Indian Economy assignment

Q1. Was Nehru a Socialist? Discuss.

Ans. Nehru being a socialist is not true in its entirety. He was a prominent
figure in the post-independence era. Bhagwati and Pangariya have quoted him
as being a fabian socialist. Fabian socialism believes in advancement the
democratic socialism principles via gradualist and reformist effort in
democracies, rather than by revolutionary overthrow. He had adopted a
'gradualist' policy of increasing the relative size of the public sector by planning
a steady increase in the share of investment with presumably each five-year
Plan. He did not fully dominate and constrain the actual policy framework that
was adopted under his leadership. According to Vijay Joshi, socialism occupied
an important place in the economy under Prime Minister Indira Gandhi,
Nehru’s daughter. She chose a rapid path of nationalism and moved firmly in
the direction of controls and state ownership. Her decisions revolved around
the public sector and the government. Desai also commented “ Today when
people criticize the Nehruvian model, little do they know that it began with the
daughter and not the man himself.”

Q2. Nehru-Mahalanobis model was a supply side model, what do you think?
Ans. Nehru- Mahalanobis strategy was considered as a cornerstone of 2nd five
year plan. This strategy under the broad spectrum of model, focuses on
accelerating economic growth through investing disproportionately in the fast
growing heavy goods sector. It looks in the direction of increasing investment,
which leads to increase in national income, which in turn causes increase in per
capita and therefore a reduction in poverty. Thus, it basically practices the
trickle down effect. It was criticized for being a supply side model because it
did not take into consideration demand constraint to capital accumulation.
The model was purely based on input and output ratio and it even couldn't
give much recognition to agriculture sector which is one of the main sectors of
indian economy. This problem arose due to its origin and incompatibility with
the indian economy as opposed to the “command economy” of Soviet where
investment could be controlled and regulated by planners and commissars.
Indian private sector can't accomodate to it because its main motive to invest
is always profit and its anticipation. For private sector to invest, demand is the
lubricant. Therefore importance to demand should have been given. As
Balakrishnan rightly points out, it is significant to note that there lies difference
in the model and the plan(strategy) and the demand side has been given
importance in the plan. Those who criticise this model actually failed to
recognise that due importance was given to agriculture sector (as a demand
creating sector) in plan adopted. Nehru accepted that there is no development
if agriculture fails and that agriculture was indeed neglected keeping in view its
great importance. Lacking in capital for development purposes India had no
option but to adopt the strategy of unbalanced growth. Unbalanced growth
works due to linkages in between sectors. So, when Balakrishnan talks in
defense of the industrial sector, he says so many sectors depend on this sector.
Through forward linkages it creates tools and products for other sectors.
Through backward linkages it creates demand for raw materials etc. for other
sectors. There was no specific strategy of how growth will be created in this
economy, Vakil and Brahmananda just highlighted the problem of inadequacy
of wage goods and its need.

Q3. Define wage good. What place wage good had in Vakil Brahmananda plan.
Ans. The portion of the national product that represents the aggregate paid
for all contributing labor and services as distinguished from the portion
retained by management or reinvested in capital goods (means for
consumption) is wage good. It was the centre-piece of the Vakil-Brahmananda
plan. Vakil and Brahmananda’s total emphasis was on the role of wage goods
as capital. Taking into account existence of massive overpopulation in
agriculture, they made an assertion that India needed development strategy
wherein the concealed saving potential that existed in the form of disguised
unemployment in the countryside could be realized. An entrée into what had
gone on in the minds of these two economists is made when we appreciate the
reason for their scepticism (disbelief) regarding the relevance of the Keynesian
problematic for India.
According to Vakil and Brahmananda the multiplier mechanism works only in
the presence of wage goods, and this led them to the assertion of the fact that
employment cannot expand without wage goods. “For these reasons,
agricultural development becomes fundamental. It has to be accorded priority
independent of whatever you place for industry.” Thus, service sector and
agriculture go hand in hand. Some points to be noted about the Vakil-
Brahmananda plan:
a) They seem to have underestimated the importance of capital goods for
raising agricultural production. There is the suggestion that these could
have been imported in return for the wage goods, but since this model
assume wage goods were scarce thus, it is not clear how easily a
sufficient export surplus could have been generated.
b) After second world war we were having nothing on the name of capital
goods and wage goods were also scarce. Our raw cotton and jute
producing areas were there with Pakistan. Agriculture was not able to
take care of our own need of wage goods. So our export prospects were
very dull.
c) The plan was lacking in an “engine of growth”. It couldn’t give us a
strategy of how the model would work. No serious scheme for
transformation of the wage goods sector appeared in the Vakil-
Brahmananda plan.
d) It is possible to notice a strange symmetry between the Mahalanobis
and the wage-goods models with the former downplaying the
importance of capital goods and the latter downplaying the importance
of consumer goods. In fact, in the Mahalanobis two-sector model the
absence of consumer goods cannot constrain output growth.
Mahalanobis saw industrialisation as an input into agricultural growth
and industrialisation was to be promoted by public investment.

