MODULE 1: ALTERNATE STRATEGIES OF DEVELOPMENT

• Historically, India was an active trading nation, and trade relations led
to a significant influence of Indian culture throughout Southeast and
East Asia until the colonial period.
• Spices and fine textiles formed two important exports of the
subcontinent.
• The colonial period was marked at various times by transfers of wealth
from India to Europe, by restrictions on trade, and even direct
limitations on domestic producers.
• This created shortage of funds for investment in infrastructure, lack of
domestic capital market and less developed technology.
• Thus, India’s development strategy after independence was a result of
the strong feeling of nationalism (economic, social and political), which
was essentially a reaction to the colonial regime’s laissez faire and free
trade policy.
• India’s post-independence development strategy was equally inspired by
the then apparent success of state activism in two contrasting
institutional environments.
• The first one was that of the centrally planned economy of the erstwhile
USSR where centralized industrial investment planning had been
bringing about rapid industrial transformation of an underdeveloped
economy since the late 1920s under Communism.
• The second one was that of the capitalist United States of America
where state intervention in a predominantly free-enterprise market
economy helped recovery from the Great Depression of the 1930s.

India’s Post-Independent Development Strategy:

• India’s post-independence development strategy was based on the
following features:
• (i) Public Sector Expansion;
• (ii) Discretionary Controls Over Markets and Private Economic Activities;
and
• (iii) Stringent Foreign Exchange and Import Controls.

Basic Contours:
• In order to tackle the existing problems and challenges before the Indian
economy at the time of Independence, the development strategy in the
early phase focused on:
• Developing a sound base for initiating the process of long term growth;
• A high priority to industrialization when actual development begins; and
• Emphasis on the development of capital goods industries against
consumer goods industries.
• Thus, the centerpiece of India’s development strategy was
modernization through industrialization. Private industrial effort was
viewed as inadequate for the task.
• Underlying this view was a realization that infrastructure has public good
aspects, or positive spillovers that could lead to under provision if left
entirely to the private sector.
• Even non-infrastructure sectors such as steel, chemicals or machine
tools may be subject to coordination or linkage issues that require a ‘big
push’ further supporting public intervention.
• An alternative approach of using tax and subsidy instruments to
influence private actors was possibly viewed as infeasible, given the
limited scope of tax base and the quantity of revenue at the time.
• Thus, public sector enterprises were created to take leading roles in all
industries and sectors viewed as central to the industrialization
programme, including steel, chemicals, and engineering, as well as trade
and finance.
• India restricted international trade and finance for various reasons.
• The negative perceptions of the results of international openness that
were formed during the colonial period continued even after
independence.
• Two more academic arguments are given for the policy restricting
international trade and finance.
• The first is the older infant industry argument which suggested that
initial protection from external competition was essential for
industrialization so that firms and industries could develop sufficiently to
compete internationally. This view also included restrictions on foreign
investment and technology transfer, again because these would stunt
the growth of domestic industries.
• The second argument held that exports of goods in which developing
countries had natural comparative advantages, such as primary
products, were subject to inelastic demand, and therefore, unlikely to be
an engine of growth.
• Import substitution was, therefore, another feature of the India’s
development strategy.
• This policy was justified, in addition to the reasons stated above, on
account of developing its industrial structure without the fear of
competition from abroad, for achieving self-sustainance, to save foreign
 exchange, and to solve the problems of unemployment and
underemployment.
• The policy of import substitution was, however, severely criticized.
• Import substitution is successful if significant progress is made in
industrialization.
• The cost of production in import substituting industries is very high,
necessitating recourse to very high protective tariffs.
• This also led us to depend upon the import of essential goods.
• This policy created an excessive protectionism, weakened and even
destroyed incentives necessary to improve the quality of output making
it thus less competitive in the international markets.
• A final, significant dimension of development strategy pertained to
improving the wellbeing or capabilities of the population, by public
provision of minimum levels of basic services in areas such as health and
education.
• However, matters relating to various dimensions of human development
did not receive any place in the plan documents during the first three
Five-Year-Plans.

Problems in the Implementation of the Development Strategy:

• In each of the dimensions of India’s development strategy (stated
above), three sets of problems arose with implementation.
• First, policy measures often were inferior ways of achieving avowed
goals.
• Second, the system of discretionary bureaucratic control created classic
‘vested interests’ that prevented reform.
• Third, the short-run political logic of governing India often conflicted
with long-term economic rationality.

