Indian Economy.2014.

8/12/2019 Indian Economy.2014.

1/77

Business, Government, and

Society

PGP Term-3

Indian Economy


2/77

Outline

A social history of economic growth anddistribution of the economic product inindependent India

Three main themes will be emphasized Growth

Poverty and Inequality (equity)

The complicated relationship between growth,poverty, and inequality The efficiency-equity tradeoff


3/77

Economic Growth: State v.Market

The Market Argument

Rapid growth largely a result of the dismantling

of the license raj that characterized import

substitution policies

Consistent regulatory frameworks help

businesses plan for growth

Reduced tariffs Latent entrepreneurial talent unleashed

Capital accumulation in economy became easier


4/77

Market Fundamentalism Critique

Growth acceleration started a full decade before the

reforms in 1991

Industrial growth was reversed in the first years post

reform Important parts of India failed to get on the growth

trajectory

Human and social capital creation needs active state

interventionContrast with East Asian Tiger economies


5/77

Market Fundamentalism Critique

Contd..

Indian reforms (even after 1991) have been very modest andcertainly gradual

Reforms not only have not worked in all parts of India, theyhave not worked in other parts of the world (mixed result in

Latin America and reversals in Sub Saharan Africa) Capital formation for poor states did not change dramatically

Market argument does not take into account initial conditions Very favorable if 1990 is the starting point

Robust capital goods sector

Early dividends on investments in technical education visible by mid1980s


6/77

Political economy explanations for

rapid economic growth

Emphasizes the interaction between state andmarkets and goes beyond unfettered markets orinterventionist states as the sole engines of growth Eg. Kohlisdistinction between pro-market strategy and

pro-business strategy

Former: shrinking the economic role of the state, reducingsubsidies, tariffs, privatising public sector enterprises,opening economy to foreign investors

Pro-business on the other hand refers to the quality ofstate intervention and its relationship to the private sector


7/77

Political Economy Explanations for

Rapid Economic Growth

Governing the Market explanations are a better fitfor historical dataespecially initial wave of highgrowth in E. Asia

State guided corporations

Helped usher in a era of growth with well designed,systematic and well implemented state interventions


8/77

Growth acceleration started in

1980


9/77

Industrial growth not impressive

Improvement in the overall rate of investment in the

economy


10/77


11/77

Reforms and Capital Formation


12/77

Contd..


13/77

Politics of economic growth in states

Higher marginal productivity of capital?

Acceleration or deceleration is at least one percentage point change over 1980s

High and low income are simply above and below national average, 1991


14/77

Momentum


15/77


16/77

Contd..


17/77

Summarize:

Post reform period, poor states did not fare too

well

Better off states gained

Capital did not move to capital-scarce areas

Role for initial conditions

Public infrastructure Social infrastructure

Human capital


18/77


19/77

Political economy explanation of

growth, contd

Shift in Indias political economy around 1980towards growth, and moving away from politicsof garibi hatao. Post Emergency, Indira Gandhi Downplayed redistribution and prioritised growth

Alliance with big business Brakes on public sector industries

Demoted significance of Planning Commission

Not systematic reform, slow changes

Fuelled by dismal growth rates in 1970s; failure ofthe public sector to deliver, hard to implementland reforms, vote bank calculus


20/77

Contd

Three main components:

Growth New industrial policy

Committees set up to review major transformations(trade, financial reform, economic administration andso on). An important signal to private sector

Pro business policy reforms MRTP diluted allowing expansion in core areas like

chemicals, drugs, cement, ceramics Financing: liberalised credit, tax relief, raise resources

directly from public


21/77

Contd

Attitude to labour:

Strikes, gheraoes, go-slow anti-socialdemonstrations of irresponsibility by a few (IG,

1980) Legislation passed to discourage strikes

Reforms picked up more pace under RajivGandhi

New liberal beginning


22/77

How Has the Indian Economy Evolved?


23/77

23

25% 23% 24%16%

13%

9%

4%

3%


24/77

The IndianEconomy

Arguments &

Ideas of

Intellectuals

Pressures &

Claims ofDemocratic

Politics

Influences on Indias

Economic Development

Social &

cultural

norms


25/77

Four Phases of Indias Economic Growth

Panagariya (2008)

Phase I (1951-65): Takeoff under Liberal Regime; Open foreign investment policy;

relatively open trade policy until late 1950s; investment licensingtightens only towards the late 1950s, early 1960s

Phase II (1965-81): Socialism struck with vengeance

Phase III: (1981-88): Ad hoc liberalization during 1975-79, 1980-84 and then more

substantial liberalization during 1985-86 and 1986-87.

