CHAPTER

10

INDIAN ECONOMY

LEARNING OUTCOMES
After studying this Chapter, you will be able to –
 Describe the state of affairs of the pre British Indian economy
 Give an account of the Indian economic phenomena during the
British rule
 Illustrate the turning points in the growth trajectory of India
 Explain the major reform initiatives post-independence and assess
their impact
 Appreciate the role of NITI Aayog
 Portray the current status of the economy sector wise

10.1 STATUS OF INDIAN ECONOMY: PRE

INDEPENDENCE PERIOD (1850 -1947)
Between the first and the seventeenth century AD, India is believed to have had the largest
economy of the ancient and the medieval world. It was prosperous and self-reliant and is
believed to have controlled between one third and one fourth of the world's wealth. The
economy consisted of self-sufficient villages as well as cities which were centres of commerce,

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pilgrimage and administration. Compared to villages, cities presented more opportunities for
diverse occupations, trades and gainful economic activities.
Simple division of labour intertwined with attributes such as race, class, and gender was the
basis of the structure of the villages and acted as a built-in mechanism of economic and social
differentiation. Though agriculture was the dominant occupation and the main source of
livelihood for majority of people, the country had a highly skilled set of artisans and craftsmen
who produced manufactures, handicrafts and textiles of superior quality and fineness for the
worldwide market.

Box.1 Ancient Economic Philosophy of India

The earliest known treatise on ancient Indian economic philosophy is ‘Arthashastra’ the
pioneering work attributed to Kautilya (Chanakya) (321–296 BCE)Arthashastra is recognized
as one of the most important works on statecraft in the genre of political philosophy. It is
believed to be a kind of handbook for King Chandragupta Maurya, the founder of Mauryan
empire, containing directives as to how to reign over the kingdom and encouraging direct
action in addressing political concerns without regard for ethical considerations.
Artha is not wealth alone; rather it encompasses all aspects of the material well-being of
individuals. Arthashastra is the science of ‘artha’ or material prosperity, or “the means of
subsistence of humanity,” which is, primarily, ‘wealth’ and, secondarily, ‘the land’. The major
focus of the work is on the means of fruitfully maintaining and using land. Kautilya emphasizes
the importance of robust agricultural initiatives for an abundant harvest which will go toward
filling the state's treasury. Taxes, which were charged equal for private and state-owned
businesses, must be fair to all and should be easily understood by the king's subjects.
Being a multidisciplinary discourse on areas such as politics, economics, military strategy,
diplomacy, function of the state, and the social organization, Kautilya’s writings relate to
statecraft, political science, economic policy and military strategy. True kingship is defined as
a ruler's subordination of his own desires and ambitions to the good of his people; i.e. a king's
policies should reflect a concern for the greatest good of the greatest number of his subjects.
The preservation and advancement of this good was comprised of seven vital elements,
namely the King, Ministers, Farmlands, Fortresses, Treasury, Military and the Allies.

The advent of the Europeans and the British marked a shift in the economic history of India.
The period of British rule can be divided into two sub periods:
1. The rule of East India Company from 1757 to 1858
2. British government in India from 1858 to 1947

The historical legacy of British colonialism is an important starting point to illustrate the
th
development path of India. With the onset of Industrial revolution in the latter half of the 18

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century, the manufacturing capabilities of Britain increased manifold, and consequently there
arose the need to augment raw material supply as well as the need for finding markets for
finished goods. This led to a virtual reversal of the nature of India’s foreign trade from an
exporter of manufactures to an exporter of raw materials.
The Indian exports of finished goods were subjected to heavy tariffs and the imports were
charged lower tariffs under the policy of discriminatory tariffs followed by the British. This
made the exports of finished goods relatively costlier and the imports cheaper. In this
backdrop, the Indian goods lost their competitiveness. Consequently, the external as well as
the domestic demand for indigenous products fell sharply culminating in the destruction of
Indian handicrafts and manufactures. The destruction of Indian manufactures, mainly due to
the hostile imperial policies to serve the British interests and the competition from machine-
made goods, had far reaching adverse consequences on the Indian manufacturing sector. The
problem was aggravated by the shift in patterns of demand by domestic consumers favouring
foreign goods as many Indians wanted to affiliate themselves with western culture and ways
of life.
The damage done to the long established production structure had far reaching economic
and social consequences as it destroyed the internal balance of the traditional village
economy which was characterized by the harmonious blending of agriculture and handicrafts.
These were manifest as:
1. Large scale unemployment and absence of alternate sources of employment which
forced many to depend on agriculture for livelihood
2. The increased pressure on land caused sub division and fragmentation of land
holdings, subsistence farming, reduced agricultural productivity and poverty.
3. The imports of cheap machine made goods from Britain and an overt shift of tastes
and fashion of Indians in favour of imported goods made the survival of domestic
industries all the more difficult.
4. The systems of land tenure, especially the zamindari system created a class of people
whose interests were focused on perpetuating the British rule.
5. Excessive pressure on land increased the demand for land under tenancy, and the
zamindars got the opportunity to extract excessive rents and other payments
6. Absentee landlordism, high indebtedness of agriculturists, growth of a class of
exploitative money lenders and low attention to productivity enhancing measures led
to a virtual collapse of Indian agriculture.
We shall now have a look into the stagnated nature of industrialisation during the colonial
era. Factory-based production did not exist in India before 1850.The ‘Modern’ industrial

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enterprises in colonial India started to grow in the mid-19th century. The cotton milling
business grew steadily throughout the second half of the 19th century, and achieved high
international competitiveness. The cotton mill industry in India had 9 million spindles in the
1930s, which placed India in the fifth position globally in terms of number of spindles.
Jute mills also expanded rapidly in and around Calcutta in response to a mounting global
demand for ropes and other products, and Indian jute occupied a large share of the
international market by the late 19th century. At the end of the 19th century, the Indian jute
mill industry was the largest in the world in terms of the amount of raw jute consumed in
production. In addition, brewing, paper-milling, leather-making, matches, and rice-milling
industries also developed during the century. Heavy industries such as the iron industry were
also established as early as 1814 by British capital. India’s iron industry was ranked eighth in
the world in terms of output in 1930. Due to progress in modern industrial enterprises, some
industries even reached global standards by the beginning of the 20th century. Just before
the Great Depression, India was ranked as the twelfth largest industrialised country measured
by the value of manufactured products.
The producer goods industries, however, did not show high levels of expansion. Perhaps, the
most important of the factors that led to this state of affairs was the pressure exerted by the
English producers in matters of policy formulation to positively discourage the development
of industries which were likely to compete with those of the English producers.
India’s industrial growth was insufficient to bring in a general transformation in its economic
structure. The share in the net domestic product (NDP) of the manufacturing sector (excluding
small scale and cottage industries) had barely reached 7% even in 1946.Considering its slow
progress, the share of factory employment in India was also small (i.e. 0.4% of the total
population in 1900 and 1.4% in 1941).

10.2 INDIAN ECONOMY: POST-INDEPENDENCE (1947-

1991)
At the time of independence, India was overwhelmingly rural inhabited by mostly illiterate
people who were exceedingly poor. We had a deeply stratified society characterized by
extreme heterogeneity on many counts. With the literacy rate just above 18 percent and barely
32 years of life expectancy in 1951, India’s poverty was not just in terms of income alone, but
also in terms of human capital,
For historical reasons, the Nehruvian model which supported social and economic
redistribution and industrialization directed by the state came to dominate the post-
Independence Indian economic policy. Centralized economic planning and direction was at
the core of India’s development strategy and the economic policies were crafted to

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accomplish rapid economic growth accompanied by equity and distributive justice. The
Planning Commission of India was established to meticulously plan for the economic
development of the nation in line with the socialistic strategy. This was carried through the
five-year plans which were developed, implemented and monitored by the Planning
Commission.

It is pertinent here to have a look at the ideology of industrialization prevailed in the early
days of independence. India’s political leadership was keen on establishing an economic
system in which the central government would have authority to design the economic strategy
and to carry out the necessary investments in coordination with the private sector. Rapid
industrialization of the economy was the cornerstone of Nehru’s development strategy. The
concept of ‘planned modernization’ meant a systematic planning to support industrialization.
The bureaucrats and the technocrats envisioned a substantially significant role for the state in
industrialisation.
The Industrial Policy Resolution (1948) envisaged an expanded role for the public sector and
licensing to the private sector. It granted state monopoly for strategic areas such as atomic
energy, arms and ammunition and railways. Also, the rights to new investments in basic
Industries were exclusively given to the state.

The policies in 1950’s were guided by two economic philosophies:

1. The then prime minister Nehru’s visualization to build a socialistic society with
emphasis on heavy industry, and

2. The Gandhian philosophy of small scale and cottage industry and village republics
The Industrial Policy Resolution of 1956 though provided a comprehensive framework for
industrial development, was lopsided as its guiding principle supported enormous expansion of
the scope of the public sector. A natural outcome of the undue priority for public sector was
the dampening of private initiative and enterprise. For obvious reasons, private investments
were discouraged and this had long-lasting negative consequences for industrial growth.

