Indian Economy after Liberalisation: Performance and Challenges

Indian Economy after Liberalisation Performance and Challenges Published by Sat parkash Katla SSDN PUBLISHERS & DISTRIBUTORS 5A, Sahni Mansion, Ansari Road Daryaganj, New Delhi 110002 (India) Ph: 011- 47520102 E-mail: ssdn.katla@gmail.com, ssdnbooks@gmail.com www.ssdnbooks.com Edited by Dilip Saikia Indian Economy after Liberalisation Performance and Challenges  Editor [All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, mechanical or photocopying, recording and otherwise, without prior written permission of the editor and the publisher.] First edition: 2012 ISBN No 978-93-8117-614-6 PRINTED IN INDIA SSDN Publishers & Distributors Printed at Asian Offset, New Delhi New Delhi  Indian Economy after Liberalisation Performance and Challenges  To my dear teacher, Prof. Madhurjya Prasad Bezbaruah, who inspires me to reach higher  (viii) putting together works of young budding researchers in a comprehensive volume is enviable on one hand and reassuring on the other. I put on record my sincere appreciation for Mr. Dilip Saikia Forword and the individual contributors to this volume for this remarkable job, which will encourage peers to make similar attempts at disseminating their early career works. Finally, it is a ‘dream India’s economy after liberalisation is filled with challenges come true’ for a sincere teacher and I wish many more and opportunities, which warrants keen introspection into similar collections of works to take shape in future. structure and performance of various sectors alongside its human face. This collection of papers drafted by young scholars Udaya S. Mishra of the Centre for Development Studies, Trivandrum demonstrates Associate Professor an exemplary cohesion of issues concerning the economy during Centre for Development Studies the post-reform era. They address contentious issues like slowing Trivandrum down of agricultural growth, deviations from the ideal pattern of inter-sectoral linkages, poverty comparisons and regional variations. While this volume may not be exhaustive in terms of addressing all possible areas of the economy having the potential bearing of liberalisation, it undoubtedly deliberates on the essential domains of the economy with its evolving perspective. Apart from agriculture, industry and services, the content extends to an understanding of poverty, regional variations and human development. As such, it serves as an ideal reading of the liberalised Indian economy in a wide-ranging perspective. Varying issues and pertinent questions are being addressed with conceptual justification and empirical exploration, which makes this volume distinct from others on the same topic. This collection of research papers, originated as term papers during the course work of M.Phil course in Applied Economics at the Center for Development Studies, has undergone substantial revision to assume its current shape. It’s rigour, veracity, and analytical strength owes a great deal to the suggestions and interventions made by the Centre’s faculty during its presentation in the seminar. Needless to mention that this initiative of  (x) these studies were formulated and to all the faculties and fellow students for their insightful comments during the presentation of the studies. I express my sincere gratitude to Dr. U. S. Mishra of Centre for Development Studies for his guidance and Preface encouragement as the Coordinator of M.Phil Programme and for writing the forward of the book. I also take this opportunity to record my sincere thanks India’s economic reform since 1991 has been catalyst in shaping to Prof. M. P. Bezbaruah (of Gauhati University) for his the performance of the economy. No doubt the economy has consent encouragement and inspiring me to reach higher. I been brought to a higher growth trajectory, emerged as one also extend my gratitude to the administration of the Institute of the fastest growing economies in the world and minimised for Financial Management and Research (IFMR), Chennai, many of the apparent inefficiencies that were persistent before where I am currently pursuing PhD programme, for providing the reform; however, it is overwhelmed by various socio- a workable environment and to the faculties and fellow research economic problems and there are new challenges in the process scholars of the Institute for exchanging their ideas on diverse and backlashes in various areas, such as growing inequalities, areas. low levels of employment, and agrarian distress, etc. The book provides a comprehensive review of the performance of I am indebted to the SSDN Publishers & Distributors for India’s economy in the context of two decades of structural publishing the book. Mr. Sat Parkash Katla of the SSDN reforms and the growth and development challenges thereof. Publishers & Distributors provided indispensable oversight It covers the main features of India’s post-reform economic for getting the book to publication. development and addresses issues such as sluggish growth I owe gratitude to my family for the care and support I of agriculture, inter-sectoral linkages, poverty, rural received throughout my life. Lastly, but not the least, I duly development and human development in the context of the economic reforms. acknowledge my sincere thanks to all those who helped me in the course of this work. All may not be mentioned but The book grew out of a series of term papers carried out none is forgotten. by the authors during the course work of M.Phil Programme Needless to say, the views expressed in the book are of in Applied Economics at the Centre for Development Studies, Trivandrum. I am thankful to the authors for their contribution the views of the authors, and do not necessarily reflect the and their diligence in revising the chapters according to the views of the organisations they belong to and the editor of the broader theme of the book Their suggestions helped me incalculably book. Nevertheless the editorial errors are mine. at various stages during editing the book. Dilip Saikia The editor and the other authors are all grateful to the Centre for Development Studies for providing a radiant academic ambiance and research facilities. Sincere thanks are due to the concerned faculties under whose able guidance  (xii) SWATI DUTTA is doing Ph.D in Economics under Madras University at Institute of Financial Management and Research. She did her M.Phil in Applied Economics from Center for Development Studies under Jawaharlal Nehru List of Contributors University. Previously she worked as project linked personnel in the project entitled Construction and Analysis of Regional Variation of Social Development Indices in DILIP SAIKIA is research scholar of Economics at Institute India, sponsored by Ministry of Statistics and Programme for Financial Management and Research, Chennai (India). Implementation, Government of India in Indian Statistical He received M.Phil in Applied Economics of Jawaharlal Institute, Kolkata. Her area of interest is Development Nehru University from Centre for Development Studies Economics. (CDS), Trivandrum and Masters Degree in Economics from Gauhati University, Assam. His research interests KHANINDRA CH. DAS is research scholar at Institute for include macroeconomics, economic development and trade, Financial Management and Research (IFMR), Chennai, industrial organisation, regional economics and economic India. He received Masters Degree in Economics from geography. His recent books include Industrial Location Gauhati University, Guwahati and M.Phil in Applied under Globalisation in India: Evidence from Unorganised Economics from Centre for Development Studies, Manufacturing Industries and Agriculture-Industry Linkages Trivandrum. His research interests are diverse that include, in India: Some Issues and Evidences. among others, Development Economics and International Trade & Finance. His recent publications include Risk VACHASPATI SHUKLA is currently research scholar at Behaviour of Commercial Banks under Reform: The Indian Centre for Development Studies (CDS), Trivandrum, India. Experience. He received M.Phil in Applied Economics from Centre for Development Studies and MA in Economics from KALYANY SANKAR is currently a Project Assistant at Centre Faculty of Social Science, Banaras Hindu University, for Development Studies (CDS), Trivandrum. She completed Varanasi. His research interests include labour economics M.Phil in Applied Economics from Centre for Development and human development. Studies. Her areas of interest are Poverty and Human Development and worked on the Social and Economic KIRAN KUMAR KAKARLAPUDI is currently doctoral Mobility of Slum Dwellers. scholar in Economics at the Centre for Development Studies, Trivandrum. He has completed M.Phil in Applied Economics from Centre for Development Studies during 2008-10 and M.A. in Economics from University of Hyderabad. His area of interest includes labour economics, economics of technological change, issues related to globalisation and inequality. He is currently working on implications of technological change on growth and employment.  (xiv) Contents 3.5 Summary and Conclusion 115 References 117 4. Agriculture and Industry: Analysing Forword viii Linkages for Pre- and Post-reform Preface ix Periods in India 122 Contributors xi Dilip Saikia List of Tables xvii 4.1 Introduction 122 List of Figures xxi 4.2 Nature of Agriculture-Industry Linkages 123 List of Boxes xxiii 4.3 A Reprise of Theories 127 Abbreviations xxv 4.4 Methodologies of Estimating Sectoral Linkages 131 4.5 Trends of Agriculture-Industry Interlinkages in 1. Introduction: India’s Economy after India 135 Liberalisation 1 4.6 Conclusion 155 Dilip Saikia References 157 1.1 Introduction 1 Annexure 4.1 164 1.2 India’s Performance: 1951-52 to 2009-10 6 Annexure 4.2 169 1.3 Overview of the Volume 39 References 44 5. Differential Growth of Poor and non-Poor and Its Implication on 2. India’s Road to Economic Reforms 47 Poverty Reduction 174 Dilip Saikia and Vachaspati Shukla Vachaspati Shukla 2.1 India’s Development Strategy in the 5.1 Introduction 174 Post-Independence Period 47 5.2 Conceptual Framework 176 2.2 Reforms of the 1980s 53 5.3 An Alternative Way to Measure the 2.3 The Crisis of 1991 57 Poverty Reduction 183 2.4 Major Reforms of the 1990s 64 5.4 Empirical Evidence from Indian States 185 2.5 Conclusion 75 5.5 Conclusion 191 References 77 References 193 Annexure 2.1 80 3. Agricultural Growth in the Post-reform Era: 6. Regional Patterns of Agricultural Growth A Critical Assessment 81 and Its Bearing on the Incidence of Kiran Kumar Kakarlapuri Poverty in India 194 3.1 Introduction 81 Swati Dutta 3.2 Review of Literature 84 6.1 Introduction 194 3.3 Sources of Agricultural Growth since 6.2 Literature Review 197 Independence 89 6.3 Objectives 200 3.4 Factors Affecting Agricultural Growth 104 6.4 Performance of Indian Agriculture 200  (xv) 6.5 Present Scenario of Poverty in India 207 6.6 How Increased Agricultural Productivity Reduces Poverty 211 6.7 Analytical Framework 217 6.8 Results 221 6.9 Conclusion 224 References 226 7. Access to Finance and Its Association with Development in Rural India 228 Khanindra Ch. Das 7.1 Introduction 228 7.2 Access to Finance and Development: A Brief Review 231 7.3 Extent of Inequality in the Access to Finance from Institutional Sources 235 7.4 Association of Inequality in Institutional Access to Finance and Development 237 7.5 Conclusion 245 References 248 8. Human Development in India: An Analysis of Inter-state and Intra-state Convergence/Divergence 251 Kalyany Sankar 8.1 Introduction 251 8.2 Review of Literature 253 8.3 Data Source and Methodology 258 8.4 Analytical Framework 259 8.5 Results 262 8.6 Conclusion 279 References 282 Annexure 8.1 286 Annexure 8.2 288 Index 293  (xviii) 2.2 Selected Balance of Payment (BoP) Indicators (as percentage of GDP) 61 3.1 Growth Rate in GDP Agriculture and non-Agriculture before and after List of Tables Reforms 92 3.2 Growth Rate in Output of various Sub- Sectors of Agriculture 93 1.1 Selected Indicators of India’s Economy: 1950-51 to 2009-10 4 3.3 Share of Foodgrain and Non-Foodgrain Crops in Cropping pattern and Value of Output in 1.2 India’s Growth Performance during India 95 Planning period 9 3.4 Sources of Agricultural Growth in different 1.3 India’s Economic Growth during Regions of India during 1980s and 1990s 96 Pre-independence period 11 3.5 Share of different Commodities in the Sources 1.4 Growth during Selected Pre-reforms periods 13 of Agricultural Growth in India during 1980s 1.5 Post-reform Growth Performance 18 and 1990s 99 1.6 Volatility in Growth Rate: Coefficient of 3.6 Rate of Growth of Area, Production, Yield and Variation 20 Area under Irrigation for major Crops percent 102 1.7 Contributions to Growth 21 3.7 Growth Rate in Area, Input Use, Credit and Capital Formation in Agriculture before and 1.8 Combined Deficits of Central and State after Reforms 104 Governments 25 1.9 Gross Domestic Saving and Gross Domestic 4.1 Sectoral Share Matrices (Production Linkages) 146 Capital Formation 28 4.2 Sectoral Demand Matrices [(I - A)-1] (Demand Linkages) 152 1.10 Selected Balance of Payments Indicators 29 4.3 Changes in Sectoral Linkages: Summery 154 1.11 Percentage of People below Poverty Line 33 4.1.A Sectoral share of GDP at factor cost 169 1.12 Rate of Growth of Organised Sector Employment 34 4.2.A Sector-wise Trend Growth Rate of 1.13 Unemployment Rate (per 1000) according to GDP 169 Usual Status, Current Weekly Status (CWS) and Current Daily Status (CDS) approach 35 4.3.A Share of Agro-based and non Agro-based 2.1 Selected Fiscal Indicators during the 1980s Industries (Organised Sector) 170 (as percentage of GDP) 58 4.4.A Share of Agriculture’s Final and Intermediate Consumption 171  (ixx) (xx) 4.5.A Share of Modern and Traditional Inputs 7.3 Correlation Matrix of Poverty, Literacy, in Agriculture 171 Electricity Use, Access and Inequality in Access to Finance 243 4.6.A Consumption of Fertilisers and Pesticides 172 7.4 Classifying Poverty and Inequality in 4.7.A Per Hectare Consumption of Fertilisers and Access to Finance into Low and High 243 Pesticides 173 7.5 Classification of States by Inequality in 5.1 An Illustration 183 Access to Finance and Poverty 245 5.2 Number and Proportion of People below Poverty Line across Indian States 187 7.6 Poverty, Inequality, NSDP, Electricity Usage, Literacy Rate, 2002 246 5.3 Decadal Population Growth across India States 188 8.1 State-wise Literacy Rate, IMR, Proportion of Households with Safe Water, Electricity 5.4 Average Household Size of Poor and non- and Toilet Facilities 263 Poor across States in 1993-94 192 8.2 District-wise Literacy Rate, IMr,Proportion 6.1 Annual Average Growth Rate in Agriculture of Households with Safe Water, and the GDP 201 Electricity and Toilet Facility in Kerala 267 6.2 Growth Rate of Yields for Foodgrains and 8.3 District-wise Literacy Rate, IMR and Oilseeds: 1980-1 to 2005-6 202 Proportion of Households with Safe Water, 6.3 Growth Rate of GDP in Agriculture 204 Electricity and Toilet Facility in Bihar 270 6.4 State-wise Incidence of Poverty 209 8.4 Sigma- Convergence of SDI 276 6.5 Correlation Matrix among Poverty Head 8.5 Summary Statistics of all India SDI in 1991 Count Ratio, Yield and NSDP per worker and 2001 277 in 1994-95 level values 218 8.6 Summary Statistics of SDI for Kerala in 1991 6.6 Correlation Matrix among Poverty Head and 2001 278 Count Ratio, Yield and NSDP per worker 8.7 Summary Statistics of SDI for Bihar in 1991 in 2004-05 level values 220 and 2001 279 6.7 OLS Estimates 1 222 6.8 OLS Estimates 2 223 7.1 Percentage of Rural Households getting Access to Finance from different Sources across Asset-holding Classes (All India) 240 7.2 ANOVA Test of Difference of Proportion 241  (xxii) 4.2 Sector-wise Trend Growth Rate of GDP 140 4.3 Comparison between different TOT Series 150 List of Figures 4.4 Relative Prices of Agriculture and Industry 151 1.1 Annual Growth Rate of GDP and Per 4.1.A Agriculture’s Purchase from non- Capita NNP: 1951/52-2009/10 8 Agricultural Sector 173 1.2 Combined Deficits of Central and State 5.1 Decomposition of total Increase in Governments 24 Population of non-Poor 191 1.3 Annual Inflation Rate in India in the 6.1 Theoretical Framework 219 Post-reform period 37 7.1 Percentage of Rural Household getting 2.1 Average Annual Growth Rates of Finance from Institutional Sources 238 Non-Oil Merchandise Exports and 7.2 Percentage Share of Institutional Agencies Imports 56 in Cash Debt Outstanding of Rural Households 239 2.2 Merchandise Non-oil Exports and Imports 8.1 State-wise Social Development Index, as Percentage of GDP 56 1991 and 2001 265 2.3 Annual Inflation Rate 59 8.2 Social Development Index for Kerala, 2.4 Real Exchange Rate 60 1991 and 2001 268 2.5 India’s Foreign Exchange Reserves 8.3 Districts with below Bihar State (as percentage to GDP) 63 Average SDI 273 2.1.A External Debt (as percentage to GDP) 80 8.4 Districts with above Bihar State Average SDI 274 2.2.A India’s Current Account (as percentage to GDP) 80 3.1 Share of different Sources of Growth in Agriculture in India 97 3.2 Capital Formation in Agriculture 107 4.1 Sectoral Composition of GDP at factor cost 140  List of Boxes 1.1 Major Econmic Reforms of 1991-93 65 1.2 Construction of Variables and Data Sources 244  (xxvi) HCR head count ratio HDI Human Development Index HYV high yielding variety Abbreviations IEM Industrial Entrepreneur Memorandum IMF International Monetary Fund ADB Asian Development Bank IMR infant mortality rate CAD current account deficit INC Indian National Congress CDS current daily status IRDP Integrated Rural Development Programme CGE computable general equilibrium IRRI International Rice Research Institute CMIE Centre for Monitoring Indian Economy JGSY Jawahar Gram Samridhi Yojana CPI consumer price index JRY Jawahar Rojgar Yojana CRR cash reserve ratio MoU Memorandum of Understanding CSO Central Statical Organisation MRTP Monopolies and Restrictive Trade Practices CV coefficient of variation MSP minimum support prices CWS current weekly status NFBS National Family Benefit Scheme EPW Economic and Political Weekly NNP net national product FEMA Foreign Exchange Management Act NOAPS National Old Age Pension Scheme FER foreign exchange reserve NREGP National Rural Employment Guarantee FERA Foreign Exchange Regulation Act Programme FODI outward foreign direct investment NREP National Rural Employment Programme FRBM Fiscal Responsibility and Budget Management NSAP National Social Assistance Programme FYP Five Year Plan NSDP net state domestic product GDCF gross domestic capital formation NSS National Sample Survey GDP gross domestic product POL petroleum, oil, and lubricants  (xxvii) PPP purchasing power parity PSU public sector undertakings RBI Reserve Bank of India RDP Rural Development Programme RLEGP Rural Development and Poverty Alleviation Programme SAM social accounting matrix SDI Social Development Index SEBI Security and Exchange Board of India SGRY Sampoorna Grameen Rozgar Yojna SGSY Swarnjayanti Gram Swarozgar Yojana SIA Secretariat of Industrial Approvals SLR statutory liquidity ratio TFP total factor productivity ToT terms of trade TPDS Targeted Public Distribution System UBSP Urban Basic Services Programme UPA United Progressive Alliance UPDS Union Pacific Distribution Services VAT value added tax WPI wholesale price index WSBI World Saving Bank Institutes WTO World Trade Organisation Introduction 1 1 Introduction: India’s Economy after Liberalisation Dilip Saikia 1.1. Introduction India had undergone structural changes in policies from import substitution regime to free market regime in the early 1990s. It has been two decades since India liberalised its policies. Therefore, it is now reasonable to review the performance of India’s economy during this period, and look at the future challenges. The stabilisation-cum-structural adjustment reforms, (see chapter 2 by Saikia and Shukla for a discussion) have become one of the landmarks for the recent spate of India’s economic development. Following the economic reforms, the economy has been performing extremely well and presently the economy is regarded as one of the fastest growing economies in the world. It has been growing at an annual average rate of 6.86 per cent during the two decades of economic reforms (1992-93 to 2009-10) as against 4.07 per cent during the four decades prior to the economic reforms (i.e. 1950-51 to 1991-92). Moreover, the growth of the economy scaled up particularly after the year 2000, with the growth averaging at an annual rate of 7.32 per cent during 2000-01 to 2009-10 and 8.46 per cent during 2 Indian Economy after Liberalisation Introduction 3 2003-04 to 2009-10. As per World Bank data1 India is now Birth rate has declined to 22.5 per thousand of population, the 10th