Management Journal for Advanced Research

1. Introduction

Modern market economies are mixed economies where both the government and the market play a critical role in allocation of resources and in achieving distributive justice. Economic planning, industrial policies and the Five-Year Plans formed the cornerstone of development under a dirigiste policy regime prior to the introduction of economic reforms in 1991. After four decades of planning the market-oriented reforms were introduced in 1991 when the country faced a balance of payments crisis. Not everyone agreed with the need to launch reforms as it was seen as a surrender to corporate interests and the international institutions. The reforms introduced many liberalizing initiatives and moved the economy towards greater privatization and globalization. India was a latecomer to economic reforms.

The need for a policy shift had become evident much earlier, as many countries in East Asia achieved high growth and poverty reduction through policies which emphasized greater export orientation and encouragement of the private sector. India took some steps in this direction in the 1980s, but it was not until 1991 that the government signaled a systemic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of government. Macroeconomic stability was the center- piece of the structural adjustment effort in 1991. Over a period of time through the 1950s, 1960s, and 1970s the economy had become over controlled and rigid; consequently, entrepreneurship was heavily constrained. The import substituting inward looking development strategy that could have been relevant in the 1950s and 1960s was no longer suitable in the modern globalizing world. Hence overall reform had to be undertaken to lay down a new framework to achieve growth with justice. The introduction of economic reforms did not mean the end of planning rather its orientation changed from the state driven strategy to a market-oriented development process. Since the early 1990s the planning process became indicative in nature with the state assuming upon itself the important responsibility of delivering welfare to the poor. The economic scenario in India has changed dramatically since the early 1990s. (Panagariya, 2008)

Then growth slowed down because of the Asian financial crisis (1997–99), two major droughts (2000 and 2002), and the recession of 2001. But after 2003 growth picked up sharp­ly and averaged almost 9.5 percent for three years from 2005–06 through 2007–08. This was unprecedented growth achievement.( Bhagwati and Panagariya, 2013)

This was accompanied by a massive surge in government welfare spending, thanks to the revenue generated by high growth. The Great Recession (2007–09) pulled growth down, but it was a still impressive 6.8 percent in the trough of 2008–09, followed by rapid recovery to 8.0 percent and 8.5 percent in the next two years. The Indian economy produced some spectacular successes in those three years not seen before — successes that rival the performance of the Chinese economy. In turn, these successes fundamentally altered the initial conditions with important longer-term implications. (Hope et al., 2013)

One important reason why this growth represented something very real was the near spectacular expansion of India’s trade with the rest of the world. There is often a contestation about the notion of structural break in the economy. The sharp step-up in growth rates not just in the aggregate but also in the various sectors in the economy suggests that the structural break occurred in the early 1980s. Having sustained 6% annual growth since the 1990s, India is now regarded as an unequivocal economic success. This has not only directly raised incomes and employment but yielded a revenue bonanza that has financed huge increases in social spending, anti-poverty programs and infrastructure. As a result of the slowdown induced by the global financial crisis in 2008-09, the Indian economy responded quickly to monetary and fiscal stimulus and achieved a growth rate of 8.6 percent and 9.3 percent in 2009-10 and 2010-11. The compound annual growth rate (CAGR) for GDP at factor cost, over the decade ending 2012-13 is 7.9 percent (Bhagwati and Panagariya, 2013)

The Eleventh Five Year Plan (2007-08 to 2011-12) had aimed at achieving faster and more inclusive growth. Rapid GDP growth, targeted at 9.0 per cent per annum, was regarded necessary for two reasons: first, to generate the income and employment opportunities that were needed for improving living standards for the bulk of the population;