India followed an open foreign investment policy and a relatively open trade policy until the
late 1950s.A balance of payments crisis emerged in 1958 causing concerns regarding foreign
exchange depletion. Consequently, there emerged a gradual tightening of trade and
reduction in investment-licensing of new investments requiring imports of capital goods. The
comprehensive import controls were maintained until 1966.
In the first three decades after independence (1950–80), India’s average annual rate of growth
of GDP- often referred to as the ‘Hindu growth rate’- was a modest 3.5 percent. While
agriculture was not neglected, the thrust of the first decade and a half was on capital goods—
capital-intensive projects such as dams, power plants, and heavy industrialization—rather than
consumer goods.

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The first major shift in Indian economic strategy was in the mid-1960s. Agriculture was not
given adequate priority during the second plan and the outlays were reduced. The strategy
for agricultural development till then was reliance on institutional model i.e. land reforms,
farm cooperatives etc. and not much importance was given to technocratic areas such as
research and development, irrigation etc. These institutional reforms were only modestly
successful and the productivity increase in agriculture was meagre.
With continuous failures of monsoon, two severe and consecutive droughts struck India in
1966 and 1967. The agricultural sector recorded substantial negative growth and India faced
a serious food problem. India had to depend on the United States for food aid under PL 480.
A quantum jump in the food grain production was the need of the hour. Increasing
productivity in agriculture was given the highest priority. This, in fact, kick-started a strategic
change in the government’s agricultural policies. The new wave of change relied less on the
earlier efforts at institutional change and relied more on enhancing productivity of agriculture,
especially of wheat. A thorough restructuring of agricultural policy referred to as the ‘green
revolution’ was initiated. The green revolution was materialised by innovative farm
technologies, including high yielding seed varieties and intensive use of water, fertilizer and
pesticides. The green revolution was successful in increasing agricultural productivity through
technical progress and significantly increased food grain production enabling India to tide
over the food problem.
While India drastically changed its agricultural policies, the government introduced extra
stringent administrative controls on both trade and industrial licensing and launched a wave
of nationalization. The government nationalized 14 banks in 1969 and then followed it up with
nationalizing another 6 in 1980. The wide sweep of the interventionist policies that had come
to exist in the 1960s had irreparable consequences in the next decade.
The economic performance during the period of 1965-81 is the worst in independent India’s
history. The decline in growth during this period is attributed mainly to decline in productivity.
The license-raj, the autarchic policies that dominated the 1960s and 1970s, the external shocks
such as three wars (in 1962, 1965, and 1971), major droughts (especially 1966 and 1967), and
the oil shocks of 1973 and 1979contributed to the decelerated growth that lasted two
decades. India being practically a closed economy missed out on the opportunities created
by a rapidly growing world economy.
Many government policies aimed at equitable distribution of income and wealth effectively
killed the incentive for creating wealth. Equity driven policies were also largely anti growth.
The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 was aimed at regulation of
large firms which had relatively large market power. Several restrictions were placed on them
in terms of licensing, capacity addition, mergers and acquisitions. Thus, policies restricting the
possibility of expansion of big business houses kept their entry away from nearly all but a few

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highly capital intensive sectors.

In 1967, the policy of reservation of many products for exclusive manufacture by the small
scale sector was initiated with the objective of promotion of small scale industries. It was
argued that this policy will encourage labour-intensive economic growth and allow
redistribution of income by shifting incomes towards lower wage earners. However, this policy
excluded all big firms from labour intensive industries and India was not able to compete in
the world market for these products. Stringent labour laws which were in place also
discouraged starting of labour intensive industries in the organized sector.

There was a growing realisation among policymakers and industrialists that the prevailing
strict regime is invariably counterproductive and that most of the controls and regulations
had not delivered in the absence of adequate incentives and openness which are necessary
conditions for sustained rapid growth.

10.3 THE ERA OF REFORMS

The seeds of early liberalisation and reforms were sown during the 1980s, especially after
1985. In early 1980s considerable efforts were initiated in different directions to restore
reasonable price stability through a combination of tight monetary policy, fiscal moderation
and a few structural reforms. These initiatives, spanning 1981 to 1989, practically referred to
as ‘early liberalization’ were specifically aimed at changing the prevailing thrust on ‘inward-
oriented’ trade and investment practices. In fact, this liberalization is often referred to as
‘reforms by stealth’ to denote its ad hoc and not widely publicized nature. Despite the fact
that these efforts were not in the form of a comprehensive package (as the one in 1991) to
reverse the centralised controls and the protectionist bias in policies, they started bearing
fruits in the form of higher growth rate during the 1980s as compared with the previous three
decades. The average annual growth rate of GDP during the sixth plan period (1980 –1985)
and the seventh plan period (1985–1990) were 5.7 and 5.8 percent respectively.

The early reforms of 1980’s broadly covered three areas, namely industry, trade and taxation.
Simultaneously, the government also embarked on a policy of skilful exchange rate
management. The prominent industrial policy initiatives during this period directed towards
removing constraints on growth and creating a more dynamic industrial environment were:
 In 1985 delicensing of 25 broad categories of industries was done. This was later
extended to many others
 The facility of ‘broad-banding’ was accorded for industry groups to allow flexibility and
rapid changes in their product mix without going in for fresh licensing. In other words,
the firms in the engineering industry were allowed to change their product mix within

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their existing capacity. For example, firms may switch production between different
production lines such as trucks and car without a new licence
 To relax the hold of the licensing and capacity constraints on larger MRTP firms, in
1985–86, the asset limit above which firms were subject to MRTP regulations was
raised from 20 crore to 100 crore.
 The multipoint excise duties were converted into a modified value-added (MODVAT)
tax which significantly reduced the taxation on inputs and the associated distortions.
 Establishment of the Securities and Exchange Board of India (SEBI) as a non-statutory
body on April 12, 1988 through a resolution of the Government of India
 The open general licence (OGL) list was steadily expanded. The number of capital
goods items included in the OGL list expanded steadily reaching1,329 in April 1990.
 Several export incentives were introduced and expanded
 The exchange rate was set at a realistic level which helped expand exports and in
turn reduced pressure on foreign exchange needed for imports
 Price and distribution controls on cement and aluminum were entirely abolished.
 Based on the real effective exchange rate (REER), the rupee was depreciated by about
30.0 per cent from 1985–86 to 1989–90. This reflects a considerable change in the
official attitude towards exchange rate depreciation
 The budget for 1986 introduced policies of cutting taxes further, liberalising imports
and reducing tariffs.
However, the growth performance of the economy was thwarted due to structural
inadequacies and distortions. The private sector investments were inhibited due to reasons
such as convoluted licensing policies, public sector reservations and excessive government
controls. Due to reservation of goods to small scale sector as well as excessive price and
distribution controls, the private sector was virtually discouraged from making investments.
The public sector which led the manufacturing and service sectors was plagued by inefficiency,
government controls and bureaucratic procedures. Despite the fact that they were of massive
in size and enjoyed monopoly in their respective areas, their performance was far from
satisfactory and yielded very low returns on investment.

The MRTP act had many restrictive conditions creating barriers for entry, diversification and
expansion for large industrial houses. Import controls in the form of tariffs, quotas and
quantitative restrictions ensured that foreign manufactures and components did not cross the
borders and compete with the domestic industries. Foreign investments and foreign
competition were not allowed on grounds of affording protection to domestic industries.
Briefly put, the rules and regulations which were aimed at promoting and regulating the

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economic activities became major hindrances to growth and development.

Though the reforms in 1980’s were limited in scope and were without a clearly observable
road map as compared to the New Economic Policy in 1990, they were instrumental in
bringing confidence in the minds of politicians and policy makers regarding the efficacy of
policy changes to produce sustained economic growth. The belief that well-regulated
competitive markets can ensure economic growth and also increase total welfare got fostered
in the minds of policy makers. In other words, the idea that government intervention in
markets need not always be accepted as ‘the standard’ and that markets should be given
priority over government in the conduct of a good number of economic activities gained a
broad acceptance. Thus, the liberalization in the 1980s served as the necessary foundation for
the more universal and organized reforms of the 1990s.

