Eco Final Draft

GLOBSYN BUSINESS SCHOOL
STUDY OF THE INDIAN AND CHINA ECONOMY
PRESENTED BY:
Learning Group 6 (PGPM-11B)
- Vasundhara Kedia - Sourabh Soni - Sudeshna Chowdhary - Niloy Biswas - Sauryadipta Basu
STUDY OF INDIAN AND CHINA ECONOMY
- Mandeep Pradhan
ACKNOWLEDGMENT
The time spent in the making of this project, as a part of our curriculum requirement of PGPM course, is invaluable in terms of learning. The application of concepts to the project added more depth and meaning to the knowledge gained in the classroom. We wish to extend our gratitude to our faculty guide Prof. S Chatterjee, for guiding us through the project with ample patience and understanding. We would also like to thank him for reminding us of the core objectives of the project every time we diverted from it.
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TABLE OF CONTENTS
Abstract
PAGE NO.
1. Introduction
4-6
THE INDIAN ECONOMY
2. Pre colonial, colonial and post-colonial India 3. Indian Planning Commission & Liberalisation 4. Indias Economic Reforms and Currency Devaluation 5. The Five Year Plans In India 6. Fiscal Policy of India 7. Monetary Policy of India 8. Impact of Financial Crisis on Indian Economy
7- 15 16- 20 21- 29 30- 56 57- 63 64- 65 66-68
THE ECONOMY OF CHINA 9. Overview of the China Economy 10. Fiscal policy, Monetary policy, Inflation 11. Contrast between India and Chinas Economy 69 70-73 74-80
ANNEXURE
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1. INTRODUCTION
Indian Economy Overview
Indian economy is growing, despite the economic crisis that engulfed the world, stated Mr Anand Sharma, Union Minister for Commerce, Industry and Textiles, Government of India, while addressing a session at the 11 thPravasi Bharatiya Divas 2013. Mr Sharma further highlighted that the national investment rate is around 33-34 per cent, and is expected to increase to 36 per cent by the end of 12th Five Year Plan (2012-17). India has been adjourned the fifth best country in the world for dynamic growing businesses, as per the Grant Thornton Global Dynamism Index. The index gives a reflection of how suitable an environment the country offers for dynamic businesses. Indian tax climate was also considered to be reasonably favourable and India continued to be an attractive investment destination, according to a survey conducted by Deloitte Touche Tohmatsu Ltd (Deloitte). Moreover, India was ranked fourth on Ernst & Young's (E&Y) renewable attractiveness index, second on the solar index, and third on the wind index, as per the latest study by E&Y and UBM India Pvt Ltd.
The Economic Scenario India is expected to be the second largest manufacturing country in the next five years, followed by Brazil as the third ranked country, according to Deloitte. Some of the other important economic developments in the country are as follows:
The HSBC's Services Purchasing Managers' Index (PMI) touched a 12 month high at 57.5 points in January 2013 as compared to 55.6 in December 2012 The net direct tax collections in India rose by 13.70 per cent to record Rs 368,322 crore (US$ 67.96 billion) during April-December 2012, as compared to Rs 323,956 crore (US$ 59.77 billion) during the corresponding months in 2011
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Indian companies have raised US$ 4.29 billion, through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) in October 2012, to fund modernisation, foreign acquisitions, import of capital goods and onward lending The total value of private equity (PE) and mergers & acquisitions (M&A) deals in November 2012 increased five-fold to US$ 10.1 billion, as per a study by Grant Thornton India. The total value of PE deals in November 2012 rose to US$ 39 billion from US$ 0.4 billion in November 2011, indicating that PE players preferred concentrated exposure to their value investments The cumulative amount of foreign direct investments (FDI) equity inflows into India were worth US$ 187,804 million between April 2000 to December 2012, while FDI equity inflow during April 2012 to December 2012 was recorded as US$ 16,946 million, according to the latest data published by Department of Industrial Policy and Promotion (DIPP) Foreign institutional investors (FIIs) made a net investment of US$ 68.46 million in the equity market and US$ 14.92 million in the debt market upto February 18, 2013, according to data released by the Securities and Exchange Board of India (SEBI)
Growth Potential Story
The pharmaceutical market of India is expected to grow at a compound annual growth rate (CAGR) of 14-17 per cent over 2012-16 and is now ranked among the top five pharmaceutical emerging markets globally The ready-to-drink tea and coffee market in India is estimated to touch Rs 2,200 crore (US$ 405.90 million) in next four years, according to estimates arrived at the World Tea and Coffee Expo 2013 India's IT and business process outsourcing (BPO) sector exports are expected to increase by 12-14 per cent in FY14 to touch US$ 84 billion - US$ 87 billion, as per National Association of Software and Services Companies (Nasscom) Indian manufacturing and natural resources industry plans to spend Rs 40,800 crore (US$ 7.53 billion) on IT products and services in 2013, a growth of 9.1 per cent over 2012, according to Gartner. The telecommunications category remains the biggest spending category and it is forecast to reach Rs 13,200 crore (US$ 2.43 billion) in 2013 The semiconductor market is expected to grow from US$ 6.03 billion in 2011 to US$ 9.7 billion by 2015. In addition, the local demand and sourcing is estimated to record US$ 3.6 billion by 2015
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The electronic system design and manufacturing (ESDM) sector of India is projected to reach US$ 94.2 billion by 2015 from US$ 64.6 billion in 2011, according to a report by the India Semiconductor Association (ISA) and Frost & Sullivan The luxury car market of India is set for growth over the medium and long term, according to Mr Philipp Von Sahr, President, BMW Group India. The market is about 30,000 cars a year and is rising steadily, Mr Sahr added The FM radio sector in India is expected to touch the Rs 2,300 crore (US$ 424.35 million) mark within three years of the Phase III licences' roll-out, as per estimates by Confederation of Indian Industry (CII) and Ernst & Young. The sector is expected to reach Rs 1,400 crore (US$ 258.30 million) with 245 private FM stations during 2012-13 The US$ 12 billion Indian foundry industry has lined up investments worth Rs 600 crore (US$ 110.70 million) over the next few years as it expands and adapts environment-friendly measures to garner global market share
Indian infrastructure landscape would attract investments worth Rs 49,000 billion (US$ 904.05 billion) during the 12th Five Year Plan period (2012-17), with at least 50 per cent funding from the private sector, as per Government's projections.
Road Ahead The Indian economy is estimated to grow at a higher rate of 6.7 per cent in 2013-14 due to revival in consumption, according to a report by CRISIL. "India's GDP growth in 2013-14 will be supported by the revival of private sector consumption growth aided by higher growth in agriculture, high government spending and lower interest rates," said Ms Roopa Kudva, Managing Director and CEO, CRISIL. "The Indian financial markets have witnessed favouritism among the investing diaspora compared to its Asian counterparts such as South Korea, Taiwan, Thailand and Indonesia," according to a report by Mecklai Financial. Exchange Rate: INR 1 = 0.01845 as on February 19, 2013
References: Ministry of Finance, Press Information Bureau (PIB), Media Report, Department of Industrial Policy and Promotion (DIPP)
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Indian Economy before Colonial Period
The earliest known evident civilization which flourished on the Indian soil was the Indus Valley Civilization. Historians believed that this civilization would have flourished between the time frame of 2800 BC and 1800 BC. It is evident from the excavated cities and structures that the inhabitants of the Indus Valley practiced agriculture, domesticated animals and had developed trade relationships between different cities. They are also known to have developed a uniform system of weights and measures. Also, the inhabitants of Indus Valley were one amongst the very first of people to have developed a network of well planned cities with their application of urban planning. These planned cities were equipped with the worlds first urban sanitation systems. India had been successful to develop international trade since as early as the first century BC. Historical evidences suggest that the Coromandel, the Malabar, the Saurashtra and the Bengal coasts were excessively used for the transportation of goods via sea roots from and towards India. In the ancient times, India conducted international trade mainly with parts of Middle East, Southeast Asia, Europe and Africa. Overland international trade, conducted via Khyber Pass, was also prevalent in ancient India. Later, in medieval times, the Mughal Empire gave way to a centrally administered uniform revenue policy and political stability in India which in turn lead to the further development of trade and unified the nation. During this era, India was primarily an agrarian selfsufficient economy which primarily depended on the primitive methods of agriculture. After the downfall of the Mughal Empire, the economy of India was primarily governed by the Maratha Empire which then ruled over most parts of India. Later, the Maratha defeat in the third battle of Panipat disintegrated India into several Maratha confederate states which raised a widespread political turmoil in the country. The economy of India turned highly disturbed in most parts of the country during this phase, but some areas gained a local prosperity too. Later, by the end of eighteenth century, the British East India Company was successful in being a part of the Indian political machinery, following which there was a drastic change in the countrys economic activities and the trade conducted from the Indian soil.
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Indian Economy during Colonial Period
During the reign of the British East India Company, there was a drastic shift in the economic activities conducted across the country. More stress was laid on commercialization of agriculture. This led to a change in the agricultural pattern across the nation. During this phase of the Indian economy, there was a constant decline in the production of food grains in the country which resulted to the mass impoverishment and destitution of farmers. Also, in a short span after this shift of pattern, there were numerous famines raised in the country. Though, after and during this phase, there was a sharp decline in the economic structure of the country, but this was also the phase during which some major and economically important developments took place. These developments include the establishment of railways, telegraphs, common law and adversarial legal system. Also, it was during this era that a civil service which essentially aimed to be free from the political interference was established.
Post-Colonialism: Definition, Development and Examples from India
1. Post-colonialism in general 1.1 Definition Post-colonialism is an intellectual direction (sometimes also called an era or the postcolonial theory) that exists since around the middle of the 20th century. It developed from and mainly refers to the time after colonialism. The post-colonial direction was created as colonial countries became independent. Nowadays, aspects of post-colonialism can be found not only in sciences concerning history, literature and politics, but also in approach to culture and identity of both the countries that were colonised and the former colonial powers. However, post-colonialism can take the colonial time as well as the time after colonialism into consideration. 1.2 Development
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The term decolonisation seems to be of particular importance while talking about postcolonialism. In this case it means an intellectual process that persistently transfers the independence of former-colonial countries into peoples minds. The basic idea of this process is the deconstruction of old-fashioned perceptions and attitudes of power and oppression that were adopted during the time of colonialism. First attempts to put this long-term policy of decolonising the minds into practice could be regarded in the Indian population after India became independent from the British Empire in 1947. However, post-colonialism has increasingly become an object of scientific examination since 1950 when Western intellectuals began to get interested in the Third World countries. In the seventies, this interest lead to an integration of discussions about post-colonialism in various study courses at American Universities. Nowadays it also plays a remarkable role at European Universities. A major aspect of post-colonialism is the rather violent-like, unbuffered contact or clash of cultures as an inevitable result of former colonial times; the relationship of the colonial power to the (formerly) colonised country, its population and culture and vice versa seems extremely ambiguous and contradictory. This contradiction of two clashing cultures and the wide scale of problems resulting from it must be regarded as a major theme in post-colonialism: For centuries the colonial suppressor often had been forcing his civilised values on the natives. But when the native population finally gained independence, the colonial relicts were still omnipresent, deeply integrated in the natives minds and were supposed to be removed. So decolonisation is a process of change, destruction and, in the first place, an attempt to regain and lose power. While natives had to learn how to put independence into practice, colonial powers had to accept the loss of power over foreign countries. However, both sides have to deal with their past as suppressor and suppressed. This complicated relationship mainly developed from the Eurocentric perspective from which the former colonial powers saw themselves: Their colonial policy was often criticised as arrogant, ignorant, brutal and simply nave. Their final colonial failure and the total independence of the once suppressed made the process of decolonisation rather tense and emotional. Post-colonialism also deals with conflicts of identity and cultural belonging. Colonial powers came to foreign states and destroyed main parts of native tradition and culture; furthermore, they continuously replaced them with their own ones. This often lead to conflicts when countries became independent and suddenly faced the challenge of developing a new nationwide identity and self-confidence. As generations had lived under the power of colonial rulers, they had more or less adopted their Western tradition and culture. The challenge for these countries was to find an individual way of proceeding to call their own. They could not get rid of the Western way of life from one day to the other; they could not manage to create a completely new one either. On the other hand, former colonial powers had to change their self-assessment. This paradox identification process seems to be what decolonisation is all about, while post-colonialism is
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the intellectual direction that deals with it and maintains a steady analysis from both points of view. So how is this difficult process of decolonisation being done? By the power of language, even more than by the use of military violence. Language is the intellectual means by which postcolonial communication and reflection takes place. This is particularly important as most colonial powers tried to integrate their language, the major aspect of their civilised culture, in foreign societies. A lot of Indian books that can be attached to the era of post-colonialism, for instance, are written in English. The cross-border exchange of thoughts from both parties of the postcolonial conflict is supported by the use of a shared language. To give a conclusion of it all, one might say that post-colonialism is a vivid discussion about what happened with the colonial thinking at the end of the colonial era. What legacy arouse from this era? What social, cultural and economical consequences could be seen and are still visible today? In these contexts, one examines alternating experiences of suppression, resistance, gender, migration and so forth. While doing so, both the colonising and colonised side are taken into consideration and related to each other. The main target of postcolonialism remains the same: To review and to deconstruct one-sided, worn-out attitudes in a lively discussion of colonisation.
2. The post-colonial experience in India

