India Development Path

University of Westminster

MSc International Development Management

7ECON007W Development Economics and Policy

 Development Policy Report on India

Swan Nesi

Table of Contents

1.        Executive Summary        2

1.        Introduction        3

2.        Indian Development Path        3

3. Someone has been left behind        7

3.        Recommendations and Conclusion        9

4.        References        10

1. Executive Summary

India is the 4th largest economy in the world with its 1.3 billion people. Since independence, in 1947, has reached significant achievement regarding literacy rate (72 percent), life expectancy has more than doubled, health condition has been improved and poverty reduced, though 400 million people still live below the poverty line. Based on latest GDP growth rate data, it has also been ranked as the fastest-growing economy in the world, eased by the slowing China's growth, along with other BRICS, like Brazil and Russia.

This success also reflects gains from past structural reforms, strong capital inflows and expansionary fiscal and monetary policy (OECD,2014). Besides this, the India's expertise in information technology, pharmaceutical goods and steel production, combined with increased FDI, contributed to the creation both of new jobs and the middle-income class, but also to increased inequalities.

This paper aims to analyses the development model followed by the Indian economy and highlight the issues encountered on its way, along with the development issues emerged from the process.

1. Introduction

Looking at India's development pattern, emerge a phase of inertia followed by a sudden dynamism. Many authors agreed on the view that the main factors that have triggered the surge in growth rate in India are explained by the policy reforms of the early 1990s. Indeed, during that period, India has developed into an open-market economy. Economic liberalisation measure, such as privatisation of state-owned enterprises, industrial deregulation, reduced controls on foreign trade and investment were implemented (CIA, 2016), though some policy constraints are still present. The in-depth transformations occurred after the collapse of the Soviet Union, India's major trading partner and supplier of low price crude oil, and the Gandhi's regime. With the incentive of help offered by the IMF and the World Bank, in exchange for economic reforms, has started the transformation of Indian economy. However, it is believed that the first structural break in the GDP trend occurred in the 1980s, and therefore could not only be imputed to the economic policies of the 90s (Rodrik and Subramanian, 2004). The change has been attributed to an increase in the TFP (Total Factor Productivity), due to some neo-liberalist reform in the industry sector, the ease of import restriction and tax reduction, though a structural change in the economy was already evident.

1. Indian Development Path

India followed an Import Substitution Industrialisation model (ISI)^[1] as most of the developing countries as a strategy for structural changes and to break the dependence on row material  export to the ex-colonies (and not only). Below is explained briefly the main changes occurred in the Indian’s economy.

This strategy was adopted in two phases. The first was from the 50s to the 60s^[2], followed by the second stage from the 60s to the 70s, in order to achieve rapid industrialisation. The second Five Year Plan pursued by India was based on the model of growth proposed by Mahalonobis. He stressed the fact that, to reach a long-term sustained growth a country need to industrialise and break the dependence on the agricultural sector, thus diversify the economy. However, he also emphasise the need of investment (I) in the agricultural sector, irrigation, transport and power to create the base for more rapid industrialisation. Indeed, according to Kuznets, the agricultural sector can contribute in many ways to the industry sector (Kuznets, in Cypher 2014)^[3].

The state in both phases played an active role in sheltering the new sector, discriminated structure of protection was adopted to acquire foreign technology, along with import protection, such as entry tariff and quotas, to allows new industries to gain competitive advantage, and export discrimination. Although, between 1950 and 1965 India increased the output by 23% in capital and intermediate good, exports were mainly based on primary product (34 per cent) and intermediate products (41 per cent), but were agricultural-based low value added products^[4]. The unbalance between import demanded by the industry sector and export offered exhausted the forex, and instead of adjust the exchange rate, more restrictive trade controls were intro (Mathur, 2006). Thereafter, the export-led growth strategy has pursued to achieve a much faster development and due to the inefficient domestic production. However, during the period 70s/80s trade regime was still under strict licensing, aside from commodities listed under the OGL category. Import were allowed only based on the principle of ‘essentiality’ (for the production) and ‘indigenous non-availability’, but export was still lower than the import^[5]. Thereafter, the capital good listed under the OGL category increased from 79 to 1170, and intermediate good followed the same shift (Pursell, 1996). Import were restricted to non-availability internally, to push established producer to be competitive. In spite of measures of protection, industries, though grew, remained a marginal component of the economy, also due to the inefficiency caused by the preference of the government toward small-scale producers, giving them special privilege sheltering them from other larger domestic competitors (Mohan, 2002). Furthermore, lack of investment in infrastructure, and the strict regulation of the labour market (firm could not fire worker for instance), length of bureaucratic process to attain license contributed to hinder efficiency and India’s economic growth. By the end of 80s first 90s import restriction were further relaxed to encourage technological modernization, incentive on export increased and duty on import reduced further, but were introduced antidumping measures^[6], mostly on agricultural products, chemicals, plastics, rubber, metals and textile and clothing (WTO, 2007).