10.4 THE ECONOMIC REFORMS OF 1991

India embarked on a bold set of economic reforms in 1991 under the Narsimha Rao
government.
The causes attributed to the immediate need for such a drastic change are:
1. The fiscal initiatives for enhanced economic growth in 1980s saw the government
revenue expenditure consistently exceeding revenue receipts. The fiscal deficit was
financed by huge amounts of domestic as well as external debt. The high level current
expenditure proved clearly unsustainable and got manifested on extremely large fiscal
deficits and adverse balance of payments.
2. Persistent huge deficits led to swelling public debt and a large proportion of
government revenues had to be earmarked for interest payments.
3. The surge in oil prices triggered by the gulf war in 1990 and the consequent severe
strain on a balance of payments.
4. The foreign exchange reserves touched the lowest point with a reserve of only $1.2
billion which was barely sufficient for two weeks of imports. This was the major context
that triggered economic reforms.
5. Tightening of import restrictions to muster forex for essential imports resulted in
reduction in industrial output.
6. India had to depend on external borrowing from the International Monetary Fund
which in turn put forth stringent conditions in terms of corrective policy measures
before additional drawings could be made.

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7. The fragile political situation along with the crises in the economic front ballooned
into what may be called a ‘crisis of confidence’.
The year 1991 marked a paradigm shift in the Indian policy reforms. The nation which had
embraced the ‘socialist model’, with the state playing an overriding role in the economy had
the history of the government persistently intervening in the markets. Collapse of the Soviet
Union and the spectacular success of China, based on outward oriented policies were lessons
for the Indian policy makers. The reforms instituted in 1991 aimed to move the economy
toward greater market orientation and external openness.

The reforms, popularly known as liberalization, privatization and globalisation, spelt a major
shift in economic philosophy and fundamental change in approach and had two major
objectives:
1. reorientation of the economy from a centrally directed and highly controlled one to a
‘market friendly’ or market oriented economy.
2. macroeconomic stabilization by substantial reduction in fiscal deficit.

A detailed description of reform measures is beyond the scope of this unit. We shall now have
a brief account of the major measures taken in 1991.
As we know, the momentum for reforms originated in the critical economic, fiscal and balance
of payments crises. Therefore, the reform package was structured as a core package of
mutually supportive reforms to address the balance of payment crisis and the structural
rigidities. The policy paradigm focused on shifting from central direction to market
orientation.
The policies can be broadly classified as :
1. stabilisation measures which were short term measures to address the problems of
inflation and adverse balance of payment and
2. the structural reform measures which are long term and of continuing nature aimed at
bringing in productivity and competitiveness by removing the structural rigidities in
different sectors of the economy.

10.4.1 The Fiscal Reforms

The escalating deficit levels rendered the stabilisation efforts rather complicated. Bringing in
fiscal discipline by reducing the fiscal deficit was vital because the crisis was caused by excess
domestic demand, surge in imports and the widening of the current account deficit (CAD)
which was to be financed by drawing down on reserves. This was attempted by radical
measures to augment revenues and to curtail government expenditure. Measures to this effect
included:

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1. Introduction of a stable and transparent tax structure,

2. Ensuring better tax compliance,

3. Thrust on curbing government expenditure

4. Reduction in subsidies and abolition of unnecessary subsidies
5. Disinvestment of part of government’s equity holdings in select public sector
undertakings and
6. Encouraging private sector participation.

In order to bring in fiscal discipline, it was essential to do away with the temptation to finance
deficit thorough the easy path of money creation. Therefore, the government entered into a
historic agreement with the Reserve Bank in September 1994 to bring down the fiscal deficit
in a phased manner to nil by 1997–98.

10.4.2 Monetary and Financial Sector Reforms

Drastic monetary and financial sector reforms were introduced with the objective of making
the financial system more efficient and transparent. The focus was mostly on reducing the
burden of nonperforming assets on government banks, introducing and sustaining
competition, and deregulating interest rates. These included many measures, important
among them are:
1. Interest rate liberalization and reduction in controls on banks by the Reserve Bank of
India in respect of interest rates chargeable on loans and payable on deposits.
2. Opening of new private sector banks and facilitating greater competition among public
sector, private sector and foreign banks and simultaneously removal of administrative
constraints that reduced efficiency
3. Reduction in reserve requirements namely, statutory liquidity ratio (SLR) and cash
reserve ratio (CRR) in line with the recommendations of the Narasimham Committee
Report, 1991.
4. Liberalisation of bank branch licensing policy and granting of freedom to banks in
respect of opening, relocating or closure of branches
5. Prudential norms of accounting in respect of classification of assets, disclosure of
income and provisions for bad debt were introduced in tune with the Narasimham
Committee recommendations to ensure that the books of commercial banks reflect
the accurate and truthful picture of their financial position.

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10.4.3 Reforms in Capital Markets

The Securities and Exchange Board of India (SEBI) which was set up in 1988 was given statutory
recognition in 1992. SEBI has been mandated as an independent regulator of the capital
market so as to create a transparent environment which would facilitate mobilization of
adequate resources and their efficient allocation.

10.4.4 The ‘New Industrial Policy’

The ‘New Industrial Policy’ announced by the government on 24 July 1991 sought to
substantially deregulate industry so as to promote growth of a more efficient and competitive
industrial economy. In order to provide greater competitive stimulus to the domestic industry,
a series of reforms were introduced
1. The New Economic Policy put an end to the ‘License Raj’ by removing licensing
restrictions for all industries except for 18 that ‘related to security and strategic
concerns, social reasons, problems related to safety and overriding environmental
issues’. Consequently, 80 percent of the industry was taken out of the licensing
framework. This is subsequently reduced to 5,namely, arms and ammunition, atomic
substances, narcotic drugs and hazardous chemicals, distillation and brewing of
alcoholic drinks and cigarettes and cigars as these have severe implications on health,
safety, and environment.

2. Public sector was limited to eight sectors based on security and strategic grounds.
Subsequently only two items remained – railway transport and atomic energy
3. The Monopolies and Restrictive Trade Practices (MRTP) Act was restructured and the
provisions relating to merger, amalgamation, and takeover were repealed. This has
eliminated the need for pre-entry scrutiny of investment decisions and prior approval
for large companies for capacity expansion or diversification.

4. Many goods produced by small-scale industries have been de reserved enabling entry
of large scale industries.
5. The policy ended the public sector monopoly in many sectors The number of areas
reserved for public sector was narrowed down to ensure liberal participation by the
private sector. Only eight industries which are of importance due to strategic and
security concerns were reserved for the public sector. The changes continued and we
find that now the industries reserved for the public sector are only a part of atomic
energy generation and some core activities in railway transport.
6. Foreign investment was also liberalised. The concept of automatic approval was
introduced for foreign direct investments up to 51 percent which was later extended

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to nearly all industries except the reserved ones. FDI is prohibited only in four sectors
viz. retail trade, atomic energy, lottery business and betting and gambling.
7. External trade was further liberalised by substituting ‘the positive list approach’ of
listing license-free items on the OGL list with the negative list approach. The policy did
away with import licensing on all but a handful of intermediate and capital goods. The
consumer goods which remained under licensing was made free 10 years later. Today,
except for a handful of goods disallowed on health, environmental and safety grounds,
and few others such as edible oil, fertilizer and petroleum products all goods can be
imported
8. In 1990-91, the highest tariff rate was 355%, The top tariff rate was brought down to
85% in 1993-94 and to 50% in 1995-96 and by 2007-08, it has come down to 10% with
some exceptions such as automobile at 100%
9. Rupee was devalued by 18% against the dollar. From 1994 onwards, all current account
transactions including business, education, medical and foreign travel were permitted
at market exchange rate and rupee became officially convertible on current account
10. The disinvestment of government holdings of equity share capital of public sector
enterprises was a very bold step. The hitherto constrained public sector units were
provided with greater autonomy in decision making and opportunity for professional
management for ensuring reasonable returns. The budgetary support to public sector
was progressively reduced.

10.4.5 Trade Policy Reforms

The trade policy reforms aimed at:

 dismantling of quantitative restrictions on imports and exports

 focusing on a more outward oriented regime with phased reduction and simplification
of tariffs, and
 removal of licensing procedures for imports.
A number of export incentives were continued and new ones were initiated for boosting
exports. Export duties were removed to increase the competitive position of Indian goods in
the international markets. In 1991, India still had a fixed exchange rate system, under which
the rupee was pegged to the value of a basket of currencies of major trading partners. In July
1991 the Indian government devalued the rupee by between 18 and 19 percent. In March
1992 the government decided to establish a dual exchange rate regime. The government
allowed importers to pay for some imports with foreign exchange valued at free-market rates
and other imports could be purchased with foreign exchange purchased at a government-

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mandated rate In March 1993 the government unified the exchange rate and allowed, for the
first time, the rupee to float. From 1993 onwards, India has followed a managed floating
exchange rate system.
India has witnessed vast changes over the last 31 years of economic reforms. Changes
enumerated below are only broad observations and are in no way comprehensive.
 India has increasingly integrated its economy with the global economy.
 India has progressively moved towards a market oriented economy, with a sizeable
reduction in government’s market intervention and controls

 There is an unprecedented growth of private sector investment and initiatives

 A number of sectors such as auto components, telecommunications, software,
pharmaceuticals, biotechnology, and professional services have achieved vey high
levels of international competitiveness
 Easing of trade controls has enabled easier access to foreign technology, inputs, know-
how and finance
 Stable foreign direct investment inflows and substantial foreign portfolio investments
 India enjoys a solid cushion of foreign exchange reserves close to eight months of
import cover. India has one of the largest holdings of international reserves in the
world.
 Robust demand for information technology and financial services has kept the services
trade surplus high at around 3.7 percent of GDP
 Pressure on the Indian rupee is lower compared to other emerging market economies
(EMEs)
 Increased incomes, large domestic market and high levels of aggregate demand
sustains the economy.
 India is better placed than most of the emerging market economies to deal with global
headwinds
 Poverty has reduced substantially

 Reforms led to increased competition in sectors like banking, insurance and other
financial services leading to greater customer choice and increased efficiency. It has
also led to increased investment and growth of private players in these sectors.
 Infrastructure sectors have achieved phenomenal growth
 Value-added share of agriculture and allied activities has declined steadily over the
past four decades.

