10 Indiar Economl: Performance and Poliriet

...Contd....

2. The Environmenr and Development. ............................46

- Introduction
- Tbe Basic Issues
. Sustainable Development and Environmental Accounting
. Population, Resources, and the Environment
. Poverry and Environment
. Growth uersus the Environment
. Rural Development and the Environment
. Urban Development and the Environment
. The Global Environment
- Consequences of Enuironmental Damage
- The Indian Case
. Consequences of Environmental Plunder
- Public Policy

SncrroN - II
Indian Econorny at Independence

3. India's Economy at Independence. ...........57

- Introduction
- The Rektiae Inportance of Various Indusnial Actiuities
. Composition of National Income
- The W'orking Force
- The Agrarian Scene
. StagnatingAgriculture
. Causes

- Indiai Ind.ustrial Production and its Structure

. India's Industrial Resources
. The Decline of Tiaditional Industry and
the Development of Modern Industry
. Some other Economic Indicators of Economic Backwardness

- Some Positiue Features

Contetts in Detail
11

SBcrloN - III
Policy Regimes
4. Planning in India: Development
Strategy and Role of State-... ..........................70
- Euolution of planning
- Structural Coninaints and the Deuelopment Stategy
- Role of the State as Visualised in the Fifiies
- Euolution ofStrateglr and priorities
- Changing perceptions
- The Role of planning
.
Redefining the Role of State
- The Gouernrnent, the State and the Market
- Cooperatiae Action

5. Economic Reform and Liberalisation.......................,....88

- Debate on Liberalisation
- Economic Reform
. The Background
. The Macroeconomic Crisis
. Rationale for the Reforms
. MacroeconomicReforms
. Structural Reforms
- Implementation of the Agenda
- Removal of eRs
- National Structural Adjustment programme
- Safery Ner
. Macroeconomic Impact of Reforms
. Fiscal Adjustment and Stabilisation
. Political Resistance to Reform
. Concerns Regarding Social and
Political Implications of Reform
. Impacr of the New Economic policy
on the Vulnerable Secrions
. Conclusion
- The Next Round of Reforms

Contd
t2 Indian Economl: Performaue ard policiet

...Contd..,,

SpcrloN - IV
Growth, Deuelopment and Structural Change

6. Indiat Growth Experience.................... ....... Ir5

- The Performance
- Two Phases of Growth
- Assessment of performance
- Causal Factors
- Vhat Next?
- Sectoral Composition of Reat GDp
- Inter-regional Disparities in Growth and Deuelopment
. Implications of Inter_state Inequaliry
. Sectoral Composition of Growth
. Causal Factors
- Investmenr
o planning and public Investment
o Private Investment
- Technical Change
- Institutions and Governance
- The IVay Ahead
- Conclusion

7. Institutional Reforms for

Agricultural Growth ................. r37
- Land Systems at the Tirne of Independence
. Feudal Agrarian Structure
- Policies for Resnuctaring Agrarian Rektions
. Economic Arguments in Favour of Land Reform
. Abolition of Intermediaries
. Ceiling on Land Holdings
. Tenancy Reforms
. Consolidation of Holdings
. Co-operative Farming
- Impact of Structural Reorganisation
- Emerging Perspectiues and policy Issues

- Land Reforms: Approach paper to the

Eleuenth Plan
Contents in Detail
r3

8. Policies for Regulating Pattern of

Investment and Concentration of
Economic Power in Industry............................................. 147
- Euolution of Ind.ustrial Control Regime
- Performance of the Industrial Licensing System
- New Economic Policy

9. Indiat Economic Performance

and Challenges ... 156
- Touards Faster and More Inclusite Growth
- Strengths of the Economy
- Sorne Major Challenges
. Regaining Agricultural Dynamism
. Changing Employmenr Patterns
. Providing Essential Public Services for the poor
. Increasing Manufacturing Competitiveness
. Developing Human Resources
. Protecting the Environment
. Improving Rehabilitation and Resettlement practices
. Improving Governance
. Disparities and Divides

10. Unemployment and Employment

Perspective. ................... ..................... 169
- Popuktion and. Labour Force Projections
- Concepts and Measurernent
- Measurement of Employment and (Jnemployment
- Recent Tiends in Ernployment and Unemployment Situation
. Employmenr and Unemployment (60th Round of NSSO)
. Results of6lst Round ofNSSO Survey
- Indian Labour Laws and Labour Marhets
- Strategks and Policies for Emltloyment Generation
. Eleventh Plan Approach Paper on Employment
. Promoting Employment Generation
' o Changing Employment Patterns
o Employment Generating Sectors

Contd
t4 Indian Ecotonl: Performance and Policies

o National Rural Employment

Guarantee Programme (NREGP)
o Self-Employmenr programmes

11. Poverry in India. ... r9o

- Magnitude and Determinants
. The Selection of Poverty Lines
- State Leael Poaerty Ratios
- Basic Minimum Seruices
- Policy
. Flaws in Policies and Programmes
- Targeting
- Accountabiliry
- Rok of NGOs and Voluntary Organisations
- Growth and Pouerty

12. Demographic Constrainr: Interaction

benveen Population Change and

- Econornic Deuelopment,and Popuktion Growth

. The Theory of Demographic Tiansition
. The Micro Economic Theory of Fertility
. How Does Population Growth Affect Economic Development
- Population and Labour Force Projections
- The Ongoing Demographic Tiansition:
Challenges and Opportunities
- Demographic Tiends in Ind.ia
. Period oflow Population Growth
. Period of Rapid Growth and Population Explosion
. Period of Some Decline in Rate of Growth lggl Onwards
- Tirend.s in Birth and Death Rates
. Causes of High Birth Rate
o Social Factors
o Economic Factors
. Fertility Rate
. Causes of Decline in Death Rate
o Control of Epidemics
o Control of Famines
 in Dctail
Contcnts
t5

o Improved Medical Facilities

o Spread of Maternity Homes
o Impact of Economic Development
o Meaures to Reduce Birth Rate
- Family Pknning/Farnily Velftre Programrnes
- Progress of Heahh and Farnily Velfare Programmes

- India and \Y'orld Population

. Possible Pathways to a Fasrer Decline in Fertiliry
o Urbanisation
o Literacy
" The Status of Indian W'omen
- Age Distribution of the Indian Population
.
Policy Shift Essential to Check Population Growth
o System of Incentives and Disincentives
.National Population Policy 2000
- Irnplications of Mortality Decline for the Future

SncrloN - V
Sectoral Trends and Issues

13. Agriculture: The Problem of Productivity. .............25r

- Importance of Agricuhure in National Economy
.
Agriculrure as a Source of Employmenr
. Linkage between Agricuhure and Other Sectors
- Productiuity in Indian Agricuhure
. Low Levels of Productivicy
. Causes oflow Productiviry
- General Causes
- Institutional Causes
- Technological Factors

14. Agricultural Growth, Performance

and Policies................... .................... 256
- The Instintional Context
- The New Tbchnology
- Characteristics of New Tbchnologjt

...Contd....
t6 Izdian Ecotonl: Performance and Policiet

. Better Agricultural Practices

. Economic Aspects of New Technology
- Green Reuolution
. First Phase: Increase in Public Investment in Agriculture
. Second Phase oF Green Revolution
- Periodisation of Growth Rate
- Productiuity
. The Role of Technology in Indian Agriculture
- Small Size of Farms
. Instability in Output
. Regional Disparities and Intrapersonal Disparities
. New Technology and Environmental Degradation
- Limits to Growth: Some Tbntatiue Euidence
. Deceleration in Agriculture Growth
. Major Factors Affecting the Growth Potential
o Lack of Long-term Policy Perspective
o Neglect of Capital Formation
o Lagging Research and Development Efforts
o Rising Soil Degradation and
Over-exploitation of Groundwater
- Farrn Subsidies uersus Inuestment
. Rationalising Subsidies and Strengthening Input and
Support Services
- The National Agriculnre Policy 2000
- Policies for Accelerating Agricuharal Growth
(Approach Paper to the LLth Pkn)
. Demand Side Intervention
. Supply Side Strategy
. Agriculrural Research
. Vater Management and Irrigation
. Animal Husbandry and Fishery

15. Food Security, Public Distribution

and Agricultural Price Po1icy.................. ...297
- Pre-green Reuolation
- Green Reuolution
- Post-reform Reuolution
- Emergence of Foodgrain Surpluses
- Policy Frarneworh for tbe Future
- Tbwards Elimination of Htnger dnd Malnutrition
Contetts in Detail t7

. Hunger
' Calorie Deprivation
. Nutritiond Security
' Economic Policies
- Programme Interuentions
. Public Distribution System
- The Way Forward
. Availability
' Stabiliry in SuPPlies
' Ensuring Access to Food
. Nutritional Security
- Agricuhural Price Policy
- Procarernent
- Buffer Stoch
- Minimurn SuPPort Prices
- Econornic Cost ofFoodgrains
- Central Issue Price
- Food. Subsidy
- Food Security
- Projections of 1lth Plan OutlaYs
16. Globalisation and Indian Agriculture......'....'...........'328

- Emerging Tiends and Impact of Globalisation

- Major Issues in the Context of Ghbalisation

17. Industrial Growth and Policy .."....'..'......." 335'

- Extefi and Pattern oflndustialisation

during the British Rule
- Industial Control Regirne
. Performance of the Industrial Licensing System
- The Policy Regirne in the 1990s

- New Econornic Policy

- Opening up to Foreign Inuestrnent
- Ind.usnial Poliry Reforrus
and Infrastructure
- Pubtic Sector Reforms, Priuatisation
- Industial Growth
- Phases of Indusnial Growth
18 Indian Econonl: Perfornaxce ail Policiet

-..Contd...-

. Industrial Growth in the 90s

. Comparative Growth Rates in the 80s and the 90s
o Relative Contribution of Sectors ro Toral Production
- Profile of Industrial Growth
. Fall in Potential as well as Actual Industrial Growrh
. Shift in Favour of Registered Manufacturing
. Decline in Employment Growth in Organised Manufacturing
. The Stagnant Share of Manufactuing Sector
o The Manufacturing Slowdown
o Factors Causing the Industrial Slowdown: Some Hypotheses
o Infrastructure Constraints in the Industrial Sector
. Summing Up (1992-93 to 2001-02)
. Recovery in Industrial Growth since 2002-03

18. Public Sector in the Indian Economy. .......................367

- The Rationale
- Growth in Inuestment in Central Gouernment Enterprises
- Role of Public Sector
. Public Sector and Employment
. Shareof the Public Sector in GDP
. Share of the Public Sector in Savings and
Capital Formation
- Performance of Public Enter?riset
- New Directions of Policy: 1991 Industial Policy
. Highlights of CPSE Performance in 2005-06
. Disinvestment of Public Sector Shareholding
. Issue of Privatisation
. Issues in Disinvestment in India
. Disinvestment: Policy and Practice
. Disinvestrnent Strategies
. Velfare Gains from Privatisation of Profitable PSEs
- Conclusion

19. Small-scale Industrialisation. ......................398

- Small Industry
. Rationale for Supporring Small-scale Enterprises
. Definition of Small-scale Industries
. Small-scale Reservation Policy
. Spatial Distribution of SSEs
o Impact of SSI Reservation on Exports
Contents in Detail r9

- New Small Enterprise Poli

. Small and Tiny Enterpnses
.
Village Industries
- Performance of Small-scale Ind.ustries

20. Role of Foreign Capital. ........4r4

- Introduction
- Foreign Capital aersus Export-led Growth
- The Debate on the Role of Foreign Capital
Foreign Direct Investment
. Portfolio Capital
. External Aid
. Commercial Debt Capital
- Capital Flows and Growth in Ind.ia: The Recent Experience
. FDI Policy: A Historical Perspective
- First Phase 1950-1967
- Second Phase 1967-1980
- Third Phase 1980-1990
- Fourth Phase-l991 Onwards
- Tirends in FDI-Iry the 1990s

- Changes in Sectoral Composition

- Changes in the Sources of FDI
- Pattern of FDf by Ttpt ofApprouals
- Comparatiue Performance of India and China
- Impact of FDI
.
Impact of FDI: Performance of FDl-Companies in India
- Touards a Realistic FDI Policy
- Summary and Conclusion

21. Services in the Indian Growth Process. .....................443

- Growth and Sectoral Shares, Cross Country Euidence and
Indian Experience
. of Services in GDP
Share
. in Employment
Share of Services
- \Yhich Seraices Haue Grown Rapidly ?
. Fast Growers
. Tiend Growers
. Contribution of Fast and Tiend Growers to Services Growth
20 Irdiar Econonl: Pe(omance and Policiet

- Factors Underlying the Seruices Growth

. External Demand for Services
- Structure oflndia's Seruices Exports
. Services Tiade
- Summing Up

22. The Financial Sector: Structure,

Performance and Reforms. ...461
- Financial Sector Deuelopment in India
. Institutional Srructure
. Capital Markets
. Strategy of Development
- Directions of Reforns
. Administered Structure of Interest Rate
. Autonomy, Prudential Regulations and Supervision
. l99l and After: The Reform Years
. Role of Comperition
. Capitd Adequacy and Government Ownership
in the Banking Secor
- for the Future of the
Some Perspectite
Indiat Financial System
- Lessons from the Indian Experience
- Conclusion

23. Foreign Trade. .........4s3

- Consnaints Arising from Foreign Tiade and
Import Sabstitution based Policies
- Inward Loohing Strategy
- Broad Tiends: Exports and lrnports
. Exports
-
Factors for Export Growth since 2002-03
. Imports
- Factors for Imports Growth
- Changing Structure of Indiai Foreign Ti"ade
. Comparison between 90's and 80t
- Tiade GDP Ratio
- Tiade Deficit-GDP Ratio
- Snuctural Change in Exports
. Changes in Terms of Broad Categories
Contents in Detail 27

.Commodity Composition: Exports

.Move Towards Value-addition
.Moving Away from Tiadidonal Exports
Towards New Manufactured Products
- India\ Share in Global Exports: Cornpositional Change
- Cornmodity Composition of Imports
- Direction of Foreign Tiafu
. Direction of Exports
. Direction of Imports
- Sumrning Up
- Balance of Tiade
. Indiat Balance ofTiade
. Causes ofUnfavourable Balance ofTiade
- Large Increase in Imports
- Modest Growth in Exports
o External Factors
o Internal Factors
- Measures to Correct Deficit in Balance of Tiade
o Restrictions on Imports
o ExPort Promotion

24. Balance of Payments and Tiade Policy 521

- Concepts
- Tiad.e Policy: An Oueruiew
- The Political Econorny of the Foreign Exchange Regimes
- Tiade Policy since 1991
- India! Bahnce of Pdyment Tiend"s 1950-2000
. The Decades of Fifties and Sixties
. Balance of Payments in the Seventies
o A Decade of Comfort
. B?lance ofPayments up to l98l-82
o The Period of Difficulties
. Balance of Payments during 1982-83 to 1984-85
oEasing of Pressure
. Balance of Payments during 1985-1990
o The Build-up to the Crisis
o The Crisis: 1990-1992
. Balance of Payments during 1993-94 to 2005-06
o Invisibles

Contd
22 Irdiat Econoay PerJormancc and Policiet

...Contd....

- Capital Accoilnt, External Debt and Exchange Rate

. Approach, Developments and Issues
- Foreign Inaestrnent
. Magnitude
. Foreign Portfolio Investment (FPI)
. NRI Deposits
- External Commercial Bonowings
- Decline in Foreign Aid
- _Impact of Reforms on BoP
'- External Debt Management
- Exchange Rate Management
. Tiansition to Market Determined Exchange Rate Sysrem
- Foreign Exchange Reserues: Approach, Deaelopments and Issues
- Surnming Up

25. India and the \7TO 563

- Vorld Trale Organization
- India and the VTO
- India at VTO Meetings
. Singapore V'TO Conference (December 2005)
- And Aftei Quly 24, 2006)

Select Bibliograpb ............ ...5e1

 THIS book is designed for use in courses on Indian economy at the
undergraduate level, particularly the restructured course of
B.Com (Hons.) at the Universiry of Delhi.

_ _Althgygh the conrents of the book follow essentially the

B.Com (Hons.) course content of Indian economy pape, XW1I the
material is sufficiently broad in scope and rigoroui in coverage to
satisf' any undergraduate and graduate requiriments in the field of
Indian economy. The thrust of the book is on the performance and
"
policies with a brief background of the colonial p"it.
The book is organised into five secions:
Section l, covers the basic concepts and issues in economic
development, and me2sures of development and underdevelopment
as well as human development. The environment and develop-.rt
is also discussed in this secrion.
Section 2, looks at the basic features of the Indian economy ar
independence: composition of national income and occupational
structure, the agrarian scene and the industrial structure.
section 3, discusses p_olicy regimes: the evolution of pranning,
import-substituting industrialisation, economic r.fo.m
liberalisation. "rrd
Section 4, deals withthe experience of growth, development and
structural changes in different phases of growth, and policy regimes
across.sectors and regions. The institutional frameu'ork and changes
in policy perspective on the role of institutional framework a[er
1991, are also discussed. This section also provides a wide coverage
of the issues of unemployment and poverry, human development,
and also the demographic constraints.
24 Indiar Econonl: Performance ail Policies

Section 5, is devoted to sectoral trends and issues:

Agriculture, Industry, Services, Financial sector and External
sector.

The analyses and discussion, covering these five sections in the

various chapters of this book, are based on the readings recommended
for this course. However, wherever required, we have supplemented
from other sources reference to which is given in the footnotes of
the various chapters A select bibliography is given at the end ofthe
book for reference to the authors cited in the text. A glossary of
selected terms is also given for the benefit of the students.
In writing this book, I have drawn liberally from the relevant
articles/papers written by renowned economists/experts in their
respective fields. The analyses have been updated from the latest
reports available such as RBI Report on Currency and Finance 2005-
2006, Economic Survey 2006-07, Planning Commission Mid-term
Appraisal of the 10th Plan and Approach Paper to the llth Plan
(December 2006).
Iowe my deep sense of gratitude to C.H. Hanumantha Rao,
C. Rangarajan, Jean Drbze, Amartya Sen, Kaushik Basu,
T.N. Srinivasan, S.D. Tendulkar, V.S. Vyas, K.L. Krishna, Deepak
Nayyar, Rakesh Mohan, Montek S. Ahluwalia, Jagdish Bhagwati,
Pravin Visaria (late), Amaresh Bagchi, A. Vaidyanathan,
J.C. Sandesara, Mihir Rakshit, R. Radhakrishna, Ishar Ahluwalia,
T.C.A. Anant, Nagesh Kumar, S.K. Ray, Ashok Gulati, R. Nagaraj,
Jim Gordon, Poonam Gupta, Rajesh Chadha and P.D. Jeromi, from
whose writings I have been able to draw to benefit the students.
I am equally grateful to my colleagues teaching in different
colleges, who inspired me to write-this book and have been making
suggestions from time-to-time to make this book more relevant and
easy to understand by the students.
I hope this thoroughly restructured book on Indian economy will
prove handy and useful to students and teachers on Indian economy.

July 2007 Uma l{apik

-
 Economic Development and
Under Development

Introduction
THE world today presents a picture of sharp contrasts between
developed/advanced and backward/underdeveloped/developing
countries. At one extreme, there are countries like USA with per capita
GNI of $ 41400 (2004) and on the other extreme are countries like
Ethiopia with per capita GNI of $ ll0.t
According to World Development Report (2006), 15.8 per cent of
world population lives in countries which are classified as high income
developed countries like USA, Canada, Australia, countries of Western
Europe, New Zealand and some of the Asian countries such as Japan,
Singapore, Hong Kong. On the other hand 84.2 per cent of the
population lives in countries which are in the category of low income
and middle income developing economies.

What does Development Mean

The term development may mean different things to different
people. In strictly economic terms, development has traditionally meant
a sustained annual increase in GNP (or GDP) at rates varying from
5 per cent to 7 per cent or more.2
A common alternative economic index of development has been the
rates of growth of per capita GNP i.e., the ability of a nation to expand
its output at a rate faster than the growth of population. Thus, per capita

The World Bank, World Development Report, 2006,

Todaro, Michael (2004), Economic Development in the Third World (8ah edition), ch.1,
Pearson Education (Singapore) Pvt. Ltd., Delhi.
 2a lndiat Econot4,: peformance and plli.ier

Economic Growth and Economic Development

Till the 1960s, the term economic development was often used as

gro
not
dev
country's GNP is required before it can hope to expand its industries
and the services sectors. Nowhere in the world has the occupational
distribution of population changed in the absence of growth.

The New View of Economic Development

3. Kindleberger, CP., Economic Development (2nd edition) ch. I

Econonit Detelopttenl and Undet Derellpnen/ 29

of a growing economy. "Redistribution from growth" became a common

slogan. In this context Kindleberger argued that "Economic development
is generally defined to include improvements in material welfare,
especially for persons with the lowest incomes, the eradication of mass
poverty with its corelates of illiteracy, diseases and early death, changes
in the composition of inputs and outputs that generally include shifts in
the underlying structure of production away from agricultural growth
towards industrial activities, the organisation of the economy in such a
mong the working age
leged minority and the
based groups in making
therwise, in which they
should move to improve their welfare."a
Dudley Seers5 posed three basic questions about the meaning of
development:
What has been haPPening to PovertY ?
What has been happening to unemployment ?

What has been happening to inequality ?

If all three of these have declined from high levels then beyond
doubt this has been a period of development for the country concerned.
If one or two of these central problems have been growing worse,
especially if all three have, it would be strange to call the result
'development' even if per capita income doubled'6
This assertion was a hard reality for a number of developing
countries which experienced relatively high rates of growth of per capita
income during the 1960s and 1970s but showed little or no improvement
or even an actual decline in employment, equality and the real income
of the bottom 40 per cent of their population. By the earlier definition
of 'growth', veloping, but by the new criteria of
poverty, equ they were not' The situation in the
1980s worse wth rates turned negative for many
less developed countries and the governments, faced with mounting
foreign debt problems, were forced to cut back on their already limited
social and economic Programmes.

4 Kindleberger op.cit.
5. Seers, Dudley (1969) "The Meaning of Development", paper Presented ar the Eleventh
Worli Confeience of the Society for International Development, New Delhi
6. Todaro op cit.
30 Itdiar Econonl: Perlornance antl Policiet

While during the 1980s, the World Bank championed .,economic

growth" as the goal of development, its World Development Report of
I99l asserted that "the challenge of development ... is to improve the
quality of life. For the world's poor countries, a better quality of life
generally calls for higher income... and it involves much more. It
encompasses, as ends in themselves, better education, higher standards
of health and nutrition, less poverty, a cleaner environment, more equality
of opportunity, greater individual freedom, and a richer cultural life."
Development as a Multi,dimensional Process
According to Todaro, "Development must, therefore, be conceived
of as a multi-dimensional process involving major changes in social
structures, popular attitudes and national institutions, as well as the
acceleration of economic growth, the reduction of inequality and the
eradication of absolute poverty. Development, in its essence, must
represent the whole gamut of change by which an entire social system,
tuned to the diverse basic needs and desires of individuals and social
groups within that system, moves away from a condition of life widely
perceived as unsatisfactory, towards a situation or condition of life as
materially and spiritually better." According to prof. Goulet,T at least
three basic components as core values should serve as a conceptual basis
and practical guidelines for understanding the "inner" meaning of
development. These core values-sustenance, self-esteem and
freedom-represent common goals sought by all individuals and
societies? They relate to fundamental human needs that find their
expression in almost all societies and cultures at all times.

Three Core Values of Development

Sustenance: The life-sustaining basic human needs include food,
shelter, health and protection. When any one of these is absent or in
critically short supply, a condition of absolute "underdevelopment"
exists.
Self-esteem: A second universal component of good life is self-
esteem-a sense of worth and self-respect-of not being used as a tool
by others for their own ends. Due to the significance attached to material
values in developed nations, worthiness and esteem are now-a-days
increasingly conferred only on countries that possess economic wealth
and technological power-those that have developed.

7. Goulet, Denis (1971). The Cruel Choice: A New Concept in the Theory of Development,
pp. 87-94, Atheneum, New York.
Econottic Det'elopneil artl unrler Det'ellpneilt 3l

Now-a-days the Third World seeks development in order to gain

the esteem which is denied to societies living in a state of disgraceful
,underdevelopment'. ... Development is legitimized as a goal because
it is an important, perhaps even an indispensable, way of gaining
esteem.s

Freedom from Servitude: To be Abte to chose: Arthur Lewise

stressed the relationship between economic growth and freedom from
servitude when he concluded that "the advantage of economic growth
is not that wealth increases happiness, but that it increases the range of
human choice." Wealth can enable a person to gain greater control over
nature and his physical environment than they would have if they
remained poor. It also gives them the freedom to chose greater leisure.
The concept of human freedom should encompass various components
of politicai freedom, freedom of expression, political participation and
equality of opportunitY.

Development' Freedom and Opportunities

AccordingtoDrbzeandSen,"Inrecentyears,development
economics has been also taking a much more inclusive view of the
nature of economic development. one way of seeing development is in

personal circumstances-to choose other types of living'

8. Goulet op.cir.
g.Lewis,W.Arthur(1963)..IsEconomicGrowthDesirable?''inAllenandUnwin(eds.)'
Theory of Economic Growth' p. 420, London'
10. Drbze, Jean and Amartya Sen (2005)' India Development and Partitipation' ch' 2'
Oxford UniversitY Press, Delhi.
 Indian Econonl: Perfornance atd Policiet
32

and related variables.lr The expansion of human capabilities can

clearly

what is crucial in all this is the need to judge the different policies,

incomes-seen as a merit in itself'

in India today as it does to evaluations of development programmes

anywhere else in the world.

ll. onomics' emphasised that the ap-

e of human cboice', but neverthe-
outPut Per head', since that 'gives
reases his freedom' (Lewis, 1955:

12. lua ndian economy' and analyses of

(1993)' Desai
to ' 1992)' Bhagwati
tle (1996)' Cassen and Joshi (1995)'
el
Econamit Deuelopnent and Under Deuelopnent 33

Human Development
The UNDP Human Development Report (1994) focusses on the new
paradigm of development that puts people at the centre of development,
regards economic growth as a means and not an end, protects the life
opportunities of future generations as well as the present generations
and respects the natural systems on which all life depends.
Such a paradigm of development enables all individuals to enlarge
their human capabilities to the full and to put these capabilities to their
best use in all fields-economic, social, cultural and political. It also
protects the options of the unborn generations. It does not run-down
the natural resource base needed for sustaining development in the
future.

Sustainable Human Development

Sustainable human development addresses both inter-generational
and intra-generational equity-enabling all generations, present and
future to make the best use of their potential capabilities. In the final
analysis, sustainable human development is pro-people, pro-jobs and
pro-nature. It gives the highest priority to poverty reduction, productive
employment, social integration and environmental regeneration. It
accelerates economic growth and translates it into improvements in
human lives, without destroying the natural capital needed to protect
the opportunities of future generations.
The strongest argument for protecting the environment is the ethical
need to guarantee the future generations opportunities similar to the ones
previous generations have enjoyed. This guarantee is the foundation of
'Sustainable Development' .
The principal goal of development policy is to create sustainable
improvements in the quality of life for all people. Sustainable
development has many objectives. Insofar as raising per capita income
improves people's living standards, it is one among many development
objectives. The aim of lifting living standards encompasses a number
of more specific goals, bettering people's health and educational
opportunities, giving every one the chance to participate in public life,
helping to ensure a clean environment, promoting inter-generational
equity and much more.13

13. The World Bank, World Development Report, 1999-2000 p. 13

34 Indiat Econonl: Perfornance and Policiet

What Makes Development Unsastainable?

When increase in GNP is brought about through depletion of
resources under unhealthy environmental conditions by the present
generation, the future generations will be left with much depleted
resource to produce output under polluted environmental conditions
adversely affecting their health and efficiency. Under such
circumstances the rate of economic development in future is bound to
fall. Thus, when we are producing more at the cost of future generations
the present level of development is not sustainable i.e., we will not be
able to maintain it in future.

Policy for Sustainable Development

Even if scarcity of natural resources increases, natural resources
and environments can be adequately preserved by investment in
conservation and anti-pollution activities such as reforestation, soil
erosion prevention (such as terracing), and purification of gas emission.
In order to promote these activities, institutional innovations are
required, such as setting property rights where applicable, regulating
and taxing natural resource utilisation, and organising governmental and
non-governmental bodies for environmental monitoring.

Human Development Index

HDI is a quality of life index prepared by UNDP and published in
Human Development Reports since 1990. It takes into account the three
most basic human capabilities.
(i) Longevity measured by life expectancy at birth.
(ii) Educational attainment as measured by adult literacy rate and
gross enrolment ratio GER (primary, secondary and tertiary
level combined).
(iii) Adjusted real GDP per capita-PPP stands for purchasing
power parity. PPP GDP is calculated after eliminating price
differences among countries.
The HDI value indicates how far a country has gone to attain certain
defined goals: an average life span of 85 years, access to education for
all and a decent standard of living. The maximum and minimum values
for each variable, which are fixed, are reduced to scale between 0 and 1.
Countries are classified into three groups:
(1) High human development countries-Countries with HDI
values of 0.800 and above.
Econonic Detelopnent aM Under Derelopnent
35

(2) Medium human development countries-Countries with HDI

values of 0.500 to 0.799.
(3) Low human development countries-Countries with HDI
values below 0.500.
Human Development Report 2005 states, "Fifteen years after the
launch of the first Human Development Report, this year's Report starts
by looking at the state of human development. Writing in that first
report, Mahbub ul Haq looked forward to a decade of rapid advance:
'The 1990s', he wrote, 'are shaping up as the decade for human
development, for rarely has there been such a consensus on the real
objectives of development strategies.' Since those words were written
a great deal has been achieved. Much of the developing world has
experienced rapid social progress and rising living standards. Millions
have benefited from globalisation. Yet the human development advances
fall short of those anticipated in Human Development Report 1990-
and far short of what was possible."
The HDR (2005) further states, "Viewed from the perspective of
2015, there is a growing danger that the next 10 years-like the past
l0-will go down in history not as a decade of accelerated human
development, but as a decade of lost opportunity, half-hearted endeavour
and failed international cooperation."

Progress and Setbacks in Human Development

Human development is about freedom. It is about building human
capabilities-the range of things that people can do, and what they can
be. Individual freedoms and rights matter a great deal, but people are
restricted in what they can do with that freedom if they are poor, ill,
illiterate, discriminated against, threatened by violent conflict or denied
a political voice. That is why the "larger freedom" proclairned in the
UN Charter is at the heart of human development.
The most basic capabilities for human development are leading a
long and healthy life, being educated and having adequate resources
for a decent standard of living. Other capabilities include social and
political participation in society.
The era of globalisation has been marked by dramatic advances in
technology, trade and investment-and an impressive increase in
prosperity. Gains in human development have been less impressive.
Large parts of the developing world are being left behind. Hirman
development gaps between rich and poor countries, already large, are
 36 Indian Econonl: perlormance antl policiet

widening' Meanwhile, some of the countries most widely

cited as
examples of globalisation "success stories" are finding
it harder to
convert rising prosperity into human development.ra

Advances in Human Development-A Global Snapshot

Life Expectancy

Education

Poverty

14 UNDP (2005). Human Development Report

l5
16 ibid.
Economic Dete/opnten/ and Urder Deuelopnenl 37

was 1.5 per cent, almost three times the rate in the 1980s. Since 2000,
average per capita income growth in developing countries has increased
to 3.4 per cent-double the average for high-income countries.rT
Conflicts
Violent conflicts pose one of the greatest barriers to accelerated
human development. Since 1990 the world has witnessed genocide in
Rwanda, violent civil wars in the heart of Europe, wars in Afghanistan
and Iraq and setbacks in the Middle East. The conflict in the Democratic
Republic of the Congo has claimed almost 4 million lives-the greatest
death toll since the Second World War. New threats to collective security
have emerged. Yet despite the challenges posed for human development
by violent conflict, there is some positive news' The number of conflicts
has fallen since 1990. The last 15 years have seen many civil wars ended
through negotiation under UN auspices.l8
Democracy
Progress towards democracy also has been mixed. Democracy is a
fundamental aspect of human development' It is both intrinsically
valuable, and therefore a human development indicator in its own right,
and a means towards wider human development goals. Multiparty
elections-now the world's preferred form of governance-are one
condition. An independent judiciary, constraints on executive power'
freedom of the press and respect for human rights give substance to the
form of electoral choice. By the Polity indicator of democracy, a
composite benchmark, the share of the world's countries with multiparty
electoral systems that meet wider criteria for democracy has risen since
1990 from 39 per cent to 55 per cent.
However, multiparty elections are not a sufficient condition for
democracy-and even on this measure the glass is almost half empty.
Multiparty elections are largely absent from the Middle East, though
countries such as Egypt and Jordan are increasing the democratic space
for electoral politics. Of the world's two most populous countries, India
is a thriving democracy, but in China political reforms have lagged
behind economic reforms.
However, the scale of the human development gains registered over
the past decade should not be underestimated-nor should it be
exaggerated. Part of the problem with global snapshots is that they

l7 UNDP op.cir.
l8 ibid.
 38 Intlian Econonl: perfornanre ail paliciet

obscure large variations across and within regions. They also hide
differences across dimensions of human development. progress towards
human development has been uneven across and within regions and
across different dimensions. re

The Limits to Human Development2o

There is no more powerful-or disturbing-indicator of capability
deprivation than child mortality. More than l0 million children die each
year before their fifth birthday. Sub-saharan Africa's share of child
mortality is growing. The region accounts for 20 per cent of births but
44 pu cent of child deaths. More than 98 per cent of children who die
each year live in poor countries. They die because of where they are
born.
Progress in reducing poverty has been partial. One in five people
in the world-more than I billion people-still survive on less than $l
a day, a level of poverty so abject that it threatens survival. Another
1.5 billion people live on $1-$2 a day. More than 40 per cent of the
world's population are faced daily with the reality or the threat of
extreme poverty.
Income poverty is closely linked to hunger. In a world of plenty,
millions of people go hungry every day. More than 850 million people,
including one in three preschool children, are still trapped in a vicious
cycle of malnutrition and its effects.
Gaps in opportunities for education remain large. In an increasingly
knowledge-based global economy about 115 million children are denied
even the most basic primary education.2r
Gender inequalities continue to limit girls' education. The deep
gender disparities represent not just a violation of the universal right to
education but also a threat to future human development prospects: girls'
education is one of the most powerful catalysts for social progress across
a wide range of indicators.