2.1 History of Indian colonialism In the 16th century, European powers began to conquer small outposts along the Indian coast. Portugal, the Netherlands and France ruled different regions in India before the British East India Company was founded in 1756. The British colonialists managed to control most parts of India while ruling the key cities Calcutta, Madras and Bombay as the main British bases. However, there still remained a few independent regions (Kashmir among others) whose lords were loyal to the British Empire. In 1857, the first big rebellion took place in the north of India. The incident is also named First war of Indian Independence, the Sepoy Rebellion or the Indian Mutiny, depending on the individual perspective. This was the first time Indians rebelled in massive numbers against the presence and the rule of the British in South Asia. The rebellion failed and the British colonialists continued their rule. In 1885, the National Indian Congress (popularly called Congress) was founded. It demanded that the Indians should have their proper legitimate share in the government. From then on, the Congress developed into the main body of opposition against British colonial rule. Besides, a Muslim anti-colonial organisation was founded in 1906, called the Muslim League. While most parts of the Indian population remained loyal to the British colonial power during
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the First World War, more and more Muslim people joined the Indian independence movement since they were angry about the division of the Ottoman Empire by the British. The non-violent resistance against British colonial rule, mainly initiated and organised by Mahatma Gandhi and Jawaharlal Nehru, finally lead to independence in 1947. At the same time, the huge British colony was split into two nations: The secular Indian Union and the smaller Muslim state of Pakistan. The Muslim League had demanded for an independent Muslim state with a majority of Muslims. India became a member of the British Commonwealth after 1947.
2.2 Post-colonial development in India The Partition of India (also called the Great Divide) lead to huge movements and an ethnic conflict across the Indian-Pakistani border. While around 10 million Hindus und Sikhs were expelled from Pakistan, about 7 million Muslims crossed the border to from India to Pakistan. Hundreds of thousands of people died in this conflict. Ever since these incidents, there have been tensions between India and Pakistan which lead to different wars particularly in the Kashmir region. For decades the Congress Party ruled the democratic country which had become a republic with its own constitution in 1950. In 1977 the opposition gained the majority of votes. In 1984, after the Congress Party had regained the majority, conflicts with the cultural minority of the Sikhs lead to the assassination of the Indian prime minister Indira Ghandi. Today, apart from the significant economic progress, India is still facing its old problems: Poverty, overpopulation, environmental pollution as well as ethnic and religious conflicts between Hindus and Muslims. Additionally, the Kashmir conflict has not come to an end yet, while both Pakistan and Indian are threatening each other with their arsenals of atomic weapons. Concerning post-colonial literature, Edward Saids book Orientalism (published in 1978) is regarded as the beginning of post-colonial studies. In this book the author analyses how European states initiated colonialism as a result of what they called their own racial superiority. The religious-ethnic conflicts between different groups of people play an important role in the early years of post-colonialism. Eye-witnesses from both sides of the Indian-Pakistani conflict wrote about their feelings and experience during genocide, being confronted to blind and irrational violence and hatred. The Partition is often described as an Indian trauma. One example for a post-colonial scriptwriter who wrote about this conflict is Saddat Hasan Manto (1912 1955). He was forced to leave Bombay and to settle in Lahore, Pakistan. He published a collection of stories and sketches (Mottled Dawn) that deal with this dark era of Indian history and its immense social consequences and uncountable tragedies.
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Furthermore, there are many different approaches to the topic of intercultural exchange between the British and the Indian population. Uncountable essays and novels deal with the ambiguous relationship between these two nations. One particularly interesting phenomenon is that authors from both sides try to write from different angles and perspectives and in that way to show empathy with their cultural counterpart. The most famous novelist who wrote about these social and cultural exchanges is Salman Rushdie. Rushdie, who won the booker prize among various others, was born in India, but studied in England and started writing books about India and the British in the early eighties. His funny, brave, metaphoric and sometimes even ironical way of writing offers a multiperspective approach to the post-colonial complex. This can be also seen in his book Midnights Children. In the past, Salman Rushdie was also repeatedly threatened by Irani fundamentalists because of his critical writing about Muslim extremism in the Middle East. Another famous post-colonial novel is Heat and Dust (published in 1975) by Ruth Prawer Jhabvala that contains two plot set in different times: One about a British lady starting an affair with a local Indian prince in the 1920s, the other one set in the 1970s, featuring young Europeans on a hippie trail who claim they have left behind Western civilisation and are trying to some spiritual home among Indian gurus. Bollywood has become a notorious synonym for the uprising Indian film industry in recent years. Young Indian scriptwriters have discovered post-colonial issues as themes for their movies and as a way of dealing with the changeful past of their country. Concerning the integration of Western values in the Indian population and culture, one can say that the British influence is still omnipresent in the Asian subcontinent. The reason for this can be also found in the persistence of the English language. Many Indians are conversant with the English language, because the British colonialists intended to export their values and culture by teaching the Indian population their language. This was regarded as the basic fundament for further education. What about the relationship between India and the United Kingdom today? It is a special one, and of course still not without tensions between these two nations that refer to the time of colonialism which from our retro perspective is not at all so far away. India has managed to become an independent state with its own political system and is still working to find its own identity. The longer the process of decolonisation lasts, the more we get the impression that only a middle course between the acceptance of British legacies and the creation of a new unique Indian self-confidence will be the right way to go for India.
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Indian Economy before Liberalization
After independence, till 1991, the economic policies of India were primarily inspired by the Soviet economic planning under which a strong emphasis was laid on increasing the domestic self-sufficiency and reducing the reliance on imports. The economic policies of India during this phase were primarily protectionist and marked by excessive economic interventions and business regulations. Also, during this era the major concern of the government was to develop large and heavy public sector industries. The economic planning process during this phase was mainly conducted centrally through the Five Year Planning process of the Planning commission. This structure of economic planning, through Five Year Plans, was analogous to the planning process of the Soviet Union. Industries like mining, steel, machine tools, insurance, telecommunications and power plants were effectively nationalized during this era. The Government of India, under the leadership of Indias first Prime Minister, Jawaharlal Nehru, along with statistician Prasanta Chandra Mahalanobis formulated an economic policy which laid a prime focus on the development of heavy industry in country by both the public and the private sector. However, despite all its efforts, the economy of India was unsuccessful to grow at pace with other Asian countries for the first three decades after independence. Later, in 1965, the advent of Green Revolution in country, triggered by the improved irrigation facilities, increased use of fertilizers and the introduction of high-yielding varieties of seeds improved the economic conditions of the country and enabled a better link between industry and agriculture in India.
The economic policies of the colonial rulers were at the centre of a controversy in the late 19th century India. Whereas the colonial administration sought to project its policies as beneficial to the country, the nationalist writers and sympathetic British commentators attacked these policies as exploitative and oppressive. Dadabhai Naoroji, R.C. Dutt and William Digby were some of the famous critics of government policies. The economic history of India, as we know it, may be said to have
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begun during this period. D.R. Gadgil, Vera Anstey and D.H. Buchanan followed in their footsteps in taking up the economic history of the colonial period. Jaduanth Sarkar and W.H. Moreland wrote about the Mughal economy. In the post-independence period, economic history became an established field of study and several studies were undertaken on various periods of Indian history covering several aspects of economy. The emergence of economics as a discipline in the eighteenth century led in due course to the development of a new branch in history called economic history. The progenitors of economics were Adam Smith and other classical economists. India was very much in the vision of the classical economists, a group of thinkers in England during the Industrial Revolution. They advocated lays faire and minimizing of state intervention in the economy. Adam Smith, the foremost classical economist, condemned the East India Company in its new role as the ruling power in India. In his view, the Company's trading monopoly ran counter to the principle of the freedom of the market. Economics underwent a theoretical transformation in the early twentieth century under the influence of John Maynard Keynes, who advocated strategic economic intervention by the government for promoting welfare and employment. Keynes, too, thought deeply about India while developing his new economic theories, and his earliest major work. Indian Currency and Finance (London 1913), illustrated his notions of good monetary management of the economy. It is also noteworthy that the early classical economists, such as Ricardo, influenced the thinking of a group of Utilitarian administrators who set about reforming the administration of India in the nineteenth century. Above all, the influence of Adam Smith is noticeable in the end of the Company's monopoly by the Charter Acts of 1813 and 1833. Not surprisingly, therefore, historians have paid close attention to the connection between the evolution of economic thought in England and the question of reform of the colonial administration in India. Classical political economy in England laid the foundations for the laissez faire economics of the Raj in the nineteenth century. Keynesian economics, on the other hand, contained the germs of the development economics of the mid-twentieth century both types of economics affected the state and the economy in India, and stimulated debates in the economic history of India. For the colonial period, R.C. Dutt's Economic History was followed by a series of works: D.R. Gadgil, The Industrial Evolution of India in Recent Times (1924); Vera Anstey, The Economic Development of India (1929); and D.H. Buchanan, and The Development of Capitalistic Enterprise in India (New York 1934). More recently, there has been a collective two-volume survey; Tapan Raychaudhuri and Irfan Habib (eds.). The Cambridge Economic History of India, Vol 1, C.1200 - C.1750 (Cambridge 1982); and Dharma Kumar, The Cambridge Economic History of India, vol. 2 C.1757 - C.1970 (Cambridge, 1983). Daniel Houston Buchanan, an American author, was of the opinion that
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other worldly values and the caste system inhibited economic development in India. D.R. Gadgil, who updated his near classic work several times, emphasized, on the contrary, more strictly economic factors: the difficulties of capital mobilization on account of the absolute smallness of capital resources in respect to the size of the population, the late development of organized banking, and the seasonal fluctuations of a monsoon economy. A dispassionate economist, he did not blame either foreign rule or the Indian social structure for the absence of an industrial revolution in India; some of the Western contributors to the second volume of The Cambridge Economic History, on the other hand, showed a disposition to challenge R.C. Dutt's vision of the negative impact of colonialism, and they dwelt instead on the technological backwardness of the Indian economy. This, in their view, inhibited industrial development and capitalist enterprise during the colonial period.
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THE INDIAN PLANNING COMMISSION HISTORY The Planning Commission was set up by a Resolution of the Government of India in March 1950 in pursuance of declared objectives of the Government to promote a rapid rise in the standard of living of the people by efficient exploitation of the resources of the country, increasing production and offering opportunities to all for employment in the service of the community. The Planning Commission was charged with the responsibility of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilisation of resources and determining priorities. Jawaharlal Nehru was the first Chairman of the Planning Commission. The first Five-year Plan was launched in 1951 and two subsequent five-year plans were formulated till 1965, when there was a break because of the Indo-Pakistan Conflict. Two successive years of drought, devaluation of the currency, a general rise in prices and erosion of resources disrupted the planning process and after three Annual Plans between 1966 and 1969, the fourth Five-year plan was started in 1969. The Eighth Plan could not take off in 1990 due to the fast changing political situation at the Centre and the years 1990-91 and 1991-92 were treated as Annual Plans. The Eighth Plan was finally launched in 1992 after the initiation of structural adjustment policies. For the first eight Plans the emphasis was on a growing public sector with massive investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, the emphasis on the public sector has become less pronounced and the current thinking on planning in the country, in general, is that it should increasingly be of an indicative nature. FUNCTIONS The 1950 resolution setting up the Planning Commission outlined its functions as to: a. Make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nations requirement; b. Formulate a Plan for the most effective and balanced utilisation of country's resources; c. On a determination of priorities, define the stages in which the Plan should be carried out and propose the allocation of resources for the due completion of each stage; d. Indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan;
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e. Determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of the Plan in all its aspects; f. Appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisal may show to be necessary; and g. Make such interim or ancillary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it, or on a consideration of prevailing economic conditions, current policies, measures and development programmes or on an examination of such specific problems as may be referred to it for advice by Central or State Governments. EVOLVING FUNCTIONS From a highly centralised planning system, the Indian economy is gradually moving towards indicative planning where Planning Commission concerns itself with the building of a long term strategic vision of the future and decide on priorities of nation. It works out sectoral targets and provides promotional stimulus to the economy to grow in the desired direction. Planning Commission plays an integrative role in the development of a holistic approach to the policy formulation in critical areas of human and economic development. In the social sector, schemes which require coordination and synthesis like rural health, drinking water, rural energy needs, literacy and environment protection have yet to be subjected to coordinated policy formulation. It has led to multiplicity of agencies. An integrated approach can lead to better results at much lower costs. The emphasis of the Commission is on maximising the output by using our limited resources optimally. Instead of looking for mere increase in the plan outlays, the effort is to look for increases in the efficiency of utilisation of the allocations being made. With the emergence of severe constraints on available budgetary resources, the resource allocation system between the States and Ministries of the Central Government is under strain. This requires the Planning Commission to play a mediatory and facilitating role, keeping in view the best interest of all concerned. It has to ensure smooth management of the change and help in creating a culture of high productivity and efficiency in the Government. The key to efficient utilisation of resources lies in the creation of appropriate self-managed organisations at all levels. In this area, Planning Commission attempts to play a systems change role and provide consultancy within the Government for developing better systems. In order to spread the gains of experience more widely, Planning Commission also plays an information dissemination role. India-Liberalization in the Early 1990s Growth since 1980 Increased borrowing from foreign sources in the late 1980s, which helped fuel economic growth, led to pressure on the balance of payments. The problem came to a head in August 1990 when Iraq invaded Kuwait, and the price of oil soon doubled. In addition, many Indian workers resident in Persian Gulf states either lost their jobs or returned home out of fear for their safety, thus reducing the flow of remittances (see Size and Composition of the Work Force, this ch.). The direct economic impact of the Persian Gulf conflict was exacerbated by domestic social and political developments. In the early 1990s, there was violence over two
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domestic issues: the reservation of a proportion of public-sector jobs for members of Scheduled Castes (see Glossary) and the Hindu-Muslim conflict at Ayodhya (see Public Worship, ch. 3; Political Issues, ch. 8). The central government fell in November 1990 and was succeeded by a minority government. The cumulative impact of these events shook international confidence in India's economic viability, and the country found it increasingly difficult to borrow internationally. As a result, India made various agreements with the International Monetary Fund (IMF--see Glossary) and other organizations that included commitments to speed up liberalization (see United Nations, ch. 9). In the early 1990s, considerable progress was made in loosening government regulations, especially in the area of foreign trade. Many restrictions on private companies were lifted, and new areas were opened to private capital. However, India remains one of the world's most tightly regulated major economies. Many powerful vested interests, including private firms that have benefited from protectionism, labor unions, and much of the bureaucracy, oppose liberalization. There is also considerable concern that liberalization will reinforce class and regional economic disparities. The balance of payments crisis of 1990 and subsequent policy changes led to a temporary decline in the GDP growth rate, which fell from 6.9 percent in FY 1989 to 4.9 percent in FY 1990 to 1.1 percent in FY 1991. In March 1995, the estimated growth rate for FY 1994 was 5.3 percent. Inflation peaked at 17 percent in FY 1991, fell to 9.5 percent in FY 1993, and then accelerated again, reaching 11 percent in late FY 1994. This increase was attributed to a sharp increase in prices and a shortfall in such critical sectors as sugar, cotton, and oilseeds. Many analysts agree that the poor suffer most from the increased inflation rate and reduced growth rate. Data as of September 1995 The rate of growth improved in the 1980s. From FY 1980 to FY 1989, the economy grew at an annual rate of 5.5 percent, or 3.3 percent on a per capita basis. Industry grew at an annual rate of 6.6 percent and agriculture at a rate of 3.6 percent. A high rate of investment was a major factor in improved economic growth. Investment went from about 19 percent of GDP in the early 1970s to nearly 25 percent in the early 1980s. India, however, required a higher rate of investment to attain comparable economic growth than did most other low-income developing countries, indicating a lower rate of return on investments. Part of the adverse Indian experience was explained by investment in large, long-gestating, capital-intensive projects, such as electric power, irrigation, and infrastructure. However, delayed completions, cost overruns, and under-use of capacity were contributing factors. Private savings financed most of India's investment, but by the mid-1980s further growth in private savings was difficult because they were already at quite a high level. As a result, during the late 1980s India relied increasingly on borrowing from foreign sources (see Aid, this ch.). This trend led to a balance of payments crisis in 1990; in order to receive new loans, the government had no choice but to agree to further measures of economic liberalization. This commitment to economic reform was reaffirmed by the government that came to power in June 1991. India's primary sector, including agriculture, forestry, fishing, mining, and quarrying, accounted for 32.8 percent of GDP in FY 1991 (see table 17, Appendix). The size of the agricultural sector and its vulnerability to the vagaries of the monsoon cause relatively large
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fluctuations in the sector's contribution to GDP from one year to another (see Crop Output, ch. 7). In FY 1991, the contribution to GDP of industry, including manufacturing, construction, and utilities, was 27.4 percent; services, including trade, transportation, communications, real estate and finance, and public- and private-sector services, contributed 39.8 percent. The steady increase in the proportion of services in the national economy reflects increased market-determined processes, such as the spread of rural banking, and government activities, such as defense spending (see Agricultural Credit, ch. 7; Defense Spending, ch. 10). Despite a sometimes disappointing rate of growth, the Indian economy was transformed between 1947 and the early 1990s. The number of kilowatt-hours of electricity generated, for example, increased more than fiftyfold. Steel production rose from 1.5 million tons a year to 14.7 million tons a year. The country produced space satellites and nuclear-power plants, and its scientists and engineers produced an atomic explosive device (see Major Research Organizations, this ch.; Space and Nuclear Programs, ch. 10). Life expectancy increased from twenty-seven years to fifty-nine years. Although the population increased by 485 million between 1951 and 1991, the availability of food grains per capita rose from 395 grams per day in FY 1950 to 466 grams in FY 1992 (see Structure and Dynamics, ch. 2). However, considerable dualism remains in the Indian economy. Officials and economists make an important distinction between the formal and informal sectors of the economy. The informal, or unorganized, economy is largely rural and encompasses farming, fishing, forestry, and cottage industries. It also includes petty vendors and some small-scale mechanized industry in both rural and urban areas. The bulk of the population is employed in the informal economy, which contributes more than 50 percent of GDP. The formal economy consists of large units in the modern sector for which statistical data are relatively good. The modern sector includes large-scale manufacturing and mining, major financial and commercial businesses, and such public-sector enterprises as railroads, telecommunications, utilities, and government itself. The greatest disappointment of economic development is the failure to reduce more substantially India's widespread poverty. Studies have suggested that income distribution changed little between independence and the early 1990s, although it is possible that the poorer half of the population improved its position slightly. Official estimates of the proportion of the population that lives below the poverty line tend to vary sharply from year to year because adverse economic conditions, especially rises in food prices, are capable of lowering the standard of living of many families who normally live just above the subsistence level. The Indian government's poverty line is based on an income sufficient to ensure access to minimum nutritional standards, and even most persons above the poverty line have low levels of consumption compared with much of the world. Estimates in the late 1970s put the number of people who lived in poverty at 300 million, or nearly 50 percent of the population at the time. Poverty was reduced during the 1980s, and in FY 1989 it was estimated that about 26 percent of the population, or 220 million people, lived below the poverty line. Slower economic growth and higher inflation in FY 1990 and FY 1991 reversed this trend. In FY 1991, it was estimated that 332 million people, or 38 percent of the population, lived below the poverty line.
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Farmers and other rural residents make up the large majority of India's poor. Some own very small amounts of land while others are field hands, seminomadic shepherds, or migrant workers. The urban poor include many construction workers and petty vendors. The bulk of the poor work, but low productivity and intermittent employment keep incomes low. Poverty is most prevalent in the states of Orissa, Bihar, Uttar Pradesh, and Madhya Pradesh, and least prevalent in Haryana, Punjab, Himachal Pradesh, and Jammu and Kashmir. By the early 1990s, economic changes led to the growth in the number of Indians with significant economic resources. About 10 million Indians are considered upper class, and roughly 300 million are part of the rapidly increasing middle class. Typical middle-class occupations include owning a small business or being a corporate executive, lawyer, physician, white-collar worker, or land-owning farmer. In the 1980s, the growth of the middle class was reflected in the increased consumption of consumer durables, such as televisions, refrigerators, motorcycles, and automobiles. In the early 1990s, domestic and foreign businesses hoped to take advantage of India's economic liberalization to increase the range of consumer products offered to this market. Housing and the ancillary utilities of sewer and water systems lag considerably behind the population's needs. India's cities have large shantytowns built of scrap or readily available natural materials erected on whatever space is available, including sidewalks. Such dwellings lack piped water, sewerage, and electricity. The government has attempted to build housing facilities and utilities for urban development, but the efforts have fallen far short of demand. Administrative controls and other aspects of government policy have discouraged many private investors from constructing housing units. Liberalization in the Early 1990s Increased borrowing from foreign sources in the late 1980s, which helped fuel economic growth, led to pressure on the balance of payments. The problem came to a head in August 1990 when Iraq invaded Kuwait, and the price of oil soon doubled. In addition, many Indian workers resident in Persian Gulf states either lost their jobs or returned home out of fear for their safety, thus reducing the flow of remittances (see Size and Composition of the Work Force, this ch.). The direct economic impact of the Persian Gulf conflict was exacerbated by domestic social and political developments. In the early 1990s, there was violence over two domestic issues: the reservation of a proportion of public-sector jobs for members of Scheduled Castes (see Glossary) and the Hindu-Muslim conflict at Ayodhya (see Public Worship, ch. 3; Political Issues, ch. 8). The central government fell in November 1990 and was succeeded by a minority government. The cumulative impact of these events shook international confidence in India's economic viability, and the country found it increasingly difficult to borrow internationally. As a result, India made various agreements with the International Monetary Fund (IMF--see Glossary) and other organizations that included commitments to speed up liberalization (see United Nations, ch. 9). In the early 1990s, considerable progress was made in loosening government regulations, especially in the area of foreign trade. Many restrictions on private companies were lifted, and new areas were opened to private capital. However, India remains one of the world's most tightly regulated major economies. Many powerful vested interests, including private firms that have benefited from protectionism, labor unions, and much of the bureaucracy,
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oppose liberalization. There is also considerable concern that liberalization will reinforce class and regional economic disparities. The balance of payments crisis of 1990 and subsequent policy changes led to a temporary decline in the GDP growth rate, which fell from 6.9 percent in FY 1989 to 4.9 percent in FY 1990 to 1.1 percent in FY 1991. In March 1995, the estimated growth rate for FY 1994 was 5.3 percent. Inflation peaked at 17 percent in FY 1991, fell to 9.5 percent in FY 1993, and then accelerated again, reaching 11 percent in late FY 1994. This increase was attributed to a sharp increase in prices and a shortfall in such critical sectors as sugar, cotton, and oilseeds. Many analysts agree that the poor suffer most from the increased inflation rate and reduced growth rate
INDIA'S ECONOMIC REFORMS