First Problem:
• First, policies were often misguided, because economic principles were
not always well understood, at least by the policymakers.
• Quantitative controls, case-by-case discretion for approvals, and outright
prohibitions permeated all aspects of the economy, including industry,
agriculture and international trade and finance.
• Even the use of taxes and tariffs to influence the price system and
markets to achieve better resource allocation proved ineffective, leading
to multiple, arbitrarily high and non-transparent rates which encouraged
tax evasion and distorted decision-making.
 • A major example of price distortion occurred with the exchange rate,
which was kept artificially high, contributing to a fulfillment of the
attitude of export pessimism.
• Competition policy was not applied in an economically rational manner
and was, in any case, undercut by the artificial restrictions placed on
industrial capacity.
• In the realm of social welfare, a major example of policy sub optimality,
one that has still not been corrected completely, has been in the design
and application of laws framed to protect the interests of labour in the
organized industrial sector.

Problem 2:
• Second, once policies that created distortions were in place, situations
almost invariably arose where there were beneficiaries of these
distortions, through the economic rents created.
• Customs officers and income tax officials became notorious for
extracting payments in return for ignoring punitive restrictions or tax
rates, but all government bureaucrats were put in positions where they
had the potential to profit from the lawful or unlawful exercise of their
discretionary control.
• In many cases, politicians became eager collaborators in, or even drivers
of, this process to claim their share of the rents.
• Of course, policy restrictions and entry barriers also created rents for
private economic actors: industrial license holders, middlemen in
agricultural markets, licensed foreign exchange dealers, import license
holders and so on.
• Indeed, there was a long period after independence in which economic
controls steadily increased, as more and more groups and organisations
sought to create rent-seeking opportunities.

Problem 3:
• Third, India’s size and diversity on one hand, and the multiplicity of
development objectives on the other, required a joint effort by both
public and private actors.
• However, a system in which the government occupied the commanding
heights became a natural tool for seeking political advantage.
• Once the new interest groups were created as beneficiaries of the
transfers or economic rents, they made it difficult to reverse the
process.
 Consequences of Post-Independence Strategy:
• Persistent foreign exchange shortages resulting from a deliberately
maintained overvalued exchange rate provided a self-fulfilling
justification for stringent quantitative controls on foreign exchange and
imports that protected domestic producers of import-competing goods
and generated shortage-induced large rents on imported products.
• This clearly reflected the influence of the ideology of economic
nationalism.
• The domestic markets insulated from external competition encouraged
inefficiency both in public and private sector units.
• Heavy-handed regulation of markets and private industrial activity
generated ample opportunities for politicians and bureaucracy (that
exercised discretionary powers from case-by-case disposal) and large
private industrialists (to seek discretionary favours in a chronic shortage
economy) to earn rents.
• Indiscriminately extended PSEs, with a legal identity distinct from that of
government, became what as private trading posts in which favours,
policies and contracts are freely traded for money and gains, and rents
on political and bureaucratic power are most transactions.
• Thus the three elements of the development strategy opened up
avenues for unproductive profit-seeking activities, stifled the creative
dynamism of private enterprise and suppressed the potential
capabilities of markets while fostering inefficiency in the expanding PSEs.

Evaluation of Post-Independence Development Strategy:

• The broad objectives which guided the development strategies are as
follows:
• Achievement of a high rate of economic growth leading to a sustained
improvement in the levels of living of the population.
• Reduction in inequalities, and more especially, an accelerated effort to
remove poverty at a pace faster than what would be achieved solely
through the normal growth process.
• Development of a mixed economy with a strong public sector, especially
in key areas of the economy.
• Achievement of a high order of “self-reliance”.
• It meant basically two things:
• First, development must be financed, as far as possible, from domestic
savings, avoiding excessive dependence on external assistance.
• Second, self-reliance also meant a conscious effort at developing a broad
domestic production base and an indigenous technological capacity,
 both of which were felt to be essential requirements for building a
strong industrialized economy.
• Promotion of balanced regional development, with a narrowing of
economic difference across regions.

Evaluation with Growth Performance:

• India grew at an annual average growth rate of 3.5 per cent during 1950-
51 to 1980-81, ignoring yearly fluctuations.
• This was below the targeted growth rate of 5 per cent per annum as
mentioned in the draft plan document.
• Agricultural performance also improved, but with large variations. It not
only contributed to the faster growth of the overall economy, but also
stimulated the industrial growth through well-known linkages between
the two sectors.
• Agricultural policy evolved to make Green Revolution a great success.
• Efforts were made to expand irrigation facilities from major to medium
and minor irrigation.
• Banks were nationalized so as to facilitate rural credit for the purchase
of bio-chemical inputs needed for high-yielding varieties.
• These measures were accompanied by a policy for providing effective
price support at remunerative prices.
• Research was promoted to adapt high-yielding varieties to local
conditions and to develop new varieties continuously.
• Despite these measures, regional disparities in agriculture are found to
increase by some studies.
• The compound growth rate of production for all crops has increased
from about 2.5 per cent during 1950-51 to 1967-68 to about 3 per cent
during the decade of 1970s.
• Industrial policies were not framed solely by the immediate
requirements of growth maximization. They were also influenced by
active Government intervention in pursuit of some of the other
developmental objectives.
• A high degree of “self-reliance” has been achieved in the sense that a
highly diversified industrial base has been created, catering to the
domestic needs of the economy in a very wide variety of products.
• The entrepreneurial base of the economy has also been widened greatly,
with the emergence of a number of new large and medium-scale
industrial houses and a profusion of small-scale entrepreneurs.
• Finally, industrialisation has spread into regions where industry did not
exist earlier and into which it probably would not have gone for many
more years but for government intervention.
• Against these achievements there are some obvious shortcomings.
• Industrial growth has not been as rapid as was expected. After a
promising early period in the fifties and early sixties, industrial growth
slowed down considerably, and from 1964-65 to 1975-76 the index of
industrial production showed a growth rate of only 4 percent per year
and value added in industry grew at 3.5 percent per year.
• There is evidence of a gradual acceleration after the mid-seventies,
through with considerable year-to-year fluctuations.
• Another major shortcoming in India’s industrial sector was its lack of
international competitiveness in terms of cost and quality and
consequent poor export performance.
• A number of official reports and academic studies have documented
that problems were created by a control system consisting of detailed,
often multiple, regulation and scrutiny.
• This system has operated in a manner which hampered the ability of
industrial units to take rational investment decisions, limited their ability
to modernize existing capacities and even discouraged expansion of
production beyond licensed capacity.
• It has also restricted competition which would have been a spur to
improved quality and lower cost.
• Much of the problem arose because of the multiplicity of objectives to
which industrial policy was tailored, each involving an intervention
which had an economic cost.
• An important determinant of industrial performance in India was the
performance of the public sector.
• The creation of a large public sector presence in the Indian economy was
one of the explicit objectives of India’s development strategy and the
success in achieving this objective is evident.
• Public sector output at the end of 1970s accounted for about 40 per cent
of the output of the organized industrial sector and 27 per cent of total
industrial output.
• Public sector units were expected to operate efficiently and generate
resources for further investment.
• Instead, they were saddled with multiplicity of often-conflicting
objectives, they had to accept politically driven inappropriate
administered prices for their products and services, and were subjected
to bureaucratic and political interference, which made their efficient
operation difficult.
• They also faced the 'soft-budget constraint’ with neither penalty for
losses nor rewards for efficient functioning.
Evaluation (financing):
• India’s economic development has largely been financed by domestic
savings and investments.
• The rate of gross domestic investment in the economy increased from
about 10.8 per cent during 1950s to 17 per cent in 1960-61, to 18 per
cent in 1970-71 and further to 24.7 per cent in 1980-81.
• This high rate of investment was financed by high rate of domestic
saving, thereby justifying to the success of self-reliance in this sense.
• Gross domestic savings rate has increased from 9.6 per cent during
1950s to around 13 per cent in 1960-61, then 17 per cent in 1970-71 and
further to around 22 per cent in 1980-81.
• An important feature of the increase in the aggregate savings rate is that
it has occurred entirely because of the rapid growth in private household
savings as a percent of GDP.
• Following nationalization of the Indian commercial banks in 1969, there
was a massive expansion of the banking system spreading bank branches
to all parts of the country, including also rural areas.
• The spread of bank branches definitely helped to mobilize private
savings for investment in the organized sector.
• Interest rate policy was also geared to encourage household savings.
• This favorable interest rate policy was reinforced by fiscal incentives for
savings built into the direct tax structure which provided deductions
from taxable income of the interest earned on a wide range of financial
instruments.
• There were also some weaknesses in the financial system existing at that
time.
• Complex structure of differential indirect tax rates as also administered
interest rates and labour legislation led to distortions in relative product
and factor prices and resulted in not only inefficient allocation but also
misallocation of resources out of line with relative scarcities of capital
and labour.
• Indian government used the public sector dominated financial system as
an instrument of public finance with a complex set of regulations on
fixed deposit and lending rates, and channelled credit to the government
and priority sectors at below market rates.
• All these amounted to tax on financial intermediation, which not only
reduced the allocative efficiency of intermediation but also resulted in
the loss of efficiency and lower real growth of economy.
 • These regulations made maximisation of working capital and cash-credit
loans and project financing as the primary objectives of banks and
financial institutions.
• Monitoring debtors and recovering loans got low priority encouraged by
budgetary support.
• As a result lending occurred with inadequate project appraisal and
favoured companies established in line with government dogmas and
loan amounts did not have any relation with perceived risks and
expected returns.
• In addition, there was no uniform system of accounting practices, no
provisioning for non-performing assets and valuation of securities held
in the bank.