Source: Planning Commission

However, the biggest achievement of the reforms to date remains the sharp reduction in poverty. The proportion of those living below the poverty line has come down. This is in sharp contrast to pre-reform days of autarky, license raj and state ownership when the rate of reduction of poverty was slow. Ever since Independence, the goal of our policy had been to eliminate poverty but little success was achieved until liberalization helped push up the growth rate, generated massive revenues for welfare programmes and brought a relatively faster reduction in poverty. The planning commission estimates poverty using data from the large sample surveys on household consumer expenditure carried out by National Sample Survey Organization (NSSO) every five years. It defines poverty line on the basis of monthly per capita consumption expenditure (MPCE). Economic growth has no meaning without substantial poverty reduction. According to previous official poverty estimates, the per centage of the population living below the poverty line had declined by 8.5 per centage points between 1993-04 and 2004-05. Since the appropriateness of the poverty line was questioned in some quarters, the Government appointed an Expert Committee under the Chairmanship of the late Prof. Suresh Tendulkar. The methodology followed currently is based on the recommendation of the Expert group headed by Professor Suresh Tendulkar which submitted its report in 2009. It computed the poverty lines at an all India level as MPCE of Rs 447 for rural areas and Rs 579 for urban areas in 2004-05. The Planning Commission has updated the poverty lines and poverty ratios for the year 2009-10 as per the recommendations of the Tendulkar committee using NSS 66^th round (2009-10) data from Household Consumer Expenditure Surveys. It estimated the poverty lines at the all India level as MPCE of Rs 673 for rural areas and Rs 860 for urban areas in 2009-10. Based on these cut-offs the percentage of people living the poverty line has declined from 37.2 percent in 2004-05 to 29.8 percent in 2009-10.

In growth terms, agriculture and allied sectors has registered an annual average growth of around 4 percent in the last few years. Growth in allied sectors including livestock, dairying and fisheries has been the major drivers of overall growth in the sector. Agriculture is central to the nutritional needs of the country and also remains the largest sector of Indian economy as a source of employment. In 2014-15, 45.7 percent of the workforce was employed in agriculture. The agriculture and allied sectors grew at a positive growth rate of 3.9 percent during 2021-22. The timely intervention in the form of Atma Nirbhar Bharat coupled with other growth promoting schemes have further helped agriculture to achieve an improved growth of 3.9 percent in 2021-22. The farm sector grew at an average rate of around 3.2 per cent during the first four years of the Eleventh Plan and the average farm sector growth in the Eleventh Plan period was around 3.0 per cent. This is a marked improvement from the average growth of about 2.0 per cent during the Tenth Plan period. Still, with half of our population dependent on agriculture and allied activities, we needed faster farm sector growth to benefit poor farmers, many of whom are women. It has been suggested that one percentage point growth in agriculture is at least two to three times more effective in reducing poverty than the same magnitude of growth emanating from non-agriculture sector. Since agriculture is a State subject, the Centre has to work hand in hand with the States to bring coherence in policies and strategies. There was deceleration in agricultural sector in the Ninth plan and it continued in the Tenth plan. This necessitated to take corrective steps to reverse the slowdown and attain the desired 4 percent growth target. The food grain production touched a new peak of 241 million tons in 2010-11 and growth in agriculture in the Eleventh Plan was around an average 3.3 per cent per year as compared to 2.2 per cent in the Tenth Plan. The rural incomes have increased and rural poverty has reduced over the years, however the the gap between urban and rural incomes has widened quite sharply because agriculture has grown slower than other sectors and because employment growth in non-agriculture has not been enough to sufficiently reduce the population dependent on agriculture. It is important to recognize that in India aound 45 percent of the population still relies on farm sector for livelihood opportunities.

e. Liberalization of Industrial location Policy
f. Abolition of Phased Manufacturing Programme
g. Removal of Mandatory Convertibility Clause