The reform process in India was initiated with the aim of accelerating the pace of economic growth and eradication of poverty. The process of economic liberalization in India can be traced back to the late 1970s. However, the reform process began in earnest only in July 1991. It was only in 1991 that the Government signaled a systemic shift to a more open economy with greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of Government. The reforms of the last decade and a half have gone a long way in freeing the domestic economy from the control regime. An important feature of India's reform programme is that it has emphasized gradualism and evolutionary transition rather than rapid restructuring or "shock therapy". This approach was adopted since the reforms were introduced in June 1991 in the wake a balance of payments crisis that was certainly severe. However, it was not a prolonged crisis with a long period of non-performance. The economic reforms initiated in 1991 introduced far-reaching measures, which changed the working and machinery of the economy. These changes were pertinent to the following: Dominance of the public sector in the industrial activity Discretionary controls on industrial investment and capacity expansion Trade and exchange controls Limited access to foreign investment Public ownership and regulation of the financial sector The reforms have unlocked India's enormous growth potential and unleashed powerful entrepreneurial forces. Since 1991, successive governments, across political parties, have successfully carried forward the country's economic reform agenda. Reforms in Industrial Policy Industrial policy was restructured to a great extent and most of the central government industrial controls were dismantled. Massive deregulation of the industrial sector was done in order to bring in the element of competition and increase efficiency. Industrial licensing by the central government was almost abolished except for a few hazardous and environmentally sensitive industries. The list of industries reserved solely for the public sector -- which used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications and telecom equipment, minerals, oil, mining, air transport services and electricity generation and distribution was drastically reduced to three: defense
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aircrafts and warships, atomic energy generation, and railway transport. Further, restrictions that existed on the import of foreign technology were withdrawn. Reforms in Trade Policy It was realized that the import substituting inward looking development policy was no longer suitable in the modern globalising world. Before the reforms, trade policy was characterized by high tariffs and pervasive import restrictions. Imports of manufactured consumer goods were completely banned. For capital goods, raw materials and intermediates, certain lists of goods were freely importable, but for most items where domestic substitutes were being produced, imports were only possible with import licenses. The criteria for issue of licenses were non-transparent, delays were endemic and corruption unavoidable. The economic reforms sought to phase out import licensing and also to reduce import duties. Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1, 2001, almost exactly ten years after the reforms began, and that in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the United States. Financial sector reforms Financial sector reforms have long been regarded as an integral part of the overall policy reforms in India. India has recognized that these reforms are imperative for increasing the efficiency of resource mobilization and allocation in the real economy and for the overall macroeconomic stability. The reforms have been driven by a thrust towards liberalization and several initiatives such as liberalization in the interest rate and reserve requirements have been taken on this front. At the same time, the government has emphasized on stronger regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the prospects of systemic risks. Today the Indian financial structure is inherently strong, functionally diverse, efficient and globally competitive. During the last fifteen years, the Indian financial system has been incrementally deregulated and exposed to international financial markets along with the introduction of new instruments and products.
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Devaluation of the Rupee: Tale of Two Years, 1966 and 1991 Since its Independence in 1947, India has faced two major financial crises and two consequent devaluations of the rupee. These crises were in 1966 and 1991 and, as we plan to show in this paper, they had similar causes. Foreign exchange reserves are an extremely critical aspect of any countrys ability to engage in commerce with other countries. A large stock of foreign currency reserves facilitates trade with other nations and lowers transaction costs associated with international commerce. If a nation depletes its foreign currency reserves and finds that its own currency is not accepted abroad, the only option left to the country is to borrow from abroad. However, borrowing in foreign currency is built upon the obligation of the borrowing nation to pay back the loan in the lenders own currency or in some other hard currency. If the debtor nation is not credit-worthy enough to borrow from a private bank or from an institution such as the IMF, then the nation has no way of paying for imports and a financial crisis accompanied by devaluation and capital flight results. The destabilising effects of a financial crisis are such that any country feels strong pressure from internal political forces to avoid the risk of such a crisis, even if the policies adopted come at large economic cost. To avert a financial crisis, a nation will typically adopt policies to maintain a stable exchange rate to lessen exchange rate risk and increase international confidence and to safeguard its foreign currency (or gold) reserves. The restrictions that a country will put in place come in two forms: trade barriers and financial restrictions. Protectionist policies, particularly restrictions on imports of goods and services, belong to the former category and restrictions on the flow of financial assets or money across international borders are in the latter category. Furthermore, these restrictions on international economic activity are often accompanied by a policy of fixed or managed exchange rates. When the flow of goods, services, and financial capital is regulated tightly enough, the government or central bank becomes strong enough, at least in theory, to dictate the exchange rate. However, despite these policies, if the market for a nations currency is too weak to justify the given exchange rate, that nation will be forced to devalue its currency. That is, the price the market is willing to pay for the currency is less than the price dictated by the government. The 1966 Devaluation As a developing economy, it is to be expected that India would import more than it exports. Despite government attempts to obtain a positive trade balance, India has had consistent
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balance of payments deficits since the 1950s. The 1966 devaluation was the result of the first major financial crisis the government faced. As in 1991, there was significant downward pressure on the value of the rupee from the international market and India was faced with depleting foreign reserves that necessitated devaluation. There is a general agreement among economists that by 1966, inflation had caused Indian prices to become much higher than world prices at the pre-devaluation exchange rate. When the exchange rate is fixed and a country experiences high inflation relative to other countries, that countrys goods become more expensive and foreign goods become cheaper. Therefore, inflation tends to increase imports and decrease exports. Since 1950, India ran continued trade deficits that increased in magnitude in the 1960s. Furthermore, the Government of India had a budget deficit problem and could not borrow money from abroad or from the private corporate sector, due to that sectors negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply. In the long run, there is a strong link between increases in money supply and inflation and the data presented later in this paper support this link.
As the following tables show, growth of M1 and M2 were quite high during the 1960s and inflation was similarly high. Through restrictions on currency trading and convertibility as well as export subsidisation and quantitative restrictions on imports, India was able to maintain its unjustified exchange rate while experiencing inflation until 1966 when it faced a severe shortage of foreign reserves.
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As India continued to experience deficits in trade and the government budget, the country was aided significantly by the international community. In the period of 1950 through 1966, foreign aid was never greater than the total trade deficit of India except for 1958. Nevertheless, foreign aid was substantial and helped to postpone the rupees final reckoning until 1966. In 1966, foreign aid was finally cut off and India was told it had to liberalise its restrictions on trade before foreign aid would again materialise. The response was the politically unpopular step of devaluation accompanied by liberalisation. When India still did not receive foreign aid, the government backed off its commitment to liberalisation. According to T N Srinivasan, devaluation was seen as capitulation to external pressure which made liberalisation politically suspect (Srinivasan, pp 139). Two additional factors played a role in the 1966 devaluation. The first was Indias war with Pakistan in late 1965. The US and other countries friendly towards Pakistan, withdrew foreign aid to India, which further necessitated devaluation. In addition, the large amount of deficit spending required by any war effort also accelerated inflation and led to a further
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disparity between Indian and international prices. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest it has been in the period from 1965 to 1989 (Foundations, pp 195). The second factor is the drought of 1965/1966. The sharp rise in prices in this period, which led to devaluation, is often blamed on the drought, but in 1964/1965 there was a record harvest and still, prices rose by 10% (Bhatia, pp 35). The economic effects of the drought should not be understated, but the data show that the drought was a catalyst for, rather than a direct cause of, devaluation. Indias system of severe restrictions on international trade began in 1957 when the government experienced a balance of payments crisis. This crisis was caused by a current account deficit of over Rs 290 crore which necessitated India lowering its foreign exchange reserves (RBI Bulletin, July 1957, pp 638). The large current account deficit was largely a result of the Second Five-Year Plan which mandated higher imports, especially of capital goods. Exports in the year 1956-1957 stagnated while imports increased by Rs 325 crores from the previous year. Another factor behind the current account deficit was the increase in freight costs due to hostilities in West Asia. Unlike in 1966 and 1991, India did not explicitly devalue the rupee but instead accomplished what Srinivasan refers to as a de facto devaluation by imposing quantitative restrictions (QRs) on trade rather than imposing higher tariffs. The government used the method of QRs with varying levels of severity until the ImportExport Policy of 1985-1988. Periodically, when import prices reached a premium, the government would impose import tariffs in order to absorb the gains accruing to foreign exporters as a result of Indias import quotas. The second step the government took away from free trade came in 1962 when India began to subsidise exports in an effort to further narrow its consistent current account deficit. As import prices rose, the government began to impose tariffs to increase its revenue. Ultimately, in July 1966 India was forced by economic necessity to devalue the rupee and attempt to liberalise the economy to attract foreign aid. The drought of 1965/1966 harmed reform efforts as feeding those in drought-affected areas took political precedence over liberalising the economy. According to T N Srinivasan, the policies of export subsidisation and import tariffs adopted by the government between 1962 and 1966 were a de facto devaluation. Since they made imports more expensive and exports cheaper, these policies reduced some of the pressure on Indias balance of payments. Following the 1966 devaluation, the government initially liberalised its trade restrictions by reducing export subsidisation and import tariffs. These actions counteracted the devaluation to some extent but even taking these policies into consideration, there was still a net devaluation and, as the trade data above show, the devaluation did stimulate exports. In the resulting backlash against economic liberalisation, quantitative restrictions and export subsidies returned, albeit at lower than pre-1966 levels.
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The 1991 Devaluation