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 India’s financial sector has also deepened considerably due to increased financial
sector liberalisation.
However, the country is constrained by high levels of fiscal deficit, inflation and a high level
of debt as a share of GDP at 86 percent of GDP in FY21/22. Among the emerging market and
developing economies (EMDEs), India’s debt is higher than their average of 64.5% for
2022(IMF).

10.5 GDP GROWTH RATES POST 1991 REFORMS

As we are aware, GDP growth rate is regarded as the most reliable indicator of economic
growth. The following table and graphical presentation present data on GDP growth rate post
1991 reforms.
Table 10.1
GDP Growth (Annual %) – India from 1991 to 2021

Year GDP Growth (Annual %) Year GDP Growth (Annual %)

1991 1.056831 2006 8.060733
1992 5.482396 2007 7.660815
1993 4.750776 2008 3.086698
1994 6.658924 2009 7.861889
1995 7.574492 2010 8.497585
1996 7.549522 2011 5.241315
1997 4.049821 2012 5.456389
1998 6.184416 2013 6.386106
1999 8.845756 2014 7.410228
2000 3.840991 2015 7.996254
2001 4.823966 2016 8.256306
2002 3.803975 2017 6.795383
2003 7.860381 2018 6.453851
2004 7.922937 2019 3.737919
2005 7.923431 2020 -6.59608
2021 8.681229

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Figure 10.1
GDP Growth (Annual %) – India from 1991 to 2021
10
8
6
4
2
0
-2
-4
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
-6
-8

Source: Extracted from GDP growth (annual %) - India - World Bank Data.
data.worldbank.org › indicator › NY.GDP.MKTP.KD.ZG

10.6 NITI AAYOG: A BOLD STEP FOR TRANSFORMING

INDIA
For nearly sixty four years, the Planning Commission of India - a powerful advocate of public
investment-led development - was one of the most important institutions within India's
central government. The new ideologies of the neoliberal era with their centre of attention on
market orientation and shrinking roles of the government and the collapse of the planning
system called for a change in the nature, composition and scope of institutions of governance.
On 1st January 2015, the apex policy-making body namely Planning Commission, was
replaced by the National Institution for Transforming India (NITI) Aayog. The major objective
of such a move was to ‘spur innovative thinking by objective ‘experts’ and promote ‘co-
operative federalism’ by enhancing the voice and influence of the states’. NITI Aayog is
expected to serve as a 'Think Tank' of the government. [and] a ‘directional and policy
dynamo’.

NITI Ayog will work towards the following objectives*:

1. To evolve a shared vision of national development priorities, sectors and strategies
with the active involvement of states.

2. To foster cooperative federalism through structured support initiatives and

mechanisms with the states on a continuous basis, recognizing that strong states make
a strong nation.
3. To develop mechanisms to formulate credible plans at the village level and aggregate
these progressively at higher levels of government.

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4. To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy.
5. To pay special attention to the sections of our society that may be at risk of not
benefiting adequately from economic progress.
6. To design strategic and long-term policy and programme frameworks and initiatives,
and monitor their progress and their efficacy
7. To provide advice and encourage partnerships between key stakeholders and national
and international like-minded think tanks, as well as educational and policy research
institutions.
8. To create a knowledge, innovation and entrepreneurial support system through a
collaborative community of national and international experts, practitioners and other
partners.
9. To offer a platform for the resolution of inter-sectoral and inter departmental issues in
order to accelerate the implementation of the development agenda.
10. To maintain a state-of-the-art resource centre, be a repository of research on good
governance and best practices in sustainable and equitable development as well as
help their dissemination to stake-holders.
11. To actively monitor and evaluate the implementation of programmes and initiatives,
including the identification of the needed resources so as to strengthen the probability
of success and scope of delivery.

12. To focus on technology up gradation and capacity building for implementation of

programmes and initiatives.
13. To undertake other activities as may be necessary in order to further the execution of
the national development agenda, and the objectives mentioned above. *NITI Aaayog
https://niti.gov.in/objectives-and-features
The key initiatives of NITI Aayog are:

1. ‘Life’ which envisions replacing the prevalent 'use-and-dispose' economy

2. The National Data and Analytics Platform (NDAP) facilitates and improves access to
Indian government data

3. Shoonya campaign aims to improve air quality in India by accelerating the deployment
of electric vehicles
4. E-Amrit is a one-stop destination for all information on electric vehicles

5. India Policy Insights (IPI)

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6. 'Methanol Economy' programme is aimed at reducing India's oil import bill,

greenhouse gas (GHG) emissions, and converting coal reserves and municipal solid
waste into methanol, and
7. 'Transforming India’s Gold Market' constituted by NITI Aayog to recommend measures
for tapping into the potential of the sector and provide a stimulus to exports and
economic growth
There are arguments put forth by experts about the weaknesses of the system. They argue
that NITI has a limited role; it does not produce national plans, control expenditures, or review
state plans. The major shortcoming of NITI is its exclusion from the budgeting process. It also
lacks autonomy and balance of power within the policy making apparatus of the central
government. The termination of the Planning Commission has strengthened the hand of the
Ministry of Finance, with its ‘fixation on near-term macroeconomic stability and the natural
instinct to limit expenditure’. But NITI lacks the independence and power to perform as a
‘counterweight’ to act as a "voice of development" concerned with inequities.

10.7 THE CURRENT STATE OF THE INDIAN ECONOMY:

A BRIEF OVERVIEW
On account of the enormity of the economic phenomena and the dynamic nature of economic
variables, it is not possible to have an up-to-date and comprehensive documentation on the
current state of the economy. Given the constraints of the unit, an attempt is made in the
following sections to present the broad nature of the present day Indian economy based on
the three sectors namely, primary, secondary and tertiary.

10.7.1 The Primary Sector

Agriculture, with its allied sectors, is indisputably the largest source of livelihood in India. Till
the end of 1960’s, India was a food deficient nation and depended on imports. India has
emerged as the world’s largest producer of milk, pulses, jute and spices. India has the largest
area planted under wheat, rice and cotton. It is the second-largest producer of fruits,
vegetables, tea, farmed fish, cotton, sugarcane, wheat, rice, cotton, and sugar. Indian food and
grocery market is the world’s sixth largest, with retail contributing 70% of the sales. India has
the world’s largest cattle herd (buffaloes).The Indian livestock sector attained a record growth
of 6.6 per cent during the last decade (2010-19) emerging as a major producer of milk, egg
and meat in the world. India grows large varieties of cash crops of which cotton, jute and
sugarcane are prominent. Although the share of agriculture has been declining in overall gross
value added (GVA) of India, it continues to grow in absolute terms.

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According to the latest estimates, 47 per cent of India’s population is directly dependent on
agriculture for living. It also contributes a significant figure to the Gross Domestic Product
(GDP). Gross Value Added by the agriculture and allied sector was 18.8% in 2021 -22 (until 31
January, 2022).
The index numbers of agricultural production in 2021-22 (base: triennium ending 2007-
08=100) for categories namely, all crops, food-grains, cereals, wheat and coarse cereals was
above 140; and that of rice and pulses was 138.7 and 196.2 respectively. For non- food grains,
it was 142.9. These figures show sustained increase in agricultural output. Food grains
production has reached 315.7 million tonnes in 2021-22. Private investment in agriculture has
increased to 9.3% in 2020-21. (Source: Handbook of Statistics on the Indian Economy, 2021-22)
As per the economic survey, 2022-23, agriculture remained robust, recording a growth of 3.5
per cent in 2022-23, driven by buoyant rabi sowing and allied activities. The performance of
the agriculture and allied sectors has been buoyant over the past several years, much of which
is on account of the measures taken by the government to:

 augment crop and livestock productivity,

 ensure certainty of returns to the farmers through price support (The Minimum
Support Price (MSP) of all 23 mandated crops is fixed at 1.5 times of all India weighted
average cost of production)
 promote crop diversification,

 improve market infrastructure through the impetus provided for the setting up of
farmer-producer organisations and
 promotion of investment in infrastructure facilities through the Agriculture
Infrastructure Fund.
India has achieved a remarkable shift from a food deficient and import dependent nation
during the early nineteen sixties to a food exporting nation. India is among the top ten
exporters of agricultural products in the world. Export of agricultural and allied products has
witnessed significant increase during the last few years and touched an all-time peak of
374611 crore during the last one year. Exports of agricultural and processed food products
rose by 25 percent within six months of the current financial year 2022-23 (April-September)
in comparison to the corresponding period in 2021-22. Agricultural and Processed Food
Export Development Authority (APEDA) is entrusted with the responsibility of export
promotion of agri-products.