Q4. What we mean by export pessimism. Do you think Indian planners were
suffering from it in the early days of Indian planning, if yes, why?
Ans. Export pessimism was based on the assumption that the smallness of
their exports would not be able to promote economic development, and that
international integration would undermine whatever competitiveness an
economy might have achieved. The conclusion was that import substitution
was the only realistic policy. India’s early post-independence development
strategy was marked by export pessimism. To it was added, the import
substitution-led industrialization.There was public-sector control of the
commanding heights of the economy. It was felt that India, with its limited
production capabilities, would not be able to compete in the world export
market. It was believed that it could worsen terms of trade for the country
either because the demand for the exports would be low in the foreign
countries or there would be barriers.
Nehru is seen as an export pessimist since he did not think of trading in
agricultural produce/items. But he was right in doing so. According to
Balakrishnan, there was no question of competitiveness at that time, we were
left with nothing in the name of capital goods and even the wage goods were
scarce. Revolution was not be kept in mind without technology. India also lost
its jute and cotton producing areas to Pakistan after the partition. Agriculture
was not able to take care of our own need of wage goods. So India’s export
prospects were very dim, that is why the planners were export pessimists for
short term but in the long run they were very optimistic. According to Nehru
and Mahalanobis, increase in export was only possible in long run with the
help of sufficient capital and technological advancement.

Q5. How Indian economy performed under Nehru era? Explain.

Ans.
The Trend Growth Rate of GDP (in 1948-49 prices)
Sector 1900-01 to 1946- 1947-48 to 1999- 1950-51 to 1964-
47 2000 65
Primary 0.4 2.5 2.6
Secondary 1.5 5.5 6.8
Tertiary 1.7 5.0 4.5
GDP 0.9 4.1 4.0
GDP per capita 0.1 1.9 1.9
Population 0.8 2.0 2.0

The above table depicts the growth in the Nehruvian era.

The final half-century of colonial rule was exceeded by the growth in the nehru
years. It also depicts quickening of growth in the second half of the 20th
century under Nehru era. Not only is there an acceleration of growth across all
sectors but also the ranking of sectors by growth is reversed early with the
commodity-producing sectors now growing faster than services which had
been the fastest growing segment of the colonial economy. The above two are
the most important observations deduced from the table.
On the lines of what Kuznet suggested, in a poor economy with a low level of
consumption of even the most basic goods, a faster growth of the commodity
sectors is a desirable outcome. A qualitative difference of growth as observed
by Joel Mokyr suggests that growth now ceased to be limited to specific or
small areas, it negated the slow technological progress which was prevalent
in pre-1750 growth period and became more sustainable than before.
The greatest expansion of the economy in the Nehru years is not in industry at
all and neither is it in foreign trade or aid. The data reveal that growth
acceleration in the primary sector, largely comprising agriculture, had
exceeded that of the secondary sector, more or less synonymous with
industry. Sivasubramonian speaks of the economic recovery of the Nehru era
as having been “swift, smooth and remarkable.”
Balakrishnan compares the Indian economy with other Asian economies. We
find out that China and Korea were more or less on par with India in terms of
per capita income in 1950. Korea had a growth rate which is 50% higher than
that of India while India's growth was 25% higher than that of China during
1950- 64. He also compares India’s economy with OECD countries. The author
showed that the rate of growth of population was 2% during the era. If rate of
growth of population to remain at the colonial rate, the rate of growth of per
capita income during 1950-64 would have exceeded to 3%. This is more than
twice the rate of growth of per capita income of US and UK in 1820- 1992 and
exceeds even that of Japan. Balakrishnan gave the credit of accelerated
growth rate to Nehru-Mahalanobis strategy.