Phase IV (1988-present): Systemic and systematic liberalization


26/77

Figure 1.1: Average Growth Rate

4.1

3.2

4.8

6.3

0

1

2

3

4

5

6

7

1951-65 1965-81 1981-88 1988-06


27/77

1964-1976 Economy grew at an average rate of little

under four percent per annum. 'stagnation' compared to what was happening to

India's east (The 'tigers' and then China as well)

Public sector, by the end of this periodaccounted for over 40% of the organisedindustrial sector

In 1981-82, 24 out of thirty top companies

were in the public sector In revenue terms,the public sector was four times bigger thanthe private sector


28/77


29/77

Structural problems with public sector

units

Most units were not profitable

Returns from profitable units almost alwaysbelow plan target

The most important among the brewingtrouble was the steady increase in capital-output ratio (doubled from 3:1 to 6:1 in

through the 1970s) Growth (in a very limited and simplistic sense) is

simply investment divided by capital-output ratio


30/77

Contd...

Through the 1970s, you had a decliningnumerator (public sector profitability) andand increasing denominator (efficiency ofdeployed capital)

Beyond public sector inefficiency, there wereother constraints

Lack of domestic market (goes back to failureswith agrarian transformation)

A growing population (despite some successwith turning the corner)


31/77

The 1991 crisis point

Balance of payment problems

External borrowing during the mid 1980s pushed

interest payments to 30% of the borrowing

India was borrowing to payback old loans

The first signs of reforms (the famous V.P. Singh

budget of FY 1985-86)

Against prevailing political wisdom Origins of tax restructuring

Relaxation of key licensing guidelines


32/77

Features Common to the Four Phases

Reasons why India escaped prolonged

stagnation or decline

Macroeconomic stability

Political stability

Gradual and predictable policy changes

Capacity to implement policies


33/77

Post-Independence: The Agenda in the

Early Years (Phase I) Multipronged Development => Self-reliance Rapid industrialization; import subsn; K goods

Prevention of foreign capital domination

Land reforms: abolish zamindari; land to tenant Introduction of Cooperatives

Growth with equity: therefore positive discrimination andreservations for SC & ST

State to play central role through direct participation in theeconomic process => active public sector

Planned rapid industrialisation within a democratic & civillibertarian framework (an uncharted path!)


34/77

Indira GandhiEarly Years (Phase II)

Fears about Indias external vulnerability

Had to establish herself politically Used economic policy as active instrument

Success of green revolution created bullock capitalists as

economic and political force State subsidies to gain their support

Other interest groups flexed their muscles

Economic populism to gain support of poor

Leftward shiftbank nationalization Constraints on pvt. industry (e.g. MRTP)

Indirect taxes to fund populism


35/77

Sectoral Growth

Agriculture grew consistently slower than the

GDP

Industrial growth picked up in Phase I but

dropped drastically in Phase II

Services showed a more stable pattern with

growth accelerating particularly in Phase IV.


36/77

Growth Rates of Sectoral GDP (at factor cost)

Period Agriculture & Allied Industry Manufacturing Services GDP

1 2 4 5 6 7

1951-65 2.9 6.7 6.6 4.7 4.1

1965-81 2.1 4.0 3.9 4.3 3.2

1981-88 2.1 6.3 7.1 6.5 4.8

1988-06 3.4 6.5 6.8 7.8 6.3


37/77

Sectoral Shares

The share of agriculture declined consistently

The share of industry rose initially but

stagnated in Phases III and IV

The share of services rose consistently


38/77

The Composition of the GDP

Year Agriculture and Allied Industry Manufacturing Services

1950-51 57 15 9 28

1964-65 49 21 12 31

1980-81 40 24 14 36

1987-88 33 26 16 41

2004-05 21 27 17 52


39/77

Inequality, Poverty, and Growth

Key Concepts


40/77

Source: Datt and Ravallion, 2002


41/77

Dec 11, 2008

Growth and Poverty

Source: Chaudhauri and Ravallion, 2006


42/77

Growth and Inequality

Source: Chaudhauri and Ravallion, 2006


43/77

Positive v.Normative

What is?

What should be?

Distribution of income v.justice and fairness 30% of Indian population cannot afford a 2,000 Calorie

food intake per day

Nutritional deprivation is the most important public policy

issue in a country where scores go hungry


44/77

Moral Philosophy and Economics


45/77

Equity and Efficiency Equity and efficiency are both normative

concepts

Efficiency is a norm for how large theeconomic product can potentially be

Equity norms provide benchmarks for how theeconomic product should be distributed


46/77

Contd

There are often tradeoffs between equity andefficiency

The tradeoff is determined by beliefs aboutthe nature of individual, state, and society

Socialists value equity over efficiency

Belief in moral purpose for the state

Libertarians value efficiency over equity

State has no legitimate role in regulating individual

activity


47/77

1921 - 2002


48/77

Rawls as a Gandhian?Whenever you are in doubt, or when

the self becomes too much with you,apply the following test. Recall the face

of the poorest and the weakest man

whom you have seen, and ask yourself,

ifthe step you contemplate is going tobe

of any use to him. Will he gainanything

by it? Will it restore him to a controlover his own life and destiny?

