Indian Economy
Indian Economy

Indian Economy | Development Phases

This article is in continuation with INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

Since the Independence, Indian Economy has come a long way. However, the journey of becoming the fastest growing economy for this newly independent country was not an easy task. Since, the British literally destroyed the Indian Economy in 200 years of their rule. India had to rise from the ashes.

The whole process of development of Indian Economy is divided into six different phases:

PHASE -I (1950-1965) – Nehruvian Era

PHASE-II (1968-1980) – Command Economy

PHASE-III (1980-1990) – Phase of gradual Reforms

PHASE-IV (1990-1998) – 1st Generation reforms

PHASE-V (1998-2008) – 2nd Generation reforms

PHASE-VI (2008-Present) – 3rd Generation reforms

PHASE I- NEHRUVIAN GROWTH MODEL

1950-1955– 1st Five Year Plan

Based on Lewis2 -Sectoral Model and Harrod Domal Model

FOCUS AREAS:

  • Reconstruction
  • Basic Infrastructure land Reforms
  • Rehabilitation

Results: Institutional Development= Highly Successful Plan

2nd FIVE YEAR PLAN:

  • Continuation of 1st Plan with further focus on heavy industry & strong supply side focus/economy.
  • It was based on “Mahalanobis Model” – (statistic)

FOCUS AREAS:

  • Expansion of Public Sector
  • Import Substitution
  • Promote Savings
  • Reducing wasteful consumption

Results: Highly Successful, 5% growth target achieved

3rd FIVE YEAR PLAN:

  • Same strategy/continuation of 2nd EYP in essence, however India had to abandon growth strategy in between.
  • 1962 war with China
  • It is completely changed budgetary allocation.
  • Agricultural Stagnation
    • Lack of focus
    • Limited Success of Land reforms
  • Massive Inflation (agricultural &essential commodities)

=PLAN FAILED=

#It needed a shift to Agriculture & Consumer Goods.

#As a whole first phase did well for India except for poor performance in agricultural Inflation.

PHASE 2 (1968-1980)

  • This phase marked a serious shift in growth strategy.
  • Excessive focus on Centralization
  • Deterioration in relaxation with rest of the world and reduction in technology transfer & foreign aid.
  • Ban on Imports (large no. of commodities)

             CENTRALIZATION:

  1. Beginning of licence Permit Raj- due to laws like FERA & MRTP (Monopoly & Restrictive Trade Practices)
    1. License Raj
    1. Bureaucratic Corruption by FERA
    1. Nobody allowed to dominate market.
    1. MRTP
  • Massive hike in tax-rates.
  • Tax Evasion became big problem.
  • Green Revolution
  • Financial Inclusion through nationalization of banks &insurance.
  • Direct focus on poverty alleviation.

        4TH FIVE YEAR PLAN (1969-1974)

  • Focus on Bank Nationalization, FERA, MRTP, agriculture.

       5TH FIVE YEAR PLAN (1974-1979)

  • Started on an inflationary pressure because of high fiscal deficit.
  • Adoption of populist policy during 4th plan.
  • Tax Evasion because Indian Tax regime was operating on the extreme side of Laffer curve.
  • Global Inflation due to Oil Shock. India’s import bill also shoots up.

(OPEC increased oil prices)

  • Because of license permit Raj industrial sickness also started to build up.

       PHASE-III (1980-1990)

  • The focus was on green revolution which was able to increase the production of cereals (1980-90).
  • We revised import substitution and started to open up to by EXIM policy.
  • Our domestic industries were not up to the mark as EXIM policy, including imports but out exports could not be increased due to high inflation and industry sickness so BOP problems started is high inflation.

       LPG REFORMS: (1990)

LIBERALISATION:

  • DELICENSING– Deregistered industries and state kept control of only same i.e., Atomic, Defense etc.

      FREEDOM IN BUSINESS:

  • MRTP Act earned up.
  • Freedom to import by reforms in FERA.
  • Prices were deregulated.

TAX CUTS/ REFORMS:

  • To boost investments in private sector.
  • Simpler export import process.

PRIVATISATION:

  • Reduction in size of public sector. (Disinvestment)
  • Reduction in budgetary support for PSUs.
  • Reforms in PSU management. (Ratna System)

GLOBALISATION:

  • A gradual shift from fixed to flexible/floating exchange (market determine) rate.
  • Ease of restriction on imports.
  • Gradual Reforms in movement of capital (human and physical)
    • LPG reforms were instrumental in increasing the competitiveness of Indian Economy; however, these reforms were not enough, we still had to go for broader reforms to stabilize the economy after the shock of LPG.