Q6. Write a short note on the role of public sector during and after Nehru.
Ans. The public sector was quite infamous for its poor performance, lack of
social responsibility and no innovations. Also, it was believed to be financed
disproportionately by the poor who are not among its principal beneficiaries. A
document on financing of the recommendation for second five year plan by
the planning commission in 1956 states that small amount would come from
Sterling balance for foreign aid, from loans while the bulk of the sources for
financing use requirement of resources must be found within the economy, tax
will be put in place to collect the surplus growing out of national income,
Public sector would be extended to industrial and commercial activities where
necessary, for raising the resources for public purposes. Industrial policy
resolution 1956 states that public sector was expected to increase the revenue
of the state and provide resources for the development in fresh fields (cited by
Krishna 1988). Thus, we find that the official idea of public sector was not
welfarist. the idea of having public sector at all was to raise resources for
public purposes. The role of public sector as resource mobilization is also
recognised by ‘The Economist of the day’.
Economist empanelled by Planning Commission emphasized upon the need of
having a strong taxation system and revision of price policy of important PSEs
with the view to obtain a large surplus as a contribution of the resources for
economic development. In simplicity, profit from the state Enterprises and
additional taxes and loans were more than foreign assistance and contribution
from railway which accounted for 1/8th of the total outlay.
The Public sector flourished under Nehru’s era. Public investment increased
and 15 years record of expansion has not been surpassed. Expansion of
investment was followed by expansion in public savings as a part of total
savings increasing.
Year Public Sector Non- Private sector
Departmental
1950-51 168 9 89
1964-65 817 138 381