1991 is often cited as the year of economic reform in India. Surely, the governments economic policies changed drastically in that year, but the 1991 liberalisation was an extension of earlier, albeit slower, reform efforts that had begun in the 1970s when India relaxed restrictions on imported capital goods as part of its industrialisation plan. Then the Import-Export Policy of 1985-1988 replaced import quotas with tariffs. This represented a major overhaul of Indian trade policy as previously, Indias trade barriers mostly took the form of quantitative restrictions. After 1991, the Government of India further reduced trade barriers by lowering tariffs on imports. In the post-liberalisation era, quantitative restrictions have not been significant. While the devaluation of 1991 was economically necessary to avert a financial crisis, the radical changes in Indias economic policies were, to some extent, undertaken voluntarily by the government of P V Narasimha Rao. As in 1966, there was foreign pressure on India to reform its economy, but in 1991, the government committed itself to liberalisation and followed through on that commitment. According to Srinivasan and Bhagwati, Conditionality played a role, for sure, in strengthening our will to embark on the reforms. But the seriousness and the sweep of the reforms demonstrated that the driving force behind the reforms was equally our own conviction that we had lost precious time and that the reforms were finally our only option (IESI, pp 93). In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. At the end of 1990, the Government of India found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of imports. As in 1966, India faced high inflation, large government budget deficits, and a poor balance of payments position.
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Indias balance of payments problems began in earnest in 1985. Even as exports continued to grow through the second half of the 1980s, interest payments and imports rose faster so that India ran consistent current account deficits. Additionally, the governments deficit grew to an average of 8.2% of GDP. As in 1966, there was also an exogenous shock to the economy that led to a sharp worsening of the already precarious balance of payments situation. In the case of the 1991 devaluation, the Gulf War led to much higher imports due to the rise in oil prices. The trade deficit in 1990 was US $9.44 billion and the current account deficit was US $9.7 billion. Also, foreign currency assets fell to US $1.2 billion (RBI Bulletin, September 91, pp 905). However, as is the case with the Indo-Pakistan war of 1965 and the drought during the same period, Indias financial woes cannot be attributed exclusively to events outside of the control of the government. Since the Gulf War had international economic effects, there was no reason for India to be harmed more than other countries. Instead, it simply further destabilised an already unstable economic situation brought on by inflation and debt. In July of 1991 the Indian government devalued the rupee by between 18 and 19 percent. The government also changed its trade policy from its highly restrictive form to a system of freely tradable EXIM scrips which allowed exporters to import 30% of the value of their exports (Gupta, pp 73-74). In March 1992 the government decided to establish a dual exchange rate regime and abolish the EXIM scrip system. Under this 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-mandated rate (RBI Bulletin, January 1994, pp 40). In March 1993 the government then unified the exchange rate and allowed, for the first time, the rupee to float. From 1993 onward, India has followed a managed floating exchange rate system. Under the current managed floating system, the exchange rate is determined ostensibly by market forces, but the Reserve Bank of India plays a significant role in determining the exchange rate by selecting a target rate and buying and selling foreign currency in order to meet the target. Initially, the rupee was valued at 31.37 to one US dollar but the RBI has since allowed the rupee to depreciate against the dollar (RBI Bulletin, November 1994, pp 1485). What Went Wrong
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Clearly, there are many similarities between the devaluation of 1966 and 1991. Both were preceded by large fiscal and current account deficits and by dwindling international confidence in Indias economy. Inflation caused by expansionary monetary and fiscal policy depressed exports and led to consistent trade deficits. In each case, there was a large adverse shock to the economy that precipitated, but did not directly cause, the financial crisis. Additionally, from Independence until 1991, the policy of the Indian government was to follow the Soviet model of foreign trade by viewing exports as a necessary evil whose sole purpose was to earn foreign currency with which to purchase goods from abroad that could not be produced at home. As a result, there were inadequate incentives to export and the Indian economy missed out on the gains from comparative advantage. 1991 represented a fundamental paradigm shift in Indian economic policy and the government moved toward a freer trade stance. It is easy in retrospect to fault the governments policies for leading to these two major financial crises, but it is more difficult to convincingly state what the government should have done differently that would have averted the crises. One relatively non-controversial target for criticism is the tendency of the Indian government since Independence towards large budget deficits. Basic macroeconomic theory tells us that the current account deficit is roughly equal to the sum of government and private borrowing. Given the fact that the household saving rate in India is quite high, most of the blame for Indias balance of payments problems must rest with the government for its inability to control its own spending. By borrowing from the Reserve Bank of India and, therefore, essentially printing money, the government could finance its extravagant spending through an inflation tax. Additionally, the large amounts of foreign aid that flowed into India clearly did not encourage fiscal or economic responsibility on the part of the government. In 1966, the lack of foreign aid to India from developed countries could not persuade India to liberalise and in fact further encouraged economic isolation. In 1991, on the other hand, there was a political will on the part of the government to pursue economic liberalisation independent of the threats of aid reduction. These two financial episodes in Indias modern history show that engaging in inflationary economic policies in conjunction with a fixed exchange rate regime is a destructive policy. If India had followed a floating exchange rate system instead, the rupee would have been automatically devalued by the market and India would not have faced such financial crises. A fixed exchange rate system can only be viable in the long run when there is no significant long-run inflation. Chronology of Indias exchange rate policies 1947 (When India became member of IMF): Rupee tied to pound, Re 1 = 1 s, 6 d, rate of 28 October, 1945 18 September, 1949: Pound devalued; India maintained par with pound 6 June, 1966: Rupee is devalued, Rs 4.76 = $1, after devaluation, Rs 7.50 = $1 (57.5%) 18 November, 1967: UK devalued pound, India did not devalue August 1971: Rupee pegged to gold/dollar, international financial crisis 18 December, 1971: Dollar is devalued 20 December, 1971: Rupee is pegged to pound sterling again 1971-1979: The Rupee is overvalued due to Indias policy of import substitution
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23 June, 1972: UK floats pound, India maintains fixed exchange rate with pound 1975: India links rupee with basket of currencies of major trading partners. Although the basket is periodically altered, the link is maintained until the 1991 devaluation. July 1991: Rupee devalued by 18-19 % March 1992: Dual exchange rate, LERMS, Liberalised Exchange Rate Management System March 1993: Unified exchange rate: $1 = Rs 31.37 1993/1994: Rupee is made freely convertible for trading, but not for investment purposes
THE GOALS OF FIVE YEAR PLANS