A number of liberalization measures are adopted by the government. The Government of India
has allowed 100% FDI in marketing of food products and in food product E-commerce under
the automatic route. Considering the diverse needs of the agricultural sector and the larger

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farming community, a large number of interventions are undertaken by different

governments. A few such recent measures are:
 Income support to farmers through PM KISAN
 Fixing of Minimum Support Price (MSP) at one-and-a half times the cost of production
 Institutional credit for agriculture sector at concessional rates

 Launch of the National Mission for Edible Oils

 Pradhan Mantri Fasal BimaYojana (PMFBY) – a novel insurance scheme for financial
support to farmers suffering crop loss/damage

 Mission for Integrated Development of Horticulture (MIDH) for the holistic growth of
the horticulture sector
 Provision of Soil Health Cards

 Paramparagat Krishi Vikas Yojana (PKVY) supporting and promoting organic farming,
and improvement of soil health.
 Agri Infrastructure Fund, a medium / long term debt financing facility for investment
in viable projects for post-harvest management Infrastructure and community farming
assets
 Promotion of Farmer Producer Organisations (FPOs) to ensure better income for the
producers through an organization of their own.
 Per Drop More Crop (PDMC) scheme to increase water use efficiency at the farm level
 Setting up of Micro Irrigation Fund

 Initiatives towards agricultural mechanization

 Setting up of E-NAM -a pan-India electronic trading portal which networks the existing
APMC mandis to create a unified national market for agricultural commodities.
 Introduction of Kisan Rail for improvement in farm produce logistics, and
 Creation of a Start-up Eco system in agriculture and allied sectors
Despite phenomenal increase in output of both food crops and commercial crops, Indian
agriculture faces many issues such as:
 Indian agriculture is dominated by small and medium farmers. Small and fragmented
landholdings, low farm productivity and subsistence farming result in very little
marketable surplus and the consequent lower income levels of the agriculturists. These
also reduce their ability to participate in the domestic as well as export market.

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 Indian agriculture is resource intensive, cereal centric and regionally biased. There is
Increasing stress on water resources and soil fertility. Unscientific and wasteful
agricultural practices lead to desertification and land degradation in many parts of the
country.
 Inadequate agro-processing infrastructure and failure to build competitive value
chains from producers to urban centers and export markets
 Sluggish agricultural diversification to higher-value commodities
 Inadequate adoption of environmentally sustainable and climate resistant new farm
technology
 Poor adoption of new agricultural technologies
 Lopsided marketing practices and ineffective credit delivery

 Complexities associated with adaptation to climate change disturbances

 High food price volatility
 Heavy dependence on monsoons and loss of crops and livelihood due to vagaries of
nature
 Issues related to marketing and warehousing of agricultural products
 Inability to tap the full export potential of primary as well as value added products

 Inability to effectively channelize huge surpluses in some commodities to alternative

profitable destinations
 Inadequate post-harvest infrastructure and management practices

 Incidence of poverty and malnutrition

10.7.2 The Secondary Sector

The Indian industry holds a significant position in the Indian economy contributing about 30
percent of total gross value added in the country and employing over 12.1 crores of people.
The industrial sector in India broadly comprises of manufacturing, heavy industries, fertilizers,
pharmaceuticals, chemicals and petrochemicals, oil and natural gas, food processing, mining,
defence products, textiles, retail, micro, small & medium enterprises, cottage industries and
tourism. The share of informal sector in the economy is more than 50% of GVA. Rapid
industrial growth of domestic industries and diversification of industrial structure are essential
elements for sustainable economic growth. The development of a robust manufacturing
sector is a key priority of the Indian Government.

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A detailed discussion on industrial development is beyond the scope of this unit. Starting with
the industrial growth figures, we shall briefly touch upon the general aspects related to
industries. In India, industrial production measures the output of businesses integrated in
industrial sector of the economy. Manufacturing is the most important sector and accounts
for 78 percent of total production. The manufacturing GVA at current prices was estimated at
US$ 77.47 billion in the third quarter of financial year 2021-22 and has contributed around
16.3% to the nominal GVA during the past ten years. In 2022- 23 (until September 2022), the
combined index of eight core industries* stood at 142.8 driven by the production of coal,
refinery products, fertilizers, steel, electricity and cement industries. In Jan 31, 2023 the
Manufacturing Purchasing Managers’ Index (PMI) in India stood at 55.4 . India’s rank in the
th st
Global Innovation Index (GII) improved to 40 in 2022 from 81 in 2015.
[*ICI measures combined and individual performance of production of eight core industries viz. Coal,
Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity. The Eight Core
Industries comprise 40.27 percent of the weight of items included in the Index of Industrial Production
(IIP)].

The Department for Promotion of Industry and Internal Trade (DPIIT) has a role in the
formulation and implementation of industrial policy and strategies for industrial development
in conformity with the development needs and national objectives. Ever since independence,
many innovative schemes are undertaken by different governments from time to time to boost
industrial performance. Some of the policies are presented below:
 Introduction of goods and services tax (GST) on 1 July 2017 as a single domestic
indirect tax law for the entire country replacing many indirect taxes in India such as the
excise duty, VAT, services tax, etc.
 Reduction of corporate tax to domestic companies giving an option to pay income-tax
at the rate of 22% subject to condition that they will not avail any exemption/incentive.
 ‘Make in India’ is a 'Vocal for Local' initiative launched in 2014 to facilitate investment,
foster innovation, build excellent infrastructure and make India a hub for
manufacturing, design and innovation. Make in India 2.0’ is now focusing on 27 sectors,
which include 15 manufacturing sectors and 12 service sectors.
 ‘Ease of Doing Business’ with key focus areas as simplification of procedures,
rationalization of legal provisions, digitization of government processes, and
rd
decriminalization of minor, technical or procedural defaults. India ranks 63 in the
World Bank’s annual Doing Business Report (DBR), 2020 as against 77thrank in 2019
registering a jump of 14 ranks.

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 INDIAN ECONOMY 10.23

 The National Single Window System is a one-stop-shop for investor related approvals
and services in the country and aims to provide continuous facilitation and support to
investors.
 PM Gati Shakti National Master Plan to facilitate data-based decisions related to
integrated planning of multimodal infrastructure, thereby reducing logistics cost.
 National Logistics Policy (NLP) launched in September 2022, aims to lower the cost of
logistics and make it at par with other developed countries.
 Keeping in view India’s vision of becoming ‘Atmanirbhar’, the Production Linked
Incentive (PLI) Scheme was initiated in March 2020 for 14 key sectors to enhance India’s
manufacturing capabilities and export competitiveness. PLI Scheme is now extended
for white goods (air conditioners and led lights).

 Industrial Corridor Development Programme: Greenfield Industrial

regions/areas/nodes with sustainable infrastructure and to make available ‘plug and
play’ infrastructure at the plot level.
 FAME-India Scheme (Faster Adoption and Manufacturing of Hybrid and Electric
Vehicles) to promote manufacturing of electric and hybrid vehicle technology and to
ensure sustainable growth of the same.
 ‘Udyami Bharat’ aims at the empowerment of Micro Small and Medium Enterprises
(MSMEs).
 PM Mega Integrated Textile Region and Apparel (PM MITRA): to ensure world-class
industrial infrastructure which would attract cutting age technology and boost FDI and
local investment in the textiles sector.
 Opening up for global investments: To make India a more attractive investment
destination, the government has implemented several radical and transformative FDI
reforms across sectors such as defence, pension, e-commerce activities etc.
 100 per cent FDI under automatic route is permitted for the sale of coal, and coal
mining activities, including associated processing infrastructure and for insurance
intermediaries.
 Foreign Investment Promotion Board (FIPB) was abolished in May 2017, and a new
regime namely Foreign Investment Facilitation Portal (FIF) has been put in place. Under
the new regime, the process for granting FDI approvals has been simplified. 853 FDI
proposals were disposed off in the last 5 years. FDI has increased jumped by 39% since
FIF came into being.
 Remission of Duties and Taxes on Export Products (RoDTEP) 2021 formed to replace
the existing MEIS (Merchandise Exports from India Scheme) to boost exports. It