Evaluation (equity and social justice):

• The objective of equity and social justice is multi-dimensional in nature.
• Besides incomes and levels of living of the people, there are other
aspects which require careful examination while assessing the social
welfare of the people.
• These include provision of basic (minimum) social services such as health
and education to not just the poor, but to the entire population, safe
drinking water and sanitation, social disparities arising out of the cast
system, and of course, equality of opportunity.
• The quantitative assessment of each of these dimensions is hindered by
the lack of the reliable continuous time series data for India.
• For instance, there is no government agency in India which publishes
data on income distribution.
• Only recently, Planning Commission have come up with its own
estimates of income inequality across Indian states as well as for the
entire country based on monthly per capita consumption expenditure.
• These estimates seem to suggest an increase in the Gini coefficient in
rural and urban areas for India from 1973-74 to 1977-78, but the rural
Gini has come down thereafter.
• However, the gap between rural and urban Gini coefficients appears to
have widened over time, as the urban Gini did not register a significant
decline over the periods.
• The determination of poverty line and hence the estimation of the
incidence of poverty has been controversial and questioned by many
researchers.
• However, if we rely on the estimates released by NSSO, the incidence of
poverty has registered a continuous decline for rural and urban areas as
well as for the entire country.
 • India registered an annual average growth rate of about 3.5 per cent
during 1950-51 to 1980-81 and the population during this period
increased roughly by 2.1 per cent per annum on average, thus leaving
little room for per capita income to increase.
• The situation of employment generation in the country has not been
very satisfactory.
• Labour force increased at a faster pace than the employment
opportunities.
• The share of total employment in the unorganised sector has been larger
than that of the organised sector.
• The improvement in other social indicators has also been quite visible.
• The demographic indicators including birth rate, death rate and life
expectancy at birth have exhibited impressive progress in the desired
direction.
• Similar is the case with education and health indicators.

A Shift in the Development Strategy:

• As stated in earlier discussions, the development strategy followed since
independence was characterised by highly, but ineffectively regulated
private sector and market operations, import restrictions and exchange
rate controls.
• However, inefficiencies of public sector, government’s inability to
control the activities of the private sector and lack of competition
created hurdles in the path of free and rapid economic development.
• Furthermore, two major changes in the international economics during
1970’s compelled the Indian policy makers to rethink about economic
nationalism which resulted in a policy of isolation from the world
economy and reshape the strategy of development.
• The first was the breakdown of the Bretton Woods system of fixed
exchange rate in 1972.
• This was the beginning of the floating exchange rate regime, which was
marked by violent fluctuations in currencies of major trading nations.
• The second change consisted of two hikes in oil price by OPEC in 1973
and in 1979.
• These events along with the poor performance of agriculture and
industry during 1970’s combined with the political instability led the
Indian policy makers begin some piecemeal reforms.
• They introduced some liberalisation in the trade and exchange rate
regime by devaluing the rupee, relaxing some import controls and
linking Indian rupee with British pound sterling.
 • These steps helped in boosting up Indian exports and also opened up job
opportunities for Indian migrant labour in the Middle East markets.
• As a further move towards the shift in the approach, committees were
set up in the first-half of 1980’s to examine the earlier discretionary
control regime.
• Following their recommendations, Domestic industrial controls were
gradually loosened.
• Investment in modern technology areas such as telecommunications
was promoted.
• Rules and procedures were made flexible for private participation and
market operations.
• Central PSEs were given limited autonomy to improve their financial
performance.
• Measures were also taken to overcome financial constraints.
• Introduction of LTFP in the parliament and partial deregulation of
financial sector could not contribute much.
• The price and distribution controls that had led to persistent shortages
and corruption were also removed in the case of cement and aluminium.
This led to the expansion of production and alleviation of shortages.
• As a result of these measures and a revised approach adopted in the
Sixth and Seventh Five-Year Plans, the aggregate growth rate of GDP
rose from an average of 3.5% during 1950-51 to 1979-80 to about 5.7%
during 1980’s.
• This comprised of an average growth rate of 4.4% in agriculture, around
7% in manufacturing and 6.7% in services.
• This step up in the growth rate during 1980’s is attributed to less
wasteful utilisation of resources which was the result of reduced
magnitude of the incremental capital output ratio.
• However, trade liberalisation measures could not help much on external
front, as trade to GDP ratio declined from 13.1% in the first-half to
12.4% in the second-half of 1980’s.
• Departing fiscal conservatism, an expansionary fiscal policy was adopted,
financed by borrowing at home and abroad at increasing cost.
• Growth accelerated to 5.7% during the 1980s, but the cost of this debt-
led growth was growing macroeconomic imbalances (fiscal and current
account deficits), which worsened at the beginning of the 1990s as a
result of external shocks and led to the macroeconomic crisis.