The End of Convergence?

Human Development Report (2005) states, "For most of the past
40 years human capabilities have been gradually converging. From a
low base, developing countries as a group have been catching up with

19 UNDP ap.cit.
20 ibid.
2l ibid.
 Econattic Dete/opment atd (Jnder Deuelopuet!
39
rich countries in such areas as life expectancy, child mortality
and
literacy. A worrying aspect of human development today is that
the
overall rate of convergence is slowing_and for a lar-ge group of
countries divergence is becoming the order of the day.,,
In a world of already extreme inequalities, human development gaps
between rich and poor countries are ln some cases widenlng
and in
others narrowing very slowly. The process is uneven, wiih large
variations across regions and countries. we may live in a world where
universal rights proclaim that all people are of equar worth-but
where
you are born in the world dictates your life chances.

India-A Globalisation Success Story with

a Mixed Record on Human Development22
India has been widely heralded as a success story for globalisation.
over the past two decades the country has moved into the piemier league
of world economic growth; high-technology exports are booming and
India's emerging middle-class consumers have become a magnet for
foreign investors.However, the record on human development lias been
less impressive than the record on global integration as prime
Minister,
Dr. Manmohan Singh remarked,
"The slow improvement in the health status of our peopre has been
h
matter of great concern. we have paid inadequate attention to public
health" (April 2005).

The incidence of income poverty has fallen from about 36 per cent
in the early 1990s to somewhere between 25 per cent and 30
ier cent
today. Precise figures are widely disputed because of problems with
survey data. But overall the evidence suggests that the pick_up in
growth has not translated into a commensurate decline in poverty.
More worrying, improvements in child and infant mortaiity are
slowing-and India is now off track for these MDG (Miil"nniu-
Development Goals) targets. Some of India's southern cities may be
in the midst of a technology boom, but 1 in every l l Indian children
dies in the first five years of life. Malnutrition, which has barely
improved over the past decade, affects half the country's children. About
I in 4 girls and more than I in l0 boys do not attend primary school.

22 UNDP op.cit
I

40 Irdian Economl: Petfornance and Policiet

Source : Human Development Report, 2005.

Why has accelerated income growth not moved India onto a faster
poverty reduction path? Extreme poverty is concentrated in rural areas
of the northern poverty-belt states, including Bihar, Madhya Pradesh,
Uttar Pradesh and West Bengal, while income growth has been most
dynamic in other states, urban areas and the service sectors. While rural
poverty has fallen rapidly in some states, such as Gujarat and Tamil
Nadu, less progress has been achieved in the northern states. At a
national level, rural unemployment is rising, agricultural output is
incieasing at less than 2 per cent a year, agricultural wages are
stagnating, and growth is virtually 'jobless'. Every 1 per cent of uational
income growth generated three times as many jobs in the 1980s as in
the 1990s.
The deeper problem facing India is its human development legacy.
In particular, pervasive gender inequalities, rural poverty and
inequalities between states, is undermining the potential for converting
growth into human development.
Perhaps the starkest gender inequality is revealed by this simple
fact: girls aged 1-5 are 50 per cent more likely to die than boys. This
fact translates into 130,000 'missing' girls. Female mortality rates
remain higher than male mortality rates through age 30, reversing the
typical demographic pattern. These gender differences reflect a
Ecoronic Dnelopnert and Under Deuelapmenl 4t
widespread preference for sons, particularly in northern states. Girls,
less valued than their brothers, are often brought to health facilities in
more advanced stages of illness, taken to less qualified doctors and have
less money spent on their health care. The low status and educational
disadvantage suffered by women have a direct bearing on their health
and their children's. About one-third of India's children are underweight
at birth, reflecting poor maternal health.
Inadequate public health provision exacerbates vulnerability.
Fifteen years after universal childhood immunisation was introduced,
national health surveys suggest that only 42 per cent of children are
fully immunised. Coverage is lowest in the states with the highest child
death rates, and less than2O per cent in Bihar and Uttar Pradesh. India
may be a world leader in computer software services, but when it comes
to basic immunisation services for children in poor rural areas, the
record is less impressive.
Translating economic success into human development advances
will require public policies aimed explicitly at broadening the
distribution of benefits from growth and global integration, increased
public investment in rural areas and services and-above all-political
leadership to end poor governance and address the underlying causes
of gender inequality.
There are encouraging signs. In 2005 the Government of India
launched a $1.5 billion National Rural Health Mission, a programme
targeting some 300,000 villages, with an initial focus on the poorest
states in the north and north-east. Commitments have been made to raise
public health spending from 0.9 per cent of national income to 2.3 per
cent. Spending on education has also been increased. In an effort to
create the conditions for accelerated rural growth and poverty reduction,
ambitious public investment programmes have been put in place to
expand rural infrastructure, including the provision of drinking water
and roads.
Translating increased financial commitment into improved
outcomes will require a stronger focus on effective delivery and
measures to improve the quality of public services. There is no shortage
of innovative models to draw upon. States such Himachal Pradesh and
Tamil Nadu have sustained rapid progress in education, not just by
increasing budget provision but by increasing the accountability of
service providers and creating incentives-such as free school meals,
scholarships and free textbooks-aimed at increasing the participation
of poor households.
42 Irdian Etononl: Perfornarce ail Policiet

Overcoming the legacy of decades of underinvestment in human

development and deep-rooted gender inequalities poses immense
challenges. Failure to extend health and education opportunities for all,
regardless of wealth and gender, will ultimately act as a constraint on
India's future prospects in the global economy.
India has moved from group of low human development countries
to medium human development countries during the last decade or so.
HDI value improved from 0.439 in 1992 to 0.590 in 2001 and 0.602 in
2003. However, India's rank still remains l2i oil of 177 countries.
Indeed, it is a long way before we can catch up with developed countries.
It may be mentioned here that HDI cannot be treated as a
comprehensive index because it is based on only three variables. There
are many other variables which affect welfare.

National Human Development Report-2001

Releasing the National Human Development Report-2\O1 (April
23,2002) the Deputy Chairman, Planning Commission, Shri K.C. pant
remarked, "For any approach or development framework to be
meaningful and effective in directing public policies and programmes,
it has to be anchored in a specific social context. More importantly, it
should reflect the values and development priorities of the society where
it is applied. It is this concern that has led us to work on developing a
contextually relevant approach to human development and identify and
devise appropriate indicators to help formulate and monitor public
policy for India. Such a policy must, of course, keep in view the many
unique concerns and development priorities of the country, as well as
her social and economic diversity. The National Human Development
Report has addressed these concerns."23
The Report has broken fresh ground in quite a few areas in
presenting the status of human development at the State level in India.
It has, for the first time, put together an extensive database for at least
two, and in some cases three points of time covering the period from
1980 to 2001.

Indicators
In India there is a considerable difference in the level of
attainments of people depending on their place of residence, whether
it
23. Pant, K.C. (2003). Ind.ia's Development Scenario: Next Decade and Beyond, Academic
Foundation, New Delhi.
Econonic Detelopnenl and (Jnder Derellpnenl 43

is in rural or urban areas, and on the sex of the person' The Report
highlights these inequalities by estimating the 'Gender Gap' and the
'Rural-Urban Gap' in all indicators where the data are available'
A number of carefully selected indicators have been combined to
develop three composite indices. It may be noted that the indices
developed in this Report are not identical to the UNDP indices, which
are designed for inter-country comparisons. Our focus is not the same
and, therefore, though the names may be similar, the substance is
different. While the Human Development Index presents a quantitative
estimate of attainments of the society as a whole, the Human Poverty
Index measures the extent of deprivation in the society. In addition, for
the first time, a Gender Equality Index has also been constructed to
capture the relative attainments of women as against men. For each of
thise indices, critical indicators of well-being-capturing the ability to
live a long and healthy life; the abil acquire
knowledge; and command over resource keeping
in view the context, societal values an s of the
country.
one of the factors kept in mind while conceptualising this Report
was the need to evolve indices that could adequately reflect inter-
temporal changes and policy sensitivity in various dimensions of human
well-being.
The compilation of indicators in this Report extend beyond the
economic, educational, health and demographic concerns of society. It
also includes indicators on various aspects of the social environment,
like the state of the elderly, the working children, the disabled, and
violence and crime against women. Besides, aspects of the physical
environment having a direct bearing on the well-being of people have
also been highlighted.
In a sense, the Report marks a beginning and is a first step towards
monitoring the process of development in a manner that directly
captures the level of well-being and the quality of life of our people.
Also, a beginning has been made in the Tenth Plan by explicitly
specifying monitorable targets covering economic, social and
environmental dimensions of human development'

State of Human Development in India

Over the years, India has made substantial progress in human
development. Sustained and high economic growth in the post-reform
44 Indian Ecotonl: Performarce axd Policy'et

period reduced the poverty ratio significantly. There was also

noteworthy improvement in the literacy rates over time leading to a
decline in the absolute number of illiterates. However, India's overall
performance on human development has been mixed in the last decade.
Improvements in health indicators like life expectancy and infant
mortality rates have been much slower than expected. There is
widespread undernutrition among women and children, and maternal and
child health still remain areas of concern.
UNDP's global Human Development Report (HDR) for 2005 ranks
India at 127 out of I77 countries of the world in terms of a composite
Human Development Index (HDI) for 2003 (Table 1.2). Between 2000
and.2003, while the absolute values of HDI and Gender Development
Index (GDI) consistently improved for India, its ranking remained
invariant at I27 consecutively for three years in a row. On the other
hand, some of India's neighbours not only improved their HDI and GDI
values, but also improved their relative ranks.2a

Saarce: UNDP Human Development Report (HDR) 2002 & 2005.

24. Government of India, Economic Sumey,2O05-06.

Econonic Deuelopneil and (Jtder Deaelopnent
45

Overall, human development as reflected in the HDI has improved

significantly between 1980 and 2001. At rhe national level, during the
eighties the index has improved by nearly 26 per cent and by another
24 per cent during the nineties. There has been an improvement both in
rural, as well as in urban areas. Though the rural-urban gap in the level
of human development continues to be significant, it has declined during
the period. Inequalities across states on the HDI are less than the income
inequality as reflected in the per capita State Domestic product.

State Level
At the state level, there are wide disparities in the level of human
development. Progress of social development has varied across states.
While Kerala stood apart from the rest and achieved high levels of
human development comparable to the rich developed countries, the so
called 'BIMARU' states (viz. Bihar, Madhya pradesh, Rajasthan and
Uttar Pradesh) fared particularly badly. In the early eighties, states like
Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan and Orissa had HDI
close to just half that of Kerala's. The situation has improved since then.
Besides Kerala, among the major states, punjab, Tamil Nadu,
Maharashtra and Haryana have done well on the HDI. In general, HDI
is better in smaller states and Union Territories. In terms of the pace of
development, Tamil Nadu, Rajasthan, Madhya Pradesh, West Bengal and
Bihar improved their HDI significantly in the eighties. However, in the
nineties the momentum was maintained, from among these states, only
in case of Rajasthan, Madhya Pradesh and Uttar pradesh.
It turns out that the economically less developed states are also the
states with low HDI. Similarly, the economically better off states are
also the ones with relatively better performance on HDI. However, the
relation between.the HDI and the level of development does not show
any correspondence among the middle-income states in the country. In
this category of states, some states like Kerala have high attainments
on HDI, at the same time; there are states like Andhra pradesh or even
West Bengal where HDI values are not as high. Allocation of adequate
public resources for furthering human development alone is not enough.
It is equally important to use them efficiently and effectively. Human
attainments appear to be better and more sustained in those parts of the
country where there is social mobilisation for human development, and
where female literacy and empowerment encourageq women to have a
say in the decision making process at the household level.
 The Environment and
Development

Introduction
IN recent years, economists have become increasingly aware of the
implications of environmental issues for the success of development
efforts. Communities may inadvertently destroy or exhaust the resources
on which they depend for survival. Rising pressures on environmental
resources in developing countries can have severe consequences for self-
sufficiency, income distribution, and future growth potential in the
developing world. It is the poorest 20 per cent of the world's population
that will experience the consequences of environmental ills most acutely.
Severe environmental degradation, due to population pressures on
marginal land, has led to falling farm productivity and per capita food
production. Since the cultivation of marginal land is largely the domain
of lower-income groups, the losses are suffered by those who can least
afford them. Similarly, the inaccessibility of sanitation and clean water
mainly affects the poor and is believed to be responsible for 80 per cent
of diseases worldwide. Because the solutions to these and many other
environmental problems involve enhancing the productivity of resources
and improving living conditions among the poor, achieving
environmentally sustainable growth is synonymous with the widely
accepted definition of economic development.r
Though there is considerable dispute concerning the environmental
costs associated with various economic activities, consensus is growing
among development economists that environmental considerations

l. Todaro, P. Michael and Stephen C. Smith (2002). "The Environment and Development",
Economic Derelopment (8th edition), ch. 11, p. 463.
The Enaironnent and Develapnent 47

should form an integral part of policy initiatives.2 The exclusion of

environmental costs from calculations of GNP is largely responsible for
the historical absence of environmental considerations from
development economics. Damage to soil, water supplies, and forests
resulting from unsustainable methods of production can greatly reduce
long-term national productivity but will have a positive impact on
current GNP figures. It is thus very important that the long-term
implications of environmental quality be considered in economic
analysis. Rapid population growth and expanding economic activity in
the developing world are likely to do extensive environmental damage
unless steps are taken to mitigate their negative consequences.

The Basic Issues

According to Todaro,3 seven basic issues define the environment
of development. The seven issues are: (l) the concept of sustainable
development, and linkages between the environmefi; (2) population and
resources; (3) poverty; (4) economic growth; (5) rural development; (6)
urbanization and (7) the global economy. We briefly discuss each in
turn.

Sustainable Development and Environmental Accounting

Environmentalists have used the term sustainability in an attempt
to clarify the desired balance between economic growth on the one hand
and environmental preservation on the other. Although there are many
definitions, basically sustainability refers to "meeting the needs of the
present generation without compromising the needs of future
generations." For economists, a development path is sustainable if the
stock of overall capital assets remains constant or rises over time.
Implicit in these statements is the fact that future growth and overall
quality of life are critically dependent on the quality of the environment.
The natural resource base of a country and the quality of its air, water,
and land represents a common heritage for all generations. To destroy
that endowment indiscriminately in the pursuit of short-term economic
goals penalises both present and, especially, future generations. It is
therefore important that development policy makers incorporate some
form of environmental accounting into their decisions.

2. Fora comprebensive view of the range of issues linking the environment to econdmic devel-
opment, see World Bank, World Development Report,1992.
3. Todaro, P. Michael and Stephen C. Smith op.cit.
 48 Indiar Eeonoml: Perfornarce ad Policiet

In light of rising consumption levels worldwide combined with high

rates of population growth, the realisation of sustainable development
will be a major challenge. we must ask ourserves, what are reilistic
expectations about sustainable standards of living? From present
information concerning rapid destruction of many of the world's
resources, it is clear that meeting the needs of a world population that
is projected to grow by an addirional 3 billion in the next 50 years will
require radical and early changes in consumption and production
patterns.

Population, Resources, and the Environment

Rapidly growing populations have led to land, water, and fuelwood
shortages in rural areas and to urban health crises resulting from lack
of sanitation and clean water. In many of the poorest regions of the
globe, it is clear that increasing population density has contributed to
severe and accelerating degradation of the very resources that these
rvi
rb
SO

on
growth, per capita levels of production and food self-sufficiency will
fall. Ironically, the resulting persistence of poverty would be likely to
perpetuate high fertility rates, given, that the poor are often dependent
on large families for survival.

Poverty and Environment

It is true that environmental destruction and high fertility go hand
in hand, they are both the direct outcome of a third factor i.e. absolute
poverty. For environmental policies to succeed in developing countries,
they must first address the issues of landlessness, poverty and lack of
access to institutional resources. Insecure land tenure rights, lack of
absenc prevent the poor
augmen uld help preserve
ts from ivelihood. Hence
preventing environmental degradation is more often a matter of
providing institutional support to the poor than fighting an inevitable
process of decay.

Growth versus the Environment

Evidence indicates that the worst perpetrators of environmental
destruction are the billion richest and billion poorest people on earth.
It has even been suggested that the bottom billion are more destructive
 The Enuirotmenl aad Detelopnenl
49

Rural Development and the Environment

production.

Urban Development and the Environrnent

costs associated with poor urban conditions. Research reveals that

the
urban environment appears to worsen at a faster rate than urban
population size increases, so that the marginal environmental cost
of
additional residents rises over time.a

The Global Environment

As total world population grows and incomes rise, net global
environmental degradation is likely to worsen. Some trade-ors witt ue
necessary to achieve sustainable world development.

4. Foran excellent review see world Resources Institute, world. Resources, 1996-97:
The urban
Environment, 1996, Oxford University press, New york.
50 Irdian Econontl,: Perfbruance ant! policiet

Consequences of Environmental Damage

(i) water pollution and water scarcity causing more than

two
million deaths and billions of illnesses a year.
The effect on productivity is reflected in declining
fisheries;
rural household time and municipal costs of proiiding
safe
water; constraint on economic activity because -water
of
shortages.

Effect on productivity is restrictions on vehicle and

industrial
activity during critical episodes; effect of acid rain on
forests
and water bodies.
(iii) Solid and hazardous wastes causing spread of diseases
by
rotting garbage and brocked drains; risks from hazardous
wastes typically local but often acute.
The productivity wilr be effected by pollution
of groundwater
resources.
(iv) solid degradation resulting in reduced nutrition for poor
farmers on depleted soils; greater susceptibility
to drought.
Fi in range of 0.5 per cent to 1.5 per
ce roduct (GNp) common on tropical
so reservoirs, river_transport channels,
an estments.
(v) Deforestation causing localised flooding, leading
to death and
disease.
TLe Enrirouttetrt aad Deuelapnenl 5l

Its effect on productivity will be loss of sustainable logging

potential and of erosion prevention, watershed stability, and
carbon sequestration provided by forests.
(vi) Loss of biodiversity causing potential loss of new drugs.
The effect on productivity will be through reduction of
ecosystem adaptability and loss of genetic resources.
(vii) Atmospheric changes causing possible shifts in vector-borne
diseases; risks from climatic natural disasters; diseases
attributable to ozone depletion (perhaps 300,000 additiohal
cases of skin cancer a year worldwide; 1.7 million cases of
cataracts).
The effect on productivity will be through sea-rise damage to
coastal investments; regional changes in agricultural
productivity; disruption of marine food chain.

In the 1980s, per capita levels of arable land fell by 1.9 per cent
annually, leading to worsening land shortages, which have forced many
of the poorest onto marginal land with extremely limited cultivability.
It is estimated that over 60 per cent of the poorest people residing in
developing countries struggle for survival on agriculturally marginal
soils. This trend is greatly worsened in some areas of the developing
world by strong inequalities in the distribution of land, which force an
ever-growing class of landless workers onto increasingly taxed,
ecologically sensitive soils. The growing intensification of cultivation
on fragile lands leads to rapid soil degradation and loss of productivity.
Roughly 270,000 square kilometres of soil lose virtually all of their
productivity each year. An area greater than the size of India and China
combined, over 1.2 billion acres, has been significantly degraded. The
resulting annual loss in agricultural productivity is estimated to be
between 0.5 per cent and 1.5 per cent of annual worldwide GNP. As a
result of rapid population increases and the failure of agricultural
production to keep pace, per capita food production declined in 69
countries during the 1980s.5

The Indian Case

The record of economic and social development in India since
independence, though highly uneven and far from exemplary, includes

5. The World Bank(1992). "Development and Environment", World Development Report 1992
52 Indian Ecotonl: Per/ormanrc and Poticiet

substantial overall progress in many fields. The same period, however,

has also been one of formidable environmental plunder-Deforestation,
falling groundwater tables, polluted rivers and ponds as well as polluted
air that we breathe.
In view of these contrary trends, there has been a temptation in
public discussions to think of 'development' and 'environment, in
antagonistic terms. Many of these deteriorating environmental trends
are clearly linked with heightened economic activity, e.g., industrial
growth, increased energy consumption, more intensive irrigation,
commercial felling of trees, and other such activities that tend to be
linked with economic expansion. 'Development' is, thus, held
responsible, for the damage. On the other side, environmental activists
are often accused of being 'anti-development', since the advocates of
accelerated growth often see environmentalists as being unwelcoming
(if not obstructive) of economic progress for fear of its adverse
environmental impact. Drdze and Sen do not agree with the
confrontational view, which places development and environment on a
collisional path. According to them many human freedoms and
components of the quality of life are dependent on the integrity of the
environment (involving the air we breathe, the water we drink, the
epidemiological surroundings in which we live, and so on), development
cannot but be sensitive to the quality of the environment. The
opportunity to live the kind of lives that people value-and have reason
to value-depends inter alia on the nature and robustness of the
environment. In this sense, development has to be environment-
inclusive.
While human activities that accompany the process of development
may have destructive consequences, it is also within human power to
enhance and improve the environment in which we live. For example,
greater female education and women's employment can help to reduce
population growth and the pressure on environmental resources.
Similarly, the spread of school education and improvements in its quality
can make us more environment conscious. Better communication and a
richer media can also make us more aware of the need for environment-
oriented thinking. It is easy to find many other examples of such
interconnections. In general, seeing development in terms of increasing
the effective freedom of human beings brings the constructive agency
of people in environment-friendly activities directly within the domain
of developmental achievements. Development is empowering and that
power can be used to preserve and enrich the environment.
Tbe Ezuiranmefi and DeueloPnent 53

The assessment of development should be inclusive of

environmental concerns. we must also take note of the various ways in
which the process of development may influence the nature of the
environment and the values that are invoked in assessing it. This
recognition does not, in any way, change the basic fact that the process
of economic development can also have very destructive environmental
consequences, sometimes even swa ive'
But it is important to see the relatio the
environment in an adequately broad tive
prospects as well as destructive possibilities.

Consequences of Environmental Plunder

What, then, are the main reasons for being concerned about
environmental degradation in India and its relation with current patterns
of development? Are there real reasons for disquiet? There, certainly,
are overwhelming reasons for this concern.
First, environmental degradation has compromised or'undone' many
s were otherwi eatet
e instance, it is ising
s the qualitY of arger
c it was twentY latge
incomes. I
onsiderably
. In district
f the enviro
undermined people's traditional livelihoods and forced a large
proportion of th" workforce into seasonal or permanent migration
iOtEr", 2001d). While Kalahandi occasionally makes headlines for
extreme cases of starvation (if not 'famine'), there is a much larger story
behind the headlines, in which environmental degradation plays a major
role as a causal antecedent of chronic hunger and deprivation (Drbze
and Sen, 2005).
second, the present trends of environmental decline are not only
intolerable already, they are also incompatible with the basic
requirements of sustainable development. To illustrate, air pollution
levels in Delhi are already much above wHo standards, yet the number
of motorized vehicles-which account for the bulk of the problem-
pe
continues to grow at more than 10 )' Clearly'
something needs to be done, and given the
cumulative effects of this growth' s of rapid
 54 Itdian Ecoronl: pe{oraarce and polidet

decline of groundwater tables in large parts of the country are utterly

unsustainable, and call for urgent attention.

lng

Notesi a Based on an all-India sample survey of 23,263 households in urban areas (including
4,073 households in Delhi).
b Bangalore, Calcutta, Chennai, Delhi, Hyderabad, Mumbai conbined.
Source: Centre for Science and Environment (i999), vol. II, pp. 113, ll5, l2l, 124, lZ5,
t27.

in this way are often among the poorest in the society, from street
vendors to pavement dwellers.
The distributive aspects of environmental plunder have a gender
dimension, too. The well-being and freedom of many rural indian
women depend vitally on environmental resources, including convenient
access to water, fodder, and fuel, and this connection is often far closer
Tbe Enironment atd Dek/ofr/ent 5 j

than those that link men to these environmental resources. As a result,

women frequently suffer disproportionately from environmental
degradation.

Public Policy
State intervention to halt environmental degradation in India has
been so far rather weak in comparison with the magnitude of the
problem. In fact, not only has public policy tolerated environmental
plunder for a long time, it has even, in many cases, actively encouraged
it. For one thing, government projects (from dams and mines to firing
ranges and nuclear tests) are themselves a major cause of environmental
damage. For another, public policy has often subsidised or otherwise
encouraged the destruction of the environment by private parties. For
instance, the depletion of groundwater resources (especially by large
farmers) has been accelerated by electricity subsidies, sugarcane
subsidies, and plentiful credit for energised water extraction devices.
Environmental irresponsibility in public policy has both political
and ideological roots. To start with, environmental irresponsibility
frequently draws on the often-repeated prejudice that a little bit of
environmental vandalism is the price one has to pay for economic
development, at least in its early stages. Some have even argued that
environmental protection is a 'bourgeois' or 'western' concern, best
addressed after economic prosperity has been achieved. This carries
with it the suggestion that meanwhile environmental degradation should
be tolerated.
Public policy in India has tended to be heavily influenced by
powerful lobbies that thrive on the private appropriation of
environmental resources: mining companies, timber contractors,
sugarcane mills, car manufacturers, the plastic industry, to name a few.
Sugarcane subsidies, for instance, have far more to do with the political
influence of large farmers and mill owners than with the merits of the
case. Similarly, public regulation of the 'polybag' has been fiercely
opposed by the plastic industry.
Against this background of irresponsibility and apathy,
environmental activists have tended to seek help from the judiciary. The
nineties have seen an unprecedented wave of 'public interest litigations'
on environmental matters. In some cases (e.g. relating to pollution in
Delhi), judgements favourable to the environmental cadse have been
obtained. 'Judicial activism', however, has important limitations as a
means of environmental protection.
56 Indian Ecoaonl: Pcrfornance and Policiet

Judicial activism has played a fruitful role in generating public

awareness of, and media interest in, environmental problems, and in
giving some strength (indeed a much needed strength) to environmental
pressure groups. However, judicial activism on its own is not an
adequate and sustainable basis for environmental protection. A more
comprehensive approach is needed, which must also incorporate other
ways of giving environmental problems the attention they deserve.
We still have a long way to go, but environmental activism has
gained some considerable ground in India today, and shows promise of
advancing more.
 India's Economy at
Independence

Introduction
THE pre-Independence period was a period of near stagnation
for
the Indian economy. At the time of Independence, Indian
*u,
".Jno-y
caught up in a vicious circre of poverty characterised by
one of the
lowest per capita consumption and income levels among ihe
countries
of the world. Low income levels resurted in low levels of saving and
capital formation and, therefore, low productivity and low level
of
income and this vicious circle perpetuated pou"ity in the country.
Further, the size of the market being limited because of low incomes,
entrepreneurs had little incentive for making investments in diversified
fields and, therefore, the productivity in the economy continued to
be
low thereby perpetuating low incomes and mass poverty.
Judged in terms of per capita incomes and standard of wellbeing,
the Indian economy remained more or less stagnant during the
colonial
regime. Quoting from the First Five year plan document: ..This
is
primarily because the basic conditions under which an economy
can
continuously expand have been lacking. The impact of modern
industrialism in the latter half of the lgth was felt in this country
initially through imports of machine-made ""ntury
goods from abroad which
reacted adversely on the traditional pattern of economic life,
but did
not create the impulse for development along new lines. The transition
that followed was characterised not by expansion of industry
and a
diversification of the economic structure but by a decay of India's
traditional arts, crafts and industries and by an increasing pressure
of
population on land. This retrogression led to a decline in productivity
per person engaged in agriculture, the adverse effects of which
were
 58 ltdian Etononl: per{ormancc and policier

perhaps softened to some extent by the shock absorbing capacity of the

old institution of the joint family. The result was a continuous increase
in under-employment. In such an environment there could be little
economic or social progress. whatever surpluses might have been
available in the system under these conditions were directed to the
purchase of imports, partly of better finished products from abroad and
partly of equipment for the new transportation system designed
primarily in the interests of foreign commerce. The responsibility for
promoting modern commerce and industry came to be concentrated in
the hands of certain classes in the urban areas, and up to the end of the
nineteenth century the only major large-scale industries which had taken
root in the country were textiles. Little attention was paid to
improvement of agriculture of to the needs of the rural areas.',r
Indian economy at the time of independence was overwhelmingly
rural and agricultural in character with nearly g5 per cent of the
population living in villages and deriving their livelihood from
agricultural and related pursuits using traditional, low productivity
techniques. The backwardness of Indian economy is reflected in its
unbalanced occupational structure with 70 per cent of working
population engaged in agriculture. Even with this large proportion of
population engaged in agriculture, the country was not self-sufficient
in food and raw materials for industry. The average availability of food
was not only deficient in quantity and quality but also precarious as
exhibited in recurrent famines. Illiteracy was as high as g4 per cent;
majority of children (60 per cenr) in the 6-11 age group did not attend
school. Mass communicable diseases were wide-spread and in the
absence of a good public health service, mortality rates were very high
(27 pet thousand). Thus the economy was faced with the problems of
mass poverty, ignorance and diseases which were aggravated by the
unequal distribution of resources between groups and regions.
The India of 1947, under British rule, showed all the signs of what
is today called an underdeveloped country.

The Relative Importance of various Industrial Activities

Composition of National Income
The low degree of economic development can be judged from the
following official statisrics (Estimates of National Income l94g-49 to

1. Government of India, The First Five Year Plan,195l-56, p.28.

Indial Econonl at ltdelenderce Sg

1955-56, C.S.O., p. 3). They show how income is distributed according

to each type of industry.

TABLE _ 3.I
Distribution of National Income Per Sector
(As Percentage of Total Income) in the Year 1948-49

Agriculture
1. Agriculture, Stock-breeding and Auxiliary Activities 48. 1

2. Forestry 0.1
3. Fisheries 0.3
4. Total ,i,i
49.1

Mines, Manufacturing Industries, Small Enterprises

5. Mines 0.7
6.3
10.1
17 .t
Trade, Transport and Communications
9. Postal Services
10. Railways

18.5

5.0
4.6
16. Domestic Services 1.6
17. Building Rent 4.5
18. Total ol Other Services t5.l
1 00.1 2
0.2
100,0

Source: Betllehem Charles, India Independent (p. 2)

 60 Indian Econozl: Perforaance and Policiet

;:-,lFAs can be seen, agricultural activities contributed nearly 50 per cent

, to India's national income. Mines, factories, and small craftsmen's work
contributed only one-sixth, even lower than the figure for trade,
transport and communicationq. and hardly greater than that for other
.,)
v-The Working
SerVlCeS. "\ , --".

Force
",

The relative importance of the various industrial activities can also

be seen from statistics showing the distribution of labour.

Source: Betflehem Charles, India Indepenilent (p. 4).

S.e1gnty-two p_er cent of the total working force was.occupied_i+

agriculture, whereas the organised industries employed only,about--
2 per cent, a figure lower than the number of administrative workcrs
(2.7 per cent). Less than 11 per c€nt of the working force was e.mployed .

in all the forms of indusiry, less than 8 per cent in trade and trahiports,
less than 10 per cent in other services,\These statistics speak for low
level of industrialisation.
IndiaI Ecoronl al Independence 6t
But despite lack of industrialisation it is important, from a social
point of view, to realise that there are a large number of wage-earners
in the working population: nearly 38 per cent. Among these, industrial
wage-earners are a weak minority (about 11 per cent including transport
and communications), the large majority being agricultural labourers.2
The high percentage of agricultural workers is obviously not the
result of a modern capitalist agricultural system, but is simply evidence
of agricultural overpopulation. A large proportion of the Indian
peasantry did not own land (or owned practically none) and could not
always manage to find employment.
Little industrialisation, low agricultural output, a low figure of
national income per capita, very sluggish economic progress,
considerable unemployment and under-employment: these were some
of the main characteristics of India's social and economic situation just
after Independence.

THE AGRARIAN SCENE

Stagnating Agriculture
Colonialism became a fetter on India's agricultural and industrial
development. Agriculture stagnated and even deteriorated over the
years, especially during the first half of the 20th century when_tle full
impact of colonialism began to be felt. Per capita agricultural produption
declined at a rate of 0.72 per cent per year during I9ll-194I (Blyn'
1966). The situation was worse insofar as per capita foodgrain output
was concerned: during the same period, it declined by 29 per cent, i.e.,
at arate of 1.14 per cent per year. Even though the per capita non-
foodgrain output grew by 14 per cent, it failed to make up for the decline
in foodgrain output (Blyn, 1966).1
The per capita consumption was much below the minimum
recommended by dieticians, 460 gms against the recommended 510-520
gms. Even this low level of consumption required massive importation.
From 1948 to 1951, imports of cereals tended to increase: in 1951' they
rose to 4.7 million tonnes, which was about 10 per cent of domestic
production. These and other food imports cost India more than Rs' 200

2. This percentage is not calculated from the l95l census but from the results of a report on
agricultural labourers. (Agricultural Labour Enquiry, Delhi' 1952).
3. Blyn, G. (1966). Agricultural Trends in India, l89l-1947, Pennsylvania University Press,
Philadelphia.
6z Iurlian Econottl,: Pufbrtttance ad Policiet

crore (in I 95 I ) and thus counter-balanced more than 20 per cent of her
export receipts. Such a situation in a country where more than 70 per
cent of the population is occupied in agriculture called for drastic action.
Whatever the absolute growth in agricultural output, it occurred
mainly because of the increase in crop-acreage. The rate of increase in
all-crop yield per acre was rTear-zero during Lgll-1941. While all-crop
and foodgrain yields declined by 0.02 and0.44 per cent per year, non-
foodgrain yield went up by l.l5 per cenr per year (Blyn, 1966). The
increase in yield of non-foodgrains was basically at the cost of foodgrain
yields, as cultivators shifted better and irrigated land and capital
resources to commercial crops in order to earn cash.

Causes

(i) Regressive Organic Structure

The stagnation in agriculture is basically explained by the fact that
colonialism transformed the agrarian structure in India and made it
extremely regressive. As is well-known, the zamindars in zamindari
areas failed to invest in land and relied on rack-renting, while the
peasant proprietors fell into the clutches of the moneylenders and lost
control over their lands. Sub-infeudation, tenancy and sharecropping
increasingly dominated both the zamindari and ryotwari areas.a

(ii) Internal Drain of Capital

Agricultural surpluses were siphoned from agriculture without any
quid pro quo, thereby subjecting it to an internal drain of capital.
Throughout the 18th and 19th centuries, high land revenue demand ate
into the peasant's surplus and even his subsistence. But the government
spent very little on improving agriculture as was done, for instance, in
Japan. The landlords, old or new, took no interest in agriculture beyond
collecting rent. They found rack-rent and usury far more profitable than
making productive investment in land. The moneylenders and merchants
used their increasing share of agricultural surplus to intensify usury or
to take possession of land to become landlords.

