Economics assignment

Case study- Indian growth paradox

GROUP-7
SECTION-A

Submitted to: - Prof. Mugdha Vaidya

Submitted by: -
Name Enrollment id
Anjali jain 18BSP0143
Sakshi jaju 18BSP0998
Pooja murugan 18BSP4128
Sowndar SJ 18BSP1231
Sachin CV 18BSP0981
A Abhishek 18BSP0001
1.What are pre and post economic situation in terms of growth in India(pre & post 1990)?
Answer:
PRE-ECONOMIC GROWTH
Agriculture, the primary sector of the economy, was stagnant and the secondary sector,
comprising of the manufacturing sector and the cottage industry, experienced deceleration
as the growth rate fells by 1.2% from 1931 to 1947. After the independence in 1947, the
Indian economy reeled under severe food shortage.
In 1951, the planning commission of India launched its first 5-year plan (1951-1956) that
almost to achieve maximum production leading to high level of national and per capita
income. The first plan invested in agriculture and irrigation, infrastructure and social
services. Economy achieved GDP growth of 3.6% at the end of first 5-year plan.
The second plan focused on rapid industrialisation with the development of heavy and basic
industries. The share of government expenditure in the total outlay increased from 46% to
61% in the second plan. The second plan (1956-61) witnessed further increase from 3.6% to
4.2%.
At the beginning of the third plan (1961-66), the emphasis on the industrial development
continued. Industrial growth accelerated from 6% In first plan to 6.9% in third plan. The
growth declined substantially during third plan as GDP decreased from 4.8% to 2.8%. After
the third plan, India faced acute shortage of food forcing govt to implement a policy. That
was known as green revolution.
The green revolution focused on agriculture technology and advanced research in HYV
seeds. Consequently, production in food grains improved.
The fourth plan aimed at stabilising growth with govt control. This led to financial crunch.
The fifth plan was introduced in the face of mounting inflation and balance of payment
crisis. To combat the financial crunch, wage increment, wage increment was freezed,
income tax was increased, excise duty was on a high and railway freight rates were raised.
The sixth plan experienced stagnant growth rate of 3.6%. Poor productivity in the
manufacturing and industrial sector and huge trade deficit forced planners to re-evaluate
their strategies.
In 1980, private sector participation was encouraged. The rise in industrial growth from
4.1% in to 7.1% in 1980-90. There was simple and rational approach towards import
licencing and steep increase in export subsidy. The tariff rate on import of capital goods was
decreased. Export performed well on incentive and depreciation on exchange rate by 45%.
GDP was doubled i.e. 1.5% in 1967-80 to 3.4% during 1980s.
Although exports were high, the economy faced severe BOP crisis as oil import and import
in defence rose sharply. This lead govt to borrow heavily from internal and external sources.
Debt burden increased from 14.6% to 29.8% of GDP.
POST-ECONOMIC GROWTH
The decade started with fiscal crunch, fuelled by growing public debt, high dependence on
external borrowing and adverse BOP situation. India was highly dependent on external
sources for crude oil. The ratio of short term borrowing to foreign currency reserve was as
high as 380% of GDP. The vulnerability of public finance forced govt to implement rigorous
financial reforms to boost financial status in the beginning of 8 th plan.
To improve current account status, imports were constraint heavily by putting barriers on
petroleum products, bank and finance, etc.
The licence raj abolishment in 1991, imports on raw material, capital goods, and
intermediaries was abolished. Price control vanished and determined by market forces only,
which was handed over to SEBI. This led to growth of exports, NRI investments and hence
current account deficit declined and both FDI and FER rose.
Some structural drawbacks also hampered the growth. Productivity remained stagnant in
terms of infrastructure, labour laws, trade policy and privatisation.
In 2004, GDP growth rate reached 8.5% more than double the previous year.
Therefore, the consumption expenditure increased, forex reserve soared, which helped to
keep capital account safe from exchange rate fluctuation. While most of Asian currencies
depreciated whereas Indian currency appreciated. GDP reached 9.4%, saving and
investment grown. Globalisation played a crucial role in development process of India.
Foreign companies banked on the large pool of highly educated and low-cost workers in
India. India emerged as one of the major exporters of software as well as financial, research
and technology services.

2. What is the growth paradox explained in the case?

Answer: Although India maintained a high growth rate in economy since 2004, it also
experienced a compound growth rate in population at nearly 2% during the same period.
This has negated the economic achievements too a considerable extent.Althoough India was
a socio-economic country with social welfare as one of her main objectives, it failed to
address issues like education, health, nutrition, demographics, child protection or gender
equality. Despite focusing on poverty education in most of the five year plans, the burden of
poverty remained excessively high till the Tenth year plan(2002-2007). Although the
consumer price index(CPI), one of thee major indicator of economic prosperity, increased.
More tan 26% of the total population was still living below poverty line as on 2002. Out of
these 75% resided in rural areas. 35% of the total Indian population earned less than $1 a
day. During the period of 1994 to 2004 much lower than even the least developed countries
like Ghana, Namibia or Malawi.
Some structural drawbacks also hampered the growth. Productivity remains almost
stagnant despite the economic reform, key reform measures in infrastructure, labour laws,
trade policy and privatisation.
Other than this prices of oil also being the major problem in demolishing growth of Indian
economy as India was importing huge amount of oil than exporting other goods.
These were the growth paradox that Indian economy faced though having their Five year
plans.

3.What according to you are policy measures help in combating problems stated in case?
Answer:
Measures in Combating the Problems are:
 Foreign direct investment should be permitted and encouraged only in those sectors
which would significantly contribute to income generation, employment creation, and
net export earnings.
 India is best suited to continue to be in the framework of mixed economy, in which
the public sector, private sector and the cooperative sector coexist.
 Boosting agricultural growth through diversification and development of agro
processing.
 India should endeavour to strengthen the infrastructure, and human resources
covering areas such as universal literacy and health for all, for improving what one
may call as the social capability of the economy for taking advantages of the globally
competitive environment.
 Effecting fiscal consolidation and eliminating the revenue deficit through revenue
enhancement and expenditure management.
 Empowering the population through universal education and health care, India needs
to improve its Human Development Index.
 Labour empowerment: we have a situation where industries aren’t able to keep up
with the technological changes taking place in countries like Japan and Europe. One
has to study the employment scenario and also the labour situation to come up with
a plan.
 Income inequalities has to be abolished by allotting proper taxation rate for specific
income earning people.
 The inflation rate must be regularly monitored, hereby RBI should regulate the
liquidity flow.
 Per Capita Gross national Income has to be improved by better employment, which
can be attained by improving the Manufacturing sector rather than much focusing on
Service sectors.
 The Fiscal deficit played an important role, thereby Taxation at higher level income
groups can be implemented so as to raise the revenue for the government.