Market-Led Development Strategy:

• An important feature of India's reform programme, when compared
with reforms underway in many other countries, is that it has
emphasised gradualism and evolutionary transition rather than rapid
restructuring or "shock therapy“.
• One reason for gradualism is simply that the reforms were not
introduced in the background of a prolonged economic crisis or system
collapse of the type which would have created a widespread desire for,
and willingness to accept, radical restructuring.
• The reforms were introduced in June 1991 in the wake a balance of
payments crisis which was certainly severe. However, it was not a
prolonged crisis with a long period of non-performance.
• On the contrary, the crisis erupted suddenly at the end of a period of
apparently healthy growth in the 1980s, when the Indian economy grew
at about 5.5% per year on average.
• This may appear modest by East Asian standards, but it was much better
than India's previous experience of 3.5 to 4% growth and was also better
than the average growth rate of all developing countries taken together
in the same period.
• The fiscal stabilisation programme was initiated in view of the high fiscal
deficit, current account deficit and high inflation in 1990-91.
• Fiscal measures included abolition of export subsidies and partial
restructuring of fertilizer subsidies, tax reforms, and expenditure
restructuring.
• Besides this, it was announced that the budget support to the loss
making public sector units in the form of government loans to cover
their losses would be phased out.
• Industrial policy and foreign investment was another area of reform.
• The system of pervasive industrial licensing prevalent earlier, which
required Government permission for new investments as well as for
substantial expansion of existing capacity, was virtually abolished.
• The parallel but separate controls over investment and expansion by
large industrial houses through the Monopolies and Restrictive Trade
Practices (MRTP) Act were also eliminated.
• Restrictions were also made flexible for those medium scale industries
had substantial export potential such as toys and garments.
• The list of industries reserved for the public sector was drastically
pruned and many critical areas were opened up to private sector
participation and for foreign investment also, thereby encouraging
private actors.
• These included key areas such as electric power generation and
telecommunication services.
• Foreign investment with equity exceeding 51 per cent or investment
outside the areas reserved for the purpose required approval from
Foreign Investment Promotion Board (FIPB).
• In keeping with the objective of greater openness and outward
orientation, trade policy was very substantially liberalised for all except
final consumer goods.
• The complex import control regime earlier applicable to imports of raw
materials, other inputs into production and capital goods was virtually
dismantled.
• Quantitative restrictions on imports were largely eliminated.
• The removal of quantitative restrictions on imports was accompanied by
a gradual lowering of customs duties.
• Exchange rate policy also underwent through a series of transitional
regimes since 1991, leading to a total transformation.
• The reforms began with a devaluation of about 24% in July 1991 in a
situation in which extensive trade restrictions were still in place.
• Government gradually moved to current account convertibility in 1994
and later on, capital account was also made partially convertible.
• Instead of outright privatisation the Government initiated a limited
process of disinvestment of Government equity in public sector
companies, with Government retaining 51% of the equity and also
management control.
• The disinvestment helps provide non-inflationary resources for the
Government Budget, without adding to the fiscal deficit.
• The Sick Industrial Companies Act was amended to bring sick public
sector companies under the perview of the Board for Industrial and
Financial Reconstruction (BIFR) in the same way as the private sector
companies were covered.
• Financial sector reforms were initiated to improve banking sector and
capital markets.
• For this purpose, CRR and SLR were reduced progressively and interest
rates were deregulated so as to make them market related.
• Banks have been given much freedom.
• They have been opened for competition with private banks.
• Foreign bank branches were expanded for increased competition.
• Capital market was liberalised with the repeal of Capital Issues Control
Act in May, 1992.
 • The Securities and Exchange Board of India (SEBI) has been established
as an independent statutory authority for regulating the stock exchanges
and supervising the major players in the capital markets (brokers,
underwriters, merchant bankers, mutual funds, etc).
• The focus is not on control and Government intervention but on
establishing a framework of regulation to ensure transparency of trading
practices, speedy settlement procedures, enforcement of prudential
norms and full disclosure for investor protection.
• An important initiative taken as part of the reforms is the opening up of
the capital market for portfolio investments.
• Indian companies have been allowed to access international capital
markets by issuing equity abroad through the mechanism of Global
Depository Receipts.
• Foreign institutional investors managing pension funds or other broad
based institutional funds have been allowed to invest directly in the
Indian capital markets.
• Favourable tax treatment has been granted to such investments to
encourage capital inflows through these routes.