4. By 1947, nearly 70 per cent of the total cultivated land in British India was owned by
zamindtrs and landlords According to Nanavati ("Minute of Dissent", in the Famine In-
quiry Commission-Final Report, Government of India, Calcutra, 1945), in ryotwari zreas
between 30 to 50 per cent of the land was in the hands of the landlords and most of the rest
was heavily under debt. In 1951, 27.8 per cent of rural agricultural families consisted of
peasant proprietors wbile tenants, share-croppers and labourers made up the remaining fami-
lies(Chandra, Bipan, Nationalisn and Colonialisn in Modern India,'Delhj: Orjent
Longman, 1979).
India't Ennouy al Iudcpendene 63

In many areas, a rich peasantry developed as a result of

commercialisation and tenancy legislation but it too, quickly used its
savings to buy land to become landlords or to turn to usury as
moneylenders. One result was that no capitalist farming developed
except in a few pockets. On the other hand, the vast mass of small
peasants, tenants and sharecroppers had no resources or incentive to
invest in the improvement of agriculture. Moreover, whatever savings
some sections of peasants were able to make over time were usually
knocked off by famine, scarcity and economic depression.

(iii) Poor Technology

Another reason for the stagnation of productivity in agriculture was
the near absence of change in its technological basis or its productive
technique and inputs. As Blyn points out, the type of equipment used
changed very little till 1941. Modern machinery was conspicuous by
its absence. Improved seeds covered about 1.9 per cent of all crop-
acreage in 1922-23 and 11.1 per cent in 1938-39, these being largely
confined to non-food cash crops. The amount of chemical fertiliser used
was insignificant and confined to its imports which averaged less than
2,000 tonnes per year during 1898-1923 and 99,452 tonnes in 1939.
On the other hand, because of the decline in the proportion of cattle to
acreage there was, after 1930, considerable decline in the availability
of dung for fertiliser (Blyn, 1966).
As far as agricultural education was concerned, there were only nine
agricultural colleges with 3,110 students in 1946 (Blyn, 1966). There
was hardly any investment in terracing, flood-control, drainage and de-
salinisation of soil. Irrigation was the only field in which some progress
was made so that during the early 1940s, 26.7 per cent of the total
cultivated area was irrigated, with government works irrigating about
15.5 per cent of the total cultivated area. An adverse factor was the
increase in subdivision of landholdings into smaller sizes and
fragmentation and scattering of these holdings. It is also to be noted
that commercialisation did not change the unit or organisation of
productive activity (e.g. capitalist farming) or lead to improved
technology-only better soil and available water and other resources
were diverted from food crops to commercial crops.
64 hdian Eeonoml: Performarce and Policiet

INDIA'S INDUSTRIAL PRODUCTION

AND ITS STRUCTURE
Another aspect of India's economic backwardness was the state of
its industry in spite of her vast industrial resources which make India
one of the richest countries in the world.

India's Industrial Resourcess

India's iron ore deposits are estimated at 2I thousand million
tonnes, which is a quarter of the total world deposits.
India's deposits of manganese are the third largest in the world,
being estimated at ll2 million tonnes, 100 million tonnes of which have
been precisely located in Madhya Pradesh and the Bombay region. India
also possesses deposits of chromium, gold, bauxite and various non-
ferrous metals, which are important raw materials for atomic industries.
Finally, gypsum also exists, as does mica, the latter deposit being one
of the largest in the world.
India is equally rich in her energy potential. It is estimated that 60
thousand million tonnes of economically workable coal lie beneath her
surface. Lignite exists mainly in the Madras region, Rajasthan,
Saurashtra, Kashmir, and Kutch. Petroleum reserves are little explored.
Hydro-electric power reserves are immense: they are estimated at some
41 million kw.
India'a resources as a whole would give her a leading position in
world industry, in particular the steel and engineering industries and
the chemical industries based on coal.
Given this potential, we may now examine the state of India's
industrial development immediately after Independence.

The Decline of Tfaditional Industry and

the Development of Modern Industry
India's industrial situation in 1948 was the result of a long period
of change in which modern industry replaced the traditional crafts.
Foreign trade statistics best show the effects of 'deindustrialisation'.
India, still an exporter of manufactured products at the end of the lgth
century, becomes an importer. From 1815 to 1832 India,s cotton exports
dropped by 92 per cent.i In tS5O,-Inaia was buying one quart-r of
Britain's cotton exportsi All industrial products shared this fate.

5. Bettlehem, Charles, lndia Independent, ch. 3, pp. 46-47

India's Econattl at Independence 65

The ruin of the traditional trades and crafts was the result of the
British commercial policy. Restrictions were imposed upon Indians
exporting to the West, while favours were granted to British exporters,
who flooded the Indian markets.6
Modern industries began to develop during the second half of the
19th century but their progress was exceedingly slow and stunted. Up
to the very end of the colonial period, the level of industry and
technology remained low. During the l9th century, industrial
development was confined to cotton and jute textiles. The iron and steel
industry developed after l9O'7 while the sugar, cement and paper
industries and a few engineering firms came up in the 1930s.
Still, as late as 1946, cotton and jute textiles accounted for nearly
30 per cent of all workers employed in factories.?
According to the Census of Manufacturing in 195 I, which covered
the larger enterprises, of the total value added in manufacturing, 56.8
per cent originated in cotton and jute textiles, 6.6 in sugar, 8.4 in
engineering, T.6 in steel,4.1 in chemicals and 2.1 in cement.s
Consequently, even though modern industry developed quite fast
after 1918-its rate of growth being 3.8 per cent per annum-it had
little impact on the overall economic situation for its share in the
national income at the end of British rulel at 7 .5 per cent was quite
insignificant. In 1913, it was 3.8 per cent (CEHI, 1984). Modern
industry perhaps barely compensated for the displacement of traditional
handicrafts.e
The poor state of India's industrialisation is brought out by many
indices. For example , in 1939, out of a population of nearly 389 million
(1941 Census) only about 2 million were employed in modern
industries-the figure of those employed in factories working all the
year round was 1.5 million. In 1951, only about 2.3 per cent of the
labour force was employed in modern industries. According to the
Planning Commission, the number of persons engaged in processing and
manufacturing (including artisanal industries) fell from 10.3 million in
1901 to 8.8 million in 1951 even though the population increased by

6. ibid
7. Cambridge Economic History of India (CEHI) (1984) Volume 2, Dharma Kumar (ed.),
Indian Reprint, Orient Longman, Delhi.
8. Chaudhuri, P. (1979) The Indian Economy: Poverty and DeveloPmenl, Vikas'Publishing
House, Delbi
9. Jalan, Bimal (1992). The Indian Economy: Problems and ProsPects, p. 8, Viking, New Delhi.
66 ltlitr Ecanonl: Paloruarce tnd Poliriet

nearly 40 per cent. Moreover, in 1951, of the total industrial output, at

least 60 per cent by the unorganised, small enterprises.r0
A very important feature of India's industrial structure was the
virtual absence of capital or producers industries
had to rely almost wholly on imported . toq_lt.tn
1950, India met nearly 90 per cent of it ls through-
imports.
-Sim+la+ly, modern banking and insurance were grossly
underdeveloped. In 1946, class A and B banks had 4,644 offices or one
office for 90,000 inhabitants. Underdeveloped banking and insurance
meant that the Indian entrepreneurs could not mobilise the available
capital. Also, British-controlled banks starved Indian industry of funds
and favoured British-owned and controlled enterprisesi',
..r \.,
The growth of foreign trade and the rapid construction of railways
which could have been the positive factors, unfortunately became
instruments for the underdevelopment of the Indian economy. Increasing
imports did not supplement and aid indigenous industry or help create
'a new and effective demand' and consequently new industries. Under
conditions of free trade, imports displaced indigenous handicrafts and
artisanal industries and prevented the rise of new industries.
In the absence of a simultaneous industrial revolution, railways had
only introduced a commercial revolution and further colonialised the
Indian economy. The layout of railway lines and the railway freight rates
policy promoted the export of raw materials and distribution of imported
goods for they encouraged traffic with ports as against traffic between
inland centres. The railways also did not have any forward or backward
linkages. They had encouraged the steel and machine industry, not in
India but in Britain. they had served as a social overhead not for Indian
but British industry and their external economies were exported back
to Britain.
Till the late 1930s, foreign capital dominated the industrial and
financial fields and controlled the foreign trade network as also part of
the internal trade that fed into exports. British firms dominated coal
mining, jute industry, shipping, banking, insurance and tea and coffee
plantations.
It is important to keep in view, in this respect, that foreign
investment rarely marked a transfer to India of capital from abroad. It

10. ibid. p. 10
Indial Econonl at Indeperdence 67

was far less than the unilateral transfer of capital or the 'drain' from
India. Three other characteristics of foreign investment were important.
(i) It contributed to 'the guided underdevelopment' of India by
concentrating on the production and export of raw materials
and foodstuffs.
(ii) It went into sectors which catered to foreign markets and not
to India's home market.
(iii) 'The multiplier effects in terms of income, employment,
capital, technical knowledge, and growth of external
economies of these investments were largely exported back
to the developed countries'.rr

Some Other Economic Indicators of

Economic Backward,nes s
We may also very briefly outline certain other indicators of economic
backwardness and underdevleopment. In 1950, the per capita availability
of cereals and pulses was 394.9 grammes per day; of cloth l0 metres a
year. The death rate was 27.4 per 1,000 persons and the infant mortality
rate was between 175-190 per 1,000 live births. An average Indian could
expect to have a life span of barely 32 years. Epidemics like smallpox,
plague and cholera and diseases like dysentery and diarrhoea, malaria
and other fevers carried away millions. Malaria affected nearly one-fourth
of the population. In 1943, there were 10 medical colleges turning out
about 700 graduates and27 medical schools. In 195 1, there were only
18,000 graduate doctors in independent India. The vast majority of towns
had no sanitation and large parts of those cities which had, were kept out
of the modern system, sanitation being confined to civil lines and other
areas where Europeans and rich Indians lived. A modern water supply
system was unknown in villages and absent in a large number of towns.
A vast majority of towns were without electricity and electricity for rural
areas was unthinkable. The vast majority of Indians had no access to
education.
We may sum up India's economic profile at the time of
independence as: stagnating per capita national income, abysmal
standard of living, stunted industrial development and the bulk of the
population dependent on stagnating, low-productivity semi-feudal
r2
agriculture.

r1. ibid p.11.

t2. ibid
68 Indian Econonl: Performarce and Policiet

Some Positive Features

However, during the 1930s and 1940s some major developments
occurred in the Indian economy, which imparted it a certain strength
and provided a base for post-independence economic development.
These positive features related to the development of a small but
independent (Indian-owned-and-controlled) industrial base and the rise
of a substantial indigenous industrial capitalist class with an independent
economic and financial base.
During and after the First World War, several consumer industries,
such as textiles, sugar, soap, matches and paper, underwent a process
of rapid import substitution, so that, by 1939,India was more or less
self-sufficient in her major consumer goods requirements. There also
occurred a certain diversification and sophistication in industrial
production. Some intermediate capital goods industries such as iron and
steel, cement, basic chemicals, metallurgy and engineering also began
to develop. In the 1930s, there was also a significant shift of capital
from usury, trade and landlordism to industry. In other words, surplus
was increasingly getting into the hands of those who would invest it.
Furthermore, in contrast to the 19th century, industrial development
in the post-1918 period was increasingly getting oriented towards the
internal or home market and this too on the basis of indigenous raw
materials. Thus, the link between indigenous industry and agriculture
was becoming stronger; and a manifold increase in internal trade
occurred after l9l4 at the same time as the volume of international trade
was showing a general decline.
By 1947, India also possessed a core of scientific and technical
manpower. Unlike the 19th or early 20th century situation, when
managerial as well as technical personnel were mostly foreign even in
Indian-owned industries. Now, most of them are Indian, exceptions
being provided by a small number of highly specialised experts. India
also had a small but quite well-developed skilled labour force both in
consumer goods industries such as textiles and sugar and in the more
sophisticated steel, metallurgical and engineering sectors.
There was one other area of economic strength. India was no longer
a debtor country. By the end of the Second World War, it was able to
liquidate its foreign public debt of nearly Rs. 450 crore and replace it
with sterling assets of over Rs. 1,700 crore because of Britain's wartime
purchases in India which imposed a regime of forced savings on India.
India't Econonl al Iilefendefrce 69

Another feature which facilitated the process of economic

development in post-colonial India was the rise, after 1914, of a strong
indigenous capitalist class with an independent economic and financial
base. The considerable industrial development had been led by an
indigenous bourgeoisie that was basically independent or national.
Taking advantage of the two world wars and the Great Depression
and the consequent loosening of links with the metropolis, Indian capital
was gradually able to significantly increase its weight in the Indian
economy. Investment under Indian control grew considerably faster than
European investment. Even though multinational corporations made
their entry into India after 1918, the growth of foreign capital was far
slower than that of Indian capital.
It was Indian capital, rather than foreign capital, that pioneered new
industries and thus accounted for the overwhelming proportion of the
new investments after 1920 in sugar, paper, iron and steel, glass, heavy
chemicals, shipbuilding, sewing machines and textile machinery.
By 1944, Indian capital controlled over 60 per cent of the large
industrial units employing 1,000 or more workers (Mukherjee and
Mukherjee in EPW, Yol. 23, No. 11, 1988).
It is also significant that Indian capital controlled the bulk of
internal trade and part of external trade. Moreover, whatever the extent
of the growth of capitalism in agriculture, foreign finance or exterprise
had no role to play in it, except in tea and coffee plantations.
Thus, at Indepedence, there was available, an indigenous
entrepreneurial class which could be a major agency for carrying out
the developmental plan perspective of the newly independent state
unlike several African countries which at Independence although
adopted grand plan schemes, often borrowing from the Indian blueprint,
but lacked an indigenous agency to carry it through'
 Planning in India
Development Strategy and
Role of State

Evolution of Planning
JUST after the attainment of Independence, the Government of India
set up the Planning Commission in 1950 to make an assessment of the
material, capital and human resources of the country and to formulate
a plan for its most effective and balanced utilisation of the country's
resources.
The launching of the First Five Year Plan in April 1951 initiated a
process of development aimed not merely at raising the standards of
living of the people but also opening out to them new opportunities for
a richer and more varied life. This was sought to be achieved by
planning for growth, and social justice.
The First Five Year Plan contains one of the clearest early
formulations of the need for planning and of the State's role in it.
Planning, it pointed out, involves "acceptance of a clearly defined set
of objectives in terms of which to frame overall policies..., formulation
of a strategy for promoting the realisation of the ends defined..., and
working out a rational solution to problems - an attempt to coordinate
means and ends".
Certainly, achieving higher living standards for the Indian people
was seen to be a major goal after independence. A great deal of thought
and discussion in planning for independence focused on the need for
rapid economic growth and rising living standards. Nehru and Gandhi
had, indeed, differed on what economic policy should be, but the two
leaders agreed on the centrality of economic developmental goals as a
top priority after independence.
Phnning in Indid: Dtt'elopnent Slrategt and Rt/e o_f .lra/e 7l

At Independence, India was a predominantly agricultural economy,

with more than 70 per cent of the population deriving its livelihood from
agriculture, and just under 50 per cent of gross domestic product (GDP)
originating in agriculture. The Nehruvian view-derived predominantly
from Fabian Socialism-endorsed the need for rapid development led
by state economic activity and planning. The first few years after
Independence were naturally focused predominantly on establishing
institutions.r
Interestingly, the early planning documents regarded the chief
barrier to accelerated growth as the then-low Indian savings rate, and
set out a 25-year perspective. The Planning Commission documents
stated that a major challenge was to raise the Indian savings rate to 2O
per cent and concluded that, if that could be attained, Indian economic
growth could achieve a satisfactory rate of 5 per cent annually.

Structural Constraints and the

Development Strategy
According to Chakravarti2 "The underlying causes of structural
backwardness were perceived as follows. First, the basic constraint on
development was seen as being an acute deficiency of material capital,
which prevented the introduction of more productive technologies.
Secondly, the limitation on the speed of capital accumulation was seen
to lie in the low capacity to save. Thirdly, it was assumed that even if
the domestic capacity to save could be raised by means of suitable fiscal
and monetary policies, there were structural limitations preventing
conversion of savings into productive investment. Fourthly, it was
assumed that whereas agriculture was subject to secular diminishing
returns, industrialisation would allow surplus labour currently
underemployed in agriculture to be more productively employed in
industries which operated according to increasing returns to scale. A
fifth assumption was that if the market mechanism were accorded
primacy, this would result in excessive consumption by the upper-
income groups, along with relative under-investment in sectors essential
to the accelerated development of the economy. Sixthly, while unequal
distribution of income was considered to be a 'bad thing', a precipitate
transformation of the ownership of productive assets was held to be
detrimental to the maximisation of production and savings. In other

I Krueger, Anne O. (ed.) (2002) Economic Policy Reforns and the Indian Economy, ch I
pp. l0-ll
2. Chakravarti, S (1989). Development Planning, The Indian Experience, ch. 2, p.9.
 72 Indiar Ecoronl: perfornance and policiet

words, there was a tolerance towards income inequality, provided it was

not excessive and could be seen to result in a higher rate of growth than
would be possible otherwise."
Given all these per at economic theory
indicated that the basic q much to save, where
to invest, and in what fo est handled with the
help of a plan.
"It will be observed from the above that the Indian planners
subscribed to a basically supply-side view of the planning probiem. The
argument that domestic demand can possibly be a constraint on the
growth process was not even mentioned as a hypothesis that needed to
be rejected. The reason, presumably, was the belief that with an active

public investment could be more fruitfully deployed, in the long term.

There were three major possibilities which could be expected to bllance
supply with demand along a growing trend.
First, public investment would be concentrated in the area of
infrastructure.
Secondly, public investment could be directed primarily towards
agriculture.
Thirdly, public investment could be directed primarily towards
industrial development.
Indian planners obviously did attempt all three, as any reasonable
planner can be expected to do in such situations. The First Five-year
Plan (1950-1955) focused on the first two types of investment. At the
Planring in lndia: Deuelopnent Strategy atd Role ol State 73

demand that the productive capacity of the caPital goods sector would
have to rise at an accelerated rate to convert growing savings into
additional real investment. It was, therefore, the need to raise the real
savings rate that led Indian planners to accord primacy to a faster rate
of growth in the capital goods sector, although doubtless there could
have been other considerations such as building up defence capability'
"Indian planners ignored the trade option as a major source of
growth? The issue was posed at the time when the Second Five-Year
Plan was formulated. A projection of the balance of trade was attempted
in the plan document, and the planners concluded that no significant
increase in export earnings in the short run could be expected. However,
they recognised that 'it is only after industrialisation has proceeded
some way that increased production will be reflected in larger export
earnings...."
"The argument, briefly, was as follows' The development of a heavy
capital goods base over a period of time would lead to the diversification
of the export basket in the direction of manufactured goods, including
machinery and equipment; while the increase in employment, leading
to an expanded demand for consumer goods, would be met by pursuing
'capital-light' methods of production."3

Role of the State as Visualised in the Fiftiesa

At this time in the early 1950s it was believed that the State could
play a significant role both in raising the domestic rate of savings and
in putting it to more productive use. Pre-industrial economies are
predominantly rural and agricultural in character. They have land tenure
systems in which a substantial part of the surplus over subsistence needs
of cultivators and farm labourers gets appropriated by a small class of
non-cultivating land owners and intermediaries (especially under the
zamindari system and other feudal forms of tenure) and used for non-
essential consumption. Abolition of such exploitative and socially
wasteful land tenure systems could release surplus for productive
investment. Land reforms combined with taxation of agriculture (either
directly or indirectly by influencing prices of agricultural commodities
relative to that of manufactures) are means of exploiting this potential.
Both require strong State intervention.

3. ibid. ch.2,p.16.
4. Kapila, Uma 1ea.; (2006). Indian Econo ny Since Independence (17-h edition), ch' 2
pp. 35-48.
 7 4 lntlian Eruton.1,; pelfbrnarLe dnd p1/icie1

Apart from its role in maintaining law and order, defining and
protecting property rights, enforcement of contracts and the like,
the
State has to take the primary responsibility for providing elementary
education, basic health care, safe drinking water and other facilities
which are in the nature of basic needs in any civilized society and which,
in addition, have beneficial effects on the general level of
iroductivity.
The latter effects-which are referred to as external economies-raise
questions as to whether the market mechanism can secure the
appropriate sharing of costs and benefits. where externalities (beneficial
or otherwise) happen to be significant, direct State intervention is
necessary and justified.
Projects (e.g., road networks, major irrigation, steel plants,
railways) which call for investments on a scale far beyond the capacity
of individual investors and/or are in the nature of natural monopolies
(e'g., public utilities) form another category where direct involvement
of the State is deemed justifiable. In rnost cases even if the private sector
is allowed to operate, the need for effective mechanisms to define and
enforce standards, norms of efficiency, ,,fair', rate of return on
investment and the like is universally accepted. All of this calls for state
regulation, though not necessarily direct ownership and operation.
During the early phases of Indian planning, given that iniigenous
industrial entrepreneurs were few in number and had relatively L-it"a
resources, the industrialists themselves favoured a large, direct role for
the State in many of these activities.
The government can also herp development by creating conditions
which induce people to save more. Low rates of savings aie of course
partly a reflection of low levels of income. But those who have relatively
large incomes may prefer to spend on current consumption rather than
save when there are relatively limited opportunities for investments
that
offer attractive returns. A relatively stagnant, slow growing economy
implies that profitable opportunities for investment are limited. State
intervention can help expand such opportunities in several ways.
Public mobilisation of idle labour for creating productive assets
especially roads, irrigation, land improvement, schools, rural hospitals,
etc. increase the potential productivity of private resources and thereby
create profitable private investment opportunities. Under certain
conditions, increased public expenditure can enlarge the scope for
profitable investment by creating additional demand for gooJs and
services. Both these effects are likely to be considerably strengthened
if there is a coordinated programme of investments for ,balanced
Planning in Itdia: Deuelopment Strategl and Role of State
/t
development' ensuring that supplies of key inputs and servicas grow in
step with the demand for them. This aspect is particularly important in
the case of activities which are closely inter-related. with a coordinated
programme, the risks of shortages or excesses of particular goods or
services are substantially reduced. Reduced risks induce business to
invest more.
Finally strong State intervention is a logical corollary of the goals
of socialjustice and preventing concentration ofpower which have been
explicitly incorporated among the Directive Principles of State policy
in the Constitution. In addition, the Directive Principles lay emphasis
on:
1. Securing to all citizens the right to an adequate means of
livelihood;
2. Ensuring that distribution of ownership and control of material
resources is regulated in a manner which best serves the
common good;
3. Preventing the concentration of wealth and means of
production; and
4. Protecting children from being forced to work or being
exploited on account of economic necessity.
Though these provisions lacked legal sanction, they do reflect the
importance attached to 'social justice' and have shaped the scope and
nature of State intervention.
Altogether, as the First Plan put it. whether one thinks of the
problem of capital formation or of the introduction of new techniques
or of the extension of social services or of the overall realignment of
the productive forces and class relationships in society, one inevitably
comes to the conclusion that a rapid expansion of the economic and
social responsibilities of the State will alone be capable of satisfying
the legitimate expectations of the people. This need not involve
complete nationalisation of the means of production or elimination of
private agencies in hgriculture or business and industry. It does however
mean a progressive widening of the public sector and a reorientation of
the private sector to the needs of a planned economy (First Plan).

Evolution of Strategy and Priorities

The First Plan provided an incisive general analysis of the nature
of the country's development problem and various options for
 7 6 Idiar Econonl: perfornance antl policiet

mobilising resources and achieving deveropment with more equal

distribution' There was special emphasis on the role of mass
mobilisation of idle rural labour and land reform. But on balance
the
plan rejected radical solutions (especially in respect of redistribution
of existing wealth and incomes). The plan projected, rather
optimistically, that savings and investment as a proportion of national
income would rise from an estimated 5-6 per cent itthe early 1950s
to
20 per cenr by 1968-69 and stabilise at that level thereaft".. Aggr"gut"
income was expected to double in approxim atery 2o years and plicapita
income in 27 years.
The successful completion of the modest first plan was followed
by a very ambitious second Five-year plan. The plan's author, p.c.
Mahalanobis, provided an analytical foundation foi it with a closed-
economy growth model with two sectors, one of which produced
consumer goods and the other investment goods, with sectoi-specific
capital as the only factor of production.
The fundamental insight of this model was that the greater the
proportion of investment devoted to increasing the capa-ity of the
investment-goods sec_tor, the faster the long-run growth in consumption
and investment. In the strategy based on this model, rapid long_run
growth was to be achieved without much sacrifice of short-run
consumption by concentrating scarce investment in expanding capital-
goods-producing (and intermediate-goods-producing) -heavy lndustry.
Current consumption demand was to be met by employing abundant
labour resources to manufacture consumer goods using latoul-intensive
methods that required little capital (Srinivasan & Tendurkar, z0o3).
The second Plan underlined the political constraints on any radical
solutions to redressing inequalities and re-emphasised rapid growth and
diversification of economic activity through industrialisation u, essential
for achieving and maintaining full employment at a rising level of
productivity. It went on to define a coherent overall strategy whose
central elements included stepping up the rate of investmeniibut at
a
more moderate pace than envisaged in the first plan) and a conscious
policy of developing an indigenous heavy industry base (comprising
metallurgical, chemical and machine building industries) to iay the
foundation for accelerated self-reliant growth, with a leading ,ol" fo,
the public sector. Accordingly, the r956 Industrial policy R-esolution
emphasised that the state must play a progressive role in the
development of industries and as the Resolution puts it "the adoption
of socialist pattern of society as the national objective, as well as the
Planning in India: Deu/opnett S/rategl antl Ro/e o/ State
77
78 Indian Ecanaml: Pefornarce and Policiet

As rightly pointed out by Kaushik Basu "The actual policy regime

that India followed in its early days of independence was a mixture of
the two competing (and almost contradictory) visions. A Soviet-style
planning system was developed, but without the state having a monopoly
of control over the resources. Capitalism was allowed to flourish, but a
large bureaucracy was nurtured. Huge investments were made in basic
industries, but at the same time several sectors were protected as
belonging to the small-scale sector. Capitalism was criticised but it was
also relied upon. Socialism was never practiced, but the rhetoric of
socialism was the norm. A burgeoning bureaucracy became the surrogate
for socialism."5
However, in terms of the aggregate performance, this phase
recorded a fairly sustained 8to l0 per cent compound growth rate of
industrial output,3 to 3.5 per cent compound growth rate in the
foodgrains output and around 1.75 per cent growth rate in per capita
income. All these growth rates represented a sharp acceleration over
the pre-Independence past. A diversified industrial structure came to
be established. This was taken to be a success of the planning efforts.
Planning was regarded during this period as a "going".6
Thus, the first phase spanning roughly over the first three Five Year
Plan periods was characterised by fairly sustained growth in per capita
incomes, distinct acceleration in public sector investment and in the
growth of industrial output. This phase was dominated by the growth
oriented development strategy.

Changing Perceptions
The fifties and sixties were marked by relatively strong and stable
governments under the control of the Congress both at the Centre and
in the states as well as a clear commitment to, and support for planning
from the political leadership. The Planning Commission could impart a
sense of vision, direction and an integrated overall perspective on the
desired course of the economy. This provided a framework in which
investment allocations could be decided and the justification for
particular projects and programmes could be evaluated. The
Commission acquired prestige and began to play an important role in
mediating the claims of different ministries, of the Centre vis-d-vis the

5. Basu, Kaushik (ed.) (2004). "The Indian Economy: Up to l99l and Since", rn India's
Emerging Economy: Performance and Prospects inthe 1990s and Beyond, ch. l, Oxford
University Press.
6. Tendulkar, S.D. (2000-01). "Indian Development Strategy: Compulsion and Constraints", in
Uma Kapila (ed.), Indian Economy Since Independence, 2000-01 edition.
Plarning in India: Delehtfnent .ltrt/eg1' tti Rt/t ol \/tt/t 79

states and of different states over limited development fesources. It also

pioneered independent evaluation of the actual working of selected
schemes and their impact. According to Tendulkar "Whatever stlccess
that had been claimed for the growth oriented development strategy of
the first phase could be attributed to the credibility of the planning
process."
This atmosphere changed dramatically after the drought and the
foreign exchange crisis of the mid-sixties. The sudden increase in
defence expenditure consequent to the armed conflicts with China and
Pakistan and the levelling-off of foreign aid, all in the short span of
three years (1962-1965), put the economy under severe strain. A crisis
occurred when two consecutive droughts hit the country in 1966 and
1967 and real GDP declined in absolute terms.
The sharp deterioration of the economic situation and the security
environment highlighted two main weaknesses of the existing strategy,
namely, the relative neglect of agriculture and a critical dependence on
foreign aid.
The two-year period 1965 and 1966 witnessed the worst drought in
recent memory and consequent famines in large parts of north India. At
the same time, all aid was cut off to India by the donor countries on
account of the Indo-Pakistan War of 1965, including food aid' The
consequence was a virtual collapse of the economy, and recourse had
to be taken to extraordinary financing from the International Monetary
Fund (IMF) and the World Bank, which were accompanied by stiff
conditionalities.
This traumatic experience brought food security into the forefront
of our policy imperatives, which was further buttressed by the
observation that sustained industrialisation was not possible without
adequate provision of wage-goods. The Fourth Plan, conceived after
three years of Plan holiday, therefore, had to have food security as its
centre-piece.
The Fifth Plan recognised that growth and industrialisation would
not necessarily improve the living conditions of the people, particularly
the poor. The concepts of "minimum needs" and directed anti-poverty
programmes were innovations of this Plan, whatever may have been the
success achieved in implementing them effectively. The Fifth Plan also
marks the beginning of a period of steady increase in the growth rate of
the economy, which continued right through to the Eighth Plan'
 80 Itdiat Econonl: per;fornance and policiet

The Eighth Plan was overtaken by the crisis of 1991, and the
economic reforms that came in its wake. The dramatic events and policy
initiatives of the two-year plan holiday period between t99o ani tggz
demanded a full reappraisar of the planning methodology, and the Eighth
Plan represents the first efforts at planning for a market-oriented
economy.
Jean Drdze and Amartya Sen (1995)? pointed out ,.Four decades
of
allegedly 'interventionist' planning did little to
provide a wide-based health service, achie
reforms, or end the rampant social inequalitie
prospects of the underprivileged.,'
Thus, the Eighth Five Year Plan documents states that ,,in the
background of our experience of planning for
forty years and under the strong imperatives
emerged now, a question is generally asked:
planning in future?

The Role of Planning

"when the term 'planning' was, for the first time, officially defined
.
in the First Five Year Plan document the term used was ,,democratic
planning" as distinct from a 'plan based on regimentation'. The
centralised planning of the type practised in socialist economies did not
exist in India, ever. In practice, the market has determined allocations
in a major segment of the economy. public sector, of course, has
expanded with a wide ranging influence on the economic life of the
nation. The lack of cost consciousness of the public sector, its increasing
ineffectiveness in achieving the targets and depletion of its resources.

7. DrEze' Jean and Amartya Sen (1995). India's Economic Deveropment and
sociar opportu-
niry, Oxford: Clarendon Press.
 Planting in India: Deuelopnent Strategl ard Ro/e of State
EI

"As a corollary to this, the rore of planning commission needs to

be redefined. It has to play an integrative role in developing a holistic
approach to the policy formulation in critical and inter-sectoral areas
of human and economic development. The existing multiplicity of
agencies is not only wasteful but also counter-productive because of
the long repetitive procedures and the diffusion of authority involved.
An integrated approach can lead to better results at much lower cost.
so far, resource allocation has been the predominant role ofthe planning
commission. This has to change. Instead of looking for mere increases
in the Plan outlays the emphasis should be on increases in the efficiency
of utilisation of the allocations being made and the prospects of a return
on the investments. The Planning in our country still has a large role to
play. Planning is needed for creating social infrastructure and for human
development. Planning is necessary to take care of the poor and the
downtrodden who have little asset endowments to benefit from the

should be so dovetailed that one is complementary to the other. Market

mechanism must serve as an 'efficiency promoting device', while
planning will be the larger guiding force, keeping the long term social
goals in the perspective" (Ninth plan Document).