The public sector was classified into the public authorities- departmental, the
departments under government to provide essential goods and services like
water,health and transport etc. and non departmental enterprises, Steel,
manufacturing, Oil exploration, electricity, financial institutions etc.
Jagdish Bhagwati, referring to the “losses made by the public enterprises”
stated that, capital intensive white elephants in the public sector is supported
on the basis of models that deducted that this choice of techniques would
yield the highest savings rate and has higher growth.... conclusion that would
now sound laughable had its consequences not been so tragic.
In nutshell, pure politics of subsequent era when the public sector was turned
into a vast machine of dispensing patronage and buying out critically vested
interest of the day. Moreover the growth of the central government’s tax
revenue as share of GDP in 15 years since 1950 has not been exceeded even by
year 2000.
Q7. Write a short note on Growth acceleration in India and Economic reforms.
Ans. According to Bhagwati and Pangariya , it was Indira Gandhi’s rule that saw
a decline in the growth rate. Socialism occupied an important place under her
and she adopted a rapid path of nationalization. By the mid-1970s a lot of
people within the government realized that this increased government
controls, what has been called by Vijay Joshi a ‘command and control’ strategy,
had closed nearly all avenues to growth and that there was a need to unwind
the system. In the late 1970s Congress enacted some business friendly policy
measures. In 1980 the government came forward with an Industrial Policy
Statement which served as a guideline to various liberalization measures
undertaken all through the 1980s, which were initiated by Indira Gandhi
herself and furthered by Rajiv Gandhi.
A myth still prevalent among a few economists is that though growth did occur
after the reforms, however it was not the result of the post 1991 reforms and
can rather be traced back to the 1980s. They claim that the growth started
accelerating in the 1980s. And that the growth in 1980s wasn’t the result of the
reforms of that period but can be attributed to the ‘attitudinal changes’.
Bradford DeLong, an economic historian, in 2003 was the first person to forth
the fact that post-1991 reforms followed, rather than preceded, the growth
acceleration. DeLong however, acknowledged that the reforms and growth
couldn’t be delinked and that the reforms in the 1980s might have caused an
acceleration in the growth. He also said that if it were not for the
comprehensive reforms of the post-1991 variety, the 1980s growth
acceleration might have proven to be just ‘a short-lived flash in the pan’.
Another economist Dani Rodrik with a completely different mindset from that
of DeLong asserted that ‘the change in official attitudes’ in the 1980s towards
encouraging rather than discouraging entrepreneurial activities and integration
into the world economy, probably had more to do with the growth
acceleration rather than any specific policy reforms.
Bhagwati and Panagariya say that DeLong and Rodrik were unfortunately
wrong in their assertions. The claim that the growth in 1990s was not higher
than in the 1980s carries what might be called a fallacy of aggregation. If we
exclude the years 1988-91, growth in the remaining years i.e. 1980-81 to 1987-
88 was 4.6 per cent, which is closer to 4.1per cent that had already been
achieved in 1951-52 and 1964-65. The partial reforms especially in the years
1985-86 and 1986-87 was followed by a ‘super high’ annual rate of growth of
7.2 per cent in 1988-91. This growth was driven by fiscal expansion and
external borrowing, which was not sustainable. The surge ended in a balance
of payments crisis in 1991. However, the 1980s growth could not have been
sustained without the comprehensive reforms of 1991. The 2003-08 period is
known as the Golden period for Indian economy. The shift to 8.5 per cent in
2003-04 and 2010-11 represents a significant jump in the growth rate following
the post 1991 systematic reforms. There was a financial crisis that occurred in
2008, however growth in India continued till 2010 but then the bubble burst
and a slowdown of economy began in 2011-12. Attributing this acceleration to
some kind of attitudinal changes in 1980s, as also saying that attitudinal
changes rather than the partial reforms at that time accounted even for the
modest growth in the 1980s strains credulity.

Q8. Why did India fail to achieve high growth during first three decades of
independence (1950-80)?
Ans. After severe droughts, political battles, change of power in centre,
elections and inflation, growth fell to 2.9 per cent a year from 1965/ 66 to
1979/ 80. This was because Indian policymakers acted with a mistaken
conception of the role of the state. The state neglected some prominent areas
such as primary health care and education for poor. Low productivity of
investment proved to the cause of such low performance. Low productivity in
turn was the product of three features of economic policy: inappropriate and
excessive state intervention in markets; the dominant role of the public
sector; and neglect of critical social sectors. Further controls like license
permit discouraged large industries and controls affected all areas of
business decision- making including investment, output- mix, pricing, credit,
employment, entry, and exit. Especially the controls on foreign trade and
investment that stemmed from the belief in ‘self- reliance’ caused huge loss.
Also, returns in most public sector firms were very low. Keeping them alive
imposed a large fiscal burden. All these factors contributed in failure of high
growth in the given period.

Q9. Elaborate on Various turning points in Indian growth.