A plan should have some clearly specified goals. The goals of the five year plans are: growth, modernisation, self-reliance and equity. This does not mean that all the plans have given equal importance to all these goals. Due to limited resources, a choice has to be made in each plan about which of the goals is to be given primary importance. Nevertheless, the planners have to ensure that, as far as possible, the policies of the plans do not contradict these four goals. Let us now learn about the goals of planning in some detail. Growth: It refers to increase in the countrys capacity to produce the output of goods and services within the country. It implies either a larger stock of productive capital, or a larger size of supporting services like transport and banking, or an increase in the efficiency of productive capital and services. A good indicator of economic growth, in the language of economics, is steady increase in the Gross Domestic Product (GDP). The GDP is the market value of all the goods and services produced in the country during a year. You can think of the GDP as a cake: growth is increase in the size of the cake. If the cake is larger, more people can enjoy it. It is necessary to produce more goods and services if the people of India are to enjoy (in the words of the First Five Year Plan) a more rich and varied life. The GDP of a country is derived from the different sectors of the economy, namely the agricultural sector, the industrial sector and the service sector. The contribution made by each of these sectors makes up the structural composition of the economy. In some countries, growth in agriculture contributes more to the GDP growth, while in some countries the growth in the service sector contributes more to GDP growth (see Box 2.4).
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Modernisation: To increase the production of goods and services the producers have to adopt new technology. For example, a farmer can increase the output on the farm by using new seed varieties instead of using the old ones. Similarly, a factory can increase output by using a new type of machine. Adoption of new technology is called modernisation. However, modernisation does not refer only to the use of new technology but also to changes in social outlook such as the recognition that women should have the same rights as men. In a traditional society, women are supposed to remain at home while men work. A modern society makes use of the talents of women in the work place in banks, factories, schools etc. and such a society will be more civilised and prosperous. Self-reliance: A nation can promote economic growth and modernisation by using its own resources or by using resources imported from other nations. The first seven five year plans gave importance to self-reliance which means avoiding imports of those goods which could be produced in India itself. This policy was considered a necessity in order to reduce our dependence on foreign countries, especially for food. It is understandable that people who were recently freed from foreign domination should give importance to self-reliance. Further, it was feared that dependence on imported food supplies, foreign technology and foreign capital may make Indias sovereignty vulnerable to foreign interference in our policies. Equity: Now growth, modernisation and self-reliance, by themselves, may not improve the kind of life which people are living. A country can have high growth, the most modern technology developed in the country itself, and also have most of its people living in poverty. It is important to ensure that the benefits of economic prosperity reach the poor sections as well instead of being enjoyed only by the rich. So, in addition to growth, modernisation and self-reliance, equity is also important: every Indian should be able to meet his or her basic needs such as food, a decent house, education and health care and inequality in the distribution of wealth should be reduced.
ACHIEVEMENTS OF FIVE YEAR PLANNING