Redefining the Role of State

The Approach Paper to the Tenth Five year plan stated that an
important aspect of the redefinition of strategy that is needed relates to
the role of Government. It is now generally recognised that Government
in the past tended to take on too many responsibilities, imposing severe
strains on its limited financial and administrative capabilities and also
stifling individual initiative. An all pervasive government role may have
appeared necessary at a stage where private sector capabilities were
undeveloped, but the situation has changed dramatically in this'respect.
India now has a strong and vibrant private sector. The public sector is
 a2 Indian Econonry: Perfarnance antl policiet

much less dominant than it used to be in many critical sectors and its
relative position is likely to decline further as government ownership
in many existing public sector organisations is expected to decline to a
minority. It is clear that industrial growth in future will depend largely
upon the performance of the private sector and our policies must
therefore provide an environment which is conducive to such growth.
This is not to say that Government has no role to play or only a
minimalist role, in promoting development. on the contrary, government
has a very important role but a different one from that envisaged in the
past. There are many areas, e.g. the social sectors, where its role will
clearly have to increase. There are other areas, e.g. infrastructure
development, where gaps are large and, private sector cannot be expected
to step in significantly. In these areas the role of government may have
to be restructured. It will have to increase in some areas of infrastructure
development which are unlikely to attract private investment e.g. rural
infrastructure and road development. In others e.g. telecommunications,
power, ports, etc., the private sector can play a much larger role
provided an appropriate policy framework is in place. Here, the role of
the Government needs to change to facilitate such investment as much
as possible while still remaining a public sector service provider for
quite some time. In all these areas, the role of government as a
regulatory ensuring a fair deal for consumers, transparency and
accountability, and a level playing field is also extremely important.
Redefining the role of the Government to reflect the changed circum-
stances facing the economy must be an important aspect of future strat-
egy. This redefinition is necessary both at the central Government level
and also at State Government level.
According to Kaushik Basu "There is need now for India to move
more strongly forward with the reforms, allow private firms to enter
sectors earlier kept reserved for state-owned enterprises (this is more
important than privatisation), open the economy further, and, in
particular, allow Indian companies to go for larger acquisitions abroad.
But one must be aware that there are no panaceas in economic policy.
One has to be prepared for flexibility, to experirnent with policy but be
ready to adjust, alter, and on occasion even do a U-turn, depending on
the evidence coming in. To stick with one policy, unbendingly, is to
make the same mistake of policy stubbornness that led India to its
present predicament."
Taking the example of openess, he states, ,,While there is need to
push ahead with this in today's India, including a further lowering of
 Planilng ir ldia: Deue/opnett Strategy antl Roh of Srat
E3

tariff barriers and even greater mobility of capital, it is not obvious

that
these reforms, if implemented in the r960s, would have automatically
yielded benefits for the country. There are several laws and
institutional
features of Indian industry that handicap our domestic producers.,,
For
example, there are some industries, such as handicrafts and toys,
which
are marked as belonging to the small-scale sectors. Large-scaie
factory
production is not permitted in these industries. Imagine
what would
happen if India suddenly opened up the doors to all imports,
without
liberalising this sector. Foreign producers would manufacture the
same
goods in large-scale modern factories, lower their per-unit
cost of
production, and outcompete the Indian producers, handicapped
by the
Indian laws. This would still cause gains from trade, true, but may
inhibit the future development of Indian industry. Moreover, the free
flow of capital could cause destabilising currency crises. And, not
surprisingly, prominent econmists such as Jagdish Bhagwati have
advised against full convertibility on the capital account for-developing
countries, observing that "the optimal speed at which one liberalises
is
not necessarily the fastest."s
The same is true for globalisation, which creates great opportunities,
says Kaushik Basu. But to maintain that it has no costs isio
make the
same mistake of overconfidence that served India so poorly in
the past.
Globalisation is likely to bring prices of the weaker economies into
alignment with prices in the industrialised nations. Given that the price
of illiterate labour is close to zero in industrialised nations, this means
that the illiterate population of developing nations will tend to become
extremely impoverished if there is globalisation without complementary
government intervention. According to Basu, "In a country tit"
tnoia
where 35 per cent of the people are ilriterate, globalisation can
contribute to increasing poverty and inequality. it is important to
recognise this not in order to thwart globalisation but to piepare
for
and benefit from it."

The Government, the State and the Market

Although the competing virtues of the market mechanism and
governmental action have been much discussed in the literature, the
comparative merits of the two forms of economic decision are so
thoroughly context-dependent that it makes little sense to espouse
a
general'pro state' or 'pro market' view. For proper understanding, the
distinction between the state and the government may be of some

8. Bhagwati, Jagdish (2002). Free Trade Today, princeton University press, princeton.
 84 Indian Ecanany: Pe4[ornance and Polieier

significance. The state is, in many ways, a broader concept, which

includes the government, the legislature that votes on public rules, the
political system that regulates elections, the role that is given to
opposition parties, and the basic political rights that are upheld by the
judiciary. A democratic state makes it exceedingly difficult for the ruling
government to be unresponsive to the needs and values ofthe population
at large.e
There is a similar question about the context-dependence of the role
of the market mechanism.
The recent history of Asia and Africa provides plentiful examples
of market exchanges being used to make profits out of the miseries of
millions. There are also cases where the market manages to misjudge
the extent of a shortage quite badly, and causes suffering-even chaos-
as a result. Thus, to take general 'pro market' view without conditions
attached is no less problematic than taking a general 'pro government'
view (Drdze and Sen, 2002).
There is a close interdependence between markets and governance.
In particular, the operation and successes of the market mechanism can
be deeply influenced by the nature of governmental arrangements and
actions that go with it. As Basu puts it "There is no escape from the
need for purposive, intelligent action from government. Government or
good governance, is a concommitant of efficient markets, not a
substitute" (Basu, 2004).
Markets can hardly function in the absence of legal provisions and
justiciable rights to property and contractual entitlements. The
disastrous results of indiscriminate liberalisation and wholesale
privatisation in Russia in the 1990s illustrate the penalities of ignoring
the basic recognition that the effective functioning of the market
mechanism is highly contingent on adequate institutional foundations.
Also the government may have a major role in initiating and
facilitating market-reliant economic growth. we have examples of such
successful capitalist countries such as Germany and Japan. More
recently, the role of the government has received much attention in
interpreting the so-called 'East Asian miracle'-the remarkable
economic success of the newly industrialising countries in east Asia (in
particular South Korea, Taiwan, Hong Kong, Singapore, and more
recently China and Thailand).

9. Drbze,Jean and Amartya Sen (2002). India: Development and participqtion, cb 2, oxford
University Press.
Plaming in Intlia: Deulopnen/ Stralegl and Rok of State 85

Public debates-in India as well as elsewhere-are often dominated

by one-sided presentations, reflecting either uncritical faith in the
market or blind opposition to it. Indeed, there are signs of both 'market
mania' and 'market phobia' in the sharp exchanges that characterise
debates on this subject (Drdze and Sen, 2002)'
Market mania involves complete faith in the efficiency and other
virtues of the market, regardless of context. It calls for indiscriminate
deregulation and privatisation. Market mania played a role in Russia's
rush towards a market economy in the nineties with its catastrophic
results.

of take-off that has followed market-oriented reforms in countries such

as China and Vietnam.

Infactthereisadeepcomplementaritybetweenmarketefficiency
and state action. The performance of the market is highly contingent on
various forms of state action, from the provision of an adequate legal
framework to redistributive policies. one implication of these
complementarities is that liberalisation does not necessarily diminish
the ilportance of state action. This applies even to regulation itself, in
so far as a relaxation of one type of rules often calls for developing
new rules of a different type. For instance, allowing private entry into
new sectors (such as medical insura
may be considered as a form of
overseeing framework, esPeciallY
economies of scale, information a
that interfere with the efficiency of the market mechanism. Even in
western 'market economies', including the United States, this necessity
is well recognised.

Cooperative Action
Besides state intervention and the market mechanism therb is the third
alternative way of coordinating economic activity i.e. cooperative action.
 86 Indian Economl: Perfarnance and policiu

Development itself opens up new opportunities for social

cooperation. The recent expansion of cooperative action on a global
scale (involving concerns such as environmental protection, the debt
crisis and world peace) is one example of this p.o""rr.
Just as the state and the market are highly complementary
institutions (even though they are often seen in antagonistlc terms), a
similar relation holds between cooperative action on the one hand and

Thus, cooperative action and market institutions are often

compatible or even complementary. For instance, the efficiency of the
market mechanism can be greatly enhanced by cooperative social norms
that reduce so-called 'transaction costs'. Indeed, markets can flourish
more easily when contracts are not typically broken and do not have to
be rescued by litigation.
According to Drbze and Sen, the tendency to concentrate on the
negative roles of government has contributed to another bias in the
liberalisation debate, namely, the neglect of what can be achieved

fields of reforms are no less important than the kinds of .economic

reforms' that have captured most of the attention in the 1990s. They
are indeed best seen in an integrated perspective, where the promotion
of human freedoms (rather than just the acceleration of economic
growth) is the overarching goal. In that perspective, cooperative action
acquires a new importance, insofar as it has a major bearing on many
of these broader fields of economic and social life where reform is
needed. To illustrate, eradicating corruption or protecting the
Planilng in hdia: Deaehpmefi Stratcgl and Roh oJ State a7

environment are not just matters of sound government policy; they also
involve cooperative action of various kinds e.g. public vigilance against
bribery and community management of local environmental resources.
According to Drbze and Sen, the liberalisation debate in India in its
present form is too narrow in at least three respects: (1) over-
concentration on the negative roles of government, (2) over-
preoccupation with narrowly 'economic' reforms, and (3) neglect of the
role of cooperative action in economic and social reform.
 Economic Reform and
Llbenlisation

Debate on Liberalisation
THE most common connotation of the term liberalisation when used
in the context of economic policy is that of reducing government
regulation of economic activity and the space for state intervention
(except in the all-important matter of guaranteeing private property
rights) and allowing for the unfettered operation of market forcis in
determining economic processes. The recent focus on economic
liberalisation, in India as well as in other developing and formerly
socialist countries, has created the widespread impression that this is a
qualitatively new approach. Indeed, the arguments in favour of the
market-determination of economic processes and resource allocation,
and the counter-arguments based on notions of market failure or
inadequacy of markets in meeting social goals, are almost as old as the
discipline of economics.r
By the mid-2Oth century, state intervention in the economy and
government controls on economic activity were widely accepted and
justified across the world, not only on grounds of 'equity' and the need
to achieve particular social goals which were not inevitably delivered
by the market mechanism, but also theoretically in terms of the
possibilities of market failures. The important areas of market failures
have typically been identified in microeconomic terms as those of public
goods, externalities, industries characterised by increasing returns to
scale, situations of incomplete or asymmetric information, and in
macroeconomic terms the persistence of aggregate unemployment and

I Ghosh, Jayati (1998). "Liberalisation Debates',, in Terence J. Byers (ed.), The Indian
Economy: Major Debates Since Independence, Oxford University Fress, Delhi.
Econowic Reforn and Liberalhation 89

the emergence of sectoral imbalances. For developing economies, which

were seen to have structural constraints on growth which had to be
overcome, the consensus was that late industrialisation required
systematic and planned government economic activity with limited,
controlled and directed market functioning. This seemed obvious
because of the nature of economies with low savings (Nurkse, 1955)'
inadequately developed physical infrastructure, the presence of
numerous externalities in production (Rosenstein-Rodan, 1943;
Scitovsky, 1954), the likelihood of strong forward and backward
linkages in investment and production (Hirschman, 1958) and the need
for major 'catching up" in terms of technology (Gerschenkron, 1962)'
In other words, the consensus was that liberated markets alone could
not deliver 'development', and that systematic state intervention at the
very least to guide markets, was essential'2
Opposition to these ideas favouring state control and limiting of
free market operations, which was evident from their inception but
gained ground in the period since 1980, has usually stressed the ubiquity
of ,government failures' in development as well as the numerous cited
inefficiencies and sub-optimal outcomes associated with such state
intervention. Consequently the case for liberalisation of internal and
external markets and freeing economic agents from government controls
and regulations has been made not only on the libertarian grounds, but
also, and more significantly, in terms of the greater micro-economic
efficiency and functional superiority which are supposed to characterise
free-market-based systems of economic organisation.
The Indian debates have mirrored these basic arguments, and in
addition have been contoured by the structural characteristics of the
Indian economy as well as the imperatives of particular periods. In the
post-Independence years, the debates surrounding issues of state control
and liberalisation appear to be continuous and complex, yet the
arguments in each area and period of time have been surprisingly
interchangeable.
The Indian government at Independence inherited a very 'liberal'
economy, with far fewer controls on both internal and external markets
than are to be found in even the most market-oriented regimes across
the world today. The main government regulations in operation were
the wartime controls on food, and these became the subject of the first
significant policy debate. Subsequently, the policy ground has shifted

2. ibid
 90 Irdian Economl: perfornanrc antl policies

beween liberalisers and those arguing for more central planning and
controls. In each period of major shift, the change in strategy has come
about as a response to a particular constraint, whether in food or the
balance of payments or the fiscal position, and both in periods of greater
emphasis to planning and those in which the market mechanism was
given greater primacy, the expectation has been that the adoption of one
type of strategy would enable the economy to overcome that constraint.
However, since there have been basic political economy failures
reflecting the nature of state and society, these strategies in either
direction have provided at best temporary palliatives, and have been
unable to resolve the basic problems of development.3

ECONOMIC REFORM

The Background
After pursuing an inward-looking development strategy with the
state assuming an important role for more than four decades, India
decided to take a historic step of changing tracks in 1991. It embarked
on a comprehensive reform of the economy to widen and deepen its
integration with the world economy as a part of structural a-djustment.
There seems to be a general consensus on the desirability of reforms to
dismantle the bureaucratic regulatory apparatus evolved over the years
that may have outlived its utility. However, there has been considerable
debate on the contents of the reform package, their sequencing and the
pace, their implementation and their impact.
After a period of relatively robust economic performance in the late
1980s, the Indian economy entered into a period of unprecedented
liquidity crisis during 1990-91. This crisis was a combined effect of a
number of events coinciding. These included collapse of the soviet
Union that had emerged as India's major trading partner. The Gulf War
that erupted in January 1991 worsened the balance of payments crisis
not only with rising oil prices but also by causing a virtual stoppage of
remittances from Indian workers in the Gulf. These events coupled with
political uncertainty prevailing in the country led international credit
rating agencies to lower India's rating both for short and long-term
borrowings. The erosion of international confidence in the Indian
economy not only made borrowings in international markets difficult
but also led to outflow of deposits of non-resident Indians with Indian
banks. These developments together brought the country to the verge

3. ibid
Econonic Reform dnd Liberalintion 9l

of default with respect to external payments liability which could be

averted by resorting to borrowings from the IMF under the standby
arrangements and ccF and by mortgaging gold to the Bank of England.
This was complemented by emergency measures to restrict imports.

The Macroeconomic Crisis

The macroeconomic crisis was precipitated mainly by the growth
of the public spending through the 1980s that increased the budget
deficit as a proportion of our GNP, although external shocks played a
contributory role.
The state of our public finances had indeed reached crisis
proportions by the end of the 1980s. The public debt-to-GNP ratio
incieased through the 1980s, going up to almost 60 per cent at the end
of the decade, implying a doubling of the ratio at the end of the previous
decade. As is now well-known, the proximate reasons for this situation
were the failure of the public sector to generate investible resources
and the explosive growth of governmental current spending that saw
the budget deficit as a proportion of GDP rising from 6.4 to 9 per cent
during the 1980s.
According to Jagdish Bhagwati and T.N. Srinivasan, the question
must be addressed: Did the microeconomic inefficiencies have anything
to do with this, or was "profligacy" the true, final and sole cause of the
macroeconomic crisis? Evidently, it was the former'
of course, the failure of the public sector enterprises to generate
profits (and hence their contribution to the macro crisis) is a micro-
economic efficiency failure. But, in turn, because these enterprises have
dominated the provision of infrastructure and critical intermediates,
their inefficiency has led to downstream inefficiencies in a multiplier
fashion. Then again, the restrictive trade and industrial licensing frame-
work, for instance, led to serious loss of efficiency by reducing the scale
of output, eliminating effective competition, creating bottlenecks. The
result was to reduce the returns from our investments and our growth
rate. In turn, surely the revenues raised from the economy, for any given
tax rates, were adversely affected, the political ability to raise tax rates
in a situation of slowly-growing incomes was impaired, and the necessity
to undertake budgetary expenditures to support the creation of public
sector jobs and for consumption were also increased-all factors
contributing to the budget deficit crisis.
The rise in foreign borrowing was a major component of the fiscal
crisis, reflecting in turn the excess of domestic expenditure over income.
92 Indian Economy: Perfornance and Policiet

Thus, as evident from the external public-sector debt (and not just the
domestic public sector debt) increased greatly as a proportion of GNp
during the 1980s, rising to 2l per cent by 1987-88. This increase in
external indebtedness meant that debt service as a proportion of exports
increased more than threefold to 32 per cent in 1996-97 from 1980-81.
The macro imbalance, fuelled by the budget deficit and financed
by the external borrowings and the decumulation of reserves, was
accompanied by accelerated inflation to double-digit levels.
Given the magnitude of the fiscal and balance of payment problems,
there can be no question about the need for structural adjustment. But
there were questions about its context as well as viewing it primarily as
a means of liberalisation and opening of the economy.

Rationale for the Reforms

As is now well-understood, India faced a macroeconomic crisis that
required immediate attention when Prime Minister Rao took office. This
crisis had to be attended to forthwith. But, as in many South American
countries in the 1980s, the macroeconomic crisis became also the
occasion for undertaking substantial microeconomic (or what are
sometimes called "structural") reforms that had been long overdue.
In fact, these structural reforms were necessary because we had
evidently failed to generate adequate rates of growth of income and of
per capita income. Not merely did India's weak performance in this
regard fall below her own expectations as defined in the earlier Plans,
it also put India behind many other developing countries, and way
behind the super performers in the Far East.
"Indeed, it is necessary to appreciate that we had become
marginalised in the world economy. Not merely were our growth, and
hence all else such as poverty alleviation, unsatisfactory, the multiplying
success stories were to be found elsewhere. Increasingly, many of our
economic policies were also seen as wittingly foolish, impossible to
explain as sensible. Among these were our maze of senseless
bureaucratic controls on production and investment. Perhaps the most
compelling reason for reforms was then to clean the house and to restore
India eventually to the position of respect in the world economy and
polity that she enjoyed during the years of Prime Minister Nehru's
stewardship."a

4. Bhagwati, Jagdish and T.N. Srinivasan (1993). India\ Economic Reforms, Paper submitted
to Finance Ministry.
Economic Reform and Liberalisation 93

Macroeconomic Reforms
By the time the crisis of 1991 occurred, there was considerable
support among key figures in and out of government for the view that
a thorough going reform was necessary to pull the economy out of the
morass it had gotten into.
The reform package outlined by Manmohan Singh in l99l had three
distinct components:
(l) fiscal stabilisation to check the growing fiscal deficit and
contain it at a much lower level in such a manner that public
investments in basic social and economic infrastructure could
be substantially stepped up without generating inflationary
prgssures;
(2) internal liberalisation to increase competitive pressures,
leaving enterprises free to make their production and
investment decisions in the light of market conditions and
enlarging the scope and freedom for private enterprise:
(3) integration with the global economy by removing controls on
foreign trade and exchange rates, lowering tariffs and
rationalising their structure and substantially relaxing
regulations regarding external capital flows and a proactive
policy for attracting foreign direct investment. This package,
it was claimed, would release powerful growth impulses and
lift the economy to a high growth trajectory comparable to
that of east Asia. This view prevailed and has come to be
accepted by successive governments since.5
The policy changes brought into force since July 1991 fall broadly
into two categories. The first set of measures is part of what is
normally known as stabilisation policy. The second set of measures
come under the category of structural reform policies. As Rangarajan6
rightly points out, while the stabilisation policies were intended to
correct the lapses and put the house in order in the short term, the
structural reform policies were intended to accelerate economic growth
over the medium term. Structural reform policies cannot succeed unless
a degree of stabilisation has been brought about. But stabilisation by

5. Vaidyanathan, A. (2003). Indiq's Economic Reforms and Developmeflr, pp. l7-18,

Academic Foundation. New Delhi.
6. Rangarajan, C. (2002-03)."The New Economic Policy and the Role of the State", in
Uma Kapila (ed.), Indian Economy Since Independence
94 Indian Ecanontl: Performance azd Policiet

itself will not be adequate unless structural reforms are undertaken to

avoid the recurrence of the problems facad in the recent period.

Structural Reforms
Structural reforms were broadly in the area of industrial licensing
and regulation, foreign trade and investment and the financial sector.
There is considerable unanimity among the economists about the need
to reduce and, as far as possible, eliminate barriers to the entry and
expansion of firms. The policy of licensing as has been practised in the
past has had no particular merit and, in fact, the Approach Document
of the Eighth Plan submitted in May 1990 had also said: "A rerurn to
the regime of direct, indiscriminate and detailed controls in industry is
clearly out of question. Past experience has shown that such a control
system is not effective in achieving the desired objective. Also the
system is widely abused and leads to corruption, delays and
inefficiency." In relation to foreign trade policy, the aim was to liberalise
the regime with respect to imports and try to bring about a closer link
between exports and imports.
As regards import duties the policy has been gradual even though
it is accepted by all that the tariff
rate in India is perhaps the highest
even among the developing countries. A progressive reduction becomes
essential in order to avoid a high-cost economy. As regards foreign
investment, the new policy measures certainly make a break with the
past. In an era in which capital is mobile and moving across borders in
a big way and where technology transfer is through investment, we
cannot afford to close our country to the flow of foreign investment. In
fact, the flow of foreign investment into the country has been meagre.
If retained earnings are excluded the flow is almost negligible. The
relaxations that we have made in relation to foreign investment are yet
very modest as compared with the concessions offered by many
developing countries. Many of the fears expressed in this context are
in the nature of putting the cart before the horse. We must take action
when and if it becomes apparent that the flow of foreign investment is
excessive and it is undermining the domestic economy.
Finally, in relation to the financial sector it has to be noted that
while there has been a considerable widening and deepening of the
Indian financial system, many inefficiencies have crept into the system
during the past 15 years. An administered interest rate structure had put
the whole system in a straight-jacket. The extent of cross-subsidisation
in lending rates has undermined the profitability of the banking system.
Econonic Reform and Liberalisation 95

Equally, due to various pressures, the quality of loan assets has also
deteriorated. With low profitability, the banking system in particular has
not been in a position to provide adequately for loan losses. The capital
of the Indian banking system is woefully inadequate. Thus, a reform of
the financial system to provide greater autonomy to the institutions both
in terms of the interest rate structure and operational matters had become
necessary.

Implementation of the Agenda

The implementation of the agenda of the reforms over the eight
years has covered the following:
Trade Policy Reforms: A major reform of trade policy regime has
been effected since 1991. The import licensing system has been
dismantled. All non-tariff barriers (NTBs) have been phased out from
all tradables except consumer goods. In spite of stiff resistance from
rich industrialists on cutting tariffs, all finance ministers starting from
Manmohan Singh in 1991, P. Chidambaram, Yaswant Sinha, Jaswant
Singh and again P. Chidambaram forcefully fought on the subject of
tariff and the tariffs have indeed been substantially done away with.
Besides India has also undertaken a major commitment to liberalise its
trade regime under WTO Agreement.

Removal of
QRs
The process of removal of import restrictions, which began in 1991 ,
has been completed in a phased manner with removal of restrictions on
715 items (Exim Policy 2OOI-02). Out of these 715, 342 arc textile
products, 147 arc agricultural products including alcoholic beverages
ar,d 226 are other manufactured products including automobiles.

Industrial Policy Reforms: Although some liberalisation and

streamlining of the industrial policy had been effected in the mid-1980s,
the New Industrial Policy (NIP) announced on July 24, 1991 and
subsequent amendments brought far-reaching changes in the policy
regime governing industrial investments. The NIP dismantled the
industrial licensing (or approval) system that regulated the industrial
investments in the country by abolishing the requirement of obtaining
an industrial licence from the government in all except 14 specified
industries. These specified industries need to be regulated in view of
environmental hazards, national security or social well-being
considerations.
96 Indiat Econonl: Perforntatce and Policie:

NIP has thrown open new industries and services to private

including foreign private sector by pruning the list of 'Industries
Reserved for the Public Sector'. Only six industries, which are now
reserved for exclusive development by public sector, include those
considered sensitive from national security point of view. Thus, alarge
number of industries and services including infrastructure such as
telecommunication, roads, ports, power generation, petroleum refining
have become accessible to the private sector. NIP accords a much more
liberal attitude to foreign direct investments (FDI) than ever in post-
Independence India. The policy allows automatic approval system for
priority industries by the Reserve Bank of India within two weeks
subject to their fulfilling specified equity norms. A more favourable
treatment is also accorded to non-resident Indian (NRI) investors who
are allowed up to 100 per cent ownership priority industries.
A Foreign Investment Promotion Board (FIPB) has been set up to
consider all other proposals that do not qualify for automatic clearance.
However, to bring transparency into the working of FIPB, elaborate
guidelines and time frame of six weeks in normal cases are also
specified. FIPB is authorised to negotiate with foreign investors in
person to expedite the clearances. FIPB is empowered to approve up to
100 per cent foreign ownership in cases involving transfer of high
technology, projects producing predominantly for exports, energy and
infrastructural projects, consultancy or trading companies. The
restrictions on investments by large industrial houses and foreign
controlled companies under the MRTP Act were also abolished.
A phased programme of disinvestment of public ownership in public
sector corporations has been launched. A Disinvestment Commission
followed by Department of Disinvestment was set up to make
recommendations on the phasing of the disinvestments.
The outward investments by Indian enterprises were also liberalised
and proposals fulfilling certain norms could now be granted automatic
approval.
Exchange Rate Reforms.'The rupee was devalued twice in July 1991
leading to a 20 per cent depreciation in its value. The partial
convertibility of rupee on the trade account was announcedinthe 1992-
93 budget that was subsequently broadened to full convertibility on
current account by August 1994.
Capital Market: The Capital Issues Control Act was repealed and
the Securities and Exchange Board of India (SEBI) was set up as a
watchdog for regulating the functioning of the capital market. SEBI has
Economic Reform and Liberalisation 97

focused on regulatory reform of the capital market as well as on market

modernisation. Online trading and dematerialised trading have been
introduced. companies have been allowed to buy back their own shares
subject to the regulations laid down by SEBI.
In September 1992, the government announced guidelines for
investmenis by foreign institutional investors (FIIs) in the Indian capital'
market. FIIs were now welcome to invest in all types of securities traded
on the primary and secondary market with full repatriation benefits and
without restrictions on either volume of trading or lock-in-period.
Financial sector: In January 1993, a package of financial sector
reforms was announced that included permission to new private sector
banks including foreign joint ventures. The government has also.
established a policy regime for functioning of private non-banking
finance companies (NBFCs) and agencies for rating their credit
worthiness.
Thus, the government since 1991 has undertaken a comprehensive
reform of the economy. In addition to the above measures there has been
an emphasis in the government budget-making to restricting budget
deficits.

National Structural Adiustment Programme

All these reforms-and the list is far from exhaustive-calls for a

high order of political management. In the first place, the sense of the
crisis, the imperative need for systemic reform and the rationale for the
main element of the reforms need to be effectively communicated to all
levels of government and to the people at large. Second, the task of
structural reform should not be viewed as the responsibility of the
centre alone. States spend nearly as much as the centre. They are
responsible for key segments of infrastructure (namely electricity, roads
and water supply) as well as the social welfare and anti-poverty
98 Indian Erononl: Perfornanre aul Policict

employment and anti-poverty programmes (which provide a safety net

for the vulnerable segments).
Given this, and the vast ramifications of structural adjustment, one
would expect a serious and sustained effort by the Centre to take the
States fully into confidence about the nature and magnitude of the crisis
facing the economy and the rationale for and implications of the
'structural adjustment' programme, even while impressing on them the
contribution they have to make and the responsibilities they have to
share in order to make the programme a success. What we need is a
national structural adjustment programme based on the maximum
possible understanding and consent among the States and the Centre.
Apart from informal meets, the NDC and the inter-State Council provide
formal mechanisms for informing, counselling and discussing these
issues with the States. Unfortunately these have not been used to any
significant extent in shaping the adjustment reforms.
In the final analysis no structural adjustment programme can be
effectively implemented without broad-based political support. This
support will not be easy to muster merely on the basis of promises of
faster growth of income and employment and of lower rate of inflation
at the end of the adjustment process. It requires not only a great deal of
public education about the need for and rationale of policy changes but
also to generate a feeling that the costs of adjustment-by way of lower
subsidies, higher price of utilities and services, higher taxes, insistence
on productivity norms, the redeployment and even some retrenchment
of workers, restraints on increase in wages and salaries, restricting the
scope for using public institutions for political patronage at every
level-are being shared equitably. As it is farmers are being asked to
pay more for water, electricity and fertilisers; workers to accept wage
restraints, retrenchment and closures; and the users of PDS to pay higher
prices for foodgrains, sugar, kerosene and transport services. Necessary
as all these are, they also provoke-and understandably so-a great deal
of resistance. And the farm lobby and trade unions are forces to reckon
with. Their opposition can, however, be to some extent mitigated by
measures to contain the adverse effects on employment and incomes
specially for the vulnerable segments of the population.

Safety Net
A 'safety net' for workers in the organised sector who may lose their
jobs in the process of adjustment is on the agenda. It is extremely
important, at a minimum, to ensure that the employment and anti-poverty
Economic Reform and Liberulisation 99

programmes and access of the poor to the PDS do not get whittled down
in the name of fiscal crisis.
Above all it is essential to demonstrate that the better off
segments, especiallyin urban areas, bear their due share of the costs
of adjustment. The Government must show greater willingness and
ability to deal with this class, make them pay the taxes due from them,
pay for the full cost of public services they use, and take measures to
enforce greater austerity among them than is currently in evidence.
As Vaidyanathan has rightly remarked, "Regrettably, the tendency is
to assume that nothing much can be done to make tax administration
effectively enforce existing tax laws relating to income, wealth and
property. Amnesties and incentives to flush out black money reflect
this presumption and tantamount to sanctifying a culture of non-
compliance with the law among the well-to-do. So is the plea for
lowering of the tax rates on the ground that it will reduce incentives
for evasion. There is also a vocal lobby for raising the exemption limit
for income tax, removing restrictions on the level of executive
compensation, and reducing excise duty on durables and other goods
largely catering to the better-off segments in the face of recession.
Should the government yield to these pressures, the effective tax
burden on the well-to-do will be reduced-even as all other classes
are being asked to bear hardships for the sake of the 'larger good'.
Can we really expect a democratic polity to support, or is it even
proper to expect it to support, such an inequitous sharing of the cost
of adjustment?"7

Macroeconomic Impact of Reforms

The compound rate of growth for the second half of 1980s was 5.8
per cent per annum. Compared to that for the post-reform period
excluding I99I-92 as year of exceptional crisis, the average for 1992-
1998 comes to 6.5 per cent per annum. The average rate for the 1993-
94 to 1998-99 period (based on the new series of GDP) comes to 6.8
per cent. Similarly, the trend rate for the post-reform period estimated
at 6.9 per cent is higher than 5.5 per cent applicable for the 1980s.
The post-reform growth, therefore, has been at least 1.1 percentage
points higher than the average rate achieved during the pre-reform
period.8

7. Vaidyanathan, A. (2003). op.cit., ch. 2, pp. 84-87.

8. Kumar, Nagesh (2001-02). "Economic Reforms and their Macroeconomic Impact", in Uma
Kapila (ed.), Indian Economy Since Independence.
100 Indian Econonl: Petfornaue and Policier

Signs of Industrial Revival: Recent trends and surveys do indicate

that the industry may finally be coming out of the recession.
Liberalisation is expected to bring efficiency and productivity gains in
the industry.
FDI Inflows.' Liberalisation of FDI policy regime has been an
important aspect of the reforms. Compared to approvals of FDI in 1 99 1 ,
the approvals of FDI inflows since the liberalisation of policy in 1991
reveal a dramatic jump.
While the magnitudes of inflows have recorded impressive growth,
they are still at a small level compared to the country's potential'
Furthermore, one of the objectives of the current reforms of policies is
to remove impediments for export-oriented manufacture in general and
to attract MNEs to locate efficiency-seeking FDI in the country. These
investments could help India in expanding manufactured exports by
using her as an export platform. The majority of the recent approvals
of FDI, however, aim to exploit India's sizeable and expanding domestic
market. The efficiency seeking or export-oriented FDI have yet to start
flowing to the country in a considerable manner.

Fiscal Adjustment and Stabilisation

A key aspect of the structural adjustment programmes is to restrict
the fiscal deficits of the governments. Table 5.1 summarises the trends
in budget deficit of the central government in the late 1980s and 1990s.
In the second half of 1980s, the fiscal imbalance worsened with average
fiscal deficit rising to 8.2 per cent of GDP compared to 6.3 per cent in
the early l98os (Economic Survey, 1992-93). Compared to this, the
average fiscal deficit in the post-reform period has been 5.7 per cent of
GDP. This suggests that the government has succeeded in managing the
fiscal situation quite well.
However, the extent of fiscal deficits tends to mask the method
adopted by the government to balance the budget and its implications.
Firstly, the revenue deficit which represents the gap between
revenue receipts and revenue expenditure has increased in the post-
reform period (at 2.9 per cent) on average compared to an average of
2.6 during the second half of 1980s. This implies that the government
has been unable to contain its current expenditure. Therefore, fiscal
deficit has been contained either by reducing capital investment or by
raising capital receipts such as borrowings or disinvestment of public
sector holdings of the government. A rising level of revenue deficit has
Economic Reform and Liberalisation 101

thus been sustained with government borrowings of the scale of Jhe

revenue deficit to finance its consumption expenditure rather than
producing a revenue surplus to finance capital expenditure in social
sectors (and defence) which do not yield a future income flow to the
exchequer. Deepak Nayyare among other analysts, has argued that such
a fiscal regime "is not sustainable in medium-term for it is bound to
fuel inflationary pressures or strain the balance of payments, and thus
disrupt the process of growth."

TABLE _ 5.I
Tiends in Central Government Deficit as Percentage of GDP

Year Revenue Deficit Fiscal Deficit

1 985- 86 2.2 8.3

I 986- 87 2.7 9.0
1 987-8 8 2.7 8.1
1988-89 2.'l 7.8
1 9 89-90 2.6 7.8
I 990-9 I 3.3 6.6
1991-92 2.5 4,7
t992-93 2.5 4,8
t993-94 3.8 6.4
1,994-9s 3.1 4.'7

199s-96 2.5 4.2

|sg6-97 2.4 4.r
1997 -98 3.1 4.8
I 998-99 3.8 5.1

Averages
I985-9I 2.6 8.2
1992-99 2.9 5.7
2000-01 4.1 5.',l

2001-02 4.4 6.2

2002-03 4.4 5.9
2003-04 (Prov.) 3.6 4.6
2004-05 2.5 4.4

Source: Economic Survey 2004-05, 1992-93 znd RBI (1999)'

Secondly, Fiscal adjustment has been achieved by squeezing public

investment rather than government consumption. Capital expenditure as

g. Nayyar, Deepak (1996). .'Econonic Liberalisation in India: Analytics, Experience and

Lessons" in n.C. Outt Lectures, Orient Longman, New Delhi'
 to2 hdian Economl: Perlormarce and Policiet

a proportion of total government expenditure has declined steadily from

30.18 per cent in I990-9I to 2l.B per cent in t99g-99
(Table 5.2). As
a proportion of GDP, capital expenditure has come down from 5.5 per
cent to 3.6 per cent during the same period.

TABLE - 5.2

Receipts and Expenditure of Central Government

Years Capital Capital TotaI

Expenditure Expenditure Expenditure
os Per cent as Per Cent as Per Cent
of Total of GDP of GDP
1 985- 86 40.4 8.2 21.5
l 990-9 I 30.2 5.5 18.1
1994-95 24,0 J- t 15.5
t99s-96 2t.5 3.2 t4.6
t996-9'7 20.9 J.-1 14.3
1997 -98 22.3 3.3 14.8
1998-99 (RE) 2t.8 3.6 16.0
1999-2000 (BE) 16.5 2.3 14.2

Source: Economic Survey 1998-99 and RBI (1999).