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provides for rebate of all hidden central, state, and local duties/taxes/levies on the
goods exported which have not been refunded under any other existing scheme.
 Initiatives towards fostering innovation include incubation, handholding, funding,
industry-academia partnership and mentorship and strengthening of IPR regime.
 National Logistics Policy (NLP) is comprehensive policy framework for the Logistics
Sector.
 Start-up India Programme acts as the facilitator for ideas and innovation in the country.
India’s rank in the Global Innovation Index (GII) has improved from 81st in 2015 to 40th
in 2022.
 Public Procurement (Preference to Make in India) Order, 2017gives preference to
locally manufactured goods, works and services in public procurement thereby giving
boost to industrial growth.
 The Emergency Credit Line Guarantee Scheme (ECLGS)is a fully guaranteed emergency
credit line to monitor lending institutions.
India is gearing up for the fourth industrial revolution or Industry 4.0 in which manufacturing
transformation needs to integrate new technologies such as cloud computing, IoT, machine
learning, and artificial intelligence (AI). The National Manufacturing Policy which aims to
increase the share of manufacturing in GDP to 25 percent by 2025 is a step in this direction.
India is an attractive hub for foreign investments in the manufacturing sector. Over the last
few years, FDI equity inflows in the manufacturing sector have been progressively rising. India
continues to open up its sectors to global investors by raising FDI limits and removing
regulatory barriers in addition to developing infrastructure and improving the business
environment. According to the Department for Promotion of Industry and Internal Trade
(DPIIT), India received a total foreign direct investment (FDI) inflow of US$ 58.77 billion in
2021-22.
There are many challenges to the industrial sector; a few of these are enumerated below:

 Shortage of efficient infrastructure and manpower and consequent reduced factor

productivity.
 Reliance on imports, exchange rate volatility and associated time and cost overruns

 The MSME sector is relatively less favorably placed in terms of credit availability.
 Industrial locations established without reference to cost-effective points tend to
experience unsustainable cost structure.
 Heavy losses, inefficiencies, lower productivity and unsustainable returns plaguing
public sector industries.

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 INDIAN ECONOMY 10.25

 Strained labor-management relations and loss of man hours.

 Lower export competitiveness, slowing external demand and imposition of non tariff
barriers by other countries.
 Global supply chain disruptions and uncertainties.
 Inflation and associated macro economic developments leading to input cost
escalations and lower demand.
 Global slowdown and related negative sentiments affecting investment.

 Aggressive tightening of monetary policy and increases in cost of credit.

 High and increasing fuel prices, and

 Mounting presence of informal sector.

10.7.3 The Tertiary Sector

A remarkable feature of the post reform Indian economy is the overarching role of the services
sector in generating growth of income and employment. Unlike the usual economic
development process of nations where economic growth has led to a shift from agriculture to
industries, or from the primary sector to the secondary sector, India has the unique experience
of bypassing the secondary sector in the growth trajectory by a shift from agriculture to the
services sector.
India’s services sector covers a wide variety of activities. (Refer Box 2 Below)

BOX 2. The broad classification of services as per the National Industrial

Classification, 2008
1. Wholesale and retail trade and repair of vehicles
2. Transportation and storage
3. Accommodation and food service activities
4. Information and communication
5. Financial and insurance activities
6. Real estate activities
7. Professional, scientific and technical activities
8. Administrative and support services
9. Public administration, defence and compulsory social security
10. Education
11. Human health and social work activities
12. Arts, entertainments and recreation

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Other service activities

Activities of households as employers, undifferentiated goods and services producing activities
Activities of extra territorial organizations and bodies

Source: The Service Sector in India Arpita Mukherjee ADB Economics Working Paper Series No. 352 / June 2013

The service sector refers to the industry producing intangible goods viz. services as output.
The services sector is the largest sector of India and accounts for 53.89% of total India's GVA.
The Gross Value Added (GVA) at current prices for the services sector is estimated at
` 96.54 lakh crore in 2020-21.

The service sector is the fastest growing sector in India and has the highest labour
productivity. Both domestic and global factors influence the growth of the services sector. The
exceptionally rapid expansion of knowledge-based services such as professional and technical
services has been responsible for the faster growth of the services sector. The production and
consumption of information-intensive service activities such as computing, accounting,
inventory management, quality control, personnel administration, marketing, advertising and
legal services has increased manifold due to application of state- of the- art information
technology. Services sector growth can also complement growth in the manufacturing sector.
The start-ups which have grown remarkably over the last few years mostly belong to the
services sector.
India is among the top 10 World Trade Organization (WTO) members in service exports and
imports. India’s services exports at US$ 27.0 billion recorded robust growth in November 2022
due to software, business, and travel services. While exports from all other sectors were
adversely affected, India’s services exports have remained resilient during the Covid-19
pandemic. The reasons are the higher demand for digital support and need for digital
infrastructure modernization.
The Indian services sector is the largest recipient of FDI inflows. FDI equity inflows into the
services sector accounted for more than 60 per cent of the total FDI equity inflows into India.
The World Investment Report 2022 of UNCTAD places India as the seventh largest recipient
of FDI in the top 20 host countries in 2021. In 2021-22, India received the highest-ever FDI
inflows of US$ 84.8 billion including US$ 7.1 billion FDI equity inflows in the services sector.

To ensure the liberalisation of investment in various industries, the government has permitted
100 per cent foreign participation in telecommunication services through the Automatic Route
including all services and infrastructure providers. The FDI ceiling in insurance companies was
also raised from 49 to 74 per cent. Measures undertaken by the Government, such as the
launch of the National Single-Window system and enhancement in the FDI ceiling through
the automatic route, have played a significant role in facilitating investment.

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 INDIAN ECONOMY 10.27

10.8 CONCLUSION
The India Development Update (IDU) of the World Bank published in November 2022,
observes that India had to face an unusually challenging external environment following the
Russia-Ukraine war, increased crude oil and commodity prices, persistent global supply
disruptions, tighter financial conditions and high domestic inflationary pressures. Despite all
these, the real GDP of India grew by 6.3 percent in July-September of 2022-23 driven by
strong private consumption and investment. The report observes that India’s economy is
relatively more insulated from global spillovers than other emerging markets and is less
exposed to international trade flows on account of reliance on its large domestic market. As
such, compared to other emerging economies, India is much more resilient to withstand
adversities in the global arena.

SUMMARY
 India is believed to have had the largest economy of the ancient and the medieval
world and controlled between one third and one fourth of the world's wealth. It was
prosperous and self-reliant and had flourishing cities and self sufficient villages.

 The advent of the Europeans and the rule of British from 1757 to 1947 brought about
a marked shift in the economic history of India.

 Higher production on account of industrial revolution in Britain necessitated raw

materials and markets for finished goods for which India was made the target. This,
along with adverse imperial policies towards Indian manufacturing and the ease of
importing cheap machine made goods decreased the competitiveness of Indian
manufactures and reduced their domestic demand leading to a virtual destruction of
the Indian manufacturing sector.

 The consequence of collapse of manufacturing sector was felt heavily on agricultural

sector in the form of overcrowding on farms, subdivision and fragmentation,
subsistence farming, low productivity, lower incomes and aggravated poverty.

 Institutional inadequacies in land tenure and growth of a class of exploitative money

lenders and zamindars resulted in vices such as absentee landlordism, high rents, high
indebtedness, deterioration of fertility of land and low productivity.

 During the British period, modern industrial sector saw lopsided growth with
preponderance of cotton and jute industry. Producer goods industries lagged behind

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due to the discriminatory attitudes of self interested British rulers. The share of
manufacturing and of employment in this sector was pathetically low.

 At the time of independence, India was overwhelmingly rural, inhabited by mostly

illiterate and poor people with low life expectancy. The social structure was deeply
stratified and exceedingly heterogeneous on many counts. The country was deficient
in physical, financial and human capital.

 The economic development strategy adopted was the Nehruvian model which
supported social and economic redistribution and industrialization directed by the
state. Accordingly the Planning Commission of India was established to meticulously
plan for economic development on socialistic lines with equity and distributive justice.
The five-year plans were developed, implemented, and monitored by the Planning
Commission with this objective.

 Rapid industrialization of the economy was the cornerstone of Nehru’s development

strategy. The concept of ‘planned modernization’ meant a systematic planning to
support industrialization.

 The Industrial Policy Resolution (1948) envisaged an expanded role for the public
sector and licensing to the private sector.

 The policies in 1950’s were guided by both Nehruvian and Gandhian philosophies with
the former visualizing a socialistic society with emphasis on heavy industries and the
latter stressing on small scale and cottage industry and village republics.

 The Industrial Policy Resolution of 1956 supported undue priority and enormous
expansion of the scope of the public sector which resulted in dampening of private
initiative and enterprise.

 In the first three decades after independence (1950–80), India’s average annual rate of
growth of GDP, often referred to as the ‘Hindu growth rate’, was a modest 3.5 percent.