1) Increase in National Income: During planning period national income has increased manifold. The average annual increase in national income was registered to be 1.2 percent from 1901 to 1947. This increase was recorded to be 3 percent in two decades i.e. 1950-70. Moreover, average annual growth rate of national income was 4 per cent in 1970-80 which, further, increased to 5 percent in 1980-90. From 1980-81 to 2000-01, it increased to 5.8 per cent. Thus, a rise in national income has been key indicator for economic development of India. 2. Increase in Per Capita Income: Before independence, increase in per capita income was almost zero. But after the adoption of economic planning in free India, per capita income has continuously been increased. In the first plan, it raised .by 1.8 per cent and in Second Plan, it was 2.0 per cent.
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During Third Plan, it declined to (-) 6.8 per cent. In Three annual plans, growth of per capita income was registered at 1.5 per cent. In Fourth Plan, it came down to 1.0 per cent. In Fifth Plan, it was 2.7 per cent. During Sixth and Seventh Plan, it was 3.2 per cent and 3.6 per cent respectively. In Eighth Plan, it rose to 4.6 per cent. In 2000-01, its rise was registered at 4.9 at 1993-94 prices. 3. Development in Agriculture: Agricultural productivity has also marked an upward trend during the plan period. The production of food grains which has 510 lakh tonnes in 1950-51 increased to 1804 lakh tonnes in 1990-91 and further to 212.0 million tonnes in 2000-01. Similarly, the production of cotton which was 21 lakh bales in 1950-51 was expected to be 10.1 million bales in 2000-01. In the same period, the production of sugarcane was expected to be 300.1 lakh tonnes in 2000-01 against the 69 lakh in 1950-51. Thus, agriculture production during planning period has increased. During the entire planning period, growth rate of agricultural production remained 2.8 per cent per annum. However, use of chemical fertilizer, better seeds, irrigation and improved methods of cultivation has increased productivity per hectare and per worker many times. This development has laid the foundation of green revolution and other institutional changes in agriculture sector. 4. Development of Industry: In the first five year plan much of the capital was invested to develop the industry and defence. About fifty percent of the total outlay of the plan was invested for their development. As a result, industrial production increased to a great extent. For instance, the production of cotton cloth which was 4210 million sq. meters in 1950-51 increased to 18989 million sq. metres in 1999-2000. The production of finished steel increased to 31.1 million tonnes in 2001-02 from 10 lakh tonnes in 1950-51. In the same fashion, the production of coal was recorded to be 3226 million tonnes in 2001-02 against the 323 million tonnes in 1950-51. 5. Development of Transport and Communication: During the planning period, much attention has been paid towards the development of transport and communication. In the first two plans, more than one-fourth of the total outlay was invested on the development of transport and communication. In 1990-91, the total length of roads increased to 1024.4 thousand kms from 157.0 thousand km. However, further it increased to 1448.6 thousand km in 1998-99. In order to encourage trade goods rail was developed. 6. Self Reliance:
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During the last four decades, considerable progress seems to have been made towards the achievement of self reliance. We are no longer dependent on other countries for the supply of food grains and a number of agricultural crops. In the same fashion, we have made substantial investment in basic and heavy industries. We are in a position to produce all varieties of basic consumer goods. 7. Employment: During the planning period, many steps have been taken to increase the employment opportunities in the country. In the first five year plan employment opportunities to 70 lakh people were provided. In the fourth and fifth plans about 370 lakh persons got employment. In the seventh five year plan, provisions have been made to provide employment to 340 lakh people. 8. Development of Science and Technology: In the era of planning, India has made much progress in the field of science and technology. In reality, the development is so fast that India stands third in the world in the sphere of science and technology. Indian engineers and scientists are in a position that they can independently establish any industrial venture. 9. Capital Formation: In India due to the development of agriculture, industry and defence, the rate of capital formation has also increased. In 1950-51, the rate of capital formation was 11.5 percent. The rate of capital formation during Second, Third and Fourth plan was 12.7 per cent, 13.5 per cent and 14.5 per cent respectively. It was 24.1 per cent in seventh plan and 26 per cent in Eighth plan and 24 percent in Ninth Flan. 10. Social Services: Social services, like, education, health and medical facilities, I family planning and the like have also expanded considerably. As a result of these services: (i) Death rate reduced from 27 per thousand in 1951 to 8 per thousand in 2000-01. (ii) Average life-expectancy increased from 32 years in 1951 to 638 in 2000-01. (iii) Several deadly diseases like malaria etc. have been eradicated, (iv) The number of school going students has increased three-fold and that of collegiate five-fold since 1951. The number of annual admissions to degree courses in Engineering Colleges increased from 7100 in 1950 to 1, 33,000 and the number of universities increased from 27 to 254 by now. (v) A chain of National Laboratories and Research Centers has been set up across the country. (vi) Number of hospital-beds, doctors, nurses, medicines and family planning clinics and medical facilities has greatly increased. Number of hospitals and dispensaries has increased to 68396. Now there is one doctor per 5.2 per ten thousand.
WEAKNESS OF FIVE-YEAR PLAN