Finally, it has been shown that the burden of adjustment has been
unequal in that it has led to declining expenditures on social sectors
such as education, health and poverty alleviation. panchamukhi and
Mahendra Dev have observed a decline in social sector spending
especially during the early post-reform period. Hence, concerns have
been raised regarding the levels of human development.
Prices: An important focus of the stabilisation programme is to
bring the rate of inflation under check. The rate of change in wholesale
and consumer prices suggest that the overall trend in prices has been
on decline since 1992. one striking trend noticeable from Table 5.3 is
the growing divergence between the rate of inflation based on wholesale
prices and that for consumer price index since 1993-94. Until rgg3-94
the two rates generally converged. Since 1995-96, the consumer price
index based rate of inflation has exceeded that of one based on
wholesale prices by a wide margin. The diverging trend in the wholesale
and consumer prices has been explained in terms of the change in the
weighting scheme for the two indices. The consumer price index has a
57.0 per cent weight of the food group compared to just 27.5 per cent
in WPI. The divergence between the two indices therefore, reflects
Economic Reform and Liberalisation 103

substantial increases in food prices in the 1990s. Besides, a spurt in

prices of housing, medical care and personal care has also contributed
to the rise in CPI. The rise in food prices and other goods of mass
consumption at a faster rate than prices of other goods also indicates
that sharing of burden of adjustment by dffirent sections of society
has been uneven and weaker sections may have been affected more.

TABLE - 5.3

Inflation in India
Years Index Annual Intlex No. of Annual
No. of WP Change CP (General) Change

1 986-87 132.1 137

1 987-88 143.6 8.21 149 8.7 6
I 98 8-89 t54.3 '7.4s r63 9.40
I 989-90 165.7 '7.39 I'73 6. l3
1 990-9 1 182.7 10.26 193 11 56
r991-92 207.8 13.'7 4 2t9 13.47
1992-93 228.7 10.06 240 9.s9
1993-94 247.8 8.3 s 258 7.50
a1 i 1 10.86 8.14
1994-95 2'79
1995-96 295.8 '7.68 313 r2.19
1996-9'7 3t4.6 6.36 342 9,27
t997 -98 329.8 4.83 366 1.02
1998-99 352.5 6.9 4t4 13. l
1999-2000 up to Oct. 2.9 '1.5

Notes: Base: l98l-82 = 100.

WP = Wholesale prices, all commodities, average of weeks;
CP = Consumer prices for urban industrial workers general index (average of months).

Political Resistance to Reform

Political resistance to the reform measures was to be expected from
diverse sources, for diverse reasons and with varying force.
Industrialists and exporters had most reason to welcome the new
economic policy. But their enthusiasm has waned over time and given
place to demand for a variety of protective measures.lo
The 'middle class' with access to higher professional education
constitute perhaps the most enthusiastic supporters of the new economic
policy. Most of the large and growing number of non-resident Indians

10. Vaidyanathan, A. (2003). op.cit., ch.l, pp. 45-49.

to4 Indian Ecoton5,: Perfornance aul Poticiet

(NRIs) and those employed in the burgeoning software industry belong

to this group. Globalisation has vastly improved the opportunities and
earning potential of this class both within and outside the country. One
has only to see the veritable explosion in salaries of executives and
professional personal in recent years. Some of the most ardent and
passionate advocates of free markets, globalisation and capital account
convertibility belong to this class.
The strongest opposition comes from farmers and from workers in
the organised sector including, especially those employed in the public
sector. Farmers have fiercely, and so far successfully, resisted any
increase in the price of inputs in the name of reducing subsidies. Their
argument is that farmers are unable to recover costs at current level of
input and output prices and that farm prices are too low to enable them
to have a 'decent' income. Subsidising inputs and pegging output prices
higher than warranted by the balance between supply and demand is
neither fiscally feasible nor a viable way of raising farmers' incomes to
a higher level and even less so for ensuring their progressive
improvement. Moreover, since there is much scope for increasing the
productivity of water and fertilisers, higher prices do not necessarily
mean an increase in unit costs. On the other hand, by encouraging
excessive use of scarce resources, low input prices damage the
environment and endanger long-term sustainability of agriculture.
Labour in the organised sector is the other locus of strong and
organised resistance to the reform: Organised sector (registered
factories, financial institutions, government agencies, public sector
undertakings) constitute barely 10 per cent of the country's workforce
(and 20 per cent of the non-agricultural workforce). Trade unions,
though largely confined to this segment of the economy, have played,
and continue to play a key role in protecting the interests of their
members and in influencing state policy. They comprise an important
section of the better-off segments of the population (most of them belong
in the top quartile of the population in terms of per capita income) and
get the lion's share of the benefits of subsidised or free facilities and
services (higher education, healthcare, public transport, electricity,
water) provided by the state.
Unions in the organised sector have had considerable success in
securing better wages, working conditions and other benefits for workers
in this sector and also legislative protection against lay-off and
retrenchment. Several of the activities, especially in the public sector,
being crucial to ttre orderly governance and smooth functioning of
Economic Reform and Liberalistton 105

economy and society, those employed in them are strategically

positioned to resist lay-offs, redeployment, restraint on salaries and
benefits.
All this is threatened by proposals to permit flexibility in hiring
and firing, retrenchment and redeployment of excess workforce,
privatisation of public undertakings, allowing market forces a greater
role in determining wages; and measures to check leakages and
iorruption. As consumers, they also stand to lose by increased user
charges for public services and possibly having to pay more taxes. The
fierce resistance of trade unions to reforms-especially in the public
sector-is hardly surprising.

Concerns Regarding Social and

Political Implications of Reform
Overarching the resistance from particular interest groups are wider
concerns about the larger social and political implications of the reform.
These include several apprehensions:
that trade liberalisation and domestic regulation and
disbanding protection for small industry would have huge and
widespread adverse effects on employment and incomes;
that in the name of fiscal consolidation, expenditures are being
squeezed and the compression is at the expense of pro-poor
programmes (like basic social services, social welfare,
security and poverty alleviation);
that in the name of providing incentive for enterprise and
professional skills, inequalities are allowed to increase;
that the policy of open door for foreign capital and agreeing
to the jurisdiction of international organisations (like World
Trade Organization) created under unequal treaties in an
unequal world dominated by the developed countries reduces
the country's autonomy and makes it vulnerable to external
pressure and interference;
an added dimension is the increasing concern about the
consequences ofpursuing current patterns of development for
the environment and sustainability.
According to Vaidyanathan, criticism based on these concerns taken
paranoia or ideologically motivated, would be serious mistake.
 106 Intlian Ecotoml: performance and policiet

Impact of the New Economic policy on the

Vulnerable Sections
Coming to the issue of the impact of the new economic policy on
the vulnerable sections, Rangarajan arguest, "Analytically, we need to
address two sets of issues. one is whether the new economic policy
affects in any way the specific policy measures that we normally
undertake in order to improve the conditions of the poor. Second, is
there anything in the new economic policy which per se has an anti-
poor bias? The new economic policy which may be a convenient
expression to refer to the measures introduced since July l99l is not
the total economic policy of the Government. There are many other
elements which continue to remain as an integral part of the overall
economic policy. Among these are the measures which can be broadly
termed as anti-poverty programmes. In the total economic policy there
are four elements which can be identified as being meant speciticatty
for poverty alleviation:
"First, since agriculture is the mainstay of the majority of the
population, growth in agriculture and, therefore, resources allocated for
agriculture are an important part of the attack on poverty. This is not
an acceptance of the trickle-down theory. It is common knowledge that
in states in which agriculture has made spectacular progress pou"rty
levels have come down. Therefore, allocation of resouries for
agriculture is an important indicator.
"Second, we have evolved over time a reasonably satisf'actory food
security system. An integral part of this is the public distribution system.
with all its shortcomings, the public distribution system has played a
notable role in avoiding acute conditions of scarcity and met to a certain
extent the minimum requirements.
"Third, there has been a substantial expansion in programmes which
are intended to provide additional employment. The various employment
guarantee schemes as well as the credit-related integrated rural
development programmes are examples of such programmes.
"Fourth, expenditure on education and health also has an important
bearing on reducing poverty levels.
Is there anything in the new economic policy which is inherently
anti-poor?

l1 Rangarajan, c. "The New Economic policy and the Role of the state", in Uma Kapila (ed.),
op.cit.
 Economic Reform and Liberalisation
t07
The poor are affected most when growth is low and when prices
rise. The slowdown in growth in l99l-92 and the sharp increaies in
prices in the same year are sometimes cited as consequences of
implementing the new economic policy. This is not a correct assessment.
There was a decline in agricultural production in r99l-92 and it is well
known that the performance of agriculture from year to year is mostly a
function of the weather. The collapse of industrial production in l99l-92
can be traced in a large measure to the high degree of import compression
that was brought about which would have been inevitable in any case
whether or not we shifted to a new policy orientation. Has the attempt
to contain fiscal deficit affected, anyway, the poor more? while there
has been some attempt to reduce fertiliser subsidy as part of the efforts
to moderate the fiscal deficit, the food subsidies have been maintained.
There is a dilemma here which we have to resolve. Unless we make the
public distribution system more focused and directed towards only the
weaker sections and low-income groups, keeping the issue price
unaltered or changed moderately despite an increase in procurement
prices will not be sustainable over a long time.',
one aspect of the new economic policy which has created certain
misgivings among the organised labour relates to the several suggestions
that have been made with respect to non-viable public sector units.
While the approach should be to reorganise the loss-making public
sector units in such a way as to improve their viability, quite clearly,
there are cases in which their viability will depend on some reduction
in the labour force. The Government is again going slow in this area
because of the anxiety not to create a difficult situation for labour. That
is why various alternative schemes have been thought of, such as the
sale of the company to the
E
up a national renewal fund y
be rendered jobless, etc. o
carry on with all the labour force, irrespective of whether or not the
units are viable, is also a situation that is not sustainable over a long
time. Hence, a solution which is also reasonable and acceptable to
labour will have to be found.
As rightly pointed out by Rangarajan, "Redundancies and closures
occurring as a consequence of modernisation and technological
upgradation are not a new phenomenon. This has occurred in a big way
in centres like Ahmedabad and Kanpur where there has been a
concentration of the textile industry. It must be recognised that
restructuring of the workforce becomes uecessary for efficient growth
which alone can lead to sustainable employment growth in the medium
108 Indian Ecanaul,: Per/orntante and Polidet

and long term. At the same time, workers rendered unemployed in these
processes cannot be left high and dry. Provision for fair and reasonable
separation benefits is necessary, but more important is their
redeployment, with training, if necessary, as a part of the overall strategy
of expansion of employment opportunities. What, in fact, is being
attempted in the new economic policy, with the instrumentality of the
national renewal fund, is that the hardships of the workers affected in
the unavoidable and inevitable loss of jobs are minimised by providing
them a fair deal in terms of separation benefits and opportunities for
their productive redeployment. The national renewal fund, constituted
on a non-statutory basis, envisages the provision ofresources solely for
the rehabilitation of labour resulting from modernisation, technological
upgradation, restructuring (including revival) or closure of industrial
units. It will assist workers in this process for their retraining,
redeployment and placement in new employment, besides contributing
towards compensation payments, including legal dues and those under
the Voluntary Retirement Scheme, under the fund called the National
Renewal Grant Fund (NRGF).
Far from adversely affecting employment elasticity, the restructured
growth during the 1990s is expected to be far less capital-intensive and
far more employment-friendly. First, with the removal of distortions in
the factor markets, the new economic policy regime can be eipected to
lead to greater use of labour in the production processes as has been
the experience of several labour-surplus developing countries which
have succeeded in increasing their exports and overall growth of
manufacturing industries. Second, the processes of deregulation and
liberalisation are likely to particularly benefit the employment-intensive
small and decentralised sector which, it must be recognised, had to bear
a heavy burden of bureaucratic hurdles in the past. In the restructured
economy these sectors, particularly the rural non-farm sector, agro-
processing and agri-business in general, urban small enterprises and the
services sector, all of which have shown high potential for employment
generation, are likely to grow faster. Third, the overall objective of the
new economic policy is to improve productivity and efficiency. In a
competitive environment, both public and private sector units are
expected to show improved productivity and greater expansion in
output.

Conclusion
In conclusion, we may quote Kaushik Basu, "The economy's overall
post-reform growth rate has been very good. From 1994 to 1997 Indian
Economic Reform and Liberalitatrot 109

technological imProvements."
However, Basu believes' "Ultimately an economy has to be
evaluated in terms of what happens to the poorest and the dispossessed.
Everything else, such as a nation's income growth rate, is of instrumental
value. Not all economists concur with this view' To many, efficiency,

the early 1960s, as simply an instrumental variable, as a means to an

end, and the end was clearly the elimination of poverty''12

continues to be unacceptably high'

Literacyhasrisenfrom52percentinlgglto65percentin200l'
This is, however, not so much a consequence of government policy as
people's changing view of the value of education (caused by the greater

Oxford University Press'

12. Bhagwati, Jagdish (1985). Essays in Development Economics'
 110 Iiliar Economl: Performance antl Policiet

exposure to the world out there), which has led to parents demanding
better education for their children and often willing to pay for that at
the expense of great personal hardship. Again, while this trend is
heartening, it is tragic that a nation with so much policy devoted to
higher education and scientific work still has 35 per cent of its
population unable to read and write (Basu, 2004).
"on these fundamental indicators therefore there is reason to be
both disappointed at where the nation stands and optimistic about the
changes that have taken place"13 says Kaushik Basu.

The Next Round of Reforms

While much has been written and talked about the next round of
reforms, what is not talked about enough but is important to develop is
the institution of contracts, without which no modern market can
function. This is where government is important: It must play the crucial
role of the third party that helps enforce contracts. But contracts are
partly a matter of culture without which it is difficult to develop crucial
long term market, such as the market for mortgage and long term
investment loans, and to take full advantage of globalisation. These, in
turn, are key ingredients of fast growth. According to Kaushik Basu,
"There are, fortunately, enough strengths in the Indian economy for it
to be a net beneficiary of globalisation. The economy has gone past that
critical level where to open up is to risk being cheated and
impoverished. Though there are still innumerable important reforms to
undertake, the fundamentals of the Indian economy are probably strong
enough for it to be able to implement and benefit from another round
of market reform and further (though gradual) opening up of the
economy. Globalisation and modern markets bring with them many ills.
But, on balance, and given the new strengths of the Indian economy,
these changes will open up rather than close windows of opportunity
for India."

13 Basu, Kaushik (ed.) (2o04). India\ Emerging Economy: performance and prospects in the
1990s and Beyond., Oxford University Press.
 India's Growth Expertence

IN this chapter, we analyse the performance of Indian economy since

Independence, with reference to the experience of growth, development
and structural change in different phases of growth and policy regimes
across sectors and regions.
The structure of discussion is as follows:
Section I
outlines the growth experience, the turning points in
growth rates of national income, the sectoral contributions and
comparison with other countries. In section II the discussion is on
growth performance of different states, the regional contrasts in terms
of growth rates and structural changes. Section III draws some
conclusions.

I
TIIE PERFORMANCE
In seeking to establish turniug points in the performance of the
economy, or structural breaks in the pace of economic growth, most
studies focus on the period since 1950. However, according to Deepak
Nayyar, any meaningful assessment of economic performance in
iudependent India must situate it in a long-term historical perspective
to provide at least some comparison with the colonial era. Therefore, it
would be logical to consider the performance of the economy before
and after Independence during the 20th century.
During the first half of the 20th century, there was a near-stagnation
in per capita income while the growth in national income was minimal.
There was a steady growth in both GDP and GDP per capita during the
second half of the 20th century (Table 6.1). There are two sets of growth
rates for the period 1900-01 to 1946-47 based on two different estimates
of national income. The Sivasubramonian estimates suggest that, in real
tt6 Izdian Econozl: Perlormatce and Policiet

terms, the growth in national income was 1 per cent per annum, whereas
the growth in per capita income was 0.2 per cent per annum. The
Maddison estimates suggest that the growth in national income was 0.8
per cent per annum, whereas the growth in per capita income was almost
negligible at 0.04 per cent per annum. The growth rates for the period
from 1950-51 to 2004-05 provide a sharp contrast. In real terms, the
growth in GDP was 4.2 per cent per annum while the growth in per
capita income was 2.1 per cent per annum. The magnitude of the
increase over the entire period is also revealing. Between 1900-01 and
1946-47, at constant 1938-39 prices, national income for the undivided
India increased from Rs. 15.4 billion to Rs. 24.9 billion by 60 per cent,
whereas per capita income increased from Rs. 54 to Rs. 60 by a mere
11 per cent. Between 1950-51 and 2004-05, at constant 1993-94 prices,
GDP increased by 1,000 per cent, while GDP per capita increased by
250 per cent (Nayyar,2OO6).1

TABLE _ 6.I
Rates of Economic Growth in India during Century
(Per cent per annum)

Sivasubramonian Estimates Mad.dison Estimates

Primary sector 0.4 0.8

Secondary sector 1.7 1.1
Tertiary Sector t.7 0.8
National income 1.0 0.8
Per capita income 0.2 0.04
B. 1950-5r to 2004-05
Primary sector 2.5
Secondary sector 5.3
Tertiary sector 5.4
GDP total 4.2
GDP per capita 2.t
Note : Tbe average annual rates of growth, sectoral and aggregate, for the period 1950-51 to
2004-05, have been calculated by fitting a semi-long linear regression equation Ln Y =
a + bt and estimating the values of b.
Sources: For 1900-01 to 1946-47, Sivasubramonian (2000) and Maddison (1985). For 1950-51
to 2004-05, National Accounrs Stcrisrics of India, CSO and EPW Research Foundation.

l. Nayyar, Deepak (2006). "Economic Growth in Independent lndia", Economic anil Political
Weekly, No. 15, April.
 [ndiai Growth Experience
lt7
TWo Phases of Growth
There are two discernible phases of economic growth in India since
Independence: 1950-1980 and 1980-2005 (Nayyar, 2OO6).
During the period from 1950-51 to 1979-80, growth in GDp was
3.5 per cent per annum while growth in GDP per capita was 1.4 per
cent per annum. During the period from 1980-81 to 2004-05, growth in
GDP was 5.6 per cent per annum while growth in GDp per capita was
3.6 per cent per annum. The sharp step-up in growth rates, not only
aggregate but also sectoral, suggests that 1980-81 was the turning point.
This conclusion is reinforced by a comparison of growth rates, aggregate
and sectoral, during the sub-periods 1980-81 to 1990-91 and l99l-92
to 2004-05. The growth rates were almost the same. In fact, during the
period from 1991-92 to 2004-05, growth in the primary sector and the
secondary sector was somewhat slower while growth in the tertiary
sector was somewhat faster in comparison with the period from 1980-
8l to 1990-91. Growth in GDP was 5.9 per cant per annum as compared
with 5.4 per cent per annum, while growth in GDp per capita was 4.1
per cent per annum, as compared with3.2 per cent per annum. There
was some acceleration in the rate of growth of GDp per capita which
was largely attributable to the slowdown in population growth.
Econometric analysis of time series data on GDP and GDp per
capita for the period from the early 1950s to the early 2000s establishes
that the structural break in economic growth since Independence, which
is statistically the most significant, occured around 1980.

Assessment of Performance
An assessment of performance, in terms of economic growth, should
address two questions. First, how does this performance compare with
performance in the past? Second, how does this performance compare
with the performance of other countries?
It is clear that the pace of economic growth during the period from
1950 to 1980 constituted a radical departure from the colonial past. For
the period 1900 to 1947, there are two sets of growth rates based on
alternative estimates of national income. If the economy had continued
to grow at the rate based on the Sivasubramonian estimates, national
income would have doubled in 70 years whereas per capita income
would have doubled in 350 years. If the economy had continued to grow
at the lower rate, based on the Maddison estimates, national income
would have doubled in 87.5 years whereas per capita income would have
118 Indiar Econot4t Petforttance and Paliciet

doubled in 1.750 years. The reality in independent India turned out to

be different. The growth rates achieved during the period from 1950 to
1980 meant that GDP doubled in 20 years while GDP per capita would
have doubled in 50 years. In fact, berween 1950 and 1980, GDp
multiplied by 2.86 while GDP per capita multiplied by 1.5. (Nayyar,
2006).
Growth matters because it is cumulative. If GDP growth, in real
terms, is 3.5 per cent per annum income doubles over 20years, if it is
5 per cent per annum income doubles over 14 years, if it is 7 per cent
per annum income doubles over 10 years, and if it is l0 per cent per
annum income doubles over seven years. Of course, the complexity of
economic growth cannot be reduced to a simple arithmetic of compound
growth rates, for there is nothing automatic about growth. In retrospect,
however, the cumulative impact of growth on output is a fact (Nayyar,
2006).
Obviously, this growth was impressive with reference to the near-
stagnation during the colonial era. It was also much better than the
performance of the now industrialised countries at comparable stages
of their development. However, this growth was not enough to meet the
needs of a country where the initial level of income was so low. For
this reason, perhaps, it was described as the Hindu rate of growth by
Raj Krishna. This phrase, which became larger than life with the passage
of time, meant different things to different people. For some, it meant
a performance that was disappointing but not bad.
It has been shown that, during this period, India's performance in
terms of economic growth was about the same as in most countries in
world. It was certainly not as good as east Asia. But it was definitely
not as bad as Africa. It was average. In fact, the actual rate of growth
of output per worker in India was very close to the average across the
world. What is more, the rate of growth predicted for India, based on
its initial output per worker, its share of investment in GDP and its
population growth rate, was also very close to the world's average
(Nayyar, 2006).
It is clear that there was a sharp acceleration in the rate of growth
since 1980. It went almost unnoticed and India grew almost by stealth.
It came into the limelight in the early 2000s. Some analysts, as also
many casual observers, attributed this performance to economic
liberalisation which began in the early 1990. However, discerning
scholars recognised the reality that the structural break, which was a
India's Growth Experience 119

second turning point in the economic performance of independent India,

occurred around 1980.
In comparison with the preceding 30 years, there was a distinct step-
up in rates of growth for GDP and GDP per capita. The growth rates
achieved on an average, during the period from 1980 to 2005, meant
that GDP doubled in 12.5 years where GDP per capita doubled in 20
years. In fact, between 1980-81 and 2004-05, GDP multiplied by 3.81
while GDP per capita multiplied by 2.37 . This growth was impressive,
not only in comparison with the past in India but also in comparison
with the performance of most countries in the world. Indeed, in terms
of growth, India performed much better than the industrialised countries
which experienced a slowdown in growth, the transition economies
which did badly, and much of the developing world. And it was only
east Asia, particularly China, which performed better (Nayyar, 2006).

Causal Factors
There is an emerging literature on the subject which seeks to analyse
this rapid economic growth in India that has been sustained for 25 years.
According to Deepak Nayyar, a convincing explanation must
in economic growth, since 1980, was
recognise that the acceleration
attributable to several factors.
First, expansionary macroeconomic policies which led to an
increasein aggregate demand did stimulate an increase in the rate of
growth of output.
Second, beginning in the late 1970s, there was a significant increase
in the investment-GDP ratio which was sustained through the 1980s.
Unless there was a decline in the productivity of investment, which was
not the case, this would also have contributed to the step-up in economic
growth during the 1980s.
Third, starting in the late 1970, there was also a significant increase
in public investment which was sustained through the 1980s. Obviously,
this contributed to the increase in aggregate demand. However, insofar
as such public investment created new infrastructure or improved
existing infrastructure, it could have stimulated growth in output by
alleviating supply constraints.
Fourth, trade liberalisation beginning in the late 1970s, combined
with some deregulation in industrial policies introduced in the early
1980, also probably contributed to productivity increase and economic
 120 Idian Econozl: Performante and Policiet

growth. In particular, liberalisation of the regime for the import of

capital goods and broad-banding which reduced industrial licensing,
could have played a contributory role.
Insofar as outcomes are shaped by initial conditions, the cumulative
impact of economic policies or public actions over the preceding 30
years possibly played an important role in the turnaround. Institutional
capacities were created. The social institutions and the legal framework
for a market economy were put in place. A system of higher education
was developed. Entrepreneurial talents and managerial capabilities were
fostered. Science and technology was accorded a priority. The capital
goods sector was established. Much of this did not exist in colonial
India. But it was in place by 1980 and probably provided the essential
foundation (Nayyar, 2006).

What Next?
K.B.L. Mathur in his paper (Growth Rate Mystery)2 remarks,
"Economists are at their best while making projections particularly on
macroeconomic variables. Rodrik and Subramanian (April , 2004), in
their study came out with explanations on 'why India can Grow at 7
Per Cent a Year or More' and based on a simple growth accounting
framework, projected India's future potential output growth rate close
to 7 per cent through 2025.It was around the same time (March-April,
2004) that there was an upbeat mood to make growth rate projections
for the Indian economy partly because 'advance estimates, of GDp
growth rate for the third quarter (october-December) of 2003-04 were
at lO.4 per cent and for the full year the 'advance estimate' of GDp
growth rate during 2003-04 was placed at 8.1 per cent. Several
economists and of course politicians (particularly that being the election
period) started projecting 8 to 10 per cent GDp growth rate for next
several years. To find the seriousness of all these claims Acharya (April,
2004) came out with 'a reality check' and asked a straight question:
"Has the Indian economy really attained the new trajectory of sustained
8 per cent growth? Through the major reasons indicated in brief in the
study, he replied rather convincingly why India's medium term (five
years) growth is far more likely to be constrained to 6 per cent or below
than to rip along at 8 per cent."

2 Mathur, K.B.L. (2006) "The Growth Rare Mysrery", in Uma Kapila (ed.),Indian Economy
Since Independence-
 Indiei Growth Experience
1.1l

However, Kelkar (April, 2004) in his study on ,India : On the

Growth rurnpike' found India at the threshold of ,a golden age of growth'
and concluded that "India-riding the wave of growth fundamentals such
as
demographic transition, human capital accumulation, improved incentive
structures, diffusion of new technologies suc
accelerators through'network industries
environment-will be growing at growth
per cent per annum, i.e., double digit growth rates." Apart from the
logically established factors likely to contribute towards a double-digit
growth in the next two decades, it would appear as if it was more a
result of Kelkar's deep-rooted conviction and wish for the Indian
economy to achieve double-digit growth. In his earlier (Kelkar, 1999)
paper he had illustrated for the need of it by saying that .,when a satellite
is put into orbit, it requires high velocity to ensure exit from the earth,s
gravitational force; similarly, if our economy is to exit from the
gravitational pull of poverty, it requires an exit velocity of double-digit
growth rate over the next two decades." Interestingly, Kelkar in his
paper (April , 2oo4) includes amongst the non-economic factors India's
democratic framework as a key growth fundamental. But even on such
fundamentals there are caveats. In the context of 'credibility of reforms'
as an important factor impacting the growth rate, virmani finds that ,.the
enormous growth potential of the Indian economy is not being realised
because of the constraints placed on it by the Indian political system."
Basu (20o4), has the following to say on the contradictiont, if not
mysteries of a democratic system: ,.Advisers from Washington, DC, and
many economists recommend that third world nations must have
democracy and must open up their economy and privatise, oblivious to
the fact that to ask for a democracy and then to insist what the
democracy should choose amounts to a contradiction." It is perhaps
under such contradictions that the real mystery of India,s economic
growth would remain.

Sectoral Composition of Real GDp

In developed and mature economies, the industrial and services
sectors contribute a major share i ccounting
for a relatively lower share. Durin g the years,
the Indian economy too experienc shares of
122 Indiat Econozl: Perlornatce ard Policiet

contrast, the shares of industry and services increased from 25.0 per
cent to 27.I per cent and from 38.6 per cent to 44.3 per cent,
respectively during the same period.
Thus, there was a surge in the growth of the services sector since
the early eighties, with the trend rate of growth being more pronounced
in recent years. The recent years' experience shows that the growth of
the services sector has imparted much of the resilience to the economy,
particularly in times of adverse agricultural shocks.

TABLE _ 6.2
Sector-wise Average Shares, Growth Rates and
Contribution to GDP Growth

Services Ittdustry# Agriculture

Period Share Crowth Contrt- Share Growth Contri-
in Rale bution in Rate bution in Rate butiotr
GDP to GDP GDP to GDP GDP to GDP
Growth Groteth Growth

1950-51 to
1959-60* 28.2 4.1 32 .2 1 6.0 5 .'7 25 .3 6.0
5 2,3 425
1960-61 to
1969-7 0 3t.4 4.9 38.1 2t.t 6.5 32.9 47.8 2.5 29.2
1970-71 to
1979-80 34.4 4.5 52.7 22.8 3.7 28.'7 42.8 I .3 I 8.6
1980-81 to
9-90 8.6 6.6
19 8 3 43.6 2s .O 6.8 28.9 36.4 4.4 27.5
1990-91 to
2000-01 44.3 't.6 s7.6 27.r s.9 27.6 28.6 2.9 14.8
1999-00 53.2 9.4 79.2 21 .6 4.2 15.1 25.2 1.3 5..7
2000-01 53.7 5.0 6'7.4 22.1 6.2 34.r 24.2 _0.2 _1.4
?*;92
Notes.#
'!' ,*3 " ,:"!]
. Inclusive of construction.
-A:*.T ]j2,J."1:3 ,".:,:*::-":*
* : 9 year data for growth and weighted contribution since data for 1949-50 are not
available Due to rounding off, sectoral data may not add up to 100
Source '. Nationol Accotnts S/a/isricr. CSC)

The RBI report on Currency and Finance (2000-01) states, that the
compositional shift in favour of services has been brought about by
accelerated expansion in the services sector output at a rate of 7.6 per
cent in the period 1990-91 to 2000-01 compared with 6.6 per cent during
1980-81 to 1989-90. While the growing contribution of the services
 India\ Grouth Experience
|Z3
sector to GDp is in line with.the
development experiences of a number
of countries of the world, it is, howeverl
not yet clear whether it is the
comparative advantage that is driving
up the share of the services sector
in GDp or whether the sector uro ?Ju", strength
that are being pursued since the early from the policies
:
nineties.
There has been a relative deceleration
agriculture during the nineties despite
in the performance of
favourable monsoons, increase
in net irrigated area and positive terms
of trade. The a""rin"'in pubric
investment and the limiied infusion
of .r"* technorogies
---o^-e *rs
may have
contributed to the poor performance
of agriculture.
However, Indian economy attained
and maintained a high GDp
growrh in the nineties despite substantiar
decereration in ug;i'utturut
growth' For example in 1gg5-g6
when the economy
8.6-p:1 cent growth in GDp, the agricultural achieved a record
negligible 0.2 per cent growth
sector witnessed a
Rnt ieport on Cu.."n"y and In fact, as the
experience shows years'
that the growth ,t"::l'
tmParte^d much
ofiesilience to trr" --^-v'^rr partic
shocks.,, ""onomy r,q^lrw rse agricultural

Thus' economic growth is becoming

less vulnerable to agricultural
performance and to vagaries of th
in growth has emerged from both
there is a marked difference in the
between these two major sectors.
impetus to growth has come from
and quarrying', and .electricity, gas
an
rates of growth. The services sector,
on the other hand, experienced
higher growth in a more uniform and
consistent manner with sectors
like 'trade, hotels, restaurants, storage and communication,,
'financing, insurance, real estate-, and whereas
business services ,, ate
experiencing high trend growth rates.
A possible interpretation or rr,i,
phenomenon could be an upsurge
of industry-related services sector in
recent years.
The phenomenal expansion of s
being regarded as an engine of the led to services
concomitant of econ as a necessary
lcs suggest that
development is a th
of the services
sector in the growth associated with the tfrirJ-stage
of growth. During the l9g0s and l9
, ,"ru'"", accounted for a share
of cl0se to or above 70 per cent of GDp
in industrialised countries and
 124 Irdiar Erotoml: Performanrc and Policiet

about 50 per cent in developing countries. In India, services accounted

for 38.6 per cent of the GDP in the 1980s and 44.3 per cent in the 1990s.
Since the 1980s, growth process in India has been marked by a
robust performance of services sector. while this is partially in line with
the experience of developed countries, the Indian experience is
somewhat unique in the sense that the sectoral shift in favour of services
sector accompanied almost stagnant share of industry and reduced share
of agriculture. The momentum continued during the 1990s; in fact, it
was the growth performance of the services sector that provided a
modicum of resilience to the overall growth of the economy, particularly
in times of adverse agricultural shocks and industrial slowdown.
The set of economic reform measures initiated since l99l also
impacted on the performance of the services sector. First, reforms in
the domestic industrial environment which resulted in rising
manufacturing growth provided synergies to the services sector in the
form of increased demand for producer services. Second, the
liberalisation of the financial sector provided an environment for faster
growth of the financial services. Third, reforms in certain segments of
infrastructure services also contributed to the growth of services.
Consequently, the services sector posted a much higher growth during
the reform period as compared with the pre-reform period with its share
touching nearly the 50 per cent mark. Finally, the rapid growth in
services sector appears to have benefited from external demand; the
typical example of which is the software industry and call centres.

II
INTER.REGIONAL DISPARITIES IN
GROWTH AND DEVELOPMENT
A study by Montek Ahluwalia on Economic Performance of the
States in the post reform period brings out that there is considerable
variation in the performance of individual states, with some states
growing faster than the average and others slower. What is important is
that the degree of dispersion in growth rates of SDP (State domestic
product) across states increased significantly in the 1990s. The range
of variation in the growth rate of SDP in the 1980s was from a low of
3.6 per cent per year in Kerala to a high of 6.6 per cent in Rajasthan.
In the 1990s the variation was much larger, from a low of 2.7 per cent
per year for Bihar to a high of 9.6 per cent for Gujarat.
Indiai Groutb Experience 125

The differences in performance across states become eyen more

marked when we allow for the differences in the rates of growth of
population and evaluate the performance in terms of growth rates of
per capita SDP (Table 6.3). The variation in growth rates in the 1980s
ranged from a low of 2.L per cent for Madhya Pradesh to a high of 4.0
for Rajasthan, a factor of l:2. In the 1990s it ranged from a low of 1.1
per cent year in Bihar and 1.2 per cent in U.P., to a high of 7.6 per cent
per year in Gujarat, with Maharashtra coming next at 6.1 per cent. The
ratio between the lowest (Bihar) and the highest (Gujarat) is as much
as 1:7.

