Charting the economic journey ahead

21 Nov 2022 Charting the economic journey ahead

Significance for Prelims: Not Much

Significance for Mains: Future economic growth strategy. 

News: India will complete 100 years of its independence by 2047. But, the real question remains will India achieve the status of a developed economy keeping in mind the global situation as India cannot be decoupled from the rest of the world.  

Pre-Independence economic growth of India

• Under British rule, India’s economy was in a dismal state. India’s economic progress was stalled in the first half of the 20th century. During the last five decades of the British Raj  India’s annual growth rate was just 0.89%. The per capita income increased by 0.06% while the population grew by 0.83%.

Nature of the economic journey of India after Independence:

• After Independence, growth was the most urgent concern for policymakers.
• During the early Independence period, there was a focus on four elements of development i.e. raising savings and investment rate; dominant state intervention; import substitution, and domestic capital goods manufacturing. 
• Decade of the 1950s and 1960s: At that time, Indian policymakers were handicapped due to the unavailability of a clear model for accelerating growth in developing countries. Extensive State intervention in the economy seems appropriate at that time. 
• End of the 1970s: Indian model of state intervention did not deliver desired results and modification was needed in economic strategy. But India’s policymakers refused to recognise the failure of the Indian economic strategy and at the same time, China made a big change in the economic sphere. 
• Crisis of 1990-91: It compelled the policymakers to break with the past. Policymakers turn towards an ‘idea whose time had come. The government took three steps to break with the past. First, it focuses on dismantling the complex regime of licences and permits; second, it redefines the role of the state; and third, it gave up the inward-looking trade policy.

Impact of Indian economic strategy since Independence to 1991-92:

• Till the end of the 1970s, India’s average growth remained modest, with the average growth rate being just 3.6%. The population growth rate was 2.2%, while the per capita income growth rate was 1.4%.
• Improvements in various health and social parameters, such as the literacy rate and life expectancy.
• Green Revolution: Initially, India had to rely heavily on imports of foodgrains on a concessional basis, but it got a breakthrough in agriculture after the green revolution. 
• Broadening industrial base: India started production of a wide variety of goods including steel and machinery. Compared to the pre-Independence period, India’s post-Independence economic performance was reassuring but it is not as impressive as several developing countries even in Asia.
• Growth was also less than India’s expectations. Actual growth was less than what was projected even the following plan after plan. In the 1980s, the Indian economy did grow at 5.6% but it was accompanied by a sharp deterioration in fiscal and current account deficits.

Indian economy after 1992-93: 

• Indian economy faced its worst crisis in 1991-92: But, between 1992-93 and 2000-01, the annual growth of  GDP at factor cost was 6.20%.
• GDP at factor cost grew annually by 7.4% between 2001-02 and 2012-13.
• The potential growth rate of India was shown between 2005-06 and 2010-11: In this period GDP grew by 8.8%, and India experienced the highest growth rate over a sustained period of five to six years despite the global crisis in the 2008-09 year. 
• Between 2013-14 and 2019-20, the growth rate was 6.7%.

Way forward: Raise the growth rate and Strengthen social safety nets

• Raise the growth rate: If India achieves a continuous growth rate of  7% for the next two decades or more the level of the economy will substantially change and hence India may touch the status of a developed economy. For this India needs to raise the Gross Fixed Capital Formation(GFCF) rate from the current level of 28% of GDP to 33% of GDP and simultaneously India should have an incremental capital-output ratio of 4 to achieve capital efficiency. With this India can comfortably achieve a 7% growth rate. 
• Creation and sustenance of proper investment climate: For this, along with the rise in public investment, both corporate and non-corporate private investment should rise. 
• Stable financial and fiscal system with a focus on price stability.
• Strengthen social safety nets through a multidimensional development strategy through a strong export sector and organised manufacturing sector.
• As the output and income of India increase India must also focus on growth with equity for sustainable economic growth. 
• India should also focus on an open economy with some limitations: Champions of globalisation are making a retreat due to obvious reasons like the Russia-Ukraine war. 

Further readings:

1. Five Year Plans
2. Gross Fixed Capital Formation(GFCF)
3. GDP at factor cost
4. Current Account Deficit(CAD)

Prelims(2019):

Q. With reference to India’s Five -Year Plans, which of the following statements is/are correct?

1. From the Second Five -Year Plan, there was a determined thrust towards substitution of basic and capital good industries.
2.  The Fourth Five -Year Plan adopted the objective of correcting the earlier trend of increased concentration of wealth and economic power.
3. In the Fifth Five -Year Plan, for the first time, the financial sector was included as an integral part of the Plan.

Select the correct answer using the code given below.

(a) 1 and 2 only

(b) 2 only

(c) 3 only

(d) 1, 2 and 3

Mains (2020):

1. Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and a private entity.

Source: The Hindu

Article: Charting the economic journey ahead( C. Rangarajan)

Article Link: https://www.thehindu.com/opinion/lead/charting-the-economic-journey-ahead/article66161307.ece 

Yojna IAS Daily Current Affairs eng med 21st November 

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