largest economy in the world in terms of nominal death rate declined to 7.3 per thousand of population, life Gross Domestic Product (GDP) which stood at US$1377.26 expectancy at birth increased to 64.1 years and literacy rate billion in 2009 and the 4th largest in terms of purchasing increased to 74 per cent in 2009-10 (Table 1.1). The power parity (US$ 3808.44 billion in 2009). The country’s spectacular performance of the economy in the last two GDP per capita (PPP) recorded at US$ 2,993 (at constant decades helps in improving the investors’ confidence and 2005 international dollar) in 2009, as against US$ 1831.66 business environment in India. In this regard The Economist in 2001 and US$ 1232.19 in 1991. (2010) quotes, “Indian firms are increasingly global and sometimes world-class. Arcelor Mittal, based in Luxembourg, The success story of the economy is mainly attributed to is the world’s largest steel firm. Tata Motors, best known for the rise in the quantum of investment during this period. making cars that cost only $2,000, also owns Jaguar and The gross domestic capital formation (GDCF) stood at 36.5 Land Rover, two luxury brands. Bharti Airtel, a mobile- per cent of GDP in 2009-10 as against 26 per cent in 1990- phone firm with 140m subscribers in India, is rapidly 91 and gross domestic savings stood at 33.7 per cent of GDP expanding into Africa, too.” in 2009-10 as against 22.8 per cent in 1990-91 (Table 1.1). The industry and services sectors continued to fuel the Thus, we can see that the economy has been doing economic growth. Industry’s contribution (including superbly since the initiation of the free market principle construction sector) to GDP has steadily increased from through economic reforms in the early 1990s. To summarise 25.92 per cent in 1990-91 to 28.47 per cent in 2009-10, while the present scenario of India’s economy it is worthwhile to services sector continued to contribute about 57 per cent to quote Acharya and Mohan (2011), “Overall economic growth GDP in 2009-10. The economy has been doing well in the has accelerated, inflation has moderated, and financial external sector, especially in trade, foreign investment, and stability has been maintained. The fiscal position has accumulating foreign reserves. The volume of exports and fluctuated, registering periods of both successful imports recorded at Rs. 845534 crore and Rs. 1363736 crore consolidations and backsliding. The economy has seen respectively and the foreign exchange reserves stood at Rs. substantial opening to the rest of the world as the currency 1149650 crore in 2009-10 (Table 1.1). The economy has not has become convertible on the current account, and the only become a major destination of foreign investment; but capital account has been liberalised subsequently. The also emerged as one of the emerging source of outward industrial sector has been deregulated and exposed to foreign direct investment (OFDI). The macro-economic international competition, thereby making it more condition of the economy has been stronger over the period competitive. The services sector has exhibited a new vibrancy compared to the pre-reform decade, albeit inflation has been in some areas, with the information technology sector showing a major concern from time to time.The social sector the potential of Indian enterprise.” performance has also been impressive during this period. The aim of this book is to uncover some aspects of India’s development in the post-reform period and highlight on the 1. World bank online database available at http:// future challenges. Before presenting an overview of the data.worldbank.org book we briefly review India’s performances in the post-  4 Table 1.1: Selected Indicators of India’s Economy: 1950-51 to 2009-10 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2009-10 ECONOMIC INDICATORS GDP at factor cost: at constant prices (in Rs Cr.)% 224786 329825 474131 641921 1083572 1864300 4493743Q Per capita NNP at constant Prices (in Rs) % 5708 7121 8091 8594 11535 16172 33731Q Gross Domestic Capital Formation (as % of GDP) 8.4 14 15.1 19.9 26.0 24.3 36.5 Gross Domestic Savings (as % of GDP) 8.6 11.2 14.2 18.5 22.8 23.7 33.7 Index of agricultural production (Base: 1981-82=100) 46.2 68.8 85.9 102.1 148.4 165.7 179.9 Index of industrial production (Base: 1993-94 = 100) 7.9 15.6 28.1 43.1 91.6 162.6 316.2 Wholesale Price Index 6.8 7.9 14.3 36.8 73.7 155.7 130.4 CPI for Industrial workers 17 21 38 81 193 444 163 Exports (Rs Cr.) 606 642 1535 6711 32553 203571 845534 Indian Economy after Liberalisation Imports (Rs Cr.) 608 1122 1634 12549 43198 230873 1363736 Foreign exchange reserves @ Introduction (Rs Cr.) 911 186 438 4822 4388 184482 1149650 SOCIAL INDICATORS Population (million) 359 434 541 679 839 1019 1170 Average Annual Exponential Population Growth (%)* 1.25 1.96 2.20 2.22 2.14 1.93 - Birth Rate (per 1000) 39.9 41.7 36.9 33.9 29.5 25.4 22.5 Death Rate (per 1000) 27.4 22.8 14.9 12.5 9.8 8.4 7.3 Life Expectancy at Birth (Years) 32.1 41.3 45.6 50.4 58.7 62.5 64.1$ (a) Male 32.5 41.9 46.4 50.9 58.6 61.6 64.9$ (b) Female 31.7 40.6 44.7 50.0 59.0 63.3 62.0$ Literacy Ratio (%) 18.3 28.3 34.4 43.6 52.2 64.8 74.04# (a) Male 27.2 40.4 46.0 56.4 64.1 75.3 82.14# (b) Female 8.9 15.4 22.0 29.8 39.3 53.7 65.46# Note: Q- quick estimate; % Data relates to 1999-2000 prices up to 2000-01. For 2009-10 data are based on new series (2004-05) prices; @ Excluding gold, SDRs and Reverse Tranche Position at the IMF; # Figures are for 2011 and taken from Census 2011; $ Figures are for 2009 and taken from UNICEF India Statistics; * Figures are for the census year and data collected from Census 2001.Source: Economic Survey, 2009-10 5 6 Indian Economy after Liberalisation Introduction 7 reform period as compared to pre-reform period and look at agriculture sector performance was poor and service sector the major challenges facing the economy. In the next section grew at an average rate. Looking at the decadal annual we review India’s growth performance since independence. average growth rate there was continuous decline in each Thereafter, we will highlight some of the major challenges decade compared to previous decade for overall GDP and facing by the economy and finally,we will provide an overview well as sectoral GDP. Further, there were four years when of the book. GDP growth recorded negative rates: 1957-58, 1965-66, 1972-73 and 1979-80. The result was a much slower growth 1.2. India’s Performance: 1951-52 to 2009-10 of 3.6 per cent per annum during the first three decades of It is relatively a challenging task to review the planned development, what is often referred as the “Hindu performance of India’s economy, since there have been many Rate of Growth”.2 However, this 3.6 per cent growth rate well-known studies on the topic that have evaluated India’s during the first three decades was four times greater than growth story since the independence and specifically after the 0.9 per cent estimated for the period 1900-46 during the economic reforms both at macro and micro level in different British rule (Table 1.3), though the post-independence dimensions. One way to look at a country’s performance is growth was far below potential and much less than the 7- to look at the pace of economic growth and its macroeconomic 8 percent rates being achieved in some countries of East Asia condition during the period (Acharya and Mohan, 2011). It and Latin America (Acharya, 2008). Singh (2009) remarked, will provide an aggregate assessment of the overall economic “Using the colonial period as a benchmark, India certainly performance of the economy. Here, we look at India’s growth has done well. Its GDP growth and improvements in human performance since 1950-51. development indicators were both well above the earlier era… Infrastructure investment was greater than before, Figure 1.1 presents the annual growth of GDP and per industries were developed in support of modernisation goals, capita Net National Product (NNP) for the period 1951-52 and higher education, in particular, grew dramatically… to 2009-10. From the figure it is hard to characterise India’s also sustained relatively low inflation rates… On the other economic growth during this period, though it is clear that hand, as early as the 1960s, several East Asian countries there were very few years in the first three decades when began to outstrip India’s economic performance.” (emphasis the growth rate exceeded 5 per cent. None of the Five Year added). Another feature of the pre 1980s growth was high Plans, during the first three decades, recorded an average volatility in growth rates as we can see from Figure 1.1. The annual growth rate of over 5 per cent and the decadal volatility was highest during the 1970s compared to the average growth rate hardly exceeded 4 per cent per annum previous two decades and agriculture growth remained (Table 1.2). The growth that picked up from 3.5 per cent per highly volatile during the entire period (Table 1.6). annum during the First Five Year Plan (FYP) to 4.3 per cent per annum during the Second FYP came to a halt during the Third FYP as growth rate dropped to 2.88 per cent per 2 The “Hindu rate of growth”, as Basu (2007) noted, is the tongue- annum, which slowly bounced back during the Fourth and in-cheek expression coined by the Indian economist, the late Fifth FYPs. The performance of industrial sector was average Raj Krishna, to capture the frustrations India’s planners faced during the period except during the Fourth FYP, while with growth.  