TABLE _ 6.3
Annual Rates of Growth of Gross State Domestic Product (SDP)
(Per Cent)

I 980-81 1991-92
I 990-9 l I 997 -98

l Bihar 245 1.1,2

2. Rajasthan 3.96 3.96

3. Uttar Pradesh 2.60 1.24
4. Orissa 2.38 t.64
5. Madhya Pradesh 2.08 3.87
6. Andhra Pradesh 3.34 3.45
7. Tamil Nadu 3.87 4.95
8. Kerala 2.t9 4.52
9. Karnataka 3.28 3.45
10. West Bengal 2.39 5.04
'7.51
11. Gujarat 3.08
12. Haryana 3.86 2.66
13. Maharashtra 3.5 8 6.13
14. Punjab -1.-J-t 2.80
Combined SDP of 14 States 3.03 4.02

Sorrce: SDP and population data obtained from the CSO.

The increased variation in growth performance across states in the

1990s reflects the fact that whereas growth accelerated for the economy
as a whole, it actually decelerated sharply in Bihar, Uttar Pradesh and
Orissa, all of which had relatively low rates of growth to begin with
and were also the poorest states. There was also a deceleration in
Haryana and Punjab, but the deceleration was from relatively higher
levels of growth in the 1980s, and these states were also the richest.
126 Indian Etononl: Perlornanre and Pa/ides

Six states showed acceleration in growth of SDP in the 1990s. The

acceleration was particularly marked in Maharashtra and Gujarat, both
of which were among the richer states, but there was also acceleration
in West Bengal, Kerala, Tamil Nadu and Madhya Pradesh all belonging
to the middle group of states in terms of per capita SDP.
It is important to note that the high growth performers in the 1990s
were not concentrated in one part of the country. The six states with
growth rates of SDP in the 1990s above 6.0 per cent per year are fairly
well distributed regionally i.e. Gujarat (9.6 per cent) and Maharashtra
(8.0 per cent) in the West, West Bengal (6.9 per cent) in the East, Tamil
Nadu (6.2 per cent) in the South and Madhya Pradesh (6.2 per cent)
and Rajasthan (6.5 per cent) in the North.
The performance of Kerala deserves special attention. Kerala has
justly celebrated for its achievements in human development but it has
also been criticised for under performance in economic growth. It is
important to note that its performance in the 1990s showed a marked
improvement compared with the 1980s. From an SDP growth rate much
below the 14 states average in the 1980s it accelerated to a growth rate
only marginally below the average in the 1990s. However, because of
the low population growth, its performance in per capita SDP growth
in the 1990s was actually much better then the average.
The fact that Gujarat and Maharashtra grew at rates normally
associated with 'miracle growth' economies also deserves special
mention. It should be emphasised that if these states have benefited the
most in the post reforms period, their superior performance was not the
result of any conscious policy of limiting the benefits of liberalisation
to these states, as was the case for example in China, where
liberalisation was deliberately limited to designated coastal zones. The
superior performance of Gujarat and Maharashtra must therefore be
attributed to the fact that the states were able to provide an environment
most conducive to benefiting from the new policies.

Implications of Inter-State Inequality

The differences in per capita income and other indicators of social
development across states have long attracted attention and for good
reasons. Punjab, the richest state has a per capita SDP which is 5 times
that of Bihar at the other end of the spectrum and although our Plans
have never explicitly fixed targets for reducing these differenqes, there
has always been an unstated assumption that inter-state differences
would narrow with development. This can only happen if the poorer
India\ Grouth Experience 127

states actually grow faster than the richest states but the pattern of
growth witnessed in the 1990s has been quite different, generating
concern that we may be witnessing an increase in regional inequality,
with the poorer states being left further behind.
According to Montek Ahluwalia, while inter-state inequality as
measured by the gini-coefficient has clearly increased, the common
perception that the rich states got richer and the poor states got poorer
is not entirely accurate.
i. It is not true that all the richest states
got richer relative to
poorer states. Punjab and Haryana were the two richest of the
14 states in 1990-91. The growth rates of per capita SDP of
these two states in the 1990s were not only lower than in the
1980s, but in both cases actually fell below the national
average. Except for Bihar, UP and Orissa, all the other States
therefore narrowed the per capita income gap with the two
richest States.
ii. Maharashtra and Gujarat, which were just below Punjab and
Haryana in terms of per capita income levels and therefore in
the richer group, accelerated very significantly in the 1990s and
grew at rates much higher than the national average.
iii. It is important to note that not all the poorer states lagged
behind. Rajasthan, which was also one of the poorer states,
experienced much stronger growth in per capita SDB more
than double that of the other poor states. Rajasthan's
performance in terms of SDP growth is actually better than
the average of the l4 states but it slips below the average
in per capita SDP growth because of higher rates of
population growth.
iv. Performance of six middle income states (Tamil Nadu, Kerala,
West Bengal, Madhya Pradesh, Andhra Pradesh and
Karnataka) was clustered around the average rate. All six of
these states grew faster in terms of per capita GDP than they
did in the 1980s, though in some cases the difference was very
marginal.3
It is now well established that the inter-state disparities in the
growth of Gross State Domestic Product (GSDP) have increased in the
post-economic reform period beginning from the early nineties when

3. Kapila, Uma (2006). op.cit

l2a Iilian Econon-y: Perfornance ard Policiet

compared to the eighties. In general, the richer states have grown faster
than the poorer states (Ahluwalia, 20001, Dev and Ravi, 2003;
Bhattacharya and Sakthivel,2004). The regional disparities in per capita
GSDP growth are even greater because the poorer states in general have
experienced a faster growth in population.a
According to Rap, although these disparities have accentuated in
the post-reform period, they have been building up in the pre-reform
period itself. For example, in the early 1960s the per capita GSDP of
the richer states like Punjab, Maharashtra and Gujarat was, on an
average, about 80 per cent higher than the average per capita SDP of
the bottom four states viz., Bihar, Uttar Pradesh, Orissa and Madhya
Pradesh. This disparity increased to I25 per cent by the early 1970s
(Rao, 2006); was contained at a little over 100 per cent during the
eighties; and escalated steeply to 200 per cent towards the end of the
nineties.
States whose per capita GSDP is below the national average
together account for over 60 per cent of the country's population and
as high as 75 per cent of the country's population below the poverty
line. Further, these states account for nearly 60 per cent of the
population belonging to the socio-economically disadvantaged sections
like Scheduled Castes and Scheduled Tribes. There is thus a large
potential for growth which needs to be exploited for sustaining
development in the country over a long period. This is necessary for
improving regional and social equity and for strengthening national
integration.

Sectoral Composition of Growth

How does one explain the accentuation in inter-state disparities in
development in the post-reform period in the country and, indeed, the
tendency of a gradual build-up in these disparities over the plan period?
One way to study is to decompose by looking at the emerging regional
disparities with respect to the individual sectors, i.e., the Primary, the
Secondary and the Tertiary (Rao, 2006). The inter-state variation in per
capita GSDP originating from the Primary Sector, measured by the
coefficient of variation, has always been lower than that from the
Secondary Sector GSDP. There is also no evidence of an increase in its
variability across regions in the post-reform period when compared to

4. Rao, C H.H (2006) "Growing Regional Disparities in Development in India: Post-Reform

Experience and Challenges Ahead", in Urna Kapila (ed.), Economic Developments in India,
Vol.97.
India's Growth Experience t29

the eighties. This is understandable because agriculture is based

essentially on land and labour which are widely distributed across the
country. There are, no doubt, significant regional disparities in the
availability of physical and institutional infrastructure for agriculture
like irrigation, rural electricity and institutional credit. However, despite
these constraints, technological changes in Indian agriculture
represented by Green Revolution were adopted widely in the country'
including especially the eastern region, by the end of the eighties.
The GSDP per capita from the Secondary Sector, on the other hand,
shows much higher variability across regions and this variability rose
significantly in the post-reform period. The Tertiary Sector which has
been the prime mover of GDP growth in the post-reform period has
generally grown faster in the industrially advanced states and shows a
significant rise in its variability across states during this period. We
know that there has been a steep reduction in the share of the Primary
Sector in the overall GDP, a modest rise in that of the Secondary Sector
and a big rise in the share of the Tertiary Sector. Thus, the decline in
the relative importance of the Primary Sector-which shows lower
disparities-and the rise in the importance of the other two sectors
showing higher variability explain, at the compositional level, the rise
in inter-state disparities in per capita GSDP in the post-reform period.

Causal Factors
Investment in physical and human capital, technical change and
institutions, including those of governance, are the three key variables
usually invoked for understanding the growth performance'

A. Investment
(i) Planning and Public Investment
A glaring feature of the investment scene in the post-reform period
is the steady decline in the rate of public investment and a steep rise in
the share of private investment with a stagnation in the rate of total
investment.
The decline in public investment is even more glaring at the state
level where bulk of the public expenditure on irrigation, power and
social sectors is incurred. This is indicated by the fact that the share of
the states declined from around 50 per cent of total plan expenditure in
the country in the eighties to 40 per cent towards the close of thg nineties
(Rao, 2006).
 130 Irdian Ecoronl: Pefornarce and Policiet

Within the states, the per capita plan outlays of the poorer states
have always been much lower than those of the better-off states. These
disparities have widened in the post-reform period. For instance, during
the Sixth Plan period (1980-85), the actual per capita plan expenditure
for the poorest four states, on an average, was a little over half of the
average per capita plan expenditure of the better-off states like Gujarat,
Maharashtra and Punjab. But during the Ninth plan period (lggi--2002)
this proportion came down to around 40 per cent (Rao, 2006).
The poorer states have been handicapped basically by their own
weaker resource position. The per capita own plan resources of the
poorer states, including market borrowing, constituted around 40 per
cent of own per capita plan resources of some of the better-off states,
vlz., Punjab, Maharashtra, Haryana and Kerala during the Sixth plan
period. This ratio deteriorated to 28 per cent in 2003-04 and further to
less than 2O per cent in 2004-05. An important factor responsible for
this deterioration in the financial position of the poorer states is the
decline in the tax-GDP ratio of the Centre in the post-reform period
and the consequent decline in the transfers to the states through
devolution as recommended by the Finance commissions. The loss to
the states, that is, the difference between the devolution estimated by
the Finance Commissions and the actual devolution, amounts to
Rs. 100,000 crores for the decade 1995 to 2005 (Reddy, 2005). The
decline in per capita transfers to the poorer states was even greaier
because the formula for devolution by the Finance Commissions is quite
progressive. Therefore, the l2th Finance Commission has done well by
raising the tax devolution by I percentage point (Government of India,
Report of the Twelfth Finance Commission, 2004).
As expected, among states, there is a strong positive correlation
between the per capita income and tax-GDP ratio. For richer states,
because of their higher tax-GDP ratio, their own tax revenues per capita
are much higher than those for the poorer states.
The debt-GDP ratios of the poorer states are higher. Because of their
lower creditworthiness they have not been able to access borrowings
from the market to the same extent as the richer states. The per capita
market borrowings of the four poorest states which were almost equal
to the market borrowings of certain better-off states, viz., punjab,
Maharashtra, Haryana and Kerala during the Sixth Five year plan
declined to 72 per cent of such borrowings by these states in 2004-05.
The inability of the less developed states to access sufficient resources
for the development of infrastructure through higher plan outlays has
Indiai Growth Experience r3r
thus emerged as a critical constraint in redressing regional imbalances
in development.
Among states, the correlation between per capita GSDP growth rate
in the post-reform period of nineties and the index of Social and
Economic Infrastructure in 1995 as well as 2000 is positive and
significant. Clearly, the states whose initial or pre-reform conditions
were favourable in respect of infrastructure could benefit more from
the opportunities opened up, especially in the service sector, by
economic reforms and register higher growth rates in GSDP (Rao and
Dev, 2003).

(ii) Private Investment

Private investment has been flowing basically to the high income
states where per capita plan outlays have been higher and where,
therefore, infrastructure is well developed. For example, according to
the IDBI data, the per capita cumulative disbursements by the All India
Financial Institutions up to March,2004, were Rs. 15 lakhs for
Maharashtra, 14 lakhs for Gujarat and 7 lakhs for Tamil Nadu, as against
less than 3 lakhs for Madhya Pradesh, less than 2 lakhs for Uttar
Pradesh, and less than half a lakh for Bihar. Similarly, in 2003,
investment plus credit-deposit ratios of scheduled commercial banks
were high for the Western (15Vo) ar'd Southern Regions (79Vo) and quite
low for the Eastern (54Vo) and Central Regions (507o). As to the amount
of Foreign Direct Investment & FTC (Foreign Technical Collaboration)
approved from August 1991 to December 2000, a few advanced states,
viz., Maharashtra, Gujarat, Tamil Nadu, Karnataka and Delhi together
accounted for half the share as against the combined share of less than
l0 per cent by the four poorest states (Government of India, 2001)'
B. Technical Change
The issue of technical change does not seem to figure prominently
in the debate on regional disparities in development in India. This could
be partly because much of the technology is embodied in capital
equipment and hence is highly correlated with such investment' Also,
this may be attributed to the speedy diffusion of frontier technologies
like bio-technology and information technology across regions and even
among income groups with large differences in asset endowments, when
adequate support services are provided. The success of green revolution
in India provides a classic illustration of this process'
t32 Indian Econonl: Pe(arttance and Policier

The experience so far with information technology is equally

encouraging and holds the prospect for raising productivity enormously
in millions of farms and factories of varying sizes and the government
offices throughout the country. This experience underlines the need to
exploit the potential offered by these emerging technologies as well as
hurnan development for giving a fillip to the catching-up process in the
less developed areas of the country (Rao, 2006).

C. Institutions and Governance

Historically, the developed states are, in general, characterised by
progressive land tenures like the Ryotwari or the Mahalwarl systems,
whereas most of the less developed states were under the exploitative
tenures like the Zamindari and the Jagirdari systems. The social
structure evolved under progressive land tenures has been conducive to
the growth of enterprise and generated incentives for work, whereas the
social structure perpetuated by the exploitative land tenures has been
inimical to enterprise. Also, historically, the developed states have had
relatively more efficient systems of governance in terms of skills,
responsiveness and the quality of delivery systems. Unlike capital-
which is highly mobile across regions and continents-good governance
can not be transplanted in an area, as it evolves basically within the
prevailing socio-political structure over a long period.

The Way Ahead

It is clear from the foregoing discussion that for reducing regional
disparities in development, improving social and economic
infrastructure in the backward regions through greater public investment
needs to be given the highest priority in the development strategy. The
other two areas of priority action for these regions are: speeding up
social transformation through the empowerment of the common people
and measures for good governance.
The Mid-Term Appraisal of the Tenth Five Year Plan, by the
Planning Commission, recognises the growing regional disparities, and
states that "The objective of bringing about greater regional balance
must be the overriding consideration for determining the use of Central
funds that flow as Central assistance to State Plans" (Government of
India, 2005, p.512). The Commission notes the inadequacy of the existing
pattern of central assistance for state plans, through the Gadgil Formula,
for making progress towards mitigating these imbalances and suggests
that "The actual flow of funds to backward areas resulting from the
 India't Growth Experiencc
r33
operation of the Formula till date needs to be analysed and the Formula
may need to be revisited in the present day context" (p.50g). But with
the acceptance of the recommendation of the l2th Finance commission
to dispense with the loan component of plan assistance, there is not

among states. It appears that the normal central assistance is likely to

continue in its present form in the near term" (p.512).5
The Approach ve Year plan prepared by the
Planning Commissi 6 has
addresseA the challenge
of disparities and d lth plan must seek the bridge
these divides as an
Regional backwardness is another issue of concern. while the
differences across states have long been a cause of concern but
increasingly there is recognition of the problem of severe imbalances

spread of Naxalism in more than 100 districts in the country is a warning

sign. Pockets of despair where communalism has left scars are also
festering with anger. In all areas despair is the result of visible failures
of the state apparatus to ensure good governance and create an
environment where the bulk of the people experience the benefit of
development.
Special efforts must be made to remove the discontent, dispense
justice, instill a sense of fairness among the people and give them
dignity and hope. otherwise, not only will the growth momentum in the
rest of the country be disrupted, but we will not attain the dignity and
pride of a good society.

5. Rao, C.H.H. (20O6). op.cit,

6 Planning commission, (December 14,2006), Towards Faster and More Inclusive Growrh,
An Approach to the llth Five yeqr plan,
 r34 Indian Ecoaoml: Performance and Policiet

TABLE - 6.4
Status of Some Socio-Economic Indicators

Average/ Best Worst

AII India State State
Around Recent Recent Recent
1990 Year Year year

Per Capita Net National Product:

(Rs. per person at 1993-94 Prices)r 7321 t1799 t6679 35s7
Consumption Poverty: Head Count
36.0 27.8 6.16 47 .t5
64.t 75.3 94.2 s9.7
(age 7+) Female: l 39.3 53.t 81 .'7 33.1
Attending Elementary Schools
(6-14 years)3 55.3 7t.t 103.1 55.8
Sex Ratio: (females/1000 males)3 921 933 105 8 '7
09
Infant Mortality Rate: (2003)
(Per 1000 live births)a 80 60 1l 83
Maternal Mortality Rate: (1997)
(Per 1000 live births)a 4
Children: (1998-99)5
Weight-for-age 47,0 20.6 s5.7
Height-for-age 45.5 18.1 55.5
Weight-for-height lS.S 4.8 24.3

Notesi
1 For the years 1990-91 and 2003-04
2. The poverty estimates given are for 1993-94 and the latest estimates based on the
NSS 2004-05 survey which is comparable with 1993-94.
J Calculated from information based on Census l99l and 2001.
4 Based on SRS.
5 Percentage age below 2 standard deviation from the mean of an international refer-
ence population.
Source : An Approach Paper to the L|th Five year plan (June 14, 2006).

UI
CONCLUSION
As regards the growth performance of Indian economy, the
following conclusions emerge from the available evidence 4nd the
preceding discussion. First, if we consider the 20th century in its
India\ Growth ExPerience 135

entirety, the turning point in economic performance, or the structural

break in economic growth, is 195 1-52. Second if we consider India since
Independence, during the second half of the 20th century, the turning
point in economic performance, or structural break in economic growth,
is 1980-81.
Also the turning point in the early 1950s was much more significant
than the structural break during the early 1980s. This proposition is
validated by econometric analysis. It is also worth noting that the
proportionate change in growth rates, both aggregate and sectoral, was
-uih lu.g"r in the period between 1950 and 1980 than it was in the
period after 1980.

1980-2005. Indeed, it was much better than in most countries'

Although independent India did make significant progress during
the second half of the 20th century, particularly in comparison with the
colonial past, but poverty and deprivation persist, for at least one-fourth,
ndia's one billion people. In fact, there are more
now than the total population at the time of
terms of social development, India has miles to
go.

The real failure, throughout the second half of the 20th century, was
India's inability to transform its growth into development, which would
have broughl iving conditions of ordinary
people. Indi evelopment would not be
complete so and exclusion persist. The
destination, t ide all its citizens with the
1

capabilities, opportunites and rights they need to exercise their own

choice for a decent life. In the pursuit of this objective, economic growth
is essential. But it cannot be sufficient. What is more, it is neither
feasible nor desirable to separate economic growth from distributional
outcomes because they are inextricably linked with each other. This link
eepak Nayyar says, jobless
s or in politics. The creation
onomic growth through a
136 Indian Econon2: PerJotmance and Policiet

Regional backwardness/disparities is another issue of concern. The

differences across states have long been a cause of concern but
increasingly there is recognition of the problem of severe imbalances
within states. Backward districts of otherwise well performing states,
present a dismal picture of intra-state imbalance and neglect. The Centre
and the States together must deal with this problem on a priority basis.
We cannot let large parts of the country be trapped in a prison of
discontent, injustice and frustration that will only breed extremism.
Special efforts must be made to remove the discontent, dispense
justice, instill a sense of fairness among the people and give them
dignity and hope.
 Institutional Reforms for
Agricultural Growth

INSTITUTIONS have been defined as the rules of the game of a society

or more formally are the humanly devised constraints that structure
human interaction. They include both formal rules (statute law, common
law, regulations) and informal constraints (conventions, norms of
behaviour, and self-imposed codes of conduct), and the enforcement
characteristics of both. While the formal rules can be changed overnight,
the informal norms change only gradually.l
The realisation that economics is more than simple quantitative
assessments of inputs and outputs, or even simplistic costs and benefits,
has led to a greater interest in processes and institutions.'New
institutional economics' is an interdisciplinary exercise combining
economics, law, organisation theory, political science, sociology, and
anthropology, to understand the institutions of social, political, and
commercial life. Itborrows liberally from various social science
disciplines, but its primary language is economics. Its goal is to explain
what institutions are, how they arise, what purposes they serve, how
they change, and how-if at all-they should be reformed.
Economic development implies raising the standard of living of the
populace. Given the large dependence of a vast majority on agricultural
activity and their rural presence, implies understanding the framework
in which they work and function.
It is difficult to do justice to the entire web of institutions that
comprise rural society. In this chapter, we will examine only the land
relations.

l.Anant,T.C,A(2006)."InstitutionalReformsforAgriculturalGrowth",in
N.A. Mujumdar and Uma Kapila (eds.), Indian Agriculture in the New Millennium, Aca-
demic Foundation, New Delhi.
138 lndian Econoary: Per/otnance and Polidet

'Land Systems at the Time of Independence2

Feudal Agrarian Structure

At the time of Independence, India inherited a semi-feudal agrarian
structure with onerous tenure arrangements over substantial areas. The
ownership and control of land was highly concentrated in a relatively
few landlords and intermediaries. The principal interest of this
controlling group in agriculture was to extract maxiinum rental from
tenants, either in cash or in kind. Often tenants of land under
intermediary and landlord control sublet their lands in smaller plots to
working cultivators, thus smaller holdings increased. Under this
arrangement, economic motivation to develop farm land for increased
production or to improve the economic conditions of cultivators was
lacking. At the same time, working cultivators after paying high rent
had no surplus to invest in farm improvement. They had neither
resources nor knowledge for increasing agricultural production. Thus
the agricultural land resource of India, along with its operators was
gradually impoverished because economic motivation tended toward
exploitation rather than toward investment and improveinent.
With increasing pressure on land the operating land base of many
working cultivators was further reduced. Land occupancy rights became
increasingly insecure. Often cultivators were continuously shifted from
one plot to another according to the whims of superior holders. Land was
divided into small fragments, each owned or leased by cultivators whose
objective was subsistence. Over time, a large number of farms became
disincentive-ridden due to size disability. A substantial portion of such
cultivators sought to supplement their farm income by working as hired
labourers. Independent India thus emerged with serious imbalances in
man-land relationship among the three principal groups in the agricultural
sector, viz., proprietors, working cultivators and labourers.

Policies for Restructuring Agrarian Relations

Following Independence, land reform as well as the abolition of
intermediaries was considered an essential prerequisite for increasing
agricultural production and for establishing an egalitarian society. Each
of India's Five Year Plans since 1951 had set forth a policy for land
reform.

2. This section is drawn extensively from Ray, S.K. (2006) "Land System and its'Reforms in
India", in N.A. Mujumdar and Uma Kapila (eds.), Indian Agriculture in the New
Millennium, Vol 2, Academic Foundation, New Delhi.
Institutiondl Reforms for AgricuharaI Groatb r39
In an agrarian economy like India with great scarcity and unequal
distribution of land, coupled with a large mass of below poverty-line rural
population, there are compelling economic and political arguments for
land reform. Not surprisingly, it received top priority on the policy agenda
at the time oflndependence. In the decades following Independence, India
passed a significant body of land reform legislation. The Constitution of
1949 left the adoption and implementation of land and tenancy reforms
to state governments. The two basic objectives of land reforms were
(i) to remove such impediments on agricultural production as arise from
the character of agrarian structure in rural areas and (ii) to reduce or
eliminate exploitation of landless and small cultivators through measures
of land redistribution.
Land reform legislation in India consisted of four main categories:
(i) abolition of intermediaries who were rent collectors under the pre-
Independence land revenue system; (ii) tenancy regulation that
attempted to improve the contractual terms for tenants, including crop
shares and security of tenure; (iii) a ceiling on landholdings with a view
to redistributing surplus land to the landless; (iv) and finally, attempts
to consolidate scattered landholdings.
Economic Arguments in Favour of Land Reform
The most obvious argument in favour of land reform is equity. In a
land-scarce country with a significant section of rural population below
the poverty line, the case for ensuring that everyone has access to some
minimum amount of land seems compelling form this point of view.
Also small farms tend to be more productive than large farms. This
inverse farm size-productivity relationship is widely documented.
Another empirical evidence is that owner-cultivated plots of land tend
to be more productive than those under sharecropping tenancy.

Abolition of Interme diaries

The intermediaries were abolished within a few years after
independence and the actual tillers accounting for about 40 per cent of
the cultivated area became owners. This, according to C.H.H. Rao,
provided a major incentive for investment and the growth of agriculture
in large parts of the country.

Ceiling on Land Holdings

Ceiling on landholdings were designed to offset.the extremely
uneven distribution of agricultural land. The policy implications of this
measure were:
l4O Indiar Ecanant),: PerJbruance antl Policiet

(i) to meet the land hunger of working cultivators,

(ii) to reduce disparity in agricultural incomes, in ownership and
in the use of land, and
(iii) to increase employment opportunity in the rural sector.
As regards the ceiling on land holdings and distribution of surplus
land among the landless, there were two rounds of land reform
legislation-one in the fifties and another in the early seventies.
However, due to numerous exemptions provided in the law and due to
the lack of political will, the objective of this reform could not be
fulfilled and not much surplus land could be acquired by the government
for distribution among the landless. According to G. Parthasarthy Indian
land reform, conceived as a programme of conferment of rights of
ownership on tenants and as public distribution of the land of the big
owner in favour of the small farmer and the landless has, by and large,
been a failure. The only exception to this sad record is the abolition of
intermediaries. However, its indirect effects on the agrarian structure
have been marked, though the character of these effects has varied
depending upon the responses generated in varying situations of tenurial
relationships.
The direct effects of the redistribution to alter the structure of
ownership holdings and of cultivation holdings were only marginal
except in select pockets. The indirect effects were however quite
significant. The major indirect effecis were in respect of absentee
ownership. The quantitative significance of these could not be precisely
measured. But there is enough evidence in a number of studies to
indicate the varying trends. Broadly speaking, the absentee landowner
was of less importance in the early seventies than in the early fifties.
His importance waned much more in the dry areas than in the irrigated
areas in which land is much more valuable. Transfers of land, under the
forewarning impact of tenancy and ceiling legislation, to the resident
landowners was on a much larger scale in the dry than in the irrigated
areas. The result of shifts in land from the absentee to resident
landowner was a decline in tenancy.

Tenancy Reforms
While ceiling on holdings and consolidation of plots were planned
to increase the land base of the working cultivators, it was argued that
reforms through structural changes could be secured only when the
actual tillers of the soil were given a fair share of the fruits'of their
labour. This called for an overall change in the tenurial conditions of
Institutional Reforru for Agricabaral Growth L4t

cultivators. Tenancy reforms were launched to confirm the rights of

occupancy of tenants, Secure their possession of tenanted land and also
regulate rents on leased land.
The forewarning effects of tenancy and ceiling legislation had also
some effects on the structure of ownership holdings among the residents.
The greed of the big landowner to acquire more land was kept in
restraint, and the trrinsfer of land should have been effected mainly to
the middle group, who were below the declared level of ceiling. Decline
in tenancy, resulting in transfers of tenanted land at least in part to the
owner cultivator groups, resulting in the drift of tenants into landless,
combined with demographic pressures and poor absorption of the
growing numbers in non-agriculture had led to a rise in the class of rural
proletariat even in the absence of expansion of the large farm' Where
i"nunt, had not been evicted, tenancy was pushed underground with
informal arrangement and security of tenure.

Consoliilation of Holdings
At the same time, consolidation of holdings was advocated to
consolidate the scattered holdings of individual cultivators to form a
single tract susceptible to more efficient management'

Co'operative Farming
The rationale for co-operative farming grew out of an examination
of the man-land ratio and the supposed economies of scale achievable
on large-size units, even though there is little evidence to support the
contention that greater per capita production will be forthcoming if
holdings are pooled and cultivated jointly. Studies of farm management
have indicated that the size of the holding and the yield under traditional
ical basis of this
accepted that it is
not been subjected
stment is made for
differences in soil fertility, and proper yield and income variables are
chosen, then there will be a strong general tendency towards constant
returns to scale in Indian agriculture. This, along with the natural
reluctance of cultivators to give up their newly won rights to land,
seriously hindered co-operative farming. The failure of co-operative
farming as a policy was tacitly admitted in the Fourth Five Year Plan
when no additional programmes were proposed'
The net effect of all these reforms was presumed to'loosen the
rigidly stratified rural society so that each cultivator in accordance with
 142 Indian Economl: Performante and Policiet

his capability could find an opportunity to advance. The owner was

envisaged to become the manager as well as the operator of his holdings.

Impact of Structural Reorganisation

Land policy in the First Five Year Plan was formulated without
sufficient knowledge about the size and distribution of landholdings in
the rural sector. A considerable volume of data was collected for the
first time in the Eighth Round (1954) of the National Sample Survey
(NSS) for size and distribution of landholdings. However, the draft
report of the NSS Eighth Round was only submitted to the Union
Government in January 1960, nearly six years later. It, therefore, did
not serve the purpose of planners to assess the magnitude of the problem
involved in structural reorganisation.
Defects in policy planning became conspicuous in the
implementation stage of the land reform programme. Legal,
administrative and other factors became principal bottlenecks. In the
process, the error of doing the right things too slowly became
increasingly costly. Policy makers failed to take into account the
importance of the time dimension for the success of these reforms. A
go-slow programme of implementation failed to make effective impact
upon many working cultivators.
Under the Indian Constitution, land reform is a State subject. Apart
from the broad principles directly bearing ou the distribution of land
resources, tenancy relations are under the control of several states.
Consequently, while the main features of the reform legislation in
different states are practically identical, there is a wide difference in
the scope of the work actually undertaken. The fesult is that tenancy
problems are concentrated in certain states and are not as important in
other states.
As a result of a series of investigations and personal observations,
it is generally conceded that the reforms are not complete. For example,
while rents may be limited by law to one-fourth of the crop in a given
state, this law is not enforced in many cases. Furthermore, land
ownership can be divided among the members of a joint family so that
each member can own his legal share of the land with the result that the
total family holding is several times above the legal limit. The large
number of evictions, many justified on the grounds of a .reform'
provision which encouraged the right of land resumption for self-
cultivation, and the so-called 'voluntary' surrender of land which were
Institutional Reforrc for Agricultural Growth t43

especially prevalent during the 1950s give visible evidence that security
of tenure is not an accepted fact of life in India.
In a recently completed study,3 Appu has made a critical appraisal
of policy, legislation and implementation of land reforms in India since
Independence. He observed "The significant features of all those laws
were the slow pace of legislation, inadequacies in the content of the
legislation, the time-consuming procedures laid down and the role of
the judiciary in frustrating the the implementation of the enacted laws"
(Appu, 1995, p.2I0). Notwithstanding these serious limitations, Appu
was of the opinion that "the implementation of the laws for the Abolition
of Intermediary Interests was far more satisfactory than the
implementation of the laws enacted in later years for the Reform of
Tenancy and the imposition of Ceilings on Agricultural Holdings (Appu'
1995, p.2I0). He wrote:
"The most important beneficial result of the reform was that it put
an end to the system of parasitic intermediaries and brought some
25 million erstwhile tenants into direct relationship with the state...
With the abolition of intermediary interests the principal tenants
became owners of the land. .. The erstwhile principal tenants acquired
a higher social and political status leading to a shift in the rural
power structure. The most visible demonstration of this shift is the
emergence of persons belonging to the upper layers of the so-called
backward castes in the leadership of political Parties..." (Appu' 1995'
pp. 2ro-2tI).

On tenancy reform, Appu found that it "..'has not put an end to

absentee ownership of land nor has it led to the disappearance of
tenancies. It has only resulted in tenancies being pushed underground..."
(Appu, 1995, p.214). Summing up the Performance on this front, he
wrote:
"...Taking country as a whole, by 1992 ownership rights had been
conferred on (or tenancy rights had been protected of) some 11
million tenants on 14.4 million acres of land. That constituted no
more than 4 per cent of the operated area. It is interesting to note
that the seven states of Assam, Gujarat, Himachal Pradesh,
Karnataka, Kerala, Maharashtra and West Bengal account for 97 pet
cent of the beneficiaries. Practically no benefits accrued to the
tenants in the other states. Even in these seven states tenancy reform
led to the large scale eviction of tenants. Except in West Bengal,

3. Appu, P.S. (1995). Land Reforms in India: A Survey of Policy, Legisldtion and Implemen-
tition, tand Reforms Unit, Ltl Bahadur Shastri National Academy of Administration,
Mussoorie, U.P. (mimeo).
144 Indiar Etanony: Perfornante and Policiet

share-croppers by and large remained beyond the pale of tenancy

reform everywhere. Only in West Bengal and Kerala did those in
the lowest rungs of the peasant society receive solid benefits on the
implementation of tenancy reform. The rights of some l4 lakh share-
croppers were protected in West Bengal and in Kerala some 2.84
lakh rural poor, mostly agricultural labourers, became owners of tiny
homesteads. As a result of tenancy reform there has been a sharp
fall in the area of land under tenancy. From over one-half of the
operated area on the eve of the reform, the area under tenancy has
come down to about 15 per cent of the operated area now. The
tenants acquired ownership rights or were made secure in only about
4 per cent of the operated area. Thus the reform led to the rural poor
losing access to some 30 per cent of the operated area" (Appu, 1995,
pp. 213-214).

The performance regarding the implementation of ceiling on

agricultural holdings has turned out to be more disappointing. Appu
observed:
"....As a result of the implementation of the old and the new laws,
by 1992 only about 2 million hectares of surplus land could be
distributed to some 4.76 million beneficiaries. Thus the efforts
spread over a period of three and a half decades to enforce ceilings
and take over surplus land led to the redistribution of less than 2
per cent of the operated area. If we look into the performance of
individual states, we find that the area distributed as a percentage
of the total area operated is 1,7.4 for Jammu and Kashmir, 6.36 in
West Bengal and 5 in Assam. In all the other states only less than
one per cent of the operated area could be distributed. Obviously,
the imposition of ceilings and the redistribution of surplus land made
no impact on the agrarian structure in most states" (Appu, 1995,
p.216).