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The weakness of five year plan is as follows: 1. Stagnant Economy: When India was freed, it had deep marks of stagnation. During the phase of forty years of economic planning, its growth rate is zero or near zero. According to one estimate, growth of national income was about 1.15 per cent during 1950 to 1980 per year and growth of per capita income was at less than 0.5 percent. Similar trend has been noticed after the adoption of plans. This fact is also reflected from the national income by industrial origin. The occupational structure also provides gloomy picture as more than 70 per cent people are still engaged in agriculture sector. 2. Poverty: These five year plans have miserably failed to make a dent on poverty as 40 per cent of population is still in tight grip of poverty. Poverty is greatly responsible for poor diets, low health and poor standard of living. A proportion of the population has to go even without the most essential needs of daily life. In short, both underdevelopment and inequality are responsible for poverty in the country. 3. Unequal Distribution of Income and Wealth: Another failure of the planning is that the distribution of income and other assets in rural and urban areas continues to be skewed. The bulk of increased income has been pocketed only by the rich few while weaker section of the society lives from hand to mouth and lead a very miserable life. There is no second opinion to say that 2 per cent people of this country possessed 98 per cent wealth. 4. Mounting Unemployment: The unemployment is a constant threat to the social atmosphere of the country as they resort to various unlawful activities. According to 30th round of the N.S.S. Survey, in March 1985, in the age groups of 5 these were only 9.20 million, in the age groups of 15 they were 8.77 million and in the age groups of 15 to 59, there were 8.67 million unemployed. The pitiable position is found in rural areas where disguised unemployment and white collar unemployment (educated unemployment) in urban areas are in a deplorable position. The rising unemployment may be attributed to galloping population, capital intensive techniques, defective j education system and unstable agriculture. 5. Abnormal Growth of Population: In all plans, main objective was to check over-population but it has miserably failed to bridge the galloping population. The rapid growth of population has aggravated the situation to the worst. This problem gives birth to twin problems of poverty and unemployment. 6. Inflationary Pressure:
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Inflation has started with the onset of heavy doses of investment programmes during different five year plan periods. Now, it turned to the gravity of the problem as it has created serious imbalances in the socio-political and economic relations. The people with fixed income group find it extremely difficult to maintain the standard of living. Abnormal rise in prices has generated other problems of corruption, black marketing, dishonesty and immorality etc. 7. Adverse Balance of Payments: Truly, the production of agricultural and industrial sector has increased manifold but still we are dependent on imports. In our plans, we have stressed on export promotion and import substitution to correct the adverse balance of payments but no headway has been made in this direction. It has continuously been un favourable. The situation has further deteriorated since the penultimate year of the Sixth Five Year Plan. The situation in Seventh Plan has not improved rather it is still dismal. During nineties also, position of external debt is not encouraging. 8. Unproductive Expenditure: India is deficient in capital due to rising expenditure on unproductive channels. Moreover, huge investments are made on the construction of five star hotels and other wasteful consumption. Its benefits go in the hands of few affluent people where generally wealth concentrates. Consequently, the rich becomes rich and the poor lag behind. 9. Huge Amount of Deficit Financing: To mobilize the resources for different plans, government has absolutely failed to manage from internal resources. The government at this time is left with no alternative but deficit financing. At every successive plan, there is huge amount of deficit finance. From 1950-51 to 1984-85 total amount of deficit financing in the country was Rs. 24,440 crores. During Seventh Plan, it was proposed to be Rs. 14,000 crores and Rs. 18,000 crore in Eighth Plan. 10. Biased Growth Profile: At last, Indian plans have given many evils like the growth of monopolistic practices, large inequalities, and poverty but still it has delivered biased growth in favour of more well to do section of the society. It has widened the gap between man to man, region to region. The result is that a large many are below poverty line.
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FIRST FIVE YEAR PLAN (1951-55)

Total budget: 206.8 billion (INR) or USD$23.6 billion. Target Growth: 2.1% Growth Achieved: 3.6%
OBJECTIVES the standard of living Community and agriculture development Energy and irrigation Communications and transport Industry Land rehabilitation
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Social services
ACHIEVEMENTS GDP 3.6% per year Evolution of good irrigation system improvement in -roads -civil aviation - railways -Telegraphs - posts -manufacture of fertilizers -electrical equipment
Industries under 1st five year plan : No special efforts were maid. Attempts were laid down for future industrial growth. Many new industries were set up viz. Sindri fertilizer factory Hindustan machine tools limited Indian telephone industry etc. Importance of small scale industries were fully recognized. Production of saris ,dhotis, sport goods etc. were reserved for small scale industries in order to reduce competition. Increase excise duty on large scale factories. Growth rate of industrial sector was: 7.5% per annum.
DISADVANTAGES
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development of only a few industries private industry had not developed
The primary aim of the 1st five year plan was to improve living standards of the people of India. This could be done by making judicious use of Indias natural resources. The total outlay of the 1st five year plan was worth Rs.2, 069 crore. This amount was assigned to different sectors which included: Industrial sector Energy, Irrigation Transport, Communications Land rehabilitation Social services Development of agriculture and community Miscellaneous issues The target set for the growth in the gross domestic product was 2.1percent every year. In reality, the actual achieved with regard to gross domestic product was 3.6 percent per annum. This is a clear indication of the success of the 1st five year plan. Some important events that took place during the tenure of the 1st five year plan: The following Irrigation projects were started during that period: Mettur Dam Hirakud Dam Bhakra Dam. The government had taken steps to rehabilitate the landless workers, whose main occupation was agriculture. These workers were also granted fund for experimenting and undergoing training in agricultural know how in various cooperative institutions. Soil conservation, was also given considerable importance. The Indian government also made considerable effort in improving posts and telegraphs, railway services, road tracks, civil aviation. Sufficient fund was also allocated for the industrial sector. In addition measures were taken for the growth of the small scale industries.
SECOND FIVE YEAR PLAN (1956-1961)

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Total budget: Rs. 4,800 crore