8 Figure 1.1: Annual Growth Rate of GDP and Per Capita NNP: 1951/52 – 2009/10 Source: Based on data from Economic Survey 2011 Indian Economy after Liberalisation Note: Data are at 1999-00 series up to 2004-05, after which at 2004-05 series. Table 1.2: India’s Growth Performance during Planning period (percentage per year) GDP Primary Secondary Trade, Financing, Public Introduction Hotels, Insurance, Administration, Transport & Real estate,& Defense Communication Business and other Services First Plan (1951-56) 3.58 2.92 6.12 4.66 3.12 2.98 Second Plan (1956-61) 4.28 3.46 6.50 6.12 2.82 4.32 Third Plan (1961-66) 2.88 -0.02 6.90 5.64 3.30 5.80 Annual Plans (1966-69) 4.03 4.33 3.97 3.90 3.13 4.33 Fourth Plan (1969-74) 3.26 2.70 3.34 3.84 3.98 4.28 Fifth Plan (1974-79) 4.80 3.64 6.38 6.86 5.30 3.60 Annual Plan (1979-80) - 4.90 - 12.20 - 3.50 -0.40 1.00 7.30 Sixth Plan (1980-85) 5.60 5.94 5.08 5.44 7.36 4.90 Seventh Plan (1985-90) 5.66 3.40 6.36 6.48 9.96 6.86 Annual Plans (1990-92) 3.35 1.50 3.30 3.85 8.50 3.50 Eighth Plan (1992-97) 6.56 4.68 7.74 8.74 6.96 5.64 Ninth Plan (1997-2002) 5.52 2.60 4.34 7.96 8.02 7.66 Tenth Plan (2002-2007) 7.78 2.68 9.72 11.18 9.80 5.20 Eleventh Plan (3 Years)# 8.03 2.27 7.70 9.40 11.20 10.47 9 10 Indian Economy after Liberalisation Introduction 11 (percentage per year) Table 1.3: India’s Economic Growth during Pre- Administration, and other independence period Services Defense Public 3.65 5.30 3.98 5.91 6.50 6.83 (percentage per year) Year GDP Population Per Capita ,& Business Real estate, Financing, Insurance, GDP 2.97 3.43 4.09 9.09 7.84 9.99 1900-29 0.9 0.5 0.4 1930-46 0.8 1.3 -0.5 Communication Ttansport & Hotels, Trade, 10.37 5.39 5.01 4.86 5.90 7.69 1900-46 0.9 0.8 0.1 Source: Sivasubramonian (2000), cited in Acharya (2007) 2004-05 the data is in 1999-00 series, after that it is in 2004-05 series Secondary The gloomy performance of the economy during the first 6.31 5.61 3.96 5.97 5.75 8.28 three decades was mainly due to the development strategy Table 1.2: (Contd.) adopted by the policy makers during this period (Singh, 2009). It is well known that India had followed an inward- looking development strategy with import-substitution policy, Primary 3.19 2.58 1.95 3.83 2.90 2.90 restrictions on exports, and many industries were reserved Source: Calculated based on data from Economic Survey 2011 for the public sector until the early 1980s. (These policies For the first three years’ of 11th Plan (2007-08 to 2009-10) have been discussed in Chapter 2 of this book.) The restrictions on trade and international investment did not GDP 3.93 3.78 3.17 5.40 5.60 7.64 allow the economy to enjoy the benefit of trade as an engine of growth, while some East-Asian economies such as South Korea and Taiwan had benefited from opening their economy. Krueger (2008) pointed out three policies, viz. a neglect of infrastructure, higher regulations in the labor market, and the “license raj” that deterred the growth during this period. Decadal Average Growth However, growth rate picked up during early years of the 1980s. The Sixth and Seventh FYPs recorded over 5.5 1951-52 to 1960-61 1961-62 to 1970-71 1971-72 to 1980-81 1981-82 to 1990-91 1991-92 to 2000-01 2001-02 to 2009-10 per cent annual average growth rate and a decadal growth *Up to rate of 5.4 per cent (Table 1.2). The growth of agriculture sector was impressive compared to the earlier three decades, Note: while industry continued to grow above the average and # 12 Indian Economy after Liberalisation Introduction 13 service sector picked up. However, the growth during the Table 1.4: Growth during Selected Pre-reform second half of the 1980s was more pronounced compared to periods the first half (Table 1.4). During 1981-82 to 1985-86 growth recorded at 4.92 per cent per annum, which jumped to 5.88 (percentage per year) per cent per annum during 1986-87 to 1990-91.The Year GDP Primary Secondary Trade, Financing, Public interesting part of the decade was the exceptionally high Hotels, Insurance, Administra- growth rate of 7.2 per cent per annum during the three Transport Real tion Defense years period between 1988-89 and 1990-91, which is also & Communi- estate,& and other cation Business Services coincide with the crisis period due to which Panagariya (2005) remarked, “[...] any explanation of growth in the 1981-82 5.60 5.10 7.50 6.20 8.10 2.10 1980s must explain the exceptionally high growth during 1982-83 2.90 0.40 0.50 5.40 9.50 7.70 1988-91”. Panagariya further noted some facts of India’s growth during the 1980s “[…] the earliest break in the 1983-84 7.90 9.70 8.70 5.10 9.80 3.70 growth rate occurs in 1977-78 […] though the average growth 1984-85 4.00 1.60 4.50 4.80 7.50 6.90 rate over a whole decade hit the 5 per cent mark for the first time during 1980-90, year-to-year growth during this 1985-86 4.20 0.60 4.20 7.90 9.80 5.70 period exhibited considerable fragility […] the average of 1986-87 4.30 0.30 5.10 6.00 10.50 7.50 the growth rates over the ten-year period spanning from 1978-79 to 1987-88 was an unimpressive 4.1 per cent […] 1987-88 3.50 -1.20 5.80 5.30 7.30 7.20 the economy was still on the Hindu growth path. Even the 1988-89 10.20 15.70 8.20 5.80 9.80 6.00 average of growth rates during the seven-year period from 1989-90 6.10 1.60 8.50 7.40 12.40 7.90 1981-82 to 1987-88 [recorded] at 4.8 percent […] It is only when we include the ultra-high growth rates [7.6 per cent] 1990-91 5.30 4.50 6.70 5.10 6.20 4.40 of the last three years of 1980s that the average growth rate 1951-52 to from 1981-82 to 1990-91 jumps to 5.6 percent [...] Without 1980-81 3.63 2.57 5.29 5.09 3.50 4.31 these three years, there would be no debate on growth 1981-82 to during 1980s versus 1990s.” (emphasis added). 1985-96 4.92 3.48 5.08 5.88 8.94 5.22 However, there have been diverse explanations about 1986-87 to the acceleration of growth during the pre-reform period. For 1990-91 5.88 4.18 6.86 5.92 9.24 6.60 instance, DeLong (2003) pointed out that the post-1984 1988-89 to reforms was responsible for growth acceleration, whereas 1990-91 7.20 7.27 7.80 6.10 9.47 6.10 Note: Up to 2004-05 the data is in 1999-00 series, after that it is in 2004- 05 series Source: Calculated based on data from Economic Survey 2011 14 Indian Economy after Liberalisation Introduction 15 Rodrik and Subramanian (2004) argued that the transition whereas Ahluwalia (2002) remarked that growth of the to a higher growth path had been achieved more than a 1980s was unsustainable and was fuelled by a buildup of decade earlier; not 1984 as argued by De-Long but 1980, external debt that culminated in the crisis of 1991. Like the year Mrs. Gandhi came back to power. Bhalla (2011b), Ahluwalia, many others also argued that the fiscal profligacy on the other hand, remarked that “[…] 5 percent per annum in terms of huge unproductive expenditure in areas like growth in India prior to the 1980s wasn’t that unusual; defense spending, interest payments, and subsidies, etc. several times the two-year growth average […] had exceeded through mounting external borrowing led to the 1991 crisis 5 percent in the period prior to the 1980s [...] the conclusion (see among others, DeLong, 2003; Panagariya, 2004a,b; about a large acceleration or breakout in GDP growth seems Basu and Maertens, 2007; Bhalla, 2011b). To quote Basu to be based on a comparison of 1980s vs. 1970s. But for and Maertens (2007), “By the late 1980s, even though the most countries, 1970s is a bad “benchmark” and most country was growing fast, it was beginning to borrow heavily countries would anyway show a marked acceleration in the from its future, which makes us believe that the growth 1980s [...] GDP growth in the 1950s and 1960s averaged 4 impulse of the 1980s would not have been sustainable percent; the 1970s average was only 2.8 percent. So the real without sharp changes in policy. The fiscal deficit was acceleration in the 1980s is about 1.7 percentage point” growing, international debt was reaching record levels, and (emphasis added). the debt-service ratio had become untenable. The meltdown happened in 1990/1.” As Saikia and Shukla discussed in This acceleration in growth was mainly due to a series Chapter 2 of this book, following a rising current and trade of deregulation measures initiated during the mid 1980s by account deficit and mounting external debt and debt servicing the Rajiv Gandhi government in the areas of industrial and burden, along with the Gulf War of 1990 and the consequent trade policies and fiscal reforms (see Chapter 2 by Saikia oil price hike India’s balance of payments (BoP) tapped into and Shukla), along with a number of initiatives such as a crisis in 1990-91. Under such situation India adopted a step-up in public investment, better agricultural performance, series of stabilisation-cum-structural adjustment reforms etc. (Acharya, 2008). According to Panagariya (2005) two under the leadership of Prime Minister P. V. Narasimha Rao major factors are responsible for the growth in the 1980s, and his Finance Minister Manmohan Singh (see Chapter 2 “First, liberalisation played a significant role. On the external for the changes in policy under reforms). front, policy measures such as import liberalisation, export incentives, and a more realistic real exchange rate The economy responded quickly and positively to the contributed to productive efficiency. On the internal front, policy changes after stagnation in 1991-92. The growth freeing up of several sectors from investment licensing jumped to 5.4 per cent in 1992-93 and then averaged above reinforced import liberalisation and allowed faster industrial 7.4 per cent for three consecutive years 1994-95 to 1997- growth. Second, both external and internal borrowing 98 (Table 1.5) and 6.56 per cent per annum during the 8th allowed the government to maintain high levels of public FYP (Table 1.2). The performance of all the three sectors expenditures, and thus, boost growth through demand.” (agriculture, industry and services), especially agriculture Joshi and Little (1994) attributed this growth to the fiscal sector, were noticeable during the 8th FYP, as all the sectors expansion financed by external and internal borrowing, grew faster than the pre-reform period. However, growth 16 Indian Economy after Liberalisation Introduction 17 declined noticeably to 5.52 per cent during the 9th FYP and terms in the early nineties and a freer policy regime for then increased to 7.78 per cent during 10th FYP and 8.03 industry, foreign trade and payments; (c) the investment per cent during the first 3 years of 11th FYP (Table 1.2). The boom of 1993-96 that exerted expansionary effects on both average annual growth rate recorded 6.86 per cent during supply and demand, especially in industry; (d) the success the entire post-reform period, with 5.60 per cent during the in fiscal consolidation, which kept a check on government first post-reform decade (1991-91 to 2000-01) and 7.64 per borrowings and facilitated expansion of aggregate savings cent during the second decade (2001-02 to 2009-10). It can and investments; (e) improvement in the terms of trade for be seen from Table 1.5 growth has accelerated during the agriculture resulting from a combination of higher first five years of economic reforms, it declined in the next procurement prices for