On balance, there seems to be some reasons to conclude that

agrarian reorganisation in India has failed to make any considerable
impact on the socio-economic conditions of the working cultivators.
Indeed, the record so far is so depressing and frustrating that even an
able administrator like Appu, who championed and spent a considerable
part of his career in administering land reform programmes noted:
"Thus the programmes of land reform implemented since
Independence did not lead to any significant re-distribution of land,
or, the removal of all the obstacles to increasing agricultural
production. Of the three programmes considered in this study, the
laws for the abolition of intermediary interests were implemented
fairly well. But in the case of tenancy reform and ceilings on
lnstitutional Reforws for Agrictltrral Growth 145

holdings, the policies adopted were ambivalent and there were large
gaps between policy and legislation and between legislation and
implementation. We have seen that as result of the implementation
of the tenancy laws, tenants became owners of or acquired rights in
only about 4 per cent of the operated area. The enforcement of
ceilings led to the redistribution of less than 2 per cent of the
operated area. Thus these two measures taken together led to the
redistribution of only about 6 per cent of the operated area" (Appu,
1995, p.2t1).

Emerging Perspectives and Policy Issues

It is against the background of the last four decades experience that
the need to reformulate the land policy of India should be considered'
Even persons emotionally attached with land reform programmes agree
that the scope for improving implementation through legislative
measures is now very limited. They point out, the socio-economic and
political environment in which these programmes were introduced have
changed so dramatically, that it would be almost impossible to carry
out the reforms. Appu described the changed environment as follows:
"...If the political will in favour of meaningful land reform was weak
at independence and weaker still later on, it is non-existent today.
Land reform has practically disappeared from the agenda of most
political parties. This, in my view, is the inevitable consequence of
the great changes that have taken place in the social and economic
fields. With the abolition of intermediary interests the erstwhile
superior tenants belonging mostly to upper and middle castes
acquired a higher social status. Rise in agricultural productivity'
rising land values and higher incomes from cultivation have added
to their economic strength. Substantial landowners who wield great
authority in rural India are bitterly opposed to ceilings on
agricultural holdings. They are able to have their way because no
serious efforts have been made to organise the landless and the land
poor and enlist their support in favour of reforms. As for tenancy
reform is concerned, there is a certain commonality of interest
between all landowners-large, medium, small and even marginal.
They are all passionately attached to their land and all of them are
opposed to conferring benefits on insecure tenants' In the first round
of land reform only the intermediaries were adversely affected' They
were few in number and were weak politically. They had also made
themselves obnoxious by aligning themselves with the colonial
power. So it was easy enough to abolish intermediary inter.ests' And
it was done without hurting them much. But injuring the interests
of the present class of landowners is an entirely different proposition.
 lndian Economl: PerJorntance and Polidet
146

No political party that wishes to win elections and come to Power

can afford to do that. At the time of independence this class of
landowners did not wield much political and economic Power, and
with a modicum of political will the reforms could have been
implemented. But now it has become almost impossible to carry out
the reforms" (Appu, 1995, pp' 232-233).

Land Reforms: Approach Paper to the Eleventh Plana

However, in the Approach Paper to the 11th Five Year Plan, the
need to implement unfinished land reforms has been emphasised.
The National commission on Farmers has placed the unfinished
agenda in land reform first in its list of five factors central to the present
agrarian crisis, and states "the first and foremost task of the National
Policy for Farmers should be in the area of land reform with particular
reference to tenancy laws, distribution of ceiling surplus land, attention
to common property and wasteland resources and the consolidation of
holdings. Following the conferment of land rights to women under the
Hindu Succession Amendment Act (2005), the provision of appropriate
support services to women farmqrs has become urgent. Joint Pattas are
essential for women to get access to credit. Also, there should be
stringent restrictions on the diversion of prime farmland for non-farm
purposes."
Since migration and feminization are increasing trends, land reforms
that make tenancy legal and give well defined rights to tenants and to
women are now more necessary than ever not only to reduce distress
but also to increase agricultural growth. Facilitating leasing of land for
cultivation is necessary to prevent cultivated land from turning fallow
due to migration of owners to urban areas. Lack of recognized tenancy
rights makes it difficult for de facto tenants to get credit from formal
sources. Tenants without legal rights do not have proper incentive to
develop the land and this explains part of the yield gap. Similarly, a
woman without property title is unable to get credit when the male
member is away. Giving access to land and homesteads not only reduces
poverty but is the most powerful way to bring dignity in the lives of
today's excluded. This, along with the more general need to record land
titles properly where these are weak, is also one way to deal effectively
with encroachment and non-participation that plague watershed and
wasteland development programmes.

4 planning commission (2o06). Towards Faster and More Inclusive Growth, An

Approach Pqper to fie Eleventh Five Year Plan' December'
 Policies for Regulattng Pattern
of Investment and
Concentration of Economic
Power in Indus try

FOR understanding the policies for regulating the pattern of investment

in private and public sector in industry, one must appreciate the
industrial scene at Independence characterised as below:
(i) The industrial sector was extremely underdeveloped with a very
weak infrastructure.
(ii) The lack of government intervention in favour of the industrial
sector was considered as an important cause of under-
development.
(iii) Export orientation had been against the country's interests.
(iv) The structure of ownership was highly concentrated.
(v) Technical and managerial skills were in short supplj.
As a result, the national consensus was that economic sovereignty
and economic independence lay in rapid industrialisation including
particularly the promotion of industrial infrastructure.

Evolution of Industrial Control Regimer

Organised thinking concerning the direction of industrial
development in India may be traced to the Statement of Industrial Policy,

1. The discussion in this section is extensively drawn from Rakesh Mohan's paper in book
The Indiqn Economy: Problems and. Prospects, Binal Jalan (ed.), op.cit.
t4a Indiar Econonl: Performance and Policiet

1945; the Industrial Policy Resolution of 1948; the enactment of the

Industries (Development and Regulation) Act, 1951; the First and
Second Five Year Plan documents; and the Industrial Policy Resolution
of 1956. The 1945 Statement of Industrial Policy of the then
Government of India (GOI) is remarkable as a precursor of all the
thinking that became enshrined in the key industrial policy resolutions
after Independence. The statement also mentioned the concept of
industrial licensing. Special importance was given to the development
of steel, heavy engineering, machine tools and heavy chemicals
industries. This emphasis has been characteristic of Indian industrial
policy thinking ever since. The idea that the government should actively
participate in the setting up of certain important industries, either
directly or by subscribing shares in such industrial undertakings, was
also mooted in this industrial policy statement. The idea of licensing, it
seems, was mainly thought to be an instrument for the dispersal of
industries and to prevent the establishment of excess capacity in
industries 'which promise quick returns'. The list of industries which
were proposed to be brought under central controls bears a resemblance
to the original schedule of industries brought under the control of the
central government through the Industries Development and Regulation
(ID&R) Act of 1951. Thus there was significant continuity in thinking
between the pre-independence and post-independence government as
reflected in the Industrial Policy Resolutions of 1948 and 1956.
The First Five Year Plan stated that the objective of industrial
planning was to make good the deficiencies in production of key
industrial items and to initiate development which would enable the
cumulative expansion of such basic production. The scope and need for
the development of India's industries was felt to be so great that it was
necessary for the public sector to develop those industries 'in which
private enterprise is unable or unwilling to put up the resources required
and to run the risk involved.' The idea was that the rest of the field
could be left free for private enterprise. The Industrial Policy Resolution
of 1948 had identified a small number of industries to be reserved for
production by the public sector. The production of arms and
ammunition, production and control of atomic energy and ownership
and management of railways were to be the sole preserve of the central
government. However, coal, iron and steel, aircraft manufacturing,
shipbuilding, manufacture of telegraph and wireless equipment (except
radios) and minerals were reserved for production by central or state
government undertakings. The 1956 list of industries rdserved for the
public sector is obviously based on this 1948 list but includes a number
Policies for Regulating Pattern of Inuestment and Concentldtion of Economic 149

of additional industries. The thinking concerning the public sector had

changed during the course of the 1950s. As far as can be ascertained,
the original thinking was concerned with the use of the public sector
investment in industries which the private sector would find difficult to
invest in. By 1956 this had changed towards an explicit preference for
state ownership of industries that were termed as capturing the
'commanding heights of the economy'.
Although the Second Five Year Plan is always seen as the
conceptual basis of Indian planning, a close reading of the First Five
Year Plan suggests that the difficulty of directing a mixed economy was
better appreciated by the earlier planners and policy makers. There was
better appreciation of the need for indicative planning in the First Plan
and the need for coordination of industrial planning with the formulation
of other economic policies such as customs and excise tariff structure,
import and export policy, investment and technology policy, monetary
and financial policy. The Second Plan and later plans have been
increasingly concerned with the allocation of public resources and much
less with indications and policies to direct the whole economy in desired
directions.
The system of Indian industrial licensing, therefore, has its origins
in a combination of thinking resulting from the exigencies and
requirements of a war situation, Indian nationalistic aspirations and the
socialistic leanings of some of the founding fathers of the country. The
leaders of the private sector of the time were also in favour of strong
governmental assertion. The industrial licensing system has operated
in the country with the simultaneous operation of other schemes of
governmental allocations and controls such as:
(i) Five Year Plan documents
(ii) Import and export controls
(iii) Control of capital issues
(iv) Control of foreign exchange
(v) Transport controls including allocation of raw materials
(vi) Price controls
(vii) Allocations of credit
This suggests that the planners and policy makers in India
understood the need for using a wide variety of instruments and cdntrols
to steer Indian industrial development in a desired direction. However,
 f5O Indian Econanl: perlormanrc ant! policie:

industries with the result that regulation rather than development became
the more important feature of the system.

Performance of the Industrial Licensing System

Until the recent industrial and trade policy reforms, the

(LoI). Armed with this LoI, the entrepreneur could then tie up other
requirements for setting up the project. If he needed to import a capital
good, he had to obtain a capital goods import licence from the Chief
controller of Imports & Exports (ccI&E) in the Ministry of commerce.
The approval for the import, however, was given by a committee set up
in the Ministry of Industry. If there was also need for a foreign
technology collaboration agreement, the entrepreneur had to obtain a
specific approval for this (a Foreign Collaboration- FC-approval) from
a committee chaired by the Finance Secretary but serviced by the
Ministry of Industry. In order to raise funds for the project, if an
entrepreneur wanted to go to the capital market, he needed separate
approval from the Controller of capital Issues in the Ministry of
Finance. For imports of raw material and components, separate licences
had to be obtained on an annual basis from the ccI&E. In each case,
an 'essentiality' and indigenous non-availability clearance had to be
given by the technical wing of the Ministry of Industry (the Directorate
General of technical Development-DcTD). once everything was tied
up and the unit was about to go into production, the entrepreneur had
to go back to the Ministry of Industry for an .Industrial Licence'.
In addition to these approvals, since the enactment of the MRTP
Act in 1969, the firms covered under this needed to obtain separate
MRTP clearances from the Department of company Affairs. Further,
resulting from the desire to promote small-scale industries, g36 items
have been reserved for production in small-scare enterprises. Since
1956, there has also been a list of industries reserved for exclusive
production in the public sector. Since 1977, there has also been a ban
Policies for Regulating Pa*ern of Itucstment and Corcentrdtion of Econonic . . r5r
on the location of industries in the largest20to 30 cities. In 1988, this
ban was extended to include municipal areas of all towns and cities and
to specified areas of influence around the largest 21 cities.
That this system was unsuited for directing investments has been
well understood since the early 1960s. The most comprehensive
description, evaluation and indictment of this system is that by Bhagwati
and Desai (1970). The government appointed one committee after
another in the 1960s to examine the industrial licensing system (The
Swaminathan Committee,lg64; the Mahalanobis Committee, 1964; the
Hazari Report, 1967; the Dutt Committee Report, 1969; the
Administrative Reform Commission, 1969). Despite the findings of most
of these early committees, that the licensing mechanism was not serving
its purpose of channelising investments into desired directions, there
seems to have been a continuing inability of the government, until
recently, to bring any substantative changes to the industrial licensing
system.

Some of the Hazari Committee's conclusions were:

. That industrial licensing has served to channelise investment
into desired directions appears extremely doubtful.
. The gains in terms of balanced regional development and
wider distribution of entrepreneurship were at best moderate.
. There is very little follow-up of licensing to see that approved
projects fructify in time.
. In attempting to cover almost the whole range of large-scale
industrial development licensing, the Act inevitably loses sight
of the relative importance of different projects/products, i.e.
whether critical to the economy or otherwise, all applications
will undergo similar Processing.
In respect of licensing, the system had failed practically on all
counts, whether it was regional dispersal, import substitution, or
preventing concentration of economic power. Licensing would not even
ensure the development of industries mainly according to Plan priorities.
Moreover, the licensing system could not attain even its specific
objectives. Licences were issued in excess of capacity targets even in
non-essential industries. Influential parties and large houses were
permitted to pre-empt capacities. The follow-up of licences was
unsystematic and licences remained unimplemented for long periods...
(Paranjape, 1988).
r52 Indiar Ecoton_1: Perlornance ad Policies

Even with such adverse comments, it is instructive to examine what

this committee recommended. The committee concluded that "with all
its defects the industrial licensing system did have a useful role to play
though its limitations needed to be borne in view." The committee
recommended that:
. There should be a list of reservations for small scale industry
production.
. Bans on further capacity creation should be utilised to prevent
the creation of 'undesirable industries', particularly the
production of 'non-essential luxury goods'.
The committee went on to recommend a whole host of other
measures which would lead to more detailed rather than reduced control
of industry.
Thus despite all the evidence gathered very laboriously there was
a persistent reluctance to learn from experience and change course.
It seems the promotion of a sheltered home market had a common
appeal to the bureaucratic authoritarian state, urban manufacturers, and
multinationals that supplied technology and capital. Protection also met
the state's objectives pursuing revenue and expenditure maximising
activities through maximum revenue tariffs and export tariffs.
Thus the interests of politicians, bureaucrats, multinationals, as well
as domestic industrial houses all coincided to keep Indian industry
sheltered through the operation of the industrial control system.
The stagnation of Indian industrial production between the mid-
1960s up to the late 1970s induced some serious new thinking. Towards
the end of the 1970s and by the early 1980s there emerged a growing
consensus that Indian industry was exhibiting a slowdown in industrial
growth due to low productivity, high costs, low quality of production
and obsolete technology.2 Three important committees were set up in
the early 1980s-the Abid Hussain Committee on trade policy, the
Narasimham Committee on the shift from physical to fiscal controls and
the Sengupta Committee on the public sector, These committees clearly
recommended an easing up of trade policy, the substitution of physical
and quantitative controls by fiscal and other means of macroeconomic
management, the promotion of greater public sector autonomy in
business and operating decisions and the need for measures for
enhancing productivity efficiency and modernisation,

2. Ahluwalia, Isher J. (1985). Industrial Growth in India's Stagnation Since the Mid-sixties,
Oxford University Press, Delhi.
Policies for Regulating Pdttern of Inuettment dnd Concentration of Economic
r53
The result of such thinking was that there was some progress in the
process of deregulation during the 1980s, though perhaps not as
significant as is often believed. Two kinds of delicensing activity took
place. First, 32 groups of industries were delicensed without any
investment limit. Second, in 1988, all industries were exempted from
licensing except for a specified negative list of 26 industries. This
exemption from licensing was, however, subject to investment and
location limitations. As has often been done in the past, this
announcement also contained further restrictions which reduced
significantly the effectiveness of exemption from licensing that was
provided in this announcement. On the trade policy front, the key change
was increasing access of exporters to inputs at international prices.
However, it seems that tariff protection to industry increased
significantly during the 1980s relative to previous decades.
While the industrial licensing system underwent some changes in
terms of threshold levels and types of products, it formed an essential
part of Government policy until the end of the 1980s.

New Economic Policy

As Rangarajanr has rightly stated, the year 1991 is an important
landmark in the economic history of post-Independent India. The
country went through a severe economic crisis triggered by a serious
balance of payments situation. The crisis was converted into an
opportunity to introduce some fundamental changes in the content and
approach to economic policy. The response to the crisis was to put in
place a set of policies aimed at stabilisation and structural reform. While
the stabilisation policies were aimed at correcting the weaknesses that
had developed on the fiscal and the balance of payments fronts, the
structural reforms sought to remove the rigidities that had entered into
the various segments of the Indian economy. The structural reforms
introduced in the early 1990s broadly covered the areas of industrial
licensing, foreign trade, foreign investment, exchange rate management
and the financial sector. From the point of view of industrialisation,
changes in the areas of licensing and foreign trade and investment had
important implications. Even before the onset of reforms, the problems
associated with industrial licensing were well recognised. The approach
document of the Eighth Plan (1991-1996) submitted in May 1990 had

3. Rangarajan, C. (2006). "Shifts in Industrial Policy Paradigm", in Suresh D. Tendulker

et al,, India: Ind.ustrialisation in a Reforming Economy (Essays for K.L, Krishna), Aca-
demic Foundation, New Delhi.
 r54 Irdian Economl: Perlormance and Policict

remarked: "A return to the regime of direct, indiscriminate and detailed

controls in industry is clearly out of question. past experience has shown
that such control system is not effective in achieving the desired
objective. Also the system is widely abused and leads to corruption,
delays and inefficiency" (Government of India: 1990). One early step
that was undertaken as part of the structural reform process was to
dispense with licensing. changes in foreign trade policy focussed on
reducing the tariff rates and dismantling quantitative controls over
imports. The tariff rates have been brought down in stages. Some caution
in this regard had become necessary to enable the Indian industries set
up behind high protective tariff walls to adjust to the changed situation.
The policy towards foreign investment underwent a significant change
with foreign investors given the freedom to own majority shareholding
over a wide spectrum of industries.
Without going into details, the common thread running through the
various policy measures introduced since 1991 has been the
improvement of the efficiency of the system. The thrust of the New
Economic Policy has been towards creating a more competitive
environment in the economy as a means to improving the productivity
and efficiency of the system. This was to be achieved by removing the
barriers to entry and the restrictions on the growth of firms. while the
Industrial Policy of 1992 sought to bring about a greater competitive
environment domestically, the counterpart Trade Policy set out in the
same year, sought to improve international competitiveness subject to
the degree of protection offered by the tariffs. The private sector was
to be given a larger space to operate in as much as some of the areas,
reserved exclusively earlier for the public sector were now to be opened
to the private sector. In these areas, the public sector would have to
compete with the private sector, even though the public sector might
continue to play the dominant role in the foreseeable future. what was
sought to be achieved was the improvement in the functioning of the
various entities, whether they were in the private or in the public sector.
In the New Industrial Policy 1991, industrial licensing will
henceforth be abolished for all industries except these specified
irrespective of level of investment.
These specified industries will continue to be subject to compulsory
licensing for reasons related to security and strategic concerns, social
reasons, problems related to safety and overriding environmental issues,
manufactures of products of hazardous nature and the artigles of elitist
consumption. The exemption from licensing will be particulary helpful
 of Economic ' "' 155
Policiet for Regulating Pattern of ltuestment and Concentation

who had been

to the many dynamic small and medium entrepreneurs
system'
unnecessarily hampered by the licensing
The industrial sector has gained in strength
in many ways ov€r the
of liberalising industrial controls and
past 15 years as u
"on,"qo""-te
itre graAul integration with the world economy'
states' "Although
The draft Approach paper to the 1lth Plan
industr
remain
should
amend
where necessary"'
tiquiaution procedures of industrial units'
Itfurtherstates,"Whilepromotingindustrialgrowth'protectionof
cross- sections of
consumers, particularly illiterate and marginalised
high priority in the 1lth Five
society in rural a."us, s't'ootA be accorded
of consumer protection
Year Plan. Conipetition is the best guarantee
and should be strongly encouraged'"4

l4' 2006) An Approach PaPer to lhe llth Five Year Plan'

4. Planning Comrnission (June
 India's Economic Performance
and Challenges

A broad picture of where India stands today in cross-sectional terms is

captured in Table 9.1. The numbers tell a loi. It is a country that
remains
crushingly poor but has had a decade of fast growth. in p", capita
lncome terms, with or without purchasing power parity (ppp)
iorrection,
India has now outperformed pakistan. on the other hand, china, whose
economic performance even a decade ago was very close to India's,
has
now surged ahead and has nearly double of India's per capita income.
India's growth performance in the last decade has been second only
to
China's, but the gap between the two nations is, nevertheless,
substantial.l
on an examination of Indicators that reflect the standard of living,
such as life expectancy at birth or literacy or under-5 mortality, India
does poorly. As far as performance over time goes, these are summarised
in Table 9.2, which show that, going by pure growth rates, there is some
reason for optimism for the Indian economy. India's average growth
rate,
which was close to 3.5 per cent in the 50s and 60s, *"n1 .[ to over
5
per cent in the late seventies and stayed that way for a decade.
After
the economic depression of r991, growth picked up more clearing
the 6 per cent mark on average and actuaily seeing "u"n
a GDp growth rate
of over 7 per cent for three consecutive years starting from 1994. The
first four years of the l0th plan 2002-03 to 2005-06 huu" recorded a
GDP growth rate of 7.2 per cent.

l. Basu, Kaushik (2004). "The Indian Economy: up to 1991 and Since",

in India,s Emerpinp
Economy: Performance and prospects n tne lgbos and Beyond, o-r"J
New Delhi.
un,*i*vl.1rr1
158 Indian Ecoronl: Performance and Policies

The Approach Paper to the 1lth Plan states, "On the eve of the 1lth
Plan, Indian economy is in a much stronger position than it was a few
years ago. After slowing down to an average growth rate of about 5.5
per cent in the 9th Plan period (1997-98 to 2001-02), it has accelerated
significantly in recent years. The average growth rate in the last four
years of 10th Plan period (2003-04 to 2006-07) is likely to be a little
over 8 per cent, making the growth rate 7 .2 per cent for the entire 10th
Plan period. Though, this is below the 10th Plan target of 8 per cent, it
is the highest growth rate achieved in any plan period." Last two years
have particularly recorded very high growth rates 9 per cent (2005-06)
and 9.2 per cent (2006-07).

l9s1-1956
1956- 1 96 I 4.2
Third PIan 196r-1966 2.8
Fourth Plan 1969-197 4 3.4
Fifth Plan t9'7 4-1979 5.0
Sixth Plan 1980-198s 5.5
Seventh Plan 1985-I990 5.8
Eighth Plan 1992-1997 6.8
Ninth Plan 1997-2002 5.5
Tenth Plan 2002-2006 7.2
For Tenth Plan growth
rate is for the first 4 years
2002-03 to 2005-06 2005-2006 9.0
2006-2007 9.2

Source : National Accounts Statistics, Ministry of Statistics, Government of India.

This performance reflects the strength of our economy. Yet, it is

also true that economic growth has failed to be sufficiently inclusive,
particularly after the mid-1990s. Agriculture lost its growth momentum
from that point on and subsequently entered a near crisis situation. Jobs
in the organized sector have not increased despite faster growth. The
percentage of our population below the poverty line is declining but
Indiai Economic Performance and Challenges r59
only at a modest pace. Yet as many as 260 million persons are living
below the poverty line. According to the UNDP Human Development
Report (HDR, 2003) India has the largest number of poor among the
countries in the world and is home to one fifth of the world poor. Far
too many people still lack access to basic services such as health,
education, clean drinking water and sanitation facilities without which
they cannot be empowered to claim their share in the benefits of growth.
These problems are more severe in some states than in others, and in
general they are especially severe in rural areas.

Towards Faster and More Inclusive Growth2

Rapid growth has to be an essential part of the strategy since it is
only in a rapidly growing economy that we can expect to raise the
incomes of the mass of the population sufficiently to bring about a
general improvement in living conditions. Fortunately, the growth
objective is now more achievable than it has ever been. Work done in
the Planning Commission and elselyhere suggests that the economy can
grow between 8 per cent and 9 per cent per year on a sustained basis
provided appropriate policies are put in place. With population growing
at 1.5 per cent per year, this would ensure that the real income of the
average Indian would double in 10 years. But what needs to be ensured
is that this growth is broad based, benefiting all parts of the country,
and especially the rural areas.
This must be accompanied by a major effort to provide access to
basic facilities such as health, education, clean drinking water etc., to
large parts of our population which do not have such access at present.
These essential public services not only impact directly on welfare in
the short run, they also determine economic opportunities for the future.
Access to these services is not necessarily assured even when growth
leads to rising income levels. Governments at different levels must
ensure provision of these services. Improved levels of health and
education are in fact critical inputs that determine the growth potential
in the longer term.
The second issue is about the nature of this high growth in terms
of inclusiveness. Putting more people in productive and sustainable jobs
lies at the heart of inclusive growth. But such success, primarily, will
depend on the success in achieving and maintaining high growth. There

2. This section is extensively drawn from Planning Commission (2006). An Approach

Paper to the llth Five Year Plan, December.
 160 Iulian Econonl: Petformarce antl Po/iciet

incl
cannot be elf. The experience ofEast
Asiaclearly n eliminate poverty and
transformad opedone.
The results of the latest NSSo's 6lst Round clearly show how the
annual growth rate of employment has not only accelerated from 1.6
per cent during 1993-2000 to 2.5 per cent during rggg-200s,but crossed
the 2.1 per cent rate recorded during 1983-lgg4. unemployment has
gone up not because of high growth, but because growth was not high
enough. It is important to avoid the misconception that inclusive growth,
by necessity, will have to be low growth.
The inclusive nature of the growth itself will be conditioned by the
progress that is made in the areas of education, health and physical
infrastructure. A young girl, when denied the benefit of education, often
grows up to be excluded from participati
Similarly, villagers are literally left behind i
their village does not have the benefit of
electricity, or communication.

Strengths of the Economy

The strengths of the economy are well known and are reflected in
the macroeconomic indicators in Table 9.3, which compare the position
in the l0th Plan with the 9th plan. The growth of the economy has
accelerated compared with the Ninth plan and our macro-economic
fundamentals are sound. Domestic savings rates have been rising and
had reached 29.1 per cent in 2004-05. The combined fiscal deficit of
the Centre and State Governments is higher than it should be, but has
been falling and the Budget it may be
down to 7 per cent. Inflation sharp hike
in international oil prices. T lus during
the first two years of the 10th the extent
of 1.0 per cent of the GDP in the 3rd year i.e., zo04-05. The deficit is
estimated to have risen to around 2.3 per cent of the GDp for the first
nine months of 2005-06. This reflects the revival of investment and also
the impact of high oil prices, but a deficit of this order is eminently
financeable. The foreign exchange reserves are at a very comfortable
level of $ 165 billion (August 25,2006).
The economy appears to have decidedly .taken off' and moved from
a phase of moderate growth to a new phase of high growth.
Iadia s Economic Performancc and Challenges 161

23.1 28.2

23.8 27.5

- o.'t o.'7

8.8

54.2

Notes:
l. The growth rate for 2006-07 is as projected by the Econonic Advisory Council to the
Prime Minister.
2. Gross savings rate, gross investment rates, and the Current Account Balance are ex-
pressed in cunent prices and are averages for the Plan. For the 10th Plan, these are the
average of the first three years i.e., for the years 2Oo2-03 lo 2004-05.
3. Combined Fiscal deficit is the average of the Plan. For the lOth Plan, it is the average
of the first 4 years of the Plan, i.e., for the years 2002-03 to 2005-06.
4. Foreign Exchange Reserves are as on 29tb March, 2OO2 for the 9th Plan and 3 lst March,
2006 for the l0th Plao.
5. The rate of inflation for the l0th Plan is tbe average up to January 2006.

An important source of strength is that the economy has matured in

several important respects responding to the economic reforms
implemented by successive governments over the past two decades. Our
economy is now much more integrated with the world economy and has
benefited from this integration. The outstanding success of IT and IT-
enabled services (ITES) first demonstrated what Indian skills and
enterprise could do, given the right environment. Similar strength is now
evident in other sectors also, such as pharmaceuticals, auto components
and, more recently, even textiles.
162 Indian Ecoronl: Petfornance and Policiet

Another benefit derived from global integration is the increased

inflow of foreign direct investment. FDI increased from an average of
$3.7 billion in the 9th Plan period to average of $5.4 billion in the first
four years of the 10th Plan (up to December 2005). This is still below
our potential. The National Common Minimum Programme stated that
the country needs and can absorb three times the amount of FDI that it
gets. This remains a reasonable target and can be achieved in the llth
Plan.
In the longer run, we have another important potential strength
arising from our demographic trends. Our dependency rate (ratio of
dependent to working age population) is falling whereas it is rising in
industrialised countries and even in China. Properly handled, with an
emphasis on human resource development and an economy capable of
absorbing them in productive employment, the presence of a skilled
young population in an environment where investment is expanding and
the industrial world ageing would be a major advantage.

Some Major Challenges

The Approach Paper to the Eleventh Plan states, "The strengths
enumerated above are real and represent a base on which we must build
in the llth Plan. However there are also important challenges to be
faced."

(i) Regaining Agricultural Dynamism

One of the major challenges would be to reverse the deceleration
in agricultural growth from 3.2 per cent observed between 1980 and
1996-97 to a trend average of around 2 per cent subsequently. This
deceleration is undoubtedly at the root of the problem of rural distress
that has surfaced in many parts of the country. Low farm incomes due
to inadequate productivity growth have often combined with low prices
of output and with lack of credit at reasonable rates, to push many
farmers into crippling debt. Even otherwise, uncertainties seem to have
increased (regarding prices, quality of inputs, and also weather and
pests) which, coupled with unavailability of proper extension and risk
insurance have led farmers to despair. This has also led to widespread
distress migration, a rise in the number of female headed households in
rural areas and a general increase in women's work burden and
vulnerability. In 2004-05, women accounted for 34 per cent of principal
and 89 per cent of subsidiary workers in agriculture, higher than,in any
previous round of the National Sample Survey. What is more, the
problem is not a purely distributional one, arising out of the special
Indie's Economic Performance ard Challetget 163

problems of small and marginal farmers and landless labour. In fact,

the deceleration is in general affecting all farm size classes. To reverse
this trend, corrective policies adopted must focus not only on the small
and marginal farmers, who continue to deserve special attention, but
also on middle and large farmers who too suffer from productivity
stagnation arising from a variety of constraints.
It is vital to increase agricultural incomes as this sector still employs
nearly 60 per cent of our labour force. A measure of self-sufficiency is
also critical for ensuring food security. A second green revolution is
urgently needed to raise the growth rate of agricultural GDP to around
4 per cent. This is not an easy task since actual growth of agricultural
GDP, including forestry and fishing, was only 1 per cent per annum in
the first three years of the Tenth Plan and even the most rosy projections
for 2005-06 and 2006-O'7 would limit this below 2 per cent for the full
five year period. The challenge posed is to at least double the rate of
agricultural growth. This calls for action on both the demand side and
the supply side.

(ii) Changing Employment Patterns

Doubling the growth of agricultural GDP to 4 per cent per annum
will improve rural employment conditions by raising real wages and
reducing underemployment. However, even if this is attained, an overall
growth of 9 per cent will further increase income disparity between
agricultural and non-agricultural households unless around 10 million
workers currently in agriculture find remunerative non-agricultural
employment. To make this possible, and absorb all new entrants into
the labour force, non-agricultural employment would need to increase
at over 6 per cent per annum during llth Plan. This poses a major
challenge not only in terms of generating non-agricultural employment
but also in matching its required location and type. Care has to be taken
to manage the resulting livelihood changes and to ensure that
employment is generated at all levels of skill in non-agricultural sector.
The inadequacy of widely dispersed and sustainable off-farm productive
employment opportunities is a basic cause of most divides and
disparities. Growth without jobs can neither be inclusive nor can it
bridge divides. All avenues for increasing employment opportunities,
including those that can be provided by micro and small enterprises need
to be explored. If we fail to do so, the demographic dividend can turn
into a demographic nightmare. Thus employment creation and raising
employability is another major challenge for the 1lth Plan.
154 Indian Economl: Performance ail Policiu

(iii) Providing Essential Public Services for the Poor

The most important challenge is how to provide essential public
services such as education and health to large parts of our population
who are denied these services at present. Education is the critical factor
that will empower the poor to participate in the growth process and our
performance in this area has been disappointing. Literacy is still less
than 7O per cent. In the matter of health also there are large gaps in the
availability of health care and in related services such as maternal and
child care, clean drinking water and access to basic sanitation facilities
for the mass of our population especially the poor who do not have even
the minimum access.
Some of these services, e.g. education and curative health, are
available in the market to those who can afford to pay. However, quality
sources of supply are costly and beyond the reach of the common man,
and other privately provided services are of highly variable quality.
A major institutional challenge is that even where service providers
exist, the quality of delivery is poor and those responsible for delivering
the services cannot be held accountable. Unless such accountability is
established, it will be difficult to ensure significant improvement in
delivery even if additional resources are made available. This is a major
challenge of governance that must be faced.

(iv ) I n c r e asin g M anufac turin g C o rnp e titiv en es s

Although growth in manufacturing sector has accelerated compared
to the 9th Plan it is unlikely to exceed 8 per cent in the 10th Plan. This
is unacceptably low. If we want our GDP to grow at 9 per cent, we have
to target a 12 per cent growth rate for this sector. India's performance
in IT enabled services and other high end services is clearly a source of
strength that we must build upon. However, India cannot afford to
neglect manufacturing. India meets most of the requirements for
attaining double digit growth in manufacturing. We have a dynamic
entrepreneurial class that has gained confidence in its ability to compete.
We have skilled labour and excellent management capability. However,
there are other constraints that limit our competitiveness, especially in
labour intensive manufacturing, and the Eleventh Plan must address
these on a priority basis.
The most important constraint in achieving a fastqr growth of
manufacturing is the fact that infrastructure, consisting of roads,
railways, ports, airports, communication and electric power, is not up
to the standards prevalent in our competitor countries.
 Indit\ Economic Performance and Challenges
165

responsibility of state governments and a decisive improvement in this

area is a critical challenge.

(v) Developing Human Resources

De hasized on quality higher education by
setting er educational institutions. This has paid
us rich ere are emerging signs that rapid growth

service conditions to attract a dedicated and qualified faculty. Expanding

capacity through private sector initiatives in higher learning needs to
be explored while maintaining quality standards.

(vi) Protecting the Environment

Environmental concerns are growing globally as well as within the
country. While there may appear to be a trade-off between
environmental sustainability and economic growth in the short run, it
has to be recognised, that in the long ustainability
and human well-being are not ne Neglect of
environmental considerations, as for use of water
or deforestation can lead to adverse effects very quickly. The threat of
climate change also poses real challenge to the well being of future
generations which we can ill afford to ignore. our development strategy
has to be sensitive to these growing concerns and should ensure that
these threats and trade-offs are appropriately evaluated.