In other words, will it lead to freedom

for the hungry and spiritually starving

millions? Then you will find

1869 - 1948


49/77

Efficiency v. Equity in Policy Good policies balance efficiency and equity

considerations

Theories of optimal taxation

Efficiency: Minimise distortions

Equity: Make tax progressive

Urban housing policy

Efficiency: Let markets determine prices Equity: Zoning laws to ensure equitable access to

housing


50/77

Poverty, Inequality, and Development

Study of poverty and inequality provides the

overarching framework for understanding

human and social development

Within v. across nations (global inequality)

Gender and Development Inequality in wages earned by men and women

Son preference and sex selective abortion


51/77

Contd

Environment and Development

Equity in combating climate change

Environmental justice issues

Child Labour Poverty, an important determinant

Education

Difference in enrollment across regions

Girl child enrollment


52/77

Measuring Inequality

Size distributions Deals with individuals/households and their

income

Lorenz curves

Gini coefficients


53/77

Copyright 2006 Pearson Addison-Wesley. All rights reserved.


54/77

Lorenz Curve: Shows the relationshipbetween the percentage of income recipients(

x axis) and the percentage of total income

they receive in a given year (y axis).

Gini Concentration Ratio


55/77

Effect of Inequality on Growth

Some level of inequality leads to higher growth

[1950s]

Incentive effectsto work hard, innovate, undertake risky

entrepreneurial investments

Higher rates of savings

Absence of well-functioning capital markets and

indivisibility of investment

Thus, grow first and redistribute laterthe familiar

let the size of the pie increase argument

Source: Birdsall 2007; Stewart 2000


56/77

Contd

Point of view contested More equal initial income distribution would lead

to higher growth OR initial inequality is growthretarding

An efficiency argument

Inequality has a built in tendency to beget

inefficiency

Source: Birdsall 2007


57/77

Contd

Does not allow them to fully exploit their capabilities

Nutrition

Human capital

Lack of wealth and the credit market , indivisibility

of investment in physical and human capital


58/77

Contd

Effect of inequality on social institutions

Social capitaltrust, norms and networks that can

improve efficiency of a society [Putnam 1993]

Evidence that inequality negatively affects socialcapitalland ownership and cooperatives in India

[Banerjee et al., 1991]

Affects social stability and solidarity

Crime and violence

Homicide rates

C td


59/77

Contd Effect of inequality on political and economic

institutions Initial inequality and failure of effective institutions

to develop [Engerman and Sokoloff 1997, 2002] Colonization experience

Leads to poor public policy [Buchanan &Tollison, 1984; Easterly, Ritzen, & Woolcock2006]

High concentration of income with little checks and

balances, may resist public services Weak middle class

Source: Birdsall 2007


60/77

Inequality and growth

Kuznets [1955], earliest attempt to correlateeconomic inequality with other variables

Kuznets curve


61/77

Inconclusive

Problems with cross-section data

Is there a Latineffect?

Do middle income countries have inequality ORmiddle income countries are largely LatinAmerican and they have higher inequality forother reasons?

Time series regressions, on average do notsupport the inverted Uhypothesis


62/77

Inequality and Growth

Two way relationship

Inequality matters for growth

Growth influences inequality

What policies can reduce inequality while

promoting growth?


63/77

Poverty, Inequality, and Growth

The three pillars of development

Poverty and inequality intimately linked Suppose you make Rs. 100,000 a year, would you

like to live in a society where median income is Rs.30,000 or, a society where the median is Rs.500,000?

Redistribution as a anti-poverty measure ispolitically difficult (problems with landredistribution in India, for example)


64/77

Contd

Growth has been the fundamental means ofameliorating poverty (rising tide lifts all boats)

Rapid economic growth can result in greaterinequality (we discussed this previously)

The exact causal nature between growth,inequality, and poverty is ambiguous


65/77

Measuring Poverty: Conceptual Issues

Notion of a poverty line A critical threshold of income, consumption or

access to goods and services below whichindividuals are declared as poor

Normative

Monitoring

Contd


66/77

Contd

Income or expenditure?

Absolute v. relative?

Temporary v. chronic?

Households v. individuals?


67/77

Poverty and Assets

Correlated with lack of ownership ofproductive assets

Bulk of poor usually among landless or near

landless Lack of human capital

Inability to remove themselves from the labourmarket

High illiteracy or little schooling beyond primarylevels

Poverty and Nutrition


68/77

y

Source: India Human Development Report 2001


69/77

Contd

Poverty line definitions often rely on minimumfood or nutrient basket (plus some margin fornon food items)

However, relationship between increases inincome (expenditure) and increases innutrition may not be strong

Positive relationship, especially at low nutritional

levels Status consumptioncanned foods etc.


70/77

Contd

Importance of going beyond natl averages!

Rural poverty

Ethnic minorities, indigenous populations, and

poverty

Gender and poverty


71/77

Source: Jayadev et. al, 2007

D i i f


72/77

Deprivations on many fronts

Dec 11, 2008

Inequalities in Wealth

Inequalities in Land


73/77

Dec 11, 2008

Inequalities in Land


74/77

Dec 11, 2008


75/77

Dec 11, 2008


76/77

Source: Debroy and Bhandari, undated


77/77

Indian Economy.2014.

Documents

Transcript of Indian Economy.2014.