 The first major shift in Indian economic strategy was in the mid-1960s. Due to
continuous failures of monsoon, droughts struck India in 1966 and 1967 and food crisis
set in. The need for increased productivity in agriculture kick-started a strategic change
in agriculture policies.

 The strategy for agricultural development which had so far relied on institutional
model such as land reforms gave way to technological and farm management reforms
giving rise to a revolutionary transformation in agricultural production and
productivity.

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 INDIAN ECONOMY 10.29

 This radical change materialised by innovative farm technologies, including high

yielding seed varieties and intensive use of water, fertilizer and pesticides is referred
to as ‘Green Revolution’.

 Many government policies aimed at prevention of growth of monopolies and equitable

distribution of income and wealth such as reservation of many products for exclusive
manufacture by the small scale sector and the Monopolies and Restrictive Trade
Practices Act, 1969 (MRTP) (which placed several restrictions on large enterprises in
terms of licensing, capacity addition, mergers and acquisitions) effectively killed the
incentive for creating wealth.

 The economic performance during the period of 1965-81 is the worst in independent
India’s history. The license-raj, the autarchic policies that dominated the 1960s and
1970s, and the external shocks such as three wars, major droughts, and the oil shocks
of 1973 and 1979 contributed to the decelerated growth lasting two decades.

 The seeds of early liberalisation and reforms were sown during the 1980s, especially
after 1985. In early 1980s considerable efforts were made to restore reasonable price
stability through a combination of tight monetary policy, fiscal moderation and a few
structural reforms.

 The reform initiatives- covering three areas, namely industry, trade and taxation-
spanning 1981 to 1989, is referred to as ‘early liberalization’ or ‘reforms by stealth’ to
denote its ad hoc and not widely publicized nature. They were aimed at changing the
prevailing thrust on ‘inward-oriented’ trade and investment practices.

 The major reforms in 1980’s included de licensing of 25 broad categories of industries,

granting of the facility of ‘broad-banding’ to allow flexibility and rapid changes in the
product mix of industries without going in for fresh licensing, increase in the asset
limit of MRTP firms from 20 crore to 100 crore, introduction of modified value-added
(MODVAT), establishment of the Securities and Exchange Board of India (SEBI) as a
non-statutory body ,extension of the Open General Licence (OGL), export incentives,
liberalisation of imports , reduction in tariffs and removal of price and distribution
controls on cement and aluminium.

 The private sector investments were inhibited due to reasons such as convoluted
licensing policies, public sector reservations and excessive government controls,
reservation of goods to small scale sector as well as excessive price and distribution
controls.

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 The public sector which led the manufacturing and service sectors was plagued by
inefficiency, government controls and bureaucratic procedures and yielded very low
returns on investment.

 Import controls in the form of tariffs, quotas and quantitative restrictions, and
restrictions on foreign trade and investments virtually insulated the economy from
foreign competition.

 The reforms in 1980’swere instrumental in bringing confidence in the minds of

politicians and policy makers that a well-regulated competitive market can ensure
economic growth and increase in overall welfare.

 Extremely large fiscal deficits, severe strain on balance of payments, heavy internal as
well as external debt, unprecedented levels of interest payments, all-time low foreign
exchange reserves, lessons from collapse of Soviet Union, spectacular success of China
through adoption of outward oriented policies and above all, the stringent conditions
put forth by the International Monetary Fund for availing further loans were the
reasons for launching the drastic economic reforms of 1991.

 The twin objectives of reforms were reorientation of the economy from a centrally
directed and highly controlled one to a ‘market friendly’ or ‘market oriented’ economy
and macroeconomic stabilization by substantial reduction in fiscal deficit.

 The reform policies can be broadly classified as a) stabilisation measures which were
short term measures to address the problems of inflation and adverse balance of
payment and b) structural reform measures which are long term and of continuing
nature aimed at bringing in productivity and competitiveness by removing the
structural rigidities in different sectors of the economy.

 The fiscal reforms included introduction of a stable and transparent tax structure,
better tax compliance, control of government expenditure, reduction /abolition of
subsidies, disinvestment of part of government’s equity holdings and encouraging
private sector participation.

 The monetary and financial sector reforms were in the form of interest rate
liberalization, reduction in controls on banks by the Reserve Bank of India in respect
of interest rates and facilitating greater competition in the banking sector by private
participation and foreign competition, reduction in reserve requirements,
liberalisation of bank branch licensing policy and establishing prudential norms of
accounting in respect of classification of assets, disclosure of income and provisions
for bad debt.

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 Reforms in Capital Markets included granting of statutory recognition to the Securities

and Exchange Board of India (SEBI) to facilitate mobilization of adequate resources and
their efficient allocation.

 The ‘New Industrial Policy’ announced by the government on 24 July 1991 sought to
substantially deregulate industry so as to promote growth of a more efficient and
competitive industrial economy.

 The policy put an end to the ‘License Raj’ by removing licensing restrictions for all
industries except for 18 on strategic considerations.

 Other initiatives included reduction in the number of industries reserved for the public
sector and the small scale sector, restructuring of the polices related to merger,
amalgamation, and takeover under the MRTP act, devaluation of rupee, liberalization
of foreign investments and disinvestment of government holdings of equity share
capital of public sector enterprises.

 The trade policy reforms included liberalisation of external trade, removal of licensing
for imports, dismantling of quantitative restrictions on imports and exports and phased
reduction and simplification of tariffs.

 Reforms resulted in major changes such as increasing integration with the global
economy, progressive shift towards a market oriented economy, sizeable reduction in
government’s market intervention and controls, unprecedented growth of private
sector investments and initiatives, increased levels of international competitiveness,
easier access to foreign technology, inputs ,know-how and finance, steady inflow of
foreign direct and portfolio investments , solid cushion of foreign exchange reserves,
increased incomes, large domestic market, sustainable levels of aggregate demand,
substantial reduction in poverty, greater customer choice, increased efficiency,
phenomenal growth of infrastructure sector and the deepening of the financial sector.

 The GDP growth rate, on an average, has been commendable throughout the post
reform period except for the pandemic ridden year 2020 when the economy registered
a negative growth rate.

 Despite the above achievements, the country is constrained by high levels of fiscal
deficit, growing inequalities, inflation and high levels of debt as a share of GDP.

 The Planning Commission of India was one of the most important institutions within
India's central government for nearly sixty four years. The new ideologies of the
neoliberal era called for a change in the nature, composition and scope of institutions
of governance.

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 On 1st January 2015, the apex policy-making body namely Planning Commission, was
replaced by the National Institution for Transforming India (NITI) Aayog with the
objective to ‘spur innovative thinking by objective ‘experts’ and promote ‘co-operative
federalism’ by enhancing the voice and influence of the states’.

 NITI Aayog is expected to serve as a 'Think Tank' of the government. [and] as

‘directional and policy dynamo’. The key initiatives of NITI Aayog are: ‘Life’, The
National Data and Analytics Platform (NDAP), Shoonya, E-Amrit, India Policy Insights
(IPI), and 'Transforming India’s Gold Market'.

 The weaknesses of the system are that NITI has a limited role; it is excluded from the
budgeting process, lacks autonomy and balance of power within the policy making
apparatus of the central government and that it lacks the independence and power to
perform as a ‘counterweight’ to act as a "voice of development" concerned with
inequities.

 The Primary sector i.e agriculture with its allied sectors is the largest source of
livelihood for people. India has emerged as the world’s largest producer of milk, pulses,
jute and spices and has the largest area planted under wheat, rice and cotton. It is the
second largest producer of fruits, vegetables tea, farmed fish, cotton, sugarcane, wheat,
rice, cotton, and sugar. Forty seven per cent of India’s population is directly dependent
on agriculture for living which contributes a significant figure to the Gross Domestic
Product18.8% in 2021-22 (until 31 January, 2022). Food grains production has reached
315.7 million tonnes in 2021-22.

 India is among the top ten exporters of agricultural products in the world. Agricultural
and Processed Food Export Development Authority (APEDA) is entrusted with the
responsibility of export promotion of agri-products.

 Various measures are adopted by the government such as 100% FDI in marketing of
food products and in food product E-commerce, income support to farmers through
PM KISAN, fixing of Minimum Support Price (MSP) at one-and-a half times the cost of
production, institutional credit for agriculture sector at concessional rates , National
Mission for Edible Oils, Pradhan Mantri Fasal BimaYojana (PMFBY) a novel insurance
scheme, Mission for Integrated Development of Horticulture (MIDH, Soil Health Cards,
Paramparagat Krishi Vikas Yojana (PKVY), Agri Infrastructure Fund, Promotion of
Farmer Producer Organisations (FPOs), Per Drop More Crop (PDMC), setting up of
Micro Irrigation Fund, creation of E-NAM -a pan-India electronic trading portal,
introduction of Kisan Rail and creation of a Start-up Eco system in agriculture and
allied sectors.