      PHASE IV -FIRST GENERATION REFORMS:

  • These reforms were introduced to make Indian Economy compatible with new economic paradigm and stand up to global competition.

     MAJOR THREAT AREAS:

  1.  Fiscal /Budgetary Reforms
  2. Tax reforms by Chelliah Committee:
  3. Reduced the number of slabs.
  4. Reduced tax rate in each slab.
  5. Reduced loopholes to control tax evasion.
  6. INDIA ACQUIRED BALANCED LAFFER CURVE.
  7. Significant reduction in corporate tax rate. Provided Incentives.
  8. Introduced single rate of excise duty for most sectors. (also reduced)
  9. Introduction of Service [email protected] 5%
  10. To improve tax buoyancy, tax w.r.t. the GDP.
  • Tax Buoyancy examine the relaxation between growth in tax collection and growth in GDP. If tax collection grows at higher rate than GDP the system is buoyant and vice versa.
  • FINANCIAL REFORMS:
  • NARSIHMAN COMMITTEE I:
  • Reduced CRR and SLR to free up resources for banking system.
  • Independence in determining interest and landing rate.
  • Independence to Bank Boards in public sector banks.

      Introduced a paradigm shift in resource mobilization:

  • Introduction in private banks.
  • Introduction of Debt Tribunal.
  • Broader adoption of the policies of no further nationalization of banks.
  • Establishment of Asset Reconstruction Funds (ARF).
  • EXTERNAL SECTOR:
  • FERA was changed to FEMA.  (Indicative Planning)
  • Partial convertibility in current account was achieved which was later converted to full convertibility.
  • Abolition of quantitative restrictions on import.
  • Allowed FDIs under TRIMS gradually.

       ASSESSMENT OF 1ST GENERATION REFORMS:

  • They were very successful and shifted India from 5% growth trajectory to 6-6.5%.
  • India not only stood up to foreign competition but perform better and India’s forex grow to 60 billion USD.
  • Opening up of Indian Economy gave a rise to middle class and people’s aspirations changed.
  • Despite these achievements India had to hang its growth strategy because of number of events and development.
  1. 1997 Asian currency crisis.
  2. Tarapore committee- Capital A/C convertibility.
  3. Washington Consensus-avoidance of IMF reforms.
  4. Kargil War, 1998
  5. Pokhran test and Sanctions on India.
  6. DOT com burst.

        PHASE V – II GENERATION REFORMS:

        FOCUS AREAS

  1. Developing World Class infrastructure in India.
  2. Uninterrupted power.
  3. Good all-weather roads.
  4. Quality communication services.
  5. Improve the efficiency of PSUs to control budget or fiscal deficits.
  6. Bringing structural reforms to address long term bottle necks to shift India to 8% growth trajectory

Structural Reforms vs Policy Reforms:

  • Structural reforms require changes in broader aspects which takes time to be implemented e.g., Addressing DATA issue/cascading.
  • Policy reform can be brought by change in law e.g., Complexity of tax structure.

MAJOR REFORMS:

  1. FISCAL/ BUDGETARY:

Changing the nature of financing of deficit.

  • Discontinuation of ad-hoc T-Bills and introduction WMA (ways and Means Advance) system.
  • Moratorium on deficit financing through monetization. (Monetized Deficit)
  • SUBSIDIARY REFORMS: Through better targeting subsidies.
  • Inclusion in Service Tax to include buoyancy.
  • TAX REFORMS BY KOLKAR PANEL:
  • Introduction of VAT to reform the indirect tax structure. (However, during 2nd generation it could only be introduced on Sales tax.)
  • 1st excise, not by Kelkar, CENVAT.
  • Fiscal Consolidation through FRBM Act, 2008. (Fiscal Responsibility and Management Act)

    FRBM, 2003

  • GOI had to reduce fiscal deficit down to 3% by 2008 (2004-2008)
  • Reduction of revenue deficit to “O” by 2008.
  • Introduction of e-tax filing and simplification of tax filing procedure.
  • Elimination of tax rebates and reduction in exemptions.
  • FINANCIAL REFORMS:
  • More independence to Public Sector banks in interest rate determination and other policies.
  • NARSIHMAN COMMITTEE II
  • Tough prudential measures and introduction of CRAR/CAR (Capital Adequacy Ratio)
  • FDI in banking and Insurance
  • Introduction of foreign banks.
  • Focus on NDA recovery and establishment of ARC (Asset Reconstruction Companies)
  • Creation of SARFASEI Act.
  • EXTERNAL SECTOR:
  • Active promotion of FDI.
  • Proactive policy to integrate NRIs by easing restrictions in ownership of assets and lands.
  • Signing of DTAA.
  • Partial convertibility on capital account with higher limits.