important crops and reduction in five years before it picked up to 8.5 per cent in 2003-04 and trade protection for manufactures; (f) availability of capacity then continued to acclerate. Thus, we have three sub-periods in key infrastructure sectors, notably power; and (g) a buoyant in the post-reform period: (a) the first period 1992-93 to world economy which supported expansion of foreign trade 1996-97 accounted an annual growth rate of 6.56 per cent, and private capital inflows. (b) the second period 1997-98 to 2002-03 where growth rate declined to 5.52 percent and (c) the third period 2003-04 to The slowdown of growth during 1997-98 to 2002-03 has 2009-10, which recorded an annual growth rate of 8.46 per been treated seriously, by among others, Ahluwalia (2002), cent. Basu and Maertens (2007), and Bhalla (2011b). Ahluwalia (2002) invalidated the possibility of the impact of the Thus, regarding India’s post-reform growth there are slowdown of World economic growth in the second half of three puzzles, and thereby, debate in the literature. First, the 1990s by saying that “India’s dependence on the world what cause India’s growth to accelerate immediate after economy is not large enough for this to account for the reforms; second, what cause India’s growth to decelerate slowdown”. But he has not provided any conclusive during 1997-98 to 2002-03 after having an accelerated explanation for the same; rather he remarked that “Critics growth rate in the first five years of economic reforms, and of liberalisation have blamed the slowdown on the effect of third, what caused the growth rate to sharply accelerate trade policy reforms on domestic industry […]. However, the after 2003-04. There have been a corpus of literature dealing opposite view is that the slowdown is due not to the effects with these issues (among others, Ahluwalia, 2002; Basu and of reforms, but rather to the failure to implement the reforms Maertens, 2007; Panagariya, 2004a, 2004b, 2005; Acharya, effectively.” For Acharya (2007), the factors that contributed 2007; Bhalla, 2011b), but they differ in opinions. Acharya the deceleration of growth include: (a) the significant (2007) listed out a number of factors that contributed to the worsening of the fiscal deficits, mainly due to large public acceleration of growth during 1992-93 to 1996-97: (a) pay increases following the Fifth Pay Commission; (b) the productivity gains resulting from deregulation of trade, consequent decline in public savings, (c) slackening of industry and finance, especially in industry and some services economic reforms after 1995 as coalition governance became sectors; (b) the surge in export growth at about 20 percent the norm, (d) significant slowdown in agricultural growth, per year for three successive years beginning 1993-94, (e) a marked downswing in the industrial cycle, and (f) an attributable to the substantial devaluation in real effective increasingly unsupportive international economic 18 Indian Economy after Liberalisation Introduction 19 Table 1.5: Post-reform Growth Performance Post-reform Sub-periods (Average) 1992-93 to (percentage per year) 1996-97 6.56 4.68 7.74 8.74 6.96 5.64 Year GDP Primary Secondary Trade, Financing, Public 1997-98 to Hotels, Insurance, Administra- 2002-03 5.23 1.18 4.77 8.20 8.02 7.03 Transport Real tion Defense & Communi- estate,& and other 2003-04 to cation Business Services 2007-08 8.88 4.96 10.40 11.50 10.58 5.80 2003-04 to 1991-92 1.40 -1.50 -0.10 2.60 10.80 2.60 2009-10 8.46 3.73 9.26 10.67 10.66 7.64 1992-93 5.40 6.20 3.60 5.60 5.40 6.00 1993-94 5.70 3.20 6.30 6.90 11.20 4.50 Note: Up to 2004-05 the data is in 1999-00 series, after that it is in 2004-05 series. 1994-95 6.40 5.10 9.30 9.90 3.90 2.30 P-Provisional estimate; Q- Quick estimate 1995-96 7.30 -0.20 12.20 13.20 8.10 7.30 Source: Based on data from Economic Survey 2011 1996-97 8.00 9.10 7.30 8.10 6.20 8.10 1997-98 4.30 -1.60 3.10 7.50 11.70 8.30 environment, which includes the Asian financial crisis of 1997-98, rising energy prices and the global recession of 1998-99 6.70 6.00 4.30 7.60 7.80 9.70 2001. Bhalla (2011b), on the other hand, pointed out the 1999-00 6.40 2.70 4.70 8.20 9.20 11.50 mindset of the Indian politicians and policymakers towards 2000-01 4.40 0.00 6.80 7.30 4.10 4.70 the acceleration of GDP growth to above 7 per cent per 2001-02 5.80 5.90 2.80 9.20 7.30 4.10 annum: “In the mindset of the Indian politicians, and most 2002-03 3.80 -5.90 6.90 9.40 8.00 3.90 policy makers, it was inconceivable that the Indian economy could grow at East Asian growth rates; […] the 7 plus 2003-04 8.50 9.30 7.80 12.00 5.60 5.40 percent growth rate was considered as an overheating phase 2004-05 7.50 0.80 10.50 10.70 8.70 6.80 deserving a strong policy response. […] When this acceleration 2005-06 9.50 4.60 10.70 12.20 12.70 7.00 coincided with global and domestic inflation, the RBI panicked and tightened monetary policy to an unprecedented degree. 2006-07 9.60 4.60 12.70 11.60 14.00 2.90 Further, the RBI did not cut interest rates in response to 2007-08 9.30 5.50 10.30 11.00 11.90 6.90 the decline in worldwide, and domestic, inflation in the mid to late 1990s. By keeping deposit rates at high double digit 2008-09P 6.80 0.00 4.70 7.50 12.50 12.70 levels, and inflation collapsing, the RBI ensured that real 2009-10Q 8.00 1.30 8.10 9.70 9.20 11.80 rates reached double digit levels. This caused the growth to 1992-93 to collapse […]” (emphasis added). 2009-10 6.86 3.14 7.34 9.31 8.75 6.88 Whatever the reasons of acceleration during 1992-93 to 1996-97 and the deceleration during 1997-98 to 2002-03, 20 Indian Economy after Liberalisation Introduction 21 Table 1.6: Volatility in Growth Rate: Coefficient sectors’ growth as compared to 1980s. This suggests that of Variation3 though the overall growth was more consistent in the 1990s, the sectoral growth was less consistent in the 1990s compared Year GDP Primary Secondary Trade, Financing, Public to the 1980s. These observations are consistent with that of Hotels, Insurance, Administra- Transport Real tion Defense Ahluwalia (2002), Panagariya (2005), Acharya (2007), Basu & Communi- estate,& and other and Maertens (2007), and Bhalla (2011b). These authors cation Business Services argued that growth in the 1980s was not sustainable, since it relied too much on deficit financing and excessive foreign 1951-52 borrowing, and finally, culminated in the crisis of 1991; to 1960-61 0.707 1.368 0.666 0.384 0.356 0.230 whereas growth of the 1990s has been sustainable, as it was 1961-62 accompanied by remarkable external stability despite the to 1970-71 0.915 2.629 0.492 0.334 0.277 0.216 East Asian crisis. Bosworth et al. (2007), as quoted by Basu and Maertens (2007), observed that the pre-1980 growth 1971-72 to 1980-81 1.367 4.343 0.977 0.585 0.681 0.351 was mainly associated with an increase in factors, whereas the post-1980 growth has been associated with some increase 1981-82 in factors, but more importantly an increase in total factor to 1990-91 0.409 1.482 0.412 0.165 0.305 0.326 productivity (see Table 1.7). 1991-92 to 2000-01 0.337 1.267 0.600 0.354 0.368 0.464 Table 1.7: Contributions to Growth (in annual percentage rate of change) 2001-02 to 2009-10 0.252 1.519 0.381 0.149 0.288 0.498 Years Output Employ- Out- Contribution of- ment put Source: Based on data from Economic Survey 2011 per Physical Land Education Factor worker capital produ- ctivity the post-reform period performance is more sustainable as compared to that of the 19980s. Looking at Figure 1.1 one 1960–73 3.3 2.0 1.3 1.1 -0.2 0.1 0.2 can understand that the volatility was higher during the 1973–83 4.2 2.4 1.8 0.9 -0.2 0.3 0.6 1980s as compared to the 1990s. This is further confirmed 1983–93 5.0 2.1 2.9 0.9 -0.1 0.3 1.7 by the coefficient of variation of decadal growth in the 1980s and 1990s as shown in Table 1.6. However, 1990s 1993–99 7.0 1.2 5.8 2.4 -0.1 0.4 2.8 experienced higher volatility in the industry and services 1999–2004 6.0 2.4 3.6 1.2 0.1 0.4 2.0 1960–2004 4.7 2.0 2.6 1.2 -0.1 0.3 1.2 3 The coefficient of variation (CV) measures the variation of a 1960–80 3.4 2.2 1.3 1.0 -0.2 0.2 0.2 variable and is defined as the standard deviation divided by 1980–2004 5.8 1.9 3.8 1.4 0.0 0.4 2.0 mean. A higher value of the CV means that there is more variation in the variable. Source: Bosworth et al. (2007, Table 3); cited in Basu (2007, Table 4) 22 Indian Economy after Liberalisation Introduction 23 The momentum of growth picked up in 2003-04 and There have been many positive features of India’s post- since then the economy has not looked back. The growth reform performance apart from the recent surge of economic rate thrice crossed 9 per cent mark (years 2005-06, 2006- growth. One of the urgent priorities of the policy makers at 07 and 2007-08) and has not dropped below 7.5 per cent the start of economic reforms was to reduce fiscal deficit, as until 2008-09 when the global financial crisis hit the economy fiscal profligacy was seen as the major cause of BoP crisis (but still managed a comfortable growth rate of 6.8 per in 1991 (Ahluwalia, 2002). The combined fiscal deficit of the cent). With the impressive growth of secondary sector central and state governments was successfully reduced to (including industry, construction and water supply, 7 per cent of GDP in 1991-92 and 1992-93 from 9.41 per electricity and gas) and services sector, GDP growth cent in 1990-91 (Figure 1.2). The primary deficit came down averaged at 8.88 per cent during the five years before the from 5.02 percent of GDP to 2.27 per cent and revenue crisis (2003-04 to 2007-08) and 8.46 per cent during the deficit came down from 4.19 per cent to 3.35 per cent during entire post 2003-04 period (2003-04 to 2009-10) including the same period. the period of global financial crisis; despite the gloomy performance of the agriculture sector (though the sector The intensive effort by the government kept the fiscal started with an impressive growth rate of 9.30 per cent in deficit at a manageable level of 6.47 and 6.28 per cent per 2003-04). Regarding the sources of the latest economic surge cent of GDP respectively in 1995-96 and 1996-97, and an Bhalla (2011b) remarked that “[the high growth] was average of 6.98 per cent of GDP between 1991-92 and 1996- preceded by a decline in real interest rates of around 600 97 (Table 1.8). However, the increase in public pay since basis points […] in a matter of four years (1999 to 2002). 