Ans. Vijay Joshi has said that, there were two major turning points in Indian
growth in the 20th century. From around 1950 the growth rate of national
income went up from 1 % prevailing in the first half of the century to 3.5 % a
year, mockingly referred to as the ‘ Hindu rate of growth’ for three decades. It
was a major disappointment as the growth was slower than the world average
and the average for developing countries. The first phase followed a strict
‘command and control’ regime. Hatekar and Dongre (2005) had taken the
entire 20th century when they search for a shift in the growth of the gross
domestic product (GDP). Findings of the research shows that the most
significant break of the century is now found to be centred around 1950.
The first three years of Nehru era (1947-1964) were taken up with stabilizing
the country after the trauma of partition. Planned economic development was
initiated in 1951-56, but the detailed, comprehensive planning began with the
second five-year plan. The Mahalanobis strategy aimed to concentrate on the
economy's heavy-goods sector in order to increase capacity for future output.
However, early on this plan there was an acute foreign exchange crisis gave
policy makers to choose control over the private sector. Nehru after his death
was succeeded Lal Bahadur Shastri, his tenure was cut short by his untimely
death but he made the most important contribution- Green Revolution.
Mrs. Indira Gandhi came into power in 1966. The government carried out a
large devaluation hoping to get foreign aid, which did not happen and this
devaluation turned out to be a disaster. In 1969, she nationalized the 14
largest banks and went on to nationalize general insurance, oil companies, and
coal mines in the next few years. All the paths to growth were being shut out
and per capita income growth fell to about 0.3%.
The year 1980, marked the second turning point in India. The country’s status
changed from a British colony to self growing. India achieved a growth rate of
more than 6 % a year from 1980 to 2015, for 35 years. In this phase the
economic strategy moved towards more marketization. According to Vijay
Joshi , the change in policy was incomplete and irregular, and our approach
towards this policy change had been inadequate as a result of which growth
slowed down. In 1980 the government came forward with an Industrial Policy
Statement which served as a guideline to various liberalization measures
undertaken all through the 1980s, which were initiated by Indira Gandhi
herself and furthered by Rajiv Gandhi. Investment rose to 21% of GDP from
17% in the previous years. The liberalizing measures, few as they were, did
help improve productivity. The growth rate rose to 5.6%. After 1980, total
factor productivity, production per capita, and output per worker all increased
dramatically. Bhagwati and Panagariya say that, the partial reforms especially
in the years 1985-86 and 1986-87 was followed by a ‘super high’ annual rate of
growth of 7.2 per cent in 1988-91. This growth was driven by fiscal expansion
and external borrowing, which was not sustainable. The surge ended in a
balance of payments crisis in 1991. However, the 1980s growth could not have
been sustained without the comprehensive reforms of 1991.
The 2003-08 period is characterized by high growth rates. Between 2003 and
2011, the average growth rate was about 8.5%, termed as ‘super fast’ growth
rate by Vijay Joshi. But the UPA cannot take credit for this as there wasn’t
much supply side reform during this period and the global economic
environment was highly supportive. There was a financial crisis that occurred
in 2008, however growth in India continued till 2010 but then the bubble
burst and a slowdown of economy began in 2011-12.

Q10. Economic development in India - achievements and failures.

Ans. First talking about failures, primary education had been neglected under
Nehru leadership and Balakrishnan too supports this argument.
Krishnamoorthy highlighted low allocation of budget to education, speaking of
it as being lopsided.
Another failure that Vijay Joshi acknowledges is that, the poverty ratio fell
significantly in the fast growing period of 1980, but the rate of decline was
very slow. He also says that the ratios have been falling in all states but
unevenly. In 2011 they ranged all the way from 40% in Chhattisgarh to 7 % in
Kerala. The Northern and eastern states have worst poverty than the one in
South and west. Poverty has fallen in the disadvantaged groups ( SC, ST, and
Muslims) but the disparity rates between their poverty rates and the all India
average has remained unchanged. Health and literacy indicators are also much
worse than the national average among the disadvantaged groups. The
literacy rate among young people has risen but the dropout ratio is also very
high.
India has been facing a rising trend in inequality. A large part of the rise in
inequality took place between 1993-94 and 2004-05. According to the world
bank data, a moderate rise between 1993-94 and 2011-12 from 30.8 per cent
to 33.6 per cent nearly all of which took place in between 1993-94 and 2004-
05. It follows that poverty especially urban poverty would have fallen faster
if inequality had not worsened. The Gini coefficient faced by India were above
50%. There has also been a salient rise in the regional inequality. The gap
between richer and poorer states widened. The disparity between their growth
rates and the higher growth rate of the richer states remains.