          ASSESSMENT OF IIND GENERATION REFORMS:

  • 2nd generation reforms were very successful and shifted India from 6.5% growth trajectory to 8%
  • Indian foreign reserve surpassed $100bn to begin with and $250 billion eventually.
  • Quality of physical infrastructure also improved considerably through policies like
  • PMGSY (PM Gram Sadak Yojana)
  • Golden Quadrilateral upgradation of Delhi and Mumbai airport etc.
  • FDI and FPI touched new heights and it was higher than cumulative foreign investment in India since Independence.

 2008 Global Crisis derailed the growth process apart from the rise in property prices increase in attrition and   wages due to lack of skilled labour and high inflation had already started to create problems. This was called overheating of Indian Economy.

3rd GENERATION REFORMS (2008- PRESENT)

        Following global financial crisis focus is back to rebuilding and stabilization

  1. Focus on financial inclusion to boost savings and investment which declined after 2008.
  2. In 2008, savings rate was 34% and investment rate was 38%.
  3. By 2091 savings-28% investment 31-32%.
  4. Focus on Industry to create employment problem of jobless growth)
  5. Focus on addressing state capacity to invest as private sector investments went down.
  6. Focus on addressing infrastructural bottlenecks (environment clearance, PPP issues and land acquisition.)

FOCUS AREAS:

INDUSTRY:

  1. Addressing industrial sickness.
  2. Exit Policy and Bankruptcy code.
  3. Addressing Bureaucratic bundles
  4. Improving business environment. (MAKE IN INDIA)

REVIVING INVESTMENTS:

  1. Promoting FDI
  2. Focus on Entrepreneurs
  3. Start-up India/Stand up India
  4. MUDRA
  5. Focus on AIF
  6. VC Funds
  7. Crowd Funding.
  8. Revival of corporate bond Market.
  9. In 2016-17 FDI into industry or manufacturing was higher than services for the first time and also achieved highest investment in absolute terms.

       FINANCIAL SECTOR:

  1. Financial Inclusion
  2. PMJDY- targeted people who were not part of formal bank sector.
  3. Differentiated Bank Licenses- Special task of Banks by different entity i.e., SFB.
  4. Gold Bond Schemes.
  5. Financial Regulation
  6. Creation of MPC (Monetary Policy Committee)
  7. Inflation targeting (4+-2%)
  8.  Creation of PDMA (Public Debt Management Agency)

(in process, expected in 2018-19)

  • To manage internal/external debt of government by single autonomous body.
  • Financial Health- Bank’s health)
  • Define and Expand the scope of NPAs.
  • Mission Indradhanush
  • Capital Markets-
  • Insider Information Act
  • Reduction in listing time for IPOs.
  • Ease in market access for start ups
  • Regulation of AIF
  • Merger of FMC into SEBI (Forward Market Commission)
  • Restriction in Market for wilful defaulter.
  • Budgetary Reforms:
  • Broader tax rate forms (GST passed) (DTC-scrapped Indirect Tax Code)
  • Tax avoidance (famous cases) Vodafone, FII and TARC (Parthasarthy Shome Committee)
  • Easwar Committee for Simplification of Tax.

        FISCAL CONSOLIDATION-

  1. Subsidy Rationalization
  2. Diesel and Petrol price delinking
  3. LPG Subsidy-Mission PAHAL
  4. UJJAWALA Yojana
  5. Direct Benefit Transfer (DBT) and other mechanism (JAM Trinity)
  6. Fertilizer Subsidy
  7. Expenditure Management Commission (Jalan Committee)
  8. NR Madhav Menon Committee (Government Advertisement Expenses)
  9. N.K. Singh Panel on FRBM Act.

These was more of a scholarly article in two parts just to understand the whole process of growth Indian Economy since the eve of Independence.

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