(vii) Improving Rehabilitation and Resettlement practices

our practices regarding rehabilitation of those displaced from their
land because of development projects, conflicts, or caramities are very
deficient. These have caused many people to feel vulnerable and there is
anger because of forced exclusion and marginalisation. In particular,, the
costs of displacement borne by our tribal population. have been unduly
high. compensation has been tardy and inadequate, leading to unrest and
 166 Indian Ecoxoalt Perfornance ail Poticiet

rnsurgency in many regions. This discontent is likely to grow

exponentially if the benefits from enforced land acquisition are seen
accruing to private interests, or even to the state at the cost of those
displaced. To give displaced people especially women, their due rights,
it is necessary to frame a transparent set of policy rules that address
compensation, proper resettlement, and rehabilitation and also gives
project affected persons a permanent stake in project benefits. Moreover,
these rules need to be given a legal format in terms of the rights of the
displaced.

(viii) Improving Governance

All our efforts to achieve rapid and inclusive development will come
to naught, if we cannot ensure good governance both in the manner
public programmes are implemented and, equally important, in the way
the government interacts with the ordinary citizen. Corruption is now
seen to be endemic in all spheres and this problem needs to be addressed
urgently. Better design of projects and implementation mechanisms and
procedures can reduce the scope for corruption, Much more needs to
be done by both the Centre and the States to reduce the discretionary
power of the government, ensure greater transparency and
accountability, and create awareness among citizens. The Right to
Information Act empowers the people to demand improved governance,
and we must be ready to respond.

Quick and inexpensive dispensation ofjustice is an aspect of good

governance which is of fundamental importance in a successful civil
society. The legal system in India is respected for its independence and
fairness but it suffers from notorious delays in dispensingjustice. Delays
result in denial of justice. Delays cost money and therefore it is difficult
for the poor in India to afford justice. Fundamental reforms are needed
to give justice two attributes: speed and affordability.
Disparities and Divides
Development has not only failed to bridge the divides that afflict
our country, it may even have sharpened some of them. Some of these
perceptions may be exaggerated, but they are real nonetheless, There
are many divides, all {emanding equal attention. Foremost among these
is the divide between the rich and the poor. Poverty is declining, but
only at a modest pace which is no longer acceptable given the minimalist
level at which the poverty line is fixed. The pace of poverty reduction
must be accelerated. There is also a divide between those who have
access to essential services and those who do not, which leads to large
India's Economic pcrformancc znd Chalhnges
t67
disparities in hearth and nutritional status,
in education and skills, as
also in availability of clean water and sanitation.
There are also excluded groups in our society
such as SCs, STs and
OBCs and some minorities who continue
to lag behind the rest.
Another important_divide which compers immediate
attention is
It begins with the declining sex ratio and goes
ial between girls and boys plus the high rate of
inrabree.4are,"o"",,"#1T,i:',':'#;",1?t*llJT#ffi :1"Jf,'J,";

:).: t:..1:y ir,,

: ti: TABLE ' ,) :: -] .: \','.'
- lr' .r' ,.. . 'l
Status of

1990 Year year

47.0 20.6
45.5 18.1
1s.5 4.8 243
Notes:
l. For the years 1990-91 and 2003_04.
2. 1993_94 and the latest estimates based on
the NSS
le with 1993-94.
,. on Census l99l and 2001.
4.
5' Pe-rcentage age berow
2 standard deviation from the mean of an international
reference population.
soarce: Planning.commission (2006). An Approach popet
to IIth Five year pran,
168 Itdiat Eronoay Perlornance and Poliriet

Differences in educational status and economic empowerment are

heavily biased against women. Special, focussed efforts must be made
to purge society of this malaise by creating an enabling environment
for women to become economically empowered.
The divide between urban and rural India has become a truism of
our times.
Regional backwardness is another issue of concern. While the
differences across states have long been a cause of concern but
increasingly there is recognition of the problem of severe imbalances
within states. Backward districts of otherwise well performing states,
present a dismal picture of intra-state imbalance and neglect. The Centre
and the States together must deal with this problem on a priority basis.
We cannot let large parts of the country be trapped in a prison of
discontent, injustice and frustration that will only breed extremism.
Special efforts must be made to remove the discontent, dispense
justice, instill a sense of fairness among the people and give them
dignity and hope.
 K#
Unemployment and
Employment Perspective

The growth rate of labour force is determined partly by the age

structure of the popuration and the age and sex specific labour
force
participation rate that can be expected to obtain.

Population and Labour Force projections

age groups will lead to a faster growth of labour force as compared

to
the working age population (Table 10.1).

l Dantwala,_M.L. "Understanding_poverty and Unemployment,,, in Uma

Kapila (ed.), Indian
Economy Since Indepentlence, 1999-2000 edition, p. i65.
2. Planning Cornmission, Tenth Five year plan, ch. 5, p.
143.
 170 Indian Economl: Petformance and Policies

TABLE - 1O.I

Growth in Population and Labour Force

(Per Cent Per Annum)

2002-2007 2007-2012 20r2-2017

Population (A1l age groups) 1.63 1.41 1.20

Population (15-59 years) 2.4r 2.08 1.70
Labour Force (l) (15-59 years) 2.42 2.15 1.78
Population (15+) 2.57 2,26 1.93
Labour Force (l) (15+) 2,5r 2.2s r.92

Note : Labour force projections here are on the basis of labour force participation rate for
each quinquennial age group remaining unchanged, i.e. the changes in labour force
growth in relation to population ate due to changes in the age composition of the
population.
Sorrce : Planning Commission.

There was a substantial gap in the growth rates of working age

population and labour force in the period 1993-94to 1999-2000, leading
to a sharp fall in the growth of labour force to 1.31 per cent per annum
from 2.43 per cent during the preceding period 1983-1993-94. The
Planning Commission Special Group on Creation of 10 million
Employment Opportunities a Year in 10th Plan noted that the causes
underlying this sharp fall need to be investigated further. One view is
that withdrawal from labour force is to invest one's time in acquiring
education for better returns in future, while the Special Group observes
that this factor can only partially explain withdrawal from labour force,
and suggests that lack of work opportunities can also lead to complete
withdrawal from labour force. The decline in the rate of growth of
labour force, however, is not expected to continue unabated in future.
Hence, the Special Group adopted the higher of the two alternative
labour force growth scenarios suggested by the Task Force on
Employment Opportunities. Accordingly, the Group has adopted a 1.8
per cent growth rate oflabour force in the lOth Plan period (2002-2007),
i.e. a much slower decline in the age-specific participation rates in the
period beyond 200'7-2012. Therefore, the projections of labour force
are made here on 1.8 per cent growth.
(Jnemp loyment and Employment Pertpectiue t7t
Concepts and Measurement
National Sample Survey Organisation (NSSO) have used three
concepts of unemploYment.

(i) Usual status unemPloYment

(ii) Current weekly status unemployment
(iii) Daily status unemPloYment

The usual status or chronic unemployment measured in number of

persons i.e. persons who remain unemployed for major part of the year.
Activity status is determined with reference to a longer period, say a
year preceding to the time of survey.
The weekly status unemployment (measured in number of persons)
i.e. persons who did not find even an hour of work during the survey
week.
Daily status unemployment (measured in number of days or person
years) i.e. persons who did not find work on a day or some days during
the survey week.
The usual status unemployment is generally recorded as a measure

Measurement of Employment and Unemployment

In the 9th Plan, the calculations of employment and unemployment
were based on usual Principal and subsidiary Status basis (UPSS). The
Report of the Special Group3 has viewed that current daily status (cDs)
is a better measure to capture unemployment and underemployment,
than the usual status, and therefore recommended the use of CDS basis
for estimation purPose,

The rationale for using CDS as measuring employment and

unemployment is the following, The Approach Paper to the Tenth Plan
recommends creation of gainful employment opportunities for the entire

3. planning commission (2002). "Report of the special_Group on Targeting_Ten_Million

Elnployirent Opportunities Per Yeai over the 16th Plan Period", Chairman: S.P. Gupta.
 172 Indian Economl: Petformance and Policiet

additions to labour force in the Tenth Plan and beyond. Therefore,

policies and programmes to fill the gap between requirement and
availability of gainful employment opportunities are to be worked out.
At any point of time, there is a large unemployed and under-employed
workforce i.e., not having any gainful employment, although by using
the measurement on UPSS basis, several of them are declared employed.
This results in overestimation of the level of employment. To avoid this,
largely, the Special Group suggested estimation of the extent of
employment and unemployment on CDS basis.
According to the NSSO employment and unemployment survey
report of 1999-2000 "The usual status approach adopted for
classification of the population is unable to capture the changes in the
activity pattern caused by seasonal fluctuations. But the estimate
obtained by adopting the current weekly or current daily status
approaches are expected to reflect the overall effect caused by the
intermittent changes in the activity pattern during the year. The latter
(CDS) reflects also the changes, which take place even during the week.
The estimate of the employed based on current daily status gives average
daily picture of employment." Therefore, the Special Group regarded
the CDS measurement as the most appropriate measure to have an
estimate of the gap i.e., jobs to be created on gainful basis, in order to
bring out recommendations as to how they can be filled up by changes
in policies and programme.
The NSSO Report also provides estimates of the likely under-
employment that is hidden in the number of the employed category,
calculated by the UPSS approach when they are compared with CDS.
The activity pattern of the usual employment during the days within the
reference week is indicated by the distribution of their activity by
current daily status. The relevant results for rural and urban India are
presented in Table 10.2. It is observed that the proportion of person
days of the usually employed, utilised for work, is lower for females as
compared to the males throughout the period 1987-88 to 1999-2000.
During 1999-2000, this proportion was estimated at about 68 per cent
and79 per cent for females in the rural and urban India respectively, as
against 90 per cent and 94 per cent for males in rural and urban India
respectively. If the work is not available, large portion of the females
withdraw from the labour force rather than report themselves as
unemployed. The distribution obtained from the 1999-2000 survey is
presented in Table 10.2.
Unemploymen t and Emphyment Perspectiue 173

TABLE - IO.2

Per 1000 Distribution of Person-days of Usually Employed

(Principal and Subsidiary Status Workers Taken Together)
by their Broad Current Daily Status
Current
Daily Status
Male
1999- 1993- 1987- i,999- 1993- 1987-1999- 1993- 1987- 1999- 1993- 1987-
00 94 88 00 94 88 00 94 88 00 94 88

(1) (3) (4) (5) (6) (7) (8) (e) (10) (11) (12) (t3)
(2)

Employed 897 909 926 676 663 638 942 949 938 791 766 716
Unemployed 3 40 27 41 30 26 27 27 37 22 24 11
5

Not in
Labour Force 5l 5l 47 283 306 336 3t 25 2s 187 210 24'7

Ail 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000

Soarce: NSSO.

Recent Tlends in Employment and

Unemployment Situation
There was a slight decline in population growth between the periods
1983-1993-94 and 1993-94-1999-2000 from 2'0 per cent per anllum to
1.9 per cent. Though growth of output in the economy accelerated
between these two periods-from 5.2 per cent gross domestic product
(GDP) growth to 6.7 per cent, the pace of employment growth slowed
down from 2.7 per cent to 1.07 per cent as per NSSO employment surveys
(Annexure A-10.1). Slowdown in pace of employment growth, in the
1990s, is also borne out by demographic census data-growth of main
workers decreased from2.34 per cent to 0.81 per cent. Similar trends in
deceleration of employment growth are revealed for specific segments of
employment-growth of workers in establishment covered by economic
census came down from 2.84 per cent per annum in 1980-1990 to 1.71
per cent in 1990-1998; employment in establishments covered by
Employment Market Information System of Ministry of Labour grew at
l.2O per cent per annum during 1983-1994 but decelerated to 0.53 per
cent during the next five years 1994-1999. However, the latter decline
was mainly due to a decrease in employment in public sector
establishments, whereas the private sector showed acceleration in the pace
of growth from 0.45 per cent to 1.87 per cent (Annexure A-10.1). Thus'
the employment intensity of the growth process of the Indian economy is
coming down (Annexure A-10.2).
174 Indiar Ecozonl: Perlormance and Policiet

The decrease in employment intensity of output growth can be

explained by either an increase in capital intensity or increase in labour
productivity, releasing labour. Both happened partly in this period.
Incremental capital output ratio (ICOR) increased greatly and also
capital substituted labour. Both suggest strategies to look for labour
intensive areas and technologies.

Employment and Unemployment (60th Round. of NSSO)

As part of the annual series in the 60th round of the NSSO, an all_
India survey on the situation of employment and unemployment was
conducted in January to June, 2004 with a moderately large sample of
households. The survey points out the large rural-urban and male-female
divide in not only literacy, but also in employment and wages (Box
10.1). Between the rural and urban segments, there are differentials
among the usual principal status, current weekly status, and current daily
status of unemployment. In respect of current daily status (of
unemployment), particularly of the intermittent variety, the rate appears
to be larger in rural areas than in urban areas.
Uncmployment and Emplolnent Perspectite 175

...Contd. ...

. In the rural areas, about 66 per cent of usually employed males and
84 per cent of usually employed females were engaged in the
agricultural sector.
. In urban India, the tertiary sector engaged 59 per cent among male

Rs.36.15.
In urban India, wage difference was more prominent. A male casual
labourer in the urban areas earned Rs.75.51 in a day and female,
Rs. 44.28 in a day.
.t:L\

Some salient features of the trend of unemployment rates in the

country are:
The unemployment rate went up between 1993-94 to 2004.
On the basis of culrent daily status (unemployed on an average
in the reference week), during the reference period,
unemployment rate for males increased from 5.6 per cent to
9.0 per cent in rural areas, and from 6.7 pet cent to 8.1 per
cent in urban areas (Table 10.3).
Similarly, unemployment rate for females increased from 5.6
per cent in 1993-94 to 9.3 per cent in 2004 in rural areas and
from 10.5 per cent to 11.7 per cent in urban areas.
Furthermore, unemployment rates on the basis of current daily
status were much higher than those on the basis of usual status
(unemployed on an average in the reference year) implying a
high degree of intermittent unemployment. This could be
mainly because of the absence of regular employment for
many workers.
Urban unemployment rates (current daily status) were higher
than rural unemployment rates for both males and females in
1993-94. However, in 2004, rural unemployment rates for
males was higher than that of urban males.
t76 Indian Econonl: Petformatce ail Policiet

. Unemployment rates varied sharply across states. States,

where wages are higher than in neighbouring ones because of
strong bargains or social security provisions, such as high
minimum wage, had high incidence of unemployment, in
general.

Results of 61st Round o/ NSSO Surveya

The latest and seventh quinquennial NSS survey, namely the 6lst
round conducted during July 2004-June 2005, constitutes an important
source of information on employment and unemployment. The 61st
round of the NSSO survey reveals a faster increase in employment
during 1999-2000 to 2004-05 as compared to 1993-94 to 1999-2000
(Table 10.3).
Net annual addition to employment on Usual Principal Status (UPS)
basis went up from 5.47 million during 1993-94 to 1999-2000 to 9.58
million during 1999-2000 to 2004-05. Simultaneously, however,
according to the 61st round estimates, during 1999-2000 to 2004-05,
labour force grew even faster at an annual 2.54 per cent compared to
annual employment growth of 2.48 per cent. As a result, despite the
faster growth of employment, unemployment (on UPS basis) was higher
at 3.06 per cent of the labour force in 2004-05 compared to 2.78 in
1999-2OOO.Incidence of unemployment had come down from 2.88 per
cent in 1983 (38th round) to 2.62 per cent in 1993-94 (50th round).
It appears that the increase in unemployment between the 55th and
61st rounds of NSSO was primarily because of an increase in such
unemployment incidence for females, both in the rural and urban areas
(Table 10.4). Furthermore, while unemployment among males declined
in terms of UPS and current weekly status (CWS), it increased by the
current daily status (CDS) both in rural and urban areas. There are
analytical differences (for example, chronic unemployment versus that
of the intermittent and disguised variety) in the nature of unemployment
according to the UPS, CWS and CDS status. More expert analysis of
the recently released data from the 6lst NSSO round will reveal the
root causes as well as the probable remedies.
The reversal of the declining trend in employment growth-from
an annual 2.1 per cent in the ten years ending in 1993-94 to 1.6 per
cent in the five years ending in 1999-2000 to 2.5 per cent in the five
years ending in 2004-05 is an encouraging development. Nevertheless,

4. Government of India, Economic Suruey 2006-07

 17E Irdian Ecozoml: PerJormance and Policier

there is need for faster employment growth for not only absorbing the
addition to the labour force, particularly with the ongoing demographic
changes, but reducing the unemployment rate. The share of agriculture
in total employment has come down from 61.67 per cent in 1993-94 to
58.54 per cent in 1999-2000, and further to 54.19 per cent in 2004-05.

TABLE _ IO.4
Unemployment Rates for 55th Round (1999-2000) and 6lst Round
(2004-05) of the NSSO
(All-India)
Rural
Males Females

Round Usual CWS CDS Usual cws CDS

-55th (1999-2000) 2.1 39 72 1.5 3.7 7.0

6l st (2004-05) 2.1 38 80 3.1 4.2 8.7

Urban
Males Fenrales

Round Usual CWS CDS Usual CWS CDS

5srh (1999-2000) 4.8 5.6 7.3 7.1 7.3 9.4

6lst (2004-05) 4.4 5.2 7.5 9.1 9.0 11.6

Notes:
Usual: Usual Principal Status,
CWS : Cunent Weekly Status,
CDS : Current Daily Status
Source : Economic Suruey 2OO6-07.

Indian Labour Laws and Labour Markets

Indian labour market is characterised by a sharp dichotomy. A large
number of establishments in the unorganised sector remain outside any
regulation, while the organised sector has been regulated fairly
stringently. It can be reasonably argued that the organised sector has
provided too much of job-security for too long, while the unorganised
sector has provided too little to too many.
Various studies indicate that Indian labour laws are highly protective
of labour, and labour markets are relatively inflexible. These laws apply
tJnemp loyment and Emp lolment Perspectiue 179

only to the organised sector. Consequently, these laws have restricted

labour mobility, have led to capital-intensive methods in the organised
sector and adversely affected the sector's long-run demand for labour.
Labour being a subject in the concurrent list, state-level labour
regulations are also an important determinant of industrial performance.
Evidence suggests that states, which have enacted more pro-worker
regulations, have lost out on industrial production in general.
Perhaps there are lessons to be learnt from China in the area of
labour reforms. China, with a history of extreme employment security,
has drastically reformed its labour relations and created a new labour
market, in which workers are highly mobile. Although there have been
mass layoffs and open unemployment, high rates of industrial growth
especially in the coastal regions helped their redeployment. In spite of
hardship, workers in China seem to have benefited from wage growth,
additional job creation and new opportunities for self employment.

Strategies and Policies for Employment Generation

While a higher rate of economic growth is a necessary condition
for increasing the demand for labour, the pursuit of growth objective in
isolation may not be sufficient, at least in an immediate foreseeable
future, to gainfully absorb the annual additions to labour force.
Therefore, in the short-term perspective of a Five Year Plan, growth
will have to be supplemented by increasing the employment content of
growth in order to fulfil the employment objectives of Plan.

Eleventh Plan Approach Paper on Employments

Employment is an area which shows up where our growth process
is failing on inclusiveness. The number of workers is growing,
particularly in non-agricultural employment, but weaknesses appear in
tackling unemployment, the quality of employment, and in large and
increasing differentials in productivity and wages. Data from the latest
NSS round for 2004-05, the Economic Census 2005 and the Annual
Survey of Industry reveal the following:
(i) Employment growth accelerated to 2.6 per cent during 1999-
2005 outpacing population growth. But the average daily status
unemployment rate, which had increased from 6.1 per cent in
1993-94 to 1.3 per cent in 1999-00, increased further to 8.3 per

5. planning commission (2006)- Approach Paper to the Eleventh Five Year Plan
December
lEO Indian Econonl: perlorntarce and polidet

cent
grew
rates
tappi
employment also appears to be on the increase.
(ii) Agricultural employment has increased at less than r per cent
per annum, slower than population growth and much slower than
growth in nonagricultural employment. This is the expected trend
in long-term development but a matter of concern is that this
has also been associated with a sharp increase in unemployment
(from 9.5 per cent in 1993-94 to 15.3 per cent in ZOO+_OS)
among agricultural labour households which represent the
poorest groups. Also, although real wages of these workers
continue to rise, growth has decelerated strongly, almost
certainly reflecting the poor performance in agriculture. There
are also transition problems t patterns,
and these are probably bein ndholding
structures and by barriers of problems
need to be addressed in the
(iii) Non-agricultural employment expanded robustly at an annual
rate of 4.7 per cent during 1999-2005 but this growrh was

rising expectations.
(iv)

others and sizeable increases in earnings were confined mainly

to those who were graduates at least. According to the Annual
Survey of Industries, real wages stagnated or declined even for
workers in organized industry although managerial and technical
staff did secure large increase.
(v) The wage share in our organized industrial sector has halved
after the 1980s and is now among the lowest in the world. one
reason for this is increasing capital intensity of the organized.
Unemplolment and Employment Perspectiu 1E1

sector, another is outsourcing. An issue for policy research is

why, despite our factor endowment, organized sector has been
choosing to replace labour with capital at this scale and whether
there are policy distortions that encourage this which should be
corrected.
The llth Plan provides an opportunity to focus on and diagnose
the reasons for these failings and to reverse at least some of the adverse
outcomes of the recent growth pattern. It should aim at making
employment generation an integral part of the growth process and devise
strategies to accelerate not only growth of employment but also of wages
of the poorly paid. Central to this must be the recognition that a very
large number of people in our society lack access to income generating
productive assets and that this hinders their ability to sustain themselves
through pure self-employment. In order to make growth more inclusive,
it is vital that more people gain access to more productive assets with
which they can themselves generate decent incomes and also that GDP
growth generates sufficient demand for wage labour so that those who
cannot be self-employed are at least employed at decent twages.
Targeting faster growth in GDP and doubling of agricultural growth
will help in this process though it must be noted that this alone may not
be sufficient. On the supply side, the labour force will increase by about
52 million during llth Plan if it grows at the same rate as current
projections of working age population. The increase could be much
higher, around 65 million, if female participation rates rise at the pace
observed during 1999-2005. Since this increase will be over and above
the present backlog of about 35 million unemployed on a typical day,
and since inclusiveness requires a shift of employment from agriculture
to non-agriculture we must plan for at least 65 million additional non-
agricultural opportunities in the 1lth Plan. This will not create full
employment, but it will at least ensure that the unemployment rate falls
somewhat. However, even this modest goal implies that the rate of growth
of non-agricultural employment would need to accelerate to 5.8 per cent
per annum ftom 4.7 per cent in 1999-2005. Furthermore, if the high
unemployment among the educated youth is to be reduced and if quality
of overall employment is to improve, there must be a robust growth in
organized sector employment. In other words, a massive reversal is
required from the negative employment growth during the last decade.

Promoting Employment Generation

Additional employment opportunities in the future will be generated
mainly in the services and manufacturing sectors and policy initiatives
 ta2 Indiar Ecanat5': Pe(aruatce and Palicies

are needed to support this. Measures would need to be taken in the l lth
Plan to boost, in particular, labour intensive manufacturing sectors such
as food processing, leather products, footwear, and textiles, and service
sectors such as tourism and construction. The end of the textile import
quota regime in industrialized countries offers India a huge opportunity
to expand textile and garment exports and generate substantial
additional employment, provided we can compete with other developing
countries. Tourism-both domestic as well as international-provides large
possibilities for employment generation in the hotel, catering,
entertainment, and travel sectors and also a market for handlooms and
handicrafts to create additional employment. Substantial employment
will also be generated in the construction sector, from building houses
to expanding infrastructure. The measures to give impetus to growth in
manufacturing, tourism, and construction and the possibility that some
changes in existing labour laws may be required to spur investment and
growth in labour intensive sectors, are clearly relevant. However, it is
also necessary to address those features that underlie why higher
investment and accelerated GDP growth have not led to satisfactory
employment outcomes in the recent past.
The dualistic nature of our economy, with large differences in
productivity between agriculture and non-agriculture on the one hand
and between the organized and unorganized sectors poses problems,
especially since the dualism appears to have intensified over the last
decade or so. Labour productivity in the organized sectors6 was already
4 times that in unorganized non-agriculture in 1993 and this ratio
increased to 7 times by 2004. During the same period, the share of the
organized sector in total non-agricultural employment declined from 20
per cent to 13 per cent. Part of this was due to downsizing of the public
sector which reduced employment by 1.3 million. However, employment
growth was negligible (in fact negative after 1998) even in the private
organized sectors, despite an average growth of GDP of nearly 10 per
cent per annum after 1993 in this sector. The reason is that capital
intensity in the organized sector increased rapidly, so that the real capital
stock per worker is now three times .vhat it was in 1993. On the other
hand, with its 60 per cent higher workforce now than in 1993,
unorganized non-agriculture has absorbed over 60 million new workers,
mostly after the late-1990s. But this sector has been unable to increase

6. The definition of organized and unorganized sectors used here is the same as that adopted
in the National Accounts. This accepts the DGET definition of organized sector, i.e., enter-
prises enploying 10 or more workers, but not including temporary casual workers. The
unorganized sector includes all rernaining enterprises and workers.
Unemplolment and Emp loyment PersVective 1E3

significantly either its capital - labour ratio or labour productivity. These

two disparate private sectors in non-agriculture, unorganized and the
otganized now produce about 50 per cent and 25 per cent of all
nonagricultural value-added respectively, with 87 per cent and 4 per
cent of the non-agricultural workforce. These trends show that while
employment in the unorganized non-agricultural sector has expanded it
is generally low quality employment constrained by low productivity.
Millions of self-employed in the unorganized sector, (particularly home-
based women doing putting out work and artisans, but also many in other
manufacturing sub-sectors and in retail trade) have levels of labour
productivity no higher than in agriculture and their number is increasing
rapidly. They are as vulnerable to shocks as farmers'
h Plan states, "Concern is often
in recent Years has not generated
absorbing the additional entrants
organised sector emPloYment in
particular has been inadequate, though many new sectors such as IT
Lnabled services, financial services and tourism have generated a large
number of new and high quality jobs. The 1lth Plan must pay special
attention to the growth of employment."
The thrust areas as outlined in the appraoch paper are the following:

a) Changing EmPloYrnent Patterns

Doubling the growth o Per cent per annum
will improve rural employ sing real wages and
reducing underemployment s attained, an overall
growth of 9 per cent will further increase income disparity between
agricultural and non-agricultural households unless around 10 million
workers currently in agriculture find remunerative non-agricultural
employment. To make this possible, and absorb all new entrants into
the labour force, non-agricultural employment would need to increase
at over 6 per cent per This poses a major
challenge not only in te cultural employment
but also in matching its Care has to be taken
t84 Irdian Econozl: Petformatce and Policiet

to be explored. If we fail to do so, the demographic dividend can turn

into a demographic nightmare. Thus employment creation and raising
employability is a major challenge for the llth Plan.
A shift of the labour force out of agriculture into the non-
agricultural sector can only happenif our growth strategy is a success
and the economy as a whole grows at a more rapid rate than in the past
and generates high growth in labour intensive manufacturing and in
productive services sectors. The government will also have to focus on
employment generating schemes which qan yield result in the short term
and are oriented to supporting the employment prospects of weaker
sections. More specifically the policies should be tailored to support
the areas given below.

h) Employment Generating Sectors

To increase the employment intensity of economic growth, the l lth
Plan must pay special attention to labour intensive manufacturing
sectors such as food processing industry, textiles small and medium
enterprises, tourism, and construction. The end of the textile import
quota regime in industrialised countries, offers India a huge opportunity
to expand textile and garment exports and thus generate substantial
additional employment, provided we can compete with other developing
countries.
Tourism-both domestic as well as international-provides large
possibilities for employment generation in the hotels, catering,
entertainment and travel industries. It can also creates a market for
handlooms and handicrafts whereby additional employment can be
generated.

Accelerated growth of manufacturing at 12 pet cent per year or

higher will contribute enormously to additional job creation. The state
governments have an important role to play in making such growth
possible by creating an investor friendly environment especially for
labour intensive sectors.
Substantial employment can be generated in the construction sector,
given the need to build houses and expand infrastructure.
Labour market policies are clearly relevant in this context. In the
changing economic scenario, global as well as national, labour
flexibility is viewed as an essential attribute of competitiveness. All over
the world efforts are being made to introduce gri:ater flexibility,while
at the same time protecting the legitimate interests of labour. It must be
Llnemployment and Emplolmcnt Perqectiuc 185

emphasised that labour flexibility does not mean 'hire and fire'. There
are many aspects of our labour laws where greater flexibility is needed
and would be in the interest of labour as a whole in the sense that it
would actually generate larger volumes of employment in the organised
sector by encouraging employers to expand employment. This flexibility
is especially needed if we want to exploit the enormous opportunities
offered by export markets. Other countries, especially China, have been
remarkably successful in this area. It is time for India to compete. These
are sensitive issues on which opinions differ. We should evolve a
consensus on the scope for reforming key labour laws including
especially the Industrial Disputes Act and the Contract Labour
(Regulation and Abolition) Act.

c) National Rural Ernployment Guarantee Programme

(NREGP)
The National Rural Employment Guarantee Act (NREGA) assures
employment for at least 100 days to every rural household, and therefore
provides much needed income security to agricultural workers in lean
agricultural season. Initially implemented in 200 districts, it is to be
extended to the entire country over a five-year period. In addition to
the direct income support it provides, it also serves as a mechanism for
channelising resources for development of land and water and promote
rural connectivity in conjunction with Bharat Nirman, the Backward
Region Grant Fund and various other infrastructure oriented projects
in rural areas. The projects are to be selected by the Panchayat so that
they are relevant to the needs of the community.
Unlike employmer^l programmes in the past that were supply driven,
bureaucracy controlled, and suffered from large leakage including
misuse of funds arising from false muster rolls and poor project design,
this is demand driven, based on a legal right and requires PRIs to select
projects relevant to the needs of the community. Initial assessments are
mixed, for example muster rolls continue to be problematic in many
places, but it is clear that the demand-driven nature of NREGP has not
led to as high leakages or cost as some had originally feared. If anything,
the main teething problems appear to be insufficient information and
unduly high task norms, which have caused demand to be much less
than earlier estimated. Where these have been addressed, it is a very
popular schem ome, reducing distress
migration and created, the l1th Plan
must ensure ded and effectivelY
implemented. State governments should address existing problems, meet
186 Iulian F,totottl: Pellitrnance ond Poliiet

employment demand promptly and, by using NREGP in convergence

with other schemes, develop land and water resources effectively,
especially to benefit the scheduled castes and tribes.

BOX - 10.2

National Rural Employment Guarantee Act 2005

The National Rural Employment Guarantee Act was notified on
September 7 ,2005 and the schemes launched on February 2,2006. The
ongoing programmes of Sampoorna Grameen Rozgar Yojana (SGRY)
and National Food For Work Programme (NFFWP) will be subsumed
within the NREGS in the 200 districts identified in rhe initial stage.
All the districts in the country will be covered under the scheme within
five years.
The objective of the Act is to enhance the livelihood security of the
people in rural areas by generating wage employment through works
that develop the infrastructure base of that area. The choice of work
suggested addresses the causes of chronic poverty like drought,
deforestation, and soil erosion. The objective behind suggesting certain
key activities/works is to rejuvenate the natural resources of the area
to stimulate the local economy enabling those who work for wage
employment in creating an asset to take advantage of it to engage in
productive ways of self-employment, and augment their income.
Implementation of the Act calls for the formulation of NREGSs by the
State Governments. Section 4 of the Act provides that within six months
from the date of commencement of the Act, every State Government
shall, by notification, make a scheme for providing not less than 100
days of guaranteed employment in a financial year to every household
in the rural areas covered under the scheme and whose adult members
volunteer to do unskilled manual work subject to the conditions laid
down in the Act.

d) Self-Employment Programmes
The government's strategy for promotion of self-employment
ventures currently relies on formation of self-help groups to empower
rural communities and enable them to take up economic activities. Many
departments in the government of India implement schemes that provide
assistance to self-help groups and their guidelines vary in scope, content
and implementation mechanism thus creating overlap and inefficiency.
The llth Plan would seek to harmonise self-employment programmes
implemented by different Ministries and implement an integrated self-
(Jnemployment atd Employment Perspectiu ta7

the southern Parts of the countrY.

MarketingSupportwillhavetobeprovidedtoSHGstoensuretheir
sustainability. et-ttr" same time, the llth Plan must also examine
the
need to expand the SHG movement in urban slums'
According to C.H.H. Rao (2005)7, "Now that the Employment
GuaranteeScheme(EGS)isareality,itistimeforsomeserious

industries, the rural employment growth would have been sufficient

to
would not have been
absorb bulk of the growlng labour force and there
any need for the EGS'

sustainable reduction in poverty.

Ahead"' Economic Times'

7. Rao, C.H, Hanumantha (2005)' "Rural Jobs Schemes & Tasks
September 5.
 lE8 Indiar Eronoml: PerJormance and Policiet

rural roads, agricultural research and extension and institutional credit.

Also, effective implementation of EGS should be an area of major
concern. The objective here should be two-fold; to use the scheme for
productive activities which have the potential for sustained employment
generation; and to minimise leakages of benefits from the scheme to
the non-poor.
According to Rao the best way to ensure high productivity of public
works in rural areas is to coordinate ancl integrate EGS with the on-
going programme for 'Bharat Nirman' involving the development of
rural infrastructure like irrigation, roads, water supply, electrification,
housing, etc. As it is, under the food-for-work programme, currently in
operation in 150 most backward districts until the EGS comes into force,
eco-development works such as soil and moisture conservation are to
be given a high priority.
Certain features of the scheme, viz., the responsibility for
implementation entrusted to panchayars, invoking of social auditing
through gram sabhas and the possibility of using the newly-enacted
Right to Information Act hold promise for minimising the leakages.
However, since the risk of leakages arises essentially from the top-down
nature of the scheme, prevailing hierarchical social structure that is
exploitative and competitive politics-unless the political parties rise
above partisan considerations and display the same unity of purpose as
at the time of passing the Bill-it would be difficult to prevent the
scheme from fast degenerating into the likes of the old (Rao, 2005).
while all-out efforts need to be made to reverse this trend, it would
be naive to envisage EGS as the main instrument for poverty eradication
throughout the country. EGS quickly graduating into a programme for
infrastructure development as an integral part of Bharat Nirman provides
an efficient and the least risky way for sustainable rural development
and poverty eradication (Rao, 2005).