1996-97 along with low revenue buoyancy and weak However, many commentators, and analysts, believe that expenditure control policies reversed the fiscal position and the recent high growth has been a consequence of for 4 consecutive years between 1998-99 and 2002-03 fiscal overheating, and not because of a structural shift in the deficit recorded above 9 per cent of GDP. For the five years economy; […]. Some others believe that the recent period between 1998-99 and 2002-03 fiscal deficit averaged acceleration was part of a global phenomena of a “rising at 9.42 per cent of GDP, while primary deficit and revenue tide lifting all boats”; all emerging economies grew faster, deficit averaged at 3.52 and 6.62 per cent. However, due to and India was part of this upliftment” (emphasis added). government’s sustained efforts at fiscal consolidation after On the other hand, Acharya (2007) suggested seven major 2002-03, fiscal deficit reduced to 4.09 per cent in 2007-08 ingredients of the recent surge in economic growth: (a) the and revenue deficit to 0.19 per cent during the same. The momentum of a quarter of a century of strong economic five years period between 2003-04 and 2007-08 averaged growth, (b) a much more open economy to external trade fiscal deficit at 6.31 per cent and revenue deficit averaged and investment, (c) a growing middle class fuelling domestic at 2.73 per cent, whereas between 2005-06 and 2007-08 the consumption, (d) the demographic dividends of a young fiscal position was even better with fiscal and revenue deficits population, (e) strong companies in a modernised capital averaged at 5.31 and 1.39 per cent respectively. However, market, (f) some recent economic reforms, and finally, (g) both the fiscal and revenue deficits shot up during 2008- a supportive international economic environment. 09 and 2009-10 (Figure 1.2). 24 Indian Economy after Liberalisation Introduction 25 Table 1.8: Combined Deficits of Central and State Governments (as % of GDP) Gross Gross Revenue fiscal primary deficit deficit deficit 5 years average 1981-82 to 1985-86 7.18 4.60 0.92 1986-87 to 1990-91 9.11 5.21 3.11 1991-92 to 1995-96 7.12 2.19 3.53 1996-97 to 2000-01 8.24 2.84 5.42 Figure 1.2: Combined Deficits of Central and State Governments 2001-02 to 2005-06 8.29 2.20 5.19 Source: Handbook of Statistics on Indian Economy, 2010-11 2006-07 to 2009-10 6.77 1.57 2.61 Selected periods 1991-92 to 2000-01 7.68 2.52 4.47 2001-02 to 2009-10 7.61 1.92 4.04 1991-92 to 1996-97 6.98 2.03 3.54 1997-98 to 2004-05 8.74 2.88 5.84 1998-99 to 2002-03 9.42 3.52 6.62 2003-04 to 2007-08 6.31 0.63 2.73 2005-06 to 2007-08 5.31 -0.06 1.39 2008-09 to 2009-10 8.81 3.71 4.47 Source: Handbook of Statistics on Indian Economy, 2010-11 26 Indian Economy after Liberalisation Introduction 27 Another area where the economy has achieved 1.10). At the same time the ratio of merchandise trade to remarkable success in the post-reform period is the level and GDP steadily increased from 14.8 per cent in 1991-92 to 22.5 composition of savings and capital formation. The gross per cent in 2000-01 and then 36.7 per cent in 2009-10. domestic capital formation increased from 22 per cent of However, the gap between exports to GDP and imports to GDP in 1991-92 to 35.8 per cent in 2009-10 (Table 1.9). The GDP increased substantially from -1.0 per cent in 1991-92 increase in capital formation was more pronounced in the to -2.7 per cent in 2000-01 and then -8.9 per cent in 2009- post 2002-03 periods, whereas in the 1990s and initial 10. Some other aspects of India’s post-reform BoP position years of 2000s capital formation fluctuated around 24 per are- steady rise in net invisibles, increase in current account cent. This increase is mostly contributed by the private balance, increase in foreign exchange reserves and relatively capital, which increased from 18.6 per cent in 2002-03 to steady exchange rate (Table 1.10). The ratio of net invisibles 24.9 per cent in 2009-10, whereas public sector capital to GDP increased from 0.7 per cent in 1991-92 to 7.4 per increased from 6.1 per cent to 9.2 per cent during the same cent in 2008-09 (though it declined to 6 per cent in 2009- period. This increase in capital formation is accompanied by 10), of which half of the share came from software exports substantial increase in domestic savings, which increased in the later period. The economy experienced a steady surge from 21.5 per cent of GDP in 1991-92 to 26.3 per cent in of foreign capital in the post-reform period, especially after 2002-03 and then to 33.7 per cent in 2009-10. The household 2002-03, with foreign investment to GDP ratio increased sector is the largest single component of domestic savings, from 1.2 per cent in 2002-03 to 4.9 per cent in 2009-10. With which share rising from 15.8 per cent in 1991-92 to 23.5 per a steady current account balance during this period, the cent in 2009-10. The private corporate sector savings has improvement in the current account balance led to increase steadily increased in the post 2003-04 periods, with its the foreign exchange reserves. These reserves increased share rising from 4 to 8.1 per cent between 2002-03 and from US$ 42.28 billion in 2000-01 to US$ 309.72 billion in 2009-10. The public sector savings in India has been very 2007-08 and then declined to US$ 279.06 in 2009-10. This small and it was negative between 1998-99 and 2002-03. amount of reserves is sufficient to cover the imports However, there has been steady increase in the public sector requirement of the country for about 11.2 months in 2009- savings from 1.1 per cent to 5 per cent between 2003-04 and 10. However, this capital surge and the consequent 2007-08, but it declined to 0.5 per cent in 2008-09 and then accumulation of foreign exchange reserves poised increased to 2.1 per cent in 2009-10. macroeconomic challenges for the country, especially in the areas of exchange rate, convertibility of BoP accounts and The performance of the economy in the external sector monetary policies (see Acharya, 2008). is also satisfactory in the post-reform period. Considering the current account balance, which is the single most widely monitored indicator of a nation’s external balance position (Acharya, 2008) India’s external balance position has been comfortable throughout the post-reform period (1991-92 to 2009-10), with highest surplus of 2.3 per cent of GDP in 2003-04 and lowest deficit of 2.9 per cent in 2009-10 (Table 28 Indian Economy after Liberalisation Introduction 29 (Percentage of GDP at current market prices) Table 1.9: Gross Domestic Saving and Gross 1999-00 38.04 43.33 12.3 -4.0 -1.0 Domestic Capital Formation 8.3 2.9 1.2 8.2 (as % of GDP) 1995-96 1996-97 1997-98 1998-99 32.49 42.07 11.4 -3.2 -1.0 8.2 2.2 0.6 8.2 Years Gross Domestic Saving Gross Domestic Capital Formation House Corporate Public Total Public Private Valua- Total hold sector sector sector sector bles 29.37 37.17 12.5 -3.8 -1.4 Table 1.10: Selected Balance of Payments Indicators 8.7 2.4 1.3 6.9 sector 1950-51 5.7 0.9 2.0 8.6 2.9 7.4 - 10.3 26.42 35.50 12.6 -3.8 -1.2 8.8 2.6 1.6 6.5 1960-61 6.5 1.6 3.1 11.2 7.2 7.2 - 14.4 1970-71 9.5 1.5 3.3 14.2 6.7 8.9 - 15.6 21.69 33.45 1980-81 12.9 1.6 4.0 18.5 8.9 9.6 - 18.5 12.3 -3.2 -1.6 6.0 9.1 1.5 1.4 1990-91 18.4 2.7 1.8 22.8 10.0 14.2 - 24.2 1991-92 15.8 3.1 2.6 21.5 9.5 12.5 - 22.0 1993-94 1994-95 25.19 31.40 11.1 -2.8 -1.0 8.3 1.8 1.5 8.4 1992-93 16.4 2.7 2.2 21.2 9.1 14.7 - 23.8 1993-94 17.3 3.4 1.2 21.9 8.8 12.5 - 21.2 1994-95 18.6 3.5 2.3 24.4 9.3 14.2 - 23.5 19.25 31.37 -1.5 -0.4 8.2 9.7 1.0 1.5 8.6 1995-96 16.9 5.0 2.6 24.4 8.2 18.4 - 26.6 1996-97 16.0 4.5 2.2 22.7 7.5 14.6 - 22.1 1992-93 1997-98 17.7 4.3 1.8 23.8 7.1 16.8 - 23.9 30.65 9.83 -2.3 -1.7 7.3 9.6 0.6 0.2 4.9 1998-99 18.8 3.9 -0.5 22.3 7.0 15.6 - 22.6 1999-00 21.1 4.5 -0.8 24.8 7.4 17.9 0.8 26.1 1991-92 2000-01 21.6 3.9 -1.8 23.7 6.9 16.6 0.7 24.2 24.47 9.22 -1.0 -0.3 5.3 6.9 7.9 0.7 0.1 2001-02 22.1 3.4 -2.0 23.5 6.9 16.7 0.6 24.2 2002-03 22.9 4.0 -0.6 26.3 6.1 18.6 0.6 25.2 2003-04 24.1 4.6 1.1 29.8 6.3 19.6 0.9 26.8 1990-91 17.94 5.83 -3.0 -0.1 Current Account Balance -3.0 5.8 8.8 0.0 2.5 2004-05 23.6 6.6 2.3 32.4 7.4 23.8 1.3 32.5 2005-06 23.5 7.5 2.4 33.5 7.9 25.2 1.1 34.3 Reserves (US$ billions) 2006-07 23.2 7.9 3.6 34.6 8.3 26.4 1.2 35.9 Reserves (in months) Foreign Investment 2007-08 22.5 9.4 5.0 36.9 8.9 28.1 1.1 38.0 Foreign Exchange 2008-09P 23.8 7.9 0.5 32.2 9.5 24.6 1.3 35.4 Import cover of Exchange Rate Trade Balance Net Invisibles 2009-10Q 23.5 8.1 2.1 33.7 9.2 24.9 1.7 35.8 (Rs/US $) Exports Imports Note: Up to 2004-05 the data is in 1999-00 series, after that it is in 2004- 05 series P-Provisional estimate; Q- Quick estimate Source: Economic Survey, 2011 30 Indian Economy after Liberalisation Introduction 31 No doubt that India’s economy has achieved fabulous 2009-10 279.06 47.42 13.9 22.8 11.2 -8.9 -2.9 growth in the post-reform period, especially in the first 6.0 4.9 decade of the 21st century, emerged as one of the fastest growing economies in the world and substantially managed 2005-06 2006-07 2007-08 2008-09 251.99 45.99 15.6 25.4 -9.8 -2.4 7.4 1.7 9.8 her external as well as internal balances; but the performance of the economy has been debated throughout the period (even before reforms) in some areas such as 309.72 40.26 13.5 21.0 14.4 -7.5 -1.3 6.2 5.0 poverty and inequality, human development, agriculture growth, employment, inflation management, and so on. 199.18 42.25 13.6 20.1 12.5 -6.5 -1.0 5.5 3.1 Reduction of poverty and inequality has been one of the oldest agenda of planning in India. The post-reform period 151.62 44.27 13.0 19.4 11.6 witnessed significant decline in poverty and at a faster rate -6.4 -1.2 5.2 2.6 than the 1980s (Ahluwalia, 2002). Table 1.11 reports the percentage of population below poverty line by both the 2003-04 2004-05 141.51 44.93 12.1 16.9 14.3 -4.8 -0.4 planning commission estimates based on the Lakdawala 4.4 2.2 Table 1.10: Contd... Committee method (for 1951-52 to 2004-05) and the new Tendulkar committee estimates (for 1993-94 and 2004-05). 