Appraisal of New Development Strategies:

• Since 1991-92 onwards, growth continued at similar rate as 1980’s, but
declined during 2000‐2004.
• Structural changes continued at an accelerated pace with share of
agriculture sharply declining and services emerging as the major sector
and with very small increase in the share of industry.
• Within this phase, period 2005‐10 has seen a sharp acceleration in
growth rate, despite a slowdown in 2008‐09.
• Share of agriculture has declined from around 20 to 16 per cent, that of
services has increased from 54 to 59 per cent and that of industry has
stagnated at around 25 per cent.
• Besides a faster structural shift from agriculture to non‐agriculture and
emergence of services as the dominant part of the economy, another
major change that the Indian economy has seen during the past three
decades, especially in the post-reform period is a sharp rise in the
importance of the external sector.
• Exports and Imports together accounted for about 15 per cent of GDP in
1980‐81. By 2009‐10 the figure has gone up to 35 per cent.
• The import structure has changed in favour of energy and some new
export oriented raw materials and intermediate manufacturers over the
past three decades.
• Capital goods imports have somewhat declined in importance.
• What is particularly intriguing to note is that the share of labour and
resource intensive products has increased while that of medium skill and
technology intensive manufactures has declined.
• Growth rate of exports averaged to 13 per cent per annum in the 1990s
and 14 per cent during 2000‐2010.
• Thus the post-reforms export growth has been quite high though an
increasing trend seems to have started much earlier.
• The major change in the structure of Indian exports started during
1970s.
• By 1991, agricultural products and ores and minerals made up less than
one‐fourth and manufactured products over 70 per cent of India’s
merchandise exports.
• The trend has continued in the post-reform period: agricultural and
allied products now constitute less than 10 per cent and ores and
minerals 4 per cent. Manufactured products, however, seem to have
also lost after rising to about 79 per cent in 2000‐01, their share has
seen a decline to about two‐thirds in 2008‐09, mainly as a result of an
increase in the exports of iron ore to China and Japan.
• Export basket has become highly diversified.
• The number of items exported has increased from 71 in 1962 to254 in
2007, most new items belonging to the chemicals, metals and machinery
groups of products.
• What is however, intriguing to note is that this increase has not been
mainly contributed by products which are expected to utilise the
country’s comparative advantage of abundant availability of labour.
• Labour intensive products broadly defined, constituted about two‐thirds
of India’s merchandise exports in 1991, their share has declined to about
one half now.
• Defined more specifically, as unskilled labour and resource intensive
products, their share has declined from around 49 per cent in 1996 to 31
per cent in 2006.
• According to some other estimates, the share of unskilled labour
intensive products has declined from 28 per cent in 1993 to 15 per cent
in 2010 and that of capital intensive products has increased from 25 per
cent to 54 per cent during this period.
• The emerging pattern of Indian exports is thus not utilising the
comparative labour advantage the country is supposed to have and
export growth is, therefore, not likely to fulfil the expectations regarding
employment generation.
• Another disturbing feature of the emerging trends in India’s trade
structure during the post-reform period is that of an increasing trend in
the import intensity of exports, both at the aggregative sectoral level as
well as in the segments of the manufacturing sector.
• A rise in import intensity is likely to have a negative impact on export
growth, output growth and competitiveness.
• Increasing importance of services in exports made a significant
contribution to the structural changes in the Indian economy.
• The period 1990 to 2010 has seen a rapid increase in the share of
services both in GDP and exports.
• Growth in services is primarily accounted for the growth of
communication and business services.
• Growth rate of manufacturing sector accelerated from about 6.5 per
cent during the first decade of economic reforms to around 8 per cent
during 2000 to 2005 and further to nearly 10 per cent during 2005 to
2010.
• The share of modern industries has gone up, while that of traditional
industries came down, both in unorganised and organised segments of
manufacturing sector.
• The share of public sector in manufacturing output rose from 7 per cent
in 1960-61 to 26 per cent in 1980-81. Its share, however, declined in
post-liberalisation period to reach at 22 per cent in 2009-10.
• The post-reform period has witnessed some major changes in the
structure and characteristics of organised manufacturing sector.
• Agro‐and material based industries like textiles, food and food products,
paper and paper products and beverages have declined in importance
while capital intensive industries like coke and petroleum products,
motor vehicles and basic metals have sharply increased.
• On the whole, capital goods have maintained their share, the share of
consumer goods has increased and that of intermediates has declined,
probably due to liberal imports of parts, components and accessories.
• The share of capital intensive industries has increased rapidly and that of
labour intensive industries declined.
• Capital intensity even of labour intensive products has also sharply
increased.
• Labour productivity has increased rapidly and capital productivity has
sharply declined.
• These developments, however, have not been able to generate enough
employment in organised and unorganised manufacturing sectors.
• The unorganised manufacturing sector, however, performed reasonably
well as compared to organised manufacturing sector during post-reform
period.
• The extent of linkage between small informal enterprises with large
enterprises has not been high enough to ensure a higher degree of
integration that could ensure improvement in small enterprises through
market assurance and technological upgradation.
• The major changes in industrial and investment policies in terms of
delicensing, discontinuation of reservation of several sectors for public
sector and liberalisation of foreign investment introduced over the past
three decades especially since 1991, have led to several important
changes in the structure of Indian corporate sector.
• First, the non-government joint stock companies have acquired the
dominant position in terms of paid up capital, raising their share from a
little over one‐fourth in 1989‐90 to three‐fourths in 2009‐10.
• Second, the percentage of private companies engaged in manufacturing
fell from about three‐fourths to 36 per cent during this period.
• Third, the shift has been primarily in favour of finance, insurance, real
estate and business services.
• The private corporate sector has followed the pattern of change of
overall economy towards the services sector.
• A higher economic growth in the post-reform period has been
accompanied by a slower growth in employment.
• Employment growth, in fact, has declined with the acceleration of the
growth rate of GDP.
• Thus employment grew at around 2.4 per cent during 1972‐73/83, 2.0
per cent during 1983/1993‐94, and 1.84 per cent during 1993‐94 –
2004‐05 and only at 0.22 per cent during the shorter period of
2004‐05/2009‐10.
• For 1999‐2000/2009‐10, the rate works out to 1.5 per cent.
• GDP growth during the first four periods was 4.7, 5.0, 6.27 and 9.8 per
cent per annum, during 1999-2000/2009‐10 it average to 7.5 per cent.
