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Economic Development in Independent India

         South Asian Dialogues on Ecological Democracy (SADED)-Lecture Series

Date: 15th May 2013

Time: 2 pm

Place: Gandhi Peace Foundation (GPF), Delhi.

                               ECONOMIC DEVELOPMENT IN INDEPENDENT INDIA         

                                                                                                            Jyoti katiyar| 8th June 2013

                                                                                                     

Dr. Arun Kumar is Sukhamoy Chakravarty Chair Professor and ex-chairperson of Centre of Economic Studies and Planning, in Jawaharlal Nehru University, New Delhi. His recently published book “Indian Economy Since Independence: Persisting Colonial Disruption” was presented at the lecture series hosted by South Asian Dialogues on Ecological Democracy (SADED) at Gandhi Peace Foundation (GPF) on May 15th, 2013.

The name of the book is very thoughtfully chosen. While taking Globalization as the central theme in the Indian growth story he argued that it is not a recent phenomenon. Further he suggested that methodologically, to bring in a historical perspective, one need not go all the way back but use  1750 and 1947 as breakpoints in history to understand the post independence India.

He argued that India’s involvement in global trade has existed since eons but the circumstances changed when India got colonized. Two-way globalization of India existed  prior to the advent of colonization in the 1750s, and thereafter globalization has got reduced to one-way and resulted in loss of dynamism in the country. This one-way globalization has gone through various phases with major paradigm shifts in policy  in 1947 and 1991.

From 1950 onwards, the state played a dominant role in the economy and society because it was felt that individuals cannot on their own overcome their basic problems of poverty, unemployment, illiteracy, etc. since they were systemic. The main focus of policy was on Indigenous growth and trickle down based on the idea of catching up with western modernity by copying it. So the focus was on large scale and urban areas. In the 1960s there were wars and droughts and the shortcomings of the policies became apparent as the economy tended to stagnate. The decade of 1970s increased the challenge due to growing internal strife and oil shocks. The green revolution initiated in the mid 1960s led to relative self sufficiency in the 1970s. The 1980s began with a crisis and the country went to the IMF for adjustment and had to follow conditionalities which required the economy to open the economy to consumerism and imports which required substantial borrowing from abroad. The deficit in the budget increased rapidly which led to the economic growth rate going up to an average of 5.2%.

The 1990s began with another crisis and the country again approached the IMF and the World Bank for assistance and they imposed conditionalities on the economy. The policy paradigm was now changed to `individuals are responsible for their problems and they have to solve them through the market’. The state was no more going to be responsible for the individuals. This began the phase of marketization with the state in retreat. It saw the start of NEP and dichotomous growth with no acceleration in growth. From the start of the 2000s, the policy became “Growth at any cost” with all cost borne by the workers and the environment. This further led to increases in inequality.

The basic sectoral division of economy into primary, secondary and tertiary is followed by further subdivision into 9 major sectors and further division into organized and unorganized or private and public components. The traditional growth pattern of advanced economies has been  the development of the primary followed by the secondary and then the tertiary sector. The Indian case is starkly different because in 1950’s our tertiary sector was already larger than the secondary.  A major problem that afflicted the economy was the rapidly growing black economy  which vitiated data and analysis and led to failure of policies and governance.

Unemployment has been the major problem faced by the economy but official data shows that it has mostly remained at 2 to 2.5%.  But, that doesn’t imply that the state succeeded in job creation for most of the people. Instead, unemployment manifests itself as underemployment to a great extent since in the absence of social security people have to work to survive. Data show that 80% of the investment goes into large scale industry which gives employment to just 7% of the country’s population today and the rest 93% are employed in the unorganized sector with agriculture getting barely 3% of the investment. Hence, there is hardly any employment generation and growth  may be characterized as “Jobless Growth”. Technical progress has largely been. Thus, Lewis kind of model of development is hardly applicable in the Indian context.

The First Five Year Plan prioritized Agriculture which helped improve its  output but in  the next Plan there was a shift of interest towards industry. The drought in the mid 1960s worsened the food problem. With urgent need felt for “food security” the Green Revolution was initiated in  1967. With the use of ground water irrigation, High yield variety (HYV) seeds and mechanization agriculture saw a great increase in productivity but the production was concentrated in a few regions and there was a shift in cropping patterns.

A major problem faced by agriculture has been asymmetry in price setting with industry - agriculture follows competitive pricing unlike in organized sector industry where prices are based on mark up. To tackle this problem, CACP (Commission for Agricultural Cost and Prices) was set up to fix prices of some major crops. The government also introduced a dual pricing policy wherein producers are paid Minimum Support Price (MSP), consumers get a minimum amount at subsidized prices through PDS and the rest through the free market.

India following `Infant industry’ argument protected its domestic industry and  to preserve employment, reservation was granted to the small scale sector but it was diluted progressively and especially after 1991.  Various acts, like, Monopolistic and Restrictive Trade Practices Act (MRTP) in 1969, Foreign Exchange regulation Act (FERA) in 1974 were also diluted or eliminated in 1991. There was a great- diversification and modernization of industry after independence.

