Explain the principal causes of deceleration in industrial growth during the mid 1960's to mid

1970's in India. Do you think that the reasons for the slowdown in industrial growth since the late
1990s are basically different from those of the earlier deceleration ? Answer with proper
arguments. (20 mks.)

Industrial growth came to a halt between 1964-1980, growing slower than GDP and reducing the
possibility of industrialisation-driven poverty alleviation.

Causes

- Industrial licensing at its peak

o C Rajgopalachari’s ‘license-permit-Raj’ characterisation
- Import controls and restrictions strengthened
o According to Bhagwati, this encouraged inefficient Indian firms to thrive – import
competition might have helped improve their efficiency
- For the first half, agri. grew very slowly and frequent droughts happened
o Reduced demand for industrial output due to significant backward and forward
linkages between the two sectors
- Shock from nationalisation of banks in 1969 dried credit for some time
- For the few exporting enterprises, global growth slowed in early-1970s with oil-price shock
and stagflation in advanced countries
- Rising inflation domestically
o Oil price shock + supply chain bottlenecks magnifying
- Corruption, political instability (Emergency) and war in 1971

Causes of post 1997-slowdown

- Spare capacity was exhausted post reforms between 1991 and 1997
- Monetary tightening post 1997: real interest rates rose
- Asian Economic Crisis reduced global growth
- Insufficient progress in factor market reforms (land, labour)
- Reform momentum slowed
o Disinvestment proceeded very slowly, current account convertibility only slowly
introduced
- Competition from cheap imports
- Slowdown in agriculture post 1991 (growth roughly 2% in that decade) reduced industrial
demand
- Political instability between 1996-1999

Conclusion

Although some commonalities exist, the reasons behind the two decelerations are different as
pointed out by R. Nagaraj too. The former was the outcome of the peak of the industrial licensing
regime while the latter was a short-term consequence of reforms (industrial growth was roughly
10% the next few years post 2003). Demand factors from agriculture and global slowdown along
with political instability are common factors.
Would you advocate a programme of Universal Basic Income (UBI) to reduce extreme poverty in
India ? Discuss in detail. (15 mks.)

According to Economic Survey a UBI could cost 4-5% of GDP. A UBI will ideally have the following
characteristics:

Universal – Available to everyone – not means tested

Basic – Sufficient money for basic needs

Income – Cash transfer on a regular basis (not one-time)

Pros

- Poverty still high at 22% in 2011-12; need new approach to reduce it

- Present welfare schemes ridden with corruption
o 46.7% grain diverted under PDS (Gulati and Saini, 2015)
o Malpractices in MGNREGS
- Missing out eligible beneficiaries a major concern with current anti-poverty programmes
o E.g. 8 crore have no ration card
- DBT and JAM made efficient transfers possible
- If all subsidies are phased out, fiscal room of 4% of GDP can be made available
- Moral imperative to reduce poverty beyond 22% in a $3 trillion economy

Cons

- Fiscally unsustainable
o If subsidies are not phased out, amount may increase with political cycle
- Even the rich get a UBI transfer
o Wastage of fiscal resources
- Might reduce labour supply and job hunt
o Although Banerjee et al. found no effects in an RCT
- Amount that is transferred may be spent on sin goods
o Unequal distribution within family (women, girls)
- Multidimensional poverty will not decrease just by cash transfer
o 377 million MPI poor (2018); need other assets like housing, sanitation too that are
not supplied by private market.

Conclusion

More debate and analysis is needed on UBI. Its fiscal cost must be contained by reducing other
subsidies and pilots must be conducted at the state level to test impact on poverty.
Examine the role of capital account convertibility in controlling deficit in the current account of
India's Balance of Payments (BOPs). (15 mks.)

Capital account convertibility (CAC) is when there are no restrictions in import and export of capital
(debt, equity and other investments) to and from a country.

- India faces a persistent deficit in BOP Current Account (CAD) making it a net importer of
capital
- Rupee is convertible on the current account but many restrictions apply on capital
transactions (mostly on borrowing from abroad)

Role of CAC in controlling CAD

- If CAC is allowed:
o Capital inflows will increase in the economy
o Thus the rupee will appreciate
o In the short run since imports are more inelastic to exchange rate changes, CAD
improves because foreign imports become cheaper (J-Curve)
o Eventually, fall in rupee value of imports will lead to more imports
o Exports become less competitive in world markets and hence decline
o Thus CAD will deteriorate eventually as CAC is permitted and the rupee appreciates
from more foreign inflows
- However if capital starved enterprises get access to cheap credit and equity from foreign
institutions, their competitiveness might improve. Thus exports increase and CAD improves.
(Rodrik says little evidence for this because flows will be short-term and highly speculative).
- A boost in debt domestically might also increase domestic output (since bank lending is low
in India – only 50% of GDP) which spurs imports (oil etc.) as demand rises.

Conclusion

CAC might worsen the CAD by downward pressure on $-rupee exchange rate. However it might
boost competitiveness of few capital starved firms prompting them to import and export more,
having an ambiguous impact on CAD.

Do you think that the fall in public investment in agriculture adversely affects the productivity
growth of this sector in India ? Give reasons. (15 mks.)

Public investment in agriculture was roughly 44,000 crores in Budget 2020-21, four times less than
input subsidies of over 1.7 lakh crores (Gulati, 2020)

Effects

- Public investment in agriculture in India is stagnant at 8% of GDP

o Capital-output ratio of 4 => agri-GDP growth of 2% (half of 4% aimed by 12 th five
year plan)
- Irrigation projects have proceeded slowly
o Over 40% of area is still unirrigated
- Private investment in agriculture is low
o Private investment has been low and stagnant overall at 11% of GDP and agriculture
is no exception
 - Productivity improves by R&D and new technology
o Government’s agricultural research universities have been starved of funding
(Gulati)
- After green revolution of 1970s, few technological developments of that magnitude
o GM crops have also been underexploited due to various concerns
- Focus has shifted on food, water, fertiliser and power subsidy
o No incentive for farmers to cut costs and raise productivity

What type of public investment is needed

- Fan (2008) has shown that returns from investment in R&D are highest now
o Higher than even on irrigation
- Govt. should invest in IARIs and appoint directors at vacant positions

Conclusion

Productivity growth in India’s agriculture sector has been dismal partly due to more emphasis on
inefficient subsidies and in general reduced investment by Govt. in agriculture post 1991. To achieve
4% agri-GDP growth and double farmers’ income by 2022, productivity growth and rise in public
investment are essential.

Do you agree that the development of Indian railways during the British Rule helped facilitate the
process of industrialisation ? Give reasons. (10 mks.)

The Railways expanded rapidly after its introduction in 1858 and soon became one of the largest
railway networks in the world. Karl Marx wrote that this would facilitate industrialisation in the
Indian subcontinent.

Advantages

- Food prices fell due to specialisation

- Cotton and jute could be transported more easily – boosting industry in Bombay
- Steel industry in 20th century got encouragement due to easy transport of coal (but still most
of the coal was imported)
- Labour movement eased – supply of labour made available

Drawbacks

- Most of the investment in railways happened from abroad

- Locomotive production and other backward linkages might have spurred industrialisation
bust most of the goods were imported
- European exports had easier access to Indian market
o Railways was strategically placed towards this objective
- Frequent droughts due to commercialisation of agriculture prompted by Railways

Despite its potential Railways could not become a vehicle for industrialisation in India as it had in
other countries due to discriminatory colonial policies.