• As a result, employment elasticity has steadily declined over the years.
• It was 0.52 during 1973‐83, 0.41 during the next ten year period, 0.29
during 1993‐94/2004‐05 and 0.20 during 2000‐2010.
• The reason primarily lies in the slower growth of employment intensive
sectors.
• For example, slower growth of manufacturing relative to services (with
low and declining employment elasticity), low productivity of
 construction and decline in the share of labour intensive products in
India’s merchandise exports are some of the broad factors.
• Employment has grown much faster in urban than in rural areas
throughout the period since 1972-73, yet the dominance of rural areas
has continued in the employment structure, as it accounted for about 72
per cent of total employment in 2009-10 (though a decline from around
80 per cent in 1983).
• Within rural areas, more workers are now attracted to non-farm
activities, as they offer more stable and better paying employment than
agriculture.
• In aggregate, structural changes in employment have not been as large
as in GDP.
• Services have increased their share in GDP from 36 per cent in 1972‐73
to 45 per cent in 1993‐94 and to 59 per cent in 2009‐10, corresponding
increase in employment share has been much slower over these years
from 15 per cent to 21 per cent and to 27 per cent.
• A much larger decline in the share of agriculture in GDP than in
employment is, however, a major cause of concern. With 41 per cent
share in GDP and 74 per cent in employment, average output per worker
in agriculture was already only about one‐third of that in non-agriculture
in 1972‐73.
• In 2009‐10 with its share in GDP reduced to 15 per cent with over 51 per
cent of workers still in agriculture, the gap has widened to 1 to 6.
• Continuation of this pattern of structural changes has serious
implications not only for equity, but also for the sustainability of a high
growth rate as well.
• Organised sector employment did not grow for most of the post‐reform
period: in fact, there was a continuous decline in it during 1997‐2004.
• So practically all the new employment was in the unorganized sector
where productivity and earnings are low.
• Even within the formal sector, the proportion of ‘informal’ workers has
steadily risen, due to the most new employment being in the nature of
casual or contract employment.
• The share of the self‐employed, as expected, has declined over the years
from 61 per cent in 1972‐73 to 55 per cent in 1993‐94 and to 51 per cent
in 2009‐10, thus raising the share of the wage and salary earners in total
employment.
• But in that group, the share of casual workers has increased from about
23 per cent in 1972‐73 to 32 per cent in 1993‐94 and to 33 per cent in
2009‐10.
• The share of regular employees, considered to be qualitatively better in
terms of earnings and job and social security, has remained constant at
around 15 per cent.
• Available evidence on consumption expenditure pattern, factor shares
and other aspects of equity and distribution clearly suggests that there
has been a significant increase in inequality in income distribution,
especially in the post‐reform period.
• Analysis of consumption expenditure data with respect to three broad
consumption classes – ‘the poor’, ‘middle’ and ‘rich’ – during 1993‐94 to
2006‐07 suggests emergence of a certain degree of polarization in urban
areas where percentage of people within the middle class has declined
and that of the poor and the rich has increased.
• In rural areas, a levelling seems in operation in so far as there has been a
downward shift of some of the rich and upward shift of some of the
poor, resulting into a swelling of the ‘middle’.
• In other words, it implies an increase in disparity in the urban and
decline in it in the rural areas.
• There has been differential rise in consumption expenditure of different
classes in rural and urban areas.
• In rural areas consumption expenditure increased by 94 per cent among
the ‘poor’ and 84 per cent among the ‘rich’ during 1993‐ 94/2006‐07.
• In urban areas, the ‘rich’ had a higher (134%) increase than the ‘poor’
(114%) over the same period.
• Similarly, changes in factor shares as they have taken place over the
longer period and particularly during the past three decades, tend to
clearly suggest that income disparity between the wage earners and
those deriving income from capital and property has sharply increased.
• These trends in income distribution are likely to not only cause greater
socio‐economic distress to a large mass of people, but also weaken the
sustainability of a high rate of economic growth by posing demand
constraint.
• It is found that inter‐state disparities in rates of GSDP growth increased
during the 1990s over 1980s and disparity was more marked in the
growth of per capita income.
• Gini Coefficient of inter‐state inequality in per capita SDP increased from
0.152 in 1980‐81 to 0.161 in 1987‐88 and to 0.225 in 1997‐98.
• In the period after 2000, while some of the poorer states have
experienced a faster than average growth, growth of some of the
developed states has slowed down.
• As a result, the Gini Coefficient of inequality in per capita income has
stood at around 0.24 during 2000-01 to 2008-09, though it is still much
higher than it was before the reforms.
• Inter‐state variations in rates of GSDP growth are found to be strongly
associated with the pace of industrial growth during 1981 to 2009.
• The overall trends towards convergence or divergence are, however,
also shaped by the rate and pattern of growth in other sectors,
especially services.
• Growth of services sector has been more uneven and has, been
generally higher in the better developed states, particularly during
2000‐01/2008‐9 thus resulting in increasing divergence among states in
their levels of economic development.
• Different studies seem to suggest that FDI and export growth in various
states could not contribute to the reduction of regional disparities,
rather these factors tended to increase the same.
• The Indicators of human development have shown a converging trend
over the past three decades.
• Human development index (HDI) values ranged between 0.237 and 0.50
in 1981, between 0.367 and 0.638 in 2001 and between 0.419 and 0.910
in 2009‐10, Bihar being with the lowest and Kerala with the highest
figure in all the three years.
• Differences in literacy rates, gross enrolment ratio as well as life
expectancy at birth have declined.
• There is also a decline in the gap between rural and urban areas within
states.
• At the same time, interstate disparities in human development
indicators continue to be much higher in rural than in urban areas.
• Ranking of states by HDI, of course, did not change much, though some
states have changed position within the high HDI or low HDI groups.
• Kerala, Punjab, Maharashtra, Haryana and Gujarat made the top five
states in that order and Bihar, Madhya Pradesh, Uttar Pradesh,
Rajasthan and Orissa, the bottom five states in that order, in 1981.
• In 2009-10, Kerala, Maharashtra, Punjab, Haryana and Tamil Nadu (6th
in 1981) are at the top in that order and Bihar, Madhya Pradesh, Uttar
Pradesh, Assam (10th in 1981), and Orissa are at the bottom.
• The degree of inter‐state differences in different indicators of human
development and HDI, however, have shown significant decline.
• It is observed that the various dimensions of human development
improved with a rise in per capita income, but at a declining rate.
 • This finding along with that relating to a decline in rural‐urban gap in
human development indicators goes to suggest that beyond a threshold
income, capabilities and entitlements are available at more or less
similar levels despite divergence in per capita income.