Tertiary Sector has become the dominant sector since the mid-1980s but a part of its growth is due to technological reasons leading to accounting changes, increased pollution and related health costs, increase in need for productive services with more concentrated production and growth of the black economy. . There has also been a spurt due to increase in demand for consumptive services, growth in software and telecom sectors. In a nutshell the growth of the services sector showed an increase in the 1980s and can be explained by scale economies, nature of technical change, accounting changes and the black economy.

Government is the biggest economic entity and impacts the entire economy with its actions. Tax is received as revenue which is used to make government expenditures and financing the development of the country. Tax could be broadly classified into: 1) Direct tax: Corporation tax and Income tax are major examples. 2) Indirect Tax: custom, excise, sales, etc. In the year 1947, 45% of the total revenue from tax collection came from direct taxes which got reduced to a mere 13% in 1991. Current share is 40% from direct taxes and 60% from indirect taxes. The Classification of taxes is important because while direct taxes enhance output growth, indirect taxes are collected in the process of consumption and hence stagflationary. Taxes like wealth tax and estate duty are progressive and work towards reducing  inequality but due to pressures of lobbies  these taxes have been slowly eliminated.

In 1991 our economy was as open as  US or Japan but less than say, Sri Lanka or Germany.  Subsequently,  import duties have been sharply lowered so that both imports and exports as a per cent of GDP have risen sharply. Consequently our markets have become far more integrated with the global markets with consequences for national sovereignty and capacity to formulate independent policy. Consumerism of the well off based on imported technology led to severe BOP crisis by the end of 1980s and the country had to approach the IMF for adjustments and that brought in the conditionalities.

Technology is a moving frontier so that today’s high technology becomes tomorrow’s low and intermediate technology. High technology is not available unless there is a strategic alliance with the advanced countries. FDI also enables high technology to come in but as a condition, FII also has to be allowed to come in. This increases the risk for the economy since it is accompanied by hot money flows.

Poverty is space and time specific and depends on what is considered to be social minimum necessary. In the Indian case poverty line represents `extreme poverty’ and has been mostly fixed. Policy for eliminating poverty has failed since we have followed the trickle down approach which makes the poor residuals in the system.  Physical infrastructure related policies reflect the focus on western modernity and the elitism of policy makers.

Banking and credit not only intermediate between the savers and investors but also lead to increase in inequity with concentration o9f capital in fewer hands. In order to channel funds to the poor, the Indian govt. in 1969 nationalized all the major banks. Post 1991, succumbing to the elite, banking has again been opened up to the MNCs and the Indian private sector. India has uncritically gone for concentrated urbanization which is both energy and capital intensive and we are short of both. Hence, it cannot be a solution for development of a poor country. It also increases both rural-urban and intra-urban disparities. Growing energy intensity and dependence on imported energy has resulted in many a crisis since the early 1970s. A move towards sustainable development and using telecommunication as an alternative for transportation could be a way forward. Social infrastructure (education, health, etc.) saw a rapid expansion post-1947 but quality has been poor often.

India has tried to overcome the infrastructure gap at the time of independence (due to colonization). We have tried to copy the west and match it. But this is high cost and not suitable for a poor developing country. The disadvantage of a last start has been confused with an advantage. However, it could become an advantage if we are willing to learn and not just copy from others and keep the national perspective in mind. In the case of India, the central theme for development has been to copy from the West. For instance, the education system today is copied from West, the policy makers come from foreign universities and hence most of the ideas are recycled from the West. Health, problems reflect a lack of a holistic perspective and the issue of environmental damage has been kept aside. The two noble professions, health and education are no more noble due to commercialization based on blind copying from the West.

Conclusion

India has a far more complex structure than any other economy in the world. It cannot be characterized either as capitalist or feudal in their pure forms but is increasingly tending towards the former. While one can learn from others, development paths cannot be copied by countries. Disruptions continue from the pre 1947 period have impacted seriously the quality of the leadership which lacks independence of thought. Technology is a moving frontier and hence one can remain backward in spite of progress. It creates a mist for the future  which leads to short-termism and the leadership has succumbed to it. To divert the attention of the citizens from their problems and find an easy solution so as to maintain their hold over them, the leadership is promoting consumerism in the country in a big way. An aspect of the current problems is that focus on the markets splits up each question into its components so that the problems generated due to interdependence get eliminated. Further, developing an overview of society and economy becomes that much more difficult. It is pointed out that the only meaningful solutions are long-term ones and these must be based on  sustainable development and  tackling the  problems of socially relevant knowledge generation,  growing inequity and persisting poverty.

 

 

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Dr. Arun Kumar is Sukhamoy Chakravarty Chair Professor and ex-chairperson of Centre of Economic Studies and Planning, in Jawaharlal Nehru University, New Delhi. He is also the author of very famous book “Black economy in India”. His recently published book “Indian Economy Since Independence: Persisting Colonial Disruption” was presented at the lecture series hosted by South Asian Dialogues on Ecological Democracy (SADED) at Gandhi Peace Foundation (GPF) on May 15th, 2013.