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 Indian agriculture faces many issues, such as small and fragmented landholdings, low
farm productivity and subsistence farming, low marketable surplus and the consequent
lower income levels, inability to participate in the domestic as well as export market,
inadequate agro-processing infrastructure, failure to build competitive value chains,
sluggish agricultural diversification to higher-value commodities, inadequate adoption
of environmentally sustainable and climate resistant new farm technology, lopsided
marketing practices, ineffective credit delivery, high food price volatility, heavy
dependence on monsoons, poor warehousing, inadequate post-harvest infrastructure
management practices and incidence of poverty and malnutrition.

 The industrial sector contributes about 30 percent of total gross value added and
employs over 12.1 crores of people. Manufacturing is the most important sector and
accounts for 78 percent of total production.

 In 2022- 23 (until September 2022), the combined index of eight core industries stood
at 142.8 In Jan 31, 2023 the Manufacturing Purchasing Managers’ Index (PMI) in India
stood at 55.4. India’s rank in the Global Innovation Index (GII) improved to 40th in 2022
from 81st in 2015.

 The Department for Promotion of Industry and Internal Trade (DPIIT) has a role in the
formulation and implementation of industrial policy and strategies for industrial
development.

 Some of the policies for industrial development include introduction of goods and
services tax (GST) 2017 as a single domestic indirect tax law for the entire country,
reduction in corporate tax of domestic companies, ‘Make In India’ a 'Vocal for Local'
initiative, Ease of Doing Business , the National Single Window System, PM Gati Shakti
National Master Plan, National Logistics Policy (NLP), Production Linked Incentive (PLI)
Scheme, Industrial Corridor Development Programme, FAME-India Scheme, Udyami
Bharat’, PM Mega Integrated Textile Region and Apparel, Remission of Duties and
Taxes on Export Products (RoDTEP) ,National Logistics Policy (NLP), Start-up India,
Programme of Public Procurement (Preference to Make in India) and the Emergency
Credit Line Guarantee Scheme.

 The major challenges to the industrial sector are shortage of efficient infrastructure
and manpower, reduced factor productivity, heavy reliance on imports, exchange rate
volatility, industrial locations established without reference to cost-effective points,
heavy losses, inefficiencies, lower productivity and unsustainable returns plaguing the
public sector industries, strained labour-management relations, lower export
competitiveness, slowing external demand, imposition of non tariff barriers by other

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countries, global supply chain disruptions and uncertainties, inflation, leading to input
cost escalations and lower demand, global slowdown and related negative sentiments
affecting investments , aggressive tightening of monetary policy and increases in cost
of credit ,high and increasing fuel prices and the mounting presence of informal sector
.

 A remarkable feature of the post reform Indian economy is the unconventional

experience of bypassing the secondary sector in the growth trajectory by a shift from
agriculture to the services sector.

 The services sector is the largest sector of India and accounts for 53.89% of total India's
GVA. It has the highest labour productivity and is the fastest growing sector. The
exceptionally rapid expansion of knowledge-based services such as professional and
technical services has contributed substantially to the growth of tertiary sector.

 India is among the top 10 World Trade Organization (WTO) members in service exports
and imports. India’s services exports at US$ 27.0 billion recorded robust growth in
November 2022 due to software, business, and travel services.

 To ensure the liberalisation of investment in various industries, the government has

permitted 100 per cent foreign participation in telecommunication services through
the Automatic Route including all services and infrastructure providers.

 The India Development Update (IDU) of the World Bank published in November 2022
holds the optimistic view that compared to other emerging economies, India is much
more resilient to withstand adversities in the global arena, while acknowledging the
fact that India had to face an unusually challenging external environment following the
Russia-Ukraine war, increased crude oil and commodity prices, persistent global supply
disruptions, tighter financial conditions and high domestic inflationary pressures.

TEST YOUR KNOWLEDGE

Multiple Choice Type Questions
1. The Indian industry stagnated under the colonial rule because

(a) Indians were keen on building huge structures and monuments only

(b) Deterioration was caused by high prices of inputs due to draught

(c) The Indian manufactures could not compete with the imports of cheap machine
made goods
(d) None of the above

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 INDIAN ECONOMY 10.35

2. The first wave of liberalization starts in India

(a) In 1951

(b) In 1980’s
(c) In 1990
(d) In 1966

3. The sequence of growth and structural change in Indian economy is characterized by

(a) The historical pattern of prominence of sectors as agriculture, industry, services

(b) The historical pattern of prominence of sectors as industry, services, agriculture

(c) Unique experience of the sequence as agriculture, services, industry

(d) All the above are correct
4. Merchandise Exports from India Scheme was replaced by -

(a) Remission of Duties and Taxes on Export Products (RoDTEP) in 2021

(b) National Logistics Policy (NLP) in 2020
(c) Remission of Duties and Taxes on Export Products (RoDTEP) in 2019

(d) None of the above

5. The Foreign Investment Promotion Board (FIPB)

(a) a government entity through which inward investment proposals were routed to
obtain required government approvals
(b) no more exists as the same is replaced by a new regime namely Foreign
Investment Facilitation Portal
(c) no more exists as all inward investments are through automatic route and need
no approval
(d) is the body which connects different ministries in respect of foreign portfolio
investments
6. FAME-India Scheme aims to

(a) Enhance faster industrialization through private participation

(b) to promote manufacturing of electric and hybrid vehicle technology

(c) to spread India’s fame among its trading partners
(d) None of the above

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7. In terms of Ease of Doing Business in 2020 India ranks

(a) 63

(b) 77
(c) 45
(d) None of the above

8. E-NAM is -
(a) An electronic name card given to citizens of India

(b) National Agriculture Market with the objective of creating a unified national
market for agricultural commodities.
(c) a pan-India electronic trading portal which networks the existing APMC mandis
(d) b) and c) above

9. Which of the following is not a policy reform included in the new economic policy of
1991 -
(a) removing licensing requirements for all industries

(b) Foreign investment was liberalized

(c) Liberalisation of international trade

(d) The disinvestment of government holdings of equity share capital of public sector
enterprises
10. Imports of foreign goods and entry of foreign investments were restricted in India
because -
(a) The government wanted people to follow the policy of’ Be Indian; Buy Indian’
(b) Because foreign goods were costly and meant loss of precious foreign exchange
(c) Government policy was directed towards protection of domestic industries from
foreign competition
(d) Government wanted to preserve Indian culture and to avoid influence of foreign
culture

11. The ‘Hindu growth rate’ is a term used to refer to -

(a) the high rate of growth achieved after the new economic policy of 1991
(b) the low rate of economic growth of India from the 1950s to the 1980s, which
averaged around 3.5 per cent per year

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 INDIAN ECONOMY 10.37

(c) the low growth of the economy during British period marked by an average of
3.5 percent

(d) the growth rate of the country because India is referred to as ‘Hindustan’
12. In the context of the new economic policy of 1991, the term ‘disinvestment’ stands for -
(a) A policy whereby government investments are reduced to correct fiscal deficit

(b) The policy of sale of portion of the government shareholding of a public sector
enterprise
(c) The policy of public partnership in private enterprise

(d) A policy of opening up government monopoly to the privates sector

13. The objective of introducing Monopolies and Restrictive Trade Practices Act 1969 was -
(a) to ensure that the operation of the economic system does not result in the
concentration of economic power in hands of a few
(b) to provide for the control of monopolies
(c) to prohibit monopolistic and restrictive trade practice

(d) all the above

14. Which one of the following is a feature of green revolution -

(a) use of soil friendly green manure to preserve fertility of soil

(b) grow more crops by redistributing land to landless people

(c) High yielding varieties of seeds and scientific cultivation
(d) Diversification to horticulture

15. The strategy of agricultural development in India before green revolution was -
(a) High yielding varieties of seeds and chemical fertilizers to boost productivity
(b) Institutional reforms such as land reforms

(c) Technological up gradation of agriculture

(d) All the above

16. The Industrial Policy Resolution (1948) aimed at -

(a) Market oriented economic reforms and opening up of economy

(b) A shift from state led industrialization to private sector led industrialisation
(c) an expanded role for the public sector and licensing to the private sector

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(d) an expanded role of private sector a limited role of public sector

17. The new economic policy of 1991 manifest in -

(a) State led industrialization and import substitution

(b) Rethinking the role of markets versus the state
(c) Emphasized the role of good governance

(d) Bringing about reduction in poverty and redistributive justice

18. The post independence economic policy was rooted in -

(a) A capitalist mode of production with heavy industrialization

(b) social and economic redistribution and industrialization directed by the state
(c) social and economic redistribution through private sector initiatives
(d) Industrialization led by private entrepreneurs and redistribution by state

ANSWERS
1. (c) 2. (b) 3. (c) 4. (a) 5. (b) 6 (b)

7. (a) 8. (d) 9. (a) 10. (c) 11. (b) 12. (b)

13. (d) 14. (c) 15. (b) 16. (c) 17. (b) 18. (b)

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