References:
• Tendulkar, S. and T.A. Bhavani (2007). “Understanding Reforms”, New Delhi: Oxford University Press.
Ahluwalia, Montek S. (2000), ‘Economic Performance of States in Post‐Reforms Period’, Economic and
Political Weekly, May 6.

• Ahluwalia, M.S. (2011), ‘Prospects and Policy Changes in the Twelfth Plan’, Economic and Political
Weekly, May 21.

• Kannan, K.P. (2011), ‘How Inclusive is Inclusive Growth in India’, paper presented at the International
Workshop organised by IDRC and IIDS, New Delhi, 11–13 December.

• Nagaraj R. (2008), ‘Indian’s Recent Economic Growth: A Closer Look’, Economic and Political Weekly,
April 12.

• NCEUS (2008), Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector,
New Delhi, National Commission for Enterprises in the Unorganised Sector and Academic Foundation.

• NCEUS (2009), The Challenge of Employment in India: An Informal Economy Perspective, New Delhi,
National Commission for Enterprises in the Unorganised Sector, Volume I: Main Report, April.

• Thorat, Sukhadeo and Amresh Dubey (2012), ‘Has Growth Been Socially Inclusive during 1993‐94 –
2009‐10’, Economic and Political Weekly, March 10.

• Veeramani C (2012), ‘Anatomy of India’s Merchandise Exports Growth: 1993–94/2010– 11’, Economic
and Political Weekly, January 7.

• Rakshit, M. (2008). “Macroeconomics of Post-Reforms India”, New Delhi: Oxford University Press.

• Panagariya, A. (2008). “India: The Emerging Giant”, USA: Oxford University Press.

• Singh, Nirvikar (2009). “India’s Development Strategy: Accidents, Design and Replicability”, Research
Paper No. 2009/31, World Institute for Development Economics Research.

• Data Tables, Planning Commission, Government of India.

• Indian Planning Experience: a Statistical Profile, Planning Commission, Government of India.

• Economic Survey (various issues), Ministry of Finance, Government of India