112.96 45.95 11.0 13.3 16.9 -2.3 4.6 2.3 2.6 The poverty estimates of the Tendulkar committee are Source: Handbook of Statistics on Indian Economy, 2010-11 higher than the planning commission estimates, but both the estimates show decline in poverty. However, the pace 2002-03 75.43 48.40 10.6 12.7 14.2 -2.1 3.4 1.2 1.2 of reduction is very slow; from 36.0 to 27.5 by the planning commission estimates and from 45.3 to 37.2 by the Tendulkar committee estimates between 1993-94and 2004-05. The 2001-02 54.11 47.69 11.8 11.5 -2.4 9.4 3.1 0.7 1.7 estimates by Abhijit Sen (2010), as quoted by Ahluwalia (2011), showed that poverty has declined from 37% in 2004- 05 to 29% in 2007-08, which is much more than the 11th 2000-01 FYP’s target of reducing poverty by 2 percentage points per 42.28 45.68 12.6 -2.7 Current Account Balance -0.6 9.9 2.1 1.5 8.8 year. Another estimate by C. Ravi reported the percentage Import cover of Reserves of population below poverty line at 32 per cent in 2009-10 Reserves (US$ billions) (cited in Ahluwalia, 2011). Though these estimates showed Foreign Investment Foreign Exchange decline in poverty in the post-reform period, poverty in Exchange Rate Trade Balance absolute term remained at a higher level, with about 303 Net Invisibles (in months) million population living below the poverty line. Further, (Rs/US $) Exports Imports there have been substantial differences across the states in poverty reduction. This is, further, fuelled by increased 32 Indian Economy after Liberalisation Introduction 33 differences across the states in terms of growth and Table 1.11: Percentage of People below Poverty development. The post-reform period witnessed significant Line increase in inter-state and intra-state inequality in terms of rate of economic growth, level of income and level of Year Rural Urban All India industrialisation. Ahluwalia (2011) observed that the inter- 1951-52 47.4 35.5 45.3 state Gini coefficient of GSDP growth increased from 0.145 in 1980-81 to 0.17 in 1992-93 and then 0.22 in 2001-02 and 1977-78 53.1 45.2 51.3 0.25 in 2008-09. Thus, the increase in inter-state inequality 1983 45.7 40.8 44.5 was much faster in the 1990s compared to 19980s, but it has stabilised in the 2000s. In recent years, intra-state 1993-94 37.3 32.4 36.0 inequality is seen as another critical form of inter-regional 2004-05 28.3 25.7 27.5 inequality, which hinders achievement of “inclusive growth”, 1993-94* 50.1 31.8 45.3 the high profile objective of the 11th FYP. 2004-05* 41.8 25.7 37.2 Inequality among different sections of the population has also remained a major issue over the years. Ahluwalia * Tendulkar Estimates. The remaining are the Planning Commission (2011) found that consumption inequality (measured by estimates based on official poverty line. Gini coefficient) modestly increased in the urban areas Source: Planning Commission, Government of India between 1993-94 and 2009-10, where in the rural area it increased between 1993-94 and 2004-05 and then declined One of the key strategies for achieving inclusive growth in 2009-10. The caste and social group based inequality has has been generation of productive and gainful employment. received a new momentum in recent years. Thorat (2010), The 11 th FYP aims at generating 58 million work as quoted by Ahluwalia (2011), showed that the percentage opportunities and bring the unemployment rate to 4 per of the SC/ST and Muslim minority population in poverty is cent by the end of the plan.4 Looking at the growth of much higher than for the population as a whole, though the organised sector employment, it is observed that employment reduction in the percentage in poverty for these groups is growth has decelerated in the reforms period. The organised roughly comparable to that for the population as a whole. sector employment grew at 1.2 per cent per annum during There are more issues associated with the inclusive growth 1983 to 1994, which decelerated to 0.05 per cent during debate in India, for instance gender inequality, inter-personal/ 1994 to 2008 (Table 1.12). The decline is mainly due to the group/caste and inter-regional inequality in access to basic severe deceleration of public sector employment growth, services such as education, finance, health care, safe drinking which averaged at -0.65 per cent during 1994 to 2008 as water, sanitation, etc. These issues should be addressed with against 1.53 per cent during 1983 to 1994. However, the care as they are sensible and improvements on these areas private organised sector experienced significant increase in not only represent welfare gain, but also social development. 4 Economic Survey- 2010-11, Government of India, Chapter 12, pp. 291-331. 34 Indian Economy after Liberalisation Introduction 35 employment growth from 0.44 per cent during 1983 to 1994 first decade of the 2000s. The unemployment rate is high to 1.75 per cent during 1994 to 2008, so that the overall in terms of CDS approach being it the broadest approach, employment during the post-reform period recorded a positive which implies a higher degree of underemployment in the growth (though very small). However, the organised sector economy. accounted for only 15 per cent of employment in India, and Table 1.13: Unemployment Rate (per 1000) according the remaining 85 per cent engaged in informal sector to Usual Status, Current Weekly Status (CWS) and (including agriculture). Current Daily Status (CDS) Approach Table 1.12: Rate of Growth of Organised Sector Employment Rural Urban Usual CWS CDS Usual CWS CDS (per cent per annum) 64th Round (2007-08) Sectors 1983-1994 1994-2008 Male 23 41 85 40 47 69 Public Sector 1.53 -0.65 Female 19 35 81 66 65 95 Person 22 39 84 45 50 74 Private Sector 0.44 1.75 th 60 round (2004) Male 24 47 90 46 57 81 Total Organised 1.20 0.05 Female 22 45 93 89 90 117 Source: Economic Survey, 2010-11 Person 23 46 91 53 64 88 th 55 round (1999 – 2000) As per National Sample Survey (NSS) data on the basis Male 21 39 72 48 56 73 of current daily status about 24 million work opportunities Female 15 37 70 71 73 94 were created between 1993-94 and 1999-00, which increased Person 19 38 71 52 59 77 to 47 million between 1999-00 and 2004-05; and thus an 50 th round (1993-94) acceleration of employment growth rate from 1.25 per cent Male 20 30 56 45 52 67 per annum during 1993-94 to 1999-00 to 2.62 per cent Female 14 30 56 83 84 105 during 1999-00 to 2004-05. The 64th round of NSS survey Person 18 30 56 52 58 74 reported creation of about 4 million work opportunities 43 rd round (1987-88) during 2004-05 to 2007-08. However, the unemployment Male 28 42 46 61 66 88 rate (per 1000) has steadily increased between 1993-94 and Female 35 44 67 85 92 120 2004 in both the rural and urban areas in terms of all the 38th round (1983) three concepts of employment (Usual, CWS and CDS), though Male 21 37 75 59 67 92 it marginally declined in 2007-08 (Table 1.13). This is mainly Female 14 43 90 69 75 110 because of the faster rate of labour force growth compared to the growth in work opportunities in the 1990s and the Source: NSSO Employment-Unemployment Survey, various rounds 36 Indian Economy after Liberalisation Introduction 37 Another weak spot of India’s economic performance in the post-reform period is the inflationary pressure in the last couple of years. Though a modest rate of inflation is tolerable and may even be necessary to accommodate relative price Note: WPI (AC)-Wholesale Price Index (All Commodities), CPI (IW)-Consumer Price Index (Industrial changes, inflation beyond this level- usually put at 5 to 6 per cent by the government and 4 to 5 per cent by the Reserve Bank of India- is regressive and distortionary (Ahluwalia, 2011). Without looking at the issues related to measurement of inflation in India, we have reported three available series of inflation namely GDP deflator, wholesale price index for all commodities (WPI AC) and consumer price index for industrial workers (CPI IW) for the period 1991-91 to 2010-11 in Figure 1.3. It is obvious that the annual inflation has been steadily declining during 1991- Figure 1.3: Annual Inflation Rate in India in the Post-reform period 92 to 1999-00 and then it fluctuated within a “comfort zone” of around 5 per cent till 2008-09. However, in the last two years, inflation has been well above the “comfort zone”. The Source: Handbook of Statistics on Indian Economy, 2010-11 GDP deflator, which is perhaps the best measure of overall inflation, averaged at 4 per cent during 2000-01 to 2008- 09 and then jumped to 7.5 and 9.6 per cent respectively in 2009-10 and 2010-11. Similarly, CPI (AC) reached double digit level during 2009-11 and WPI (AC) shot up to 8.2 per cent in 2010-11 from 4.6 per cent during 2000-01 to 2008- 09. The high rates of inflation in food prices, especially vegetables, fruits, milk, eggs, etc., have been a matter of special concern in the last couple of years. According to Acharya (2008) the factors that contributed to the favourable inflationary situation until 2008-09 include- low world inflation (until 2008), more liberal Indian foreign trade policies, alert and anticipatory monetary policy, declining Workers) fiscal deficits and downward revision of inflationary expectations; which have turned sharply adverse since March 2008 and giving rise inflationary pressure in the last two years. 