India’s Economic Environment: Evolution Since Independence

The Economist
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©2023 Sthanu R Nair

 The story so far & going forward
Aggregate
Expenditure
(1) Evolution of
Fiscal Policy India’s economy &
National Income Aggregate Demand
and Aggregate economic policies
Cost of Living Supply
(2) Sectoral Policies
Unemployment Disturbances/Shocks Monetary Policy (a) Agriculture
(b) Industry
Adjustments via (c) Services
market forces & External sector policy
government policy
Govt. intervention
report card

Outcome Influencers Govt. policies

©2023 Sthanu R Nair

 Theme of the Lecture
This lecture is aimed at analysing the rationale, pros
and cons of the economic strategies adopted by India
since Independence for her economic progress; and
identify her unfinished economic tasks and emerging
economic challenges. The economic strategies will be
analysed by dividing the economic policy regime of
modern India into three periods: 1950-80 (inward
looking era), 1980-91 (mild liberalization era) and
1991 to present (extensive liberalization era).

©2023 Sthanu R Nair

 Policy Periods
• Economic performance of modern India can be
studied under three periods/policy regimes
1950 to 1980 [inward looking era]
1980 to 1991 [mild liberalization era]
1991 to present [extensive liberalization era]

©2023 Sthanu R Nair

Inward looking era: 1950 to 1980

©2023 Sthanu R Nair

 P.C Mahalanobis

©2023 Sthanu R Nair

Source: Nikhil Menon (2022). Planning Democracy, Penguin Viking
©2023 Sthanu R Nair
 India’s Growth Performance at the time of Independence

Period NDP (%) Per capita GDP (%) Per capita

NDP (%) GDP (%)

1868-98 0.99 0.59 - -

1882-98 1.29 0.78 - -

1900-46 0.86 -0.01 0.9 0.1

©2023 Sthanu R Nair

 10.00
12.00
14.00
16.00
18.00
20.00
22.00
1950-51
1951-52
1952-53
1953-54
1954-55
1955-56
1956-57
1957-58
1958-59
1959-60
1960-61
1961-62
1962-63
1963-64
1964-65
1965-66
1966-67
1967-68

©2023 Sthanu R Nair

1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
Gross Fixed Capital Formation/Investment as % of GDP

1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
 Nehru- Mahalanobis Model/Strategy
Other Elements
Source of Funds: • Import Substitution
Within India via • Lack of export promotion
Taxes, Loans, PSEs • Protection to domestic Industry
& Aids • Regulation of Pvt. Capital via QRs & Licenses
• Emphasis on Self-Sufficiency
• Govt. made responsible for employment
generation, poverty alleviation & removal of
disparities

Investment in
Investment Public Sector Capital Goods
Sector & Social
Sectors like Health
& Education

Produce
Higher Income & Pvt. Sector would consumer goods
Lower Poverty join later via SSIs &
Factories
©2023 Sthanu R Nair
India was an aid/loan-dependent country ©2023 Sthanu R Nair
 Business Line, Oct. 12, 2023: ©2023 Sthanu R Nair
This type of import restriction was rampant before the 1991 economic reforms
 10.00
12.00

0.00
2.00
4.00
6.00
8.00
1950-51
1951-52
1952-53
1953-54

1954-55
1955-56
1956-57

1957-58
1958-59
1959-60

1960-61
1961-62

1962-63
1963-64

Private Sector
1964-65
1965-66

1966-67
1967-68

©2023 Sthanu R Nair

1968-69
Public Sector

1969-70
1970-71
1971-72
1972-73

1973-74

1974-75
1975-76
Gross Fixed Capital Formation/Investment as % of GDP

1976-77

1977-78

1978-79
1979-80
In your view, what are the major
weaknesses of this model?

©2023 Sthanu R Nair

 Failures of the strategy
• Import substitution led to wastage of precious resources,
technological backwardness and low efficiency level
• Lack of encouragement to exports & foreign investment
• Pvt. Sector was not given adequate space
• Protection to domestic industry
• Decay of PSEs overtime
• License-Quota Raj resulted in redtapism and corruption
• Neglect of primary education
• Dependence on govt. breeded inefficiency & corruption
©2023 Sthanu R Nair
•Inadequate social/human development
• Persistence of poverty and inequality
• Poor performance of PSEs
• Unemployment and underemployment
• Inadequate primary education
• Lack of export & industry competitiveness
• Marginalisation of India in world affairs
• Benefits of development not trickled down
• Low and inadequate economic growth
©2023 Sthanu R Nair
Economic Growth Performance under inward looking strategy