Target Growth:4.5% Growth achieved:4.0%
OBJECTIVES To increase by 25% the national income To make the country more industrialized To increase employment opportunities so that every citizen gets a job Development of -Mining and industry -Community and agriculture development -Power and irrigation -Social services -Communications and transport -Miscellaneous
ACHIEVEMENTS 5 steel plants a hydro-electric power project production of coal increased more railway lines Land reform measures improved the living standards of the people The large enterprises in seventeen industries were nationalized
Industries under Second five year plan: Significant for industrial growth.
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Plan was based on MAHALANOBIS MODEL and aimed at developing basic industries. Acc. to industrial plan 1956, most of the capital goods industries were developed and set up during this period. New steels plants at bhilai, durgapur, rourkrla were set up. Fertilizer factory at nangal, DDT factory at Kerala were set up. 938 rupees for large scale industries and rupees 187 were spent on the development of small scale industries. Foundation was further strengthened by laying strength on small scale and village industries.
DISADVANTAGES eliminate the importation of consumer goods high tariffs Low quotas or banning some items altogether License were required for starting new companies This is when India got its License Raj, the bureaucratic control over the economy When a business was losing money the Government would prevent them from shutting down
The second five-year plan focused on industry, especially heavy industry. Unlike the First plan, which focused mainly on agriculture, domestic production of industrial products was encouraged in the Second plan, particularly in the development of the public sector. The plan followed the Mahalanobis model, an economic developmentmodel developed by the Indian statistician Prasanta Chandra Mahalanobis in 1953. The plan attempted to determine the optimal allocation of investment between productive sectors in order to maximise longrun economic growth. It used the prevalent state of art techniques of operations research and optimization as well as the novel applications of statistical models developed at the Indian Statistical Institute. The plan assumed a closed economy in which the main trading activity would be centered on importing capital goods. Hydroelectric power projects and five steel mills at Bhilai, Durgapur, and Rourkela were established. Coal production was increased. More railway lines were added in the north east.
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The Atomic Energy Commission was formed in 1958 with Homi J. Bhabha as the first chairman. The Tata Institute of Fundamental Research was established as a research institute. In 1957 a talent search and scholarship program was begun to find talented young students to train for work in nuclear power.
THIRD FIVE YEAR PLAN (1961-1966)

Target Growth: 5.6% Actual Growth: 2.4%
OBJECTIVES More stress to agriculture subsidies Sufficient help Effective use of country's resources To increase the national income by 5% per year To increase the production of agriculture so that the nation is self sufficient in food grains To provide employment opportunities for every citizen of the country To establish equality among all the people of the country
ACHIEVEMENTS
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Decentralization Organizations formed -Panchayat -Zila Parishads
Laid emphasis on -oil conservation -irrigation -Afforestation
dry farming Many fertilizer and cement plants were built Green Revolution
Industries under Third Five Year Plan Objective-to expand heavy industries. Production capacity of many industries like iron and steel ,paper ,machine were expanded. Two new machine factories were set up; one at pinjore and hyderabad. Steel plant at bokaro, electric factory at haridwar ,tiruchirapalli were also set up.
DISADVANTAGES Sino Indian War, India witnessed increase in price of products. The resulting inflation
Many primary schools have been started in rural areas. In an effort to bring democracy to the grassroots level, Panchayat elections have been started and the stateshave been given more development responsibilities.State electricity boards and state secondary education boards were formed. States were made responsible for secondary and higher education. State road
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transportation corporations were formed and local road building became a state responsibility.
4th FIVE YEAR PLAN (1969 to 1974)

OBJECTIVES
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to reform and restructure govts expenditure agenda( defense became one major expense) To facilitated growth in exports To alter the socio economic structure of the society
ACHIEVEMENTS Great advancement has been made with regard to India's national income considered as one of the emerging powers served as a stepping stone for the economic growth Food grains production increased
Industries under Fourth Five Year Plan Fourth plan could not be started due to Indo-china war. Our economy was in acute shortage of funds. 3 annual plans were formulated. Industries was not given much importance. Emphasis was on green revolution.
DISADVANTAGES a gap was created between the people of the rural areas and those of the urban areas. Due to recession, famine and drought, India did not pay much heed to long term goals
During this time Indira Gandhi was the Prime Minister. The Indira Gandhi government nationalised 14 major Indian banks and the Green Revolution in India advanced agriculture. In addition, the situation in East Pakistan (now Bangladesh) was becoming dire as the Indo-Pakistani War of 1971 and Bangladesh Liberation War took Funds earmarked for the industrial development had to be diverted for the war effort. India also performed the Smiling Buddha underground nuclear test in 1974, partially in response to the United States deployment of the Seventh Fleet in the Bay of Bengal.
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FIFTH FIVE YEAR PLAN (1974 TO 1979)

Target Growth: 4.4% Actual Growth: 5.0
OBJECTIVES To reduce social, regional, and economic disparities To enhance agricultural productivity To check rural and urban unemployment To encourage self-employment Production support policies in the cottage industry sector To develop labor intensive technological improvements
ACHIEVEMENTS Food grain production was above 118 million tons due to the improvement of infrastructural facilities Bombay High had shot up the commercial production of oil in India
Industries under the Fifth Five Year Plan Attainment of self sufficiency, social justice. Accelerate the development of core industries. Development of export industries. Increase in supply of mass consumption goods. Control over production of unnecessary goods. Encouragement to village and small industries. Application of modern tech. Development of industrially backward regions.
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Growth rate:5.9% per annum.
DISADVANTAGES The international economy was in a trouble Food, oil, and fertilizers where prices sky-rocketed Several inflationary pressures The world economy was in a troublesome state This had a negative impact on the Indian economy Prices in the energy and food sector skyrocketed and as a consequence inflation became inevitable
Stress was by laid on employment, poverty alleviation, and justice. The plan also focused on self-reliance in agricultural production and defence. In 1978 the newly elected Morarji Desai government rejected the plan. Electricity Supply Act was enacted in 1975, which enabled the Central Government to enter into power generation and transmission. The Indian national highway system was introduced and many roads were widened to accommodate the increasing traffic. Tourism also expanded.
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SIXTH FIVE YEAR PLAN (1980 to1985)

OBJECTIVES To improve productivity level To initiate modernization for achieving economic and technological self-reliance To control poverty and unemployment To develop indigenous energy sources and efficient energy usage To promote improved quality of life of the citizens To introduce Minimum Needs Program for the poor To initiate Family Planning
ACHIEVEMENTS Speedy industrial development Emphasis on the information technology sector self sufficiency in food
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science and technology also made a significant advance several successful programs on improvement of public health government in the Indian healthcare sector Government investments in the Indian healthcare sector
Industries under Sixth Five Year Plan Optimum utilizations of existing capacity and increase productivity. To pay special attention to smaller industries. To realize the need of superior technique. To meet the energy needs of industries. Development of backward region.
DISADVANTAGES During this time the Prime Minister was Rajiv Gandhi and hence industrial development was the emphasis of this plan some opposed it specially the communist groups, this slowed down the pace of progress
The sixth plan also marked the beginning of economic liberalisation. Price controls were eliminated and ration shops were closed. This led to an increase in food prices and an increase in the cost of living. This was the end of Nehruvian socialism and Rajeev Gandhi was prime minister during this period. Family planning was also expanded in order to prevent overpopulation. In contrast to China's strict and binding one-child policy, Indian policy did not rely on the threat of force. More prosperous areas of India adopted family planning more rapidly than less prosperous areas, which continued to have a high birth rate. The sixth five year plan was a great success.
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SEVENTH FIVE YEAR PLAN (1985 to 1989)

OBJECTIVES Anti-poverty program Improved facilities for education to girls The government undertook to increase productivity of Oilseeds,Fruits,Vegetables Pulses,cereals,Fish
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Egg,Meat,milk. Communications Emergence of informatics, and hooking up of telecommunications with computers Transport inland waterways, product pipelines, civil aviation, coastal shipping
ACHIEVEMENTS Social Justice Removal of oppression of the week Using modern technology Agricultural development Anti-poverty programs Full supply of food, clothing, and shelter Increasing productivity of small and large scale farmers Making India an Independent Economy
Industries under Seventh Five Year Plan In 1991,new industrial policies were announcedIts main features were: 1.Liberalisation 2.Privitisation 3.Globlisation
They are popularly known as LPG.
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DISADVANTAGES 1989-91 was a period of political instability in India and hence no five year plan was implemented In 1991, India faced a crisis in foreign exchange(Forex) reserves
The Seventh Plan marked the comeback of the Congress Party to power. The plan laid stress on improving the productivity level of industries by upgrading of technology. The main objectives of the 7th five-year plans were to establish growth in areas of increasing economic productivity, production of food grains, and generating employment. As an outcome of the sixth five-year plan, there had been steady growth in agriculture, control on rate of Inflation, and favourable balance of payments which had provided a strong base for the seventh five Year plan to build on the need for further economic growth. The 7th Plan had strived towards socialism and energy production at large. The thrust areas of the 7th Five year plan have been enlisted below:

Removal of oppression of the weak Using modern technology Agricultural development Anti-poverty programs Full supply of food, clothing, and shelter Increasing productivity of small- and large-scale farmers Making India an Independent Economy
Based on a 15-year period of striving towards steady growth, the 7th Plan was focused on achieving the pre-requisites of self-sustaining growth by the year 2000. The Plan expected a growth in labour force of 39 million people and employment was expected to grow at the rate of 4 percent per year. Some of the expected outcomes of the Seventh Five Year Plan India are given below:

Balance of Payments (estimates): Export 33,000 crore (US$6 billion), Imports (54,000 crore (US$9.8 billion), Trade Balance (-) 21,000 crore (US$3.