38 Indian Economy after Liberalisation Introduction 39 The economy has confronted with many other challenges water resources, managing urban transition, environment since the initiation of reforms in the early 1990s (or even protection and sustainability, as critical issues for achieving before), which have been discussed in well referred sources sustainable growth for the 12th FYP. (see Ahluwalia, 2002 & 2011; Acharya, 2008; Bhalla, 2011a & 2011b; Singh, 2009; Kelkar, 1999). In discussing India’s Though all these issues are equally important and deserve development strategies, Singh (2009) pointed out that special attention, covering all those issues is not possible in development of human capital, reduction of income and a single volume. Therefore, the present volume is restricted regional inequality, achieving social and gender equity, in and around the following three issues of contemporary improving agricultural productivity, developing physical India’s economy namely sectoral performance of the economy; infrastructure, macroeconomic management on the fiscal poverty, inequality and rural development; and human and monetary sides, etc. are the major future challenges of development with special reference to the economic reforms India’s economy. Acharya (2007 and 2008) listed a number initiated in the early 1990s. of risk factors and key issues for India’s sustainable future 1.3 Overview of the Volume growth, which include: restoring fiscal balance, infrastructure bottlenecks, labour market rigidities, weak performance of The present volume consists of seven chapters (excluding agriculture, pace of economic reforms, convertibility and this introduction chapter) contributed by six authors. As exchange rate management, role of the reserve bank, mentioned earlier, these chapters are broadly on three issues weaknesses in human resource development programs, coping of contemporary India’s economy- sectoral performance of with international uncertainty, etc. Similarly, Basu and the economy; poverty, inequality and rural development; Maertens (2007) also commented in the same line: “If India and human development, and have been written with the wants to sustain and raise even higher its current growth, reference to India’s economic reforms of the 1990s. the main bottlenecks in the Indian economy will need to be addressed. These are infrastructure (roads, expensive freight Chapter 2 by Dilip Saikia and Vachaspati Shukla outlines rates, power supply, ports, and airports), labour and on India’s Road to Economic Reforms. The main objective bankruptcy regulations, and the high level of corruption in of the chapter is to provide a comprehensive review of India’s the government bureaucracy. In addition, the current erratic development strategy after independence and the context in and low growth pattern of the agricultural sector and the which economic reforms were initiated in the economy. It rising inequality- between states, between rural and urban also highlights the major policy reforms initiated in India areas, and within urban and within rural areas mainly since July 1991. By doing this, the chapter provides a complete since the 1990s- are a concern. Each of these factors deserves perspective in which the rest of the chapters of the volume inquiry, research, and policy initiative […]”. Adding to the stand. list, Ahluwalia (2011) emphasised on financial sector reforms, Chapter 3 on Agricultural Growth in the Post-reform managing energy challenges through reducing energy Era by Kiran Kumar Kakarlapudi critically evaluates the intensity and increasing domestic energy supply, managing performance of the Indian agriculture before and after 40 Indian Economy after Liberalisation Introduction 41 economic reforms. The fantabulous growth performance of that agriculture-industry linkage is no longer exist and the India’s economy after reforms, to a large extent, has been share of agriculture in the economy’s GDP has declined, the driven by service sector and improvements in the secondary author argues that it need not necessarily imply that the sector. However, this growth process bypassed the sector has no meaningful implication for the growth of the agricultural sector, which showed sharp deceleration in the economy as well as industry. Even now, the sector accounts growth rate (3.62 percent during 1984/85 – 1995/96 to 1.97 for approximately one-fifth of national income and supports percent during 1995/96 – 2004/05). At the same time the more than 52 per cent of the population. The chapter unveils sector has recorded wide variations in yield and productivity that other than declining the agriculture-industry linkages, and a shift towards cash crop cultivations. The chapter the dimension of the linkages between the two sectors has presents a systematic and critical review of literature to changed over time. While the linkage was primarily through comprehend the poor performance of Indian agriculture. It the production channel in the 1960s through 1980s, it mainly focuses on the growth of agriculture in terms of area, translates primarily through the demand channel since yield and cropping pattern, the pattern and determinants 1990s. Further both the production and demand linkages (price and non-price) of agricultural growth, and evaluates were primarily industry to agriculture before reforms, which the influence of policy and environmental factors on the changes to agriculture to industry after reforms. On the sector’s performance. It unveils that in the post-reform period other hand, the linkages between industry and services there has been an increase in prices of cash crops and the sector has been very strong for both before and after reforms, changing cropping pattern towards non-foodgrains has a whereas agriculture’s linkage with services sector has been significant impact on agricultural growth. The chapter very poor and it has been worsened after reforms. concludes that much of the slowdown in agriculture is caused due to other pertinent factors such as infrastructure, Chapter 5 entitled Differential Growth of Poor and Non- technology and environmental factors, lack of political poor and Its Implication on Poverty Reduction by Vachaspati commitment and poor implementation of policies, etc. Shukla presents the anomaly between poverty reduction and the differential growth among the poor and non-poor Chapter 4 by Dilip Saikia examines the inter-sectoral population. The chapter conceptualises the Head Count Ratio linkages, especially agriculture-industry linkages in India (HCR) of measuring poverty and contrasts that though a in the pre- and post-reform period. The chapter discusses decline in HCR informs us that the probability of different dimensions of theoretical and measurement issues encountering a poor person in a given state has decreased underlying the agriculture-industry interlinkages. Many (likelihood principle), nevertheless it offers no insights studies, which are based on the traditional two-sector model whether the decrease in HCR is due to poverty eradication in a closed-economy framework, have provided a partial or due to increase in the size of non-poor population. picture of inter-sectoral linkages in India’s economy. The Therefore, the chapter develops a theoretical approach to author argues for the need of a general macroeconomic comprehend poverty reduction in the context of differential framework that could measure the potential direct and growth of poor and non-poor population. The model indirect impact of agricultural growth on the economy and decomposes poverty reduction into two components: a) its different sectors. Further, notwithstanding many argued 42 Indian Economy after Liberalisation Introduction 43 transition from poor to non-poor and b) role of population which declined further during the first decade of economic growth in poverty reduction. The chapter concludes that reforms. Further, there is significant amount of horizontal poverty comparisons across variable populations should be inequality in the access to finance from institutional sources indicative of likelihood as well as aggregate headcount. across states. The chapter unveils that better development outcomes in the rural India are associated with better access Chapter 6 by Swati Dutta on Regional Patterns of to finance. More importantly, it is observed that lower Agricultural Growth and Its Bearing on the Incidence of (higher) inequality in the access to finance from institutional Poverty in India examines the impact of agricultural growth sources is associated with better (worse) development on poverty reduction across Indian states. Given the vastness outcomes. The chapter urges for improving access to finance of the agriculture sector in terms of employment creation especially for the poor through various innovative means in India’s economy, the sector’s influence on the incidence including microfinance in order to improve the development of poverty is very high and it varies across the states. The outcomes in rural India, which need to be accompanied by chapter highlights the pattern of agricultural growth across the provision of complementary infrastructure, institutional Indian states during 1984-85 to 2004-05, and also the strengthening and prudent regulatory initiatives to deliver consumption based poverty level across states using national better access to financial services. sample survey (NSS) data on Consumption Expenditure Survey for 1987-88, 1993-94 and 2004-05. The chapter Chapter 8 by Kalyani Shankar on Human Development unveils that the agricultural growth and poverty level across in India examines the trends in inter-state and intra-state states is negatively correlated, and that agricultural NSDP disparity in social sector attainment in India between 1991 per worker, share of agricultural and manufacturing worker and 2001. The chapter has developed a Social Development and education level of workers have negative impact on Index (SDI) with five human development indicators, such incidence of poverty. The chapter concludes that agricultural as literacy rate, infant mortality rate (IMR), percentage of growth is necessary but not sufficient for poverty reduction households with electricity connection, percentage of for various reasons and government policy needs to assume households with toilet facility and percentage of households greater role in poverty reduction. with safe drinking water. This SDI has been computed for fourteen major states for the years 1991 and 2001. The Chapter 7 on Access to Finance and Its Association with findings suggest that though there has been improvement Development in Rural India by Khanindra Ch. Das throws in human development in India, persistent inter-state and light on the nuances of horizontal inequality in the access intra-state disparity is also evident. While Kerala, Punjab to finance from institutional sources and development and Tamil Nadu have been among the states with better outcomes such as poverty, educational attainment and SDI for both the period, Bihar, Madhya Pradesh, Rajasthan standard of living in rural area of Indian states since the and Orissa have been at the other end. initiation of economic reforms. It is observed that the percentage of rural households getting access to finance from institutional agencies has remained considerably low 44 Indian Economy after Liberalisation Introduction 45 Desai, A. (1999), “The Economics and Politics of Transition to an Open Market Economy: India,” OECD Working Papers, References Vol, 7, No. 100. Kelkar, V. (1999), “India’s Emerging Economic Challenges”, Economic and Political Weekly, Vol. 34, No. 33, pp. 2326- Acharya, S. (2004), “India’s Growth Prospects Revisited”, Economic 29. and Political Weekly, Vol. 39, No. 41, pp. 4537-41. Kochhar, K, U Kumar, R. Rajan, A. 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