The major reforms of policies accelerated the GDP growth above 7 percent and the industry sector growth to above 9 percent in mid-1990s. India’s organized manufacturing sector experienced a sharp acceleration in output and employment growth during the early years of economic reforms, from 1991-92 to 2001-02. The fast growth recorded by manufacturing during the first half of the 1990s was led by sharp revival in private-sector investment. Capital and skill intensive industries such as metals, machinery, automobiles and chemicals recorded extremely fast rates of growth. With the onset of the 2008 crisis manufacturing slowed due to depressed demand. During 2001-02 to 2010-11, industrial growth to 7.8 percent per annum, services growth to above 9.4 percent and GDP growth to 7.9 percent per annum. Per capital GDP growth accelerated appreciably by 2.5 percentage point to 6.2 percent. The five-year period 2003-04 to 2007-08 was remarkable for witnessing an annual average growth rate of 8.7 percent in GDP and 10.3 percent in industry. However, as a consequence of economic crisis in the developed world the industrial sector faced a slowdown but recovered in the following years. The recently released new series of national accounts, revising base year from 2004-05 to 2011-12 gives a better record of industrial sector. This is mainly due to much better performance in the mining and manufacturing sectors as per the new series. In 2020-21, the share of manufacturing fell to 14.4 percent whereas electricity, gas and water supply recorded positive growth. The Index of Industrial Production (IIP) provides data for 23 sub-groups of the manufacturing sector. In the period April-November 2021-22, all the 23 sectors recorded a positive growth. The MSME sector has emerged as a highly vibrant and dynamic sector of the economy. While the contribution of the MSMME sector to the overall GVA rose from 29.3 percent in FY2018 to 30.5 percent in FY2020, the economic impact of the pandemic caused the sector’s share to fall to 26.8 percent in FY2021. MSME contribution to the manufacturing sector’s GVA also marginally fell to 36.0 percent in FY 2021 (ASI, 2023)

The MSME sector play an important role in the economy:

a. To generate large-scale employment
b. To sustain economic growth and increase exports
c. To make the growth inclusive

The period after 1980-81 was marked by balance of payments difficulties. The second oil shock pushed up the import bill substantially while exports lagged considerably behind. This led to the widening of the trade deficit. During the seventh plan private remittances also slowed down. As a result, the net invisibles could finance only 24 percent of the trade deficit in the seventh plan. The problem was compounded by the Gulf war in 1990-91. The problem got worsened due to India’s increased reliance on costly external commercial borrowings. With the downgrading of India by credit rating agencies consequent upon the large deficit in India’s balance of payments situation and the political uncertainties at home investors’ confidence in the Indian economy was shaken and there was substantial capital flight. Default on debt servicing seemed imminent and it could be avoided only from international multilateral agencies like the International Monetary Fund (IMF). The financial assistance was made available by these institutions but on their terms and conditions. These terms included the adoption of structural reforms and stabilization policies. (Ahluwalia, 2012)

i. Exchange rate adjustment and rupee convertibility: An important measure to integrate with the world economy is to make the currency convertible and allow the exchange rate to be determined by the market forces. In subsequent years the government has moved progressively towards this goal and removed various restrictive measures

ii. Import Liberalization: India followed an inward-oriented trade strategy until the late 1980s; there were severe exchange and import controls that restricted the entry of foreign goods however after 1991 policies were liberalized the Indian market was opened up for foreign trade

iii. Opening up to foreign capital: In a bid to attract foreign capital the government liberalized the erstwhile restrictive controls on foreign capital

Over time, the trade openness of countries across the globe has increased which is reflected in the increasing trade to GDP ratio. In India the share of trade to GDP ratio has been steadily increasing reaching 46 percent in 2021. International trade has been an important pillar of India’s of India’s growth story. It has brought resilience to the economy contributing both in the GDP and also in employment generation.

Agriculture and the farm sector continue to support a bulk of the population despite the contribution to the GDP falling down. Globalization has opened up new opportunities and the country has benefitted from increased trade and investment. The adoption of economic reforms has lifted the growth potential of the economy. The higher growth rates have lifted many out of poverty and deprivation. That is the good news. The bad news is that inequality is rising and job creation has not kept pace with the needs of a burgeoning labour force. This is an area of concern. To sum up, economic reforms have produced beneficial outcomes but to further catch up with advanced economies, there is still a lot of pending reforms and work that requires action.

References

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11. Planning Commission: Eleventh Five Year Plan, 2007-2012.