Policy Regime-wise Growth of GDP and Per capita income (%)

Period GDP Per capita income
Inward looking era:
1950-51 to 1979-80* 3.52 1.39
Mild liberalisation era:
1980-81 to 1991-92* 5.08 2.88
Extensive liberalisation era:
1992-93 to 2011-12* 6.76 5.11
2011-12 to 2022-23** 5.62 4.42
6.19*** 4.77***
* Base 2004-05
** Base: 2011-12
*** Average of 1992-93 to 2011-12 & 2011-12 to 2022-23

©2023 Sthanu R Nair

 Question

Did we ‘waste our past’ by adopting the above

explained economic development model? [or] Is it the
case that the development strategy adopted by India
till 1991 was entirely in tune with the nation’s mood
and capability, and prevailing business environment?

©2023 Sthanu R Nair

 Gurcharan Das
“When I was young, “After we won freedom,
we passionately Jawaharlal Nehru and his
believed in Jawaharlal planners attempted an
Nehru’s dream of a industrial revolution
modern and just India. through the agency of the
But as the years went state. They did not trust
by we discovered that private entrepreneurs, so
Nehru’s economic path they made the state the
was taking us to a dead entrepreneur. Not
end, and the dream surprisingly, they failed,
soured. Having set out and India is still paying a
to create socialism, we huge price for their
found that we had follies”
instead created statism”

©2023 Sthanu R Nair

N R Narayana Murthy (in the context of foreign exchange
restrictions present before 1991)

“I can imagine the

intense opposition he
(Nehru) would have faced
from the jingoistic
(nationalistic/patriotic)
and less enlightened
crowd, India having come
out of a colonial regime
only recently”

©2023 Sthanu R Nair

Inward looking strategy was in tune with prevailing
situation [or] We haven’t wasted our past
• Low aggregate demand
• Extreme poverty and huge disparity
• Need to build infrastructure
• Fear of concentration of economic power in private hands
• Poor standard of living: high literacy, inadequate food, clothing
and housing; poor health condition/facilities; high birth and
death rates; malnutrition; frequent breakout of epidemics;
limited electric power.
All required more of govt. and less of private sector involvement

©2023 Sthanu R Nair

©2023 Sthanu R Nair
• Narrow (investment) resource base

• Inadequate foreign exchange reserves

• Agri. was not in a position to produce

exportable surplus due to huge need to feed
domestic population (Agri. received adequate policy
attention only after Lal Bahadur Shastri – recall the
famous ‘Jai Jawan and Jai Kisan’ slogan - became PM
in 1964 after the death of Nehru)
All required controls on the private sector expansion
and on exports
©2023 Sthanu R Nair
• Development theory and advise by Industry (Bombay
Plan 1944-45) sought state control
• Historical factor (Overall bad experience with British
rule) – Even today anti-business slogans gain
currency during election time
• Ideological factor (Nehru Vs. Gandhi)

All resulted in predominance of public sector and

sidelining of private sector
• Confidence factor (‘We can do all’ as Independent
nation)
©2023 Sthanu R Nair
 Major Achievements of Inward looking era
• Recovery of India from stagnation under British rule

Period NDP (%) Per capita GDP (%) Per capita

NDP (%) GDP (%)

1868-98 0.99 0.59 - -

1882-98 1.29 0.78 - -

1900-46 0.86 -0.01 0.9 0.1

1950-80 - - 3.52 1.30

©2023 Sthanu R Nair

• Unlike Soviet Union, we could achieve sustained growth
• Growth was distinctly Indian, i.e. not dependent on
foreign capital/aid
• Self-sufficiency in food production
• Development of industries such as iron & steel,
petroleum, fertilisers, coal, and electricity
• Progress in higher education and science and technology
• No recurrence of famines & decline in epidemics
• Balanced regional development by locating industries in
backward areas of the country
©2023 Sthanu R Nair
 We wasted our past….

What stopped us from making a major mid-

course correction until 1991?
[Referring to East Asian country experiences
namely Japan (mid-1960s), South Korea (from
1961), China (from 1978), Taiwan (from 1970s) and
to other neighbors namely Singapore (from 1965),
Indonesia (late 1960s), Malaysia (from 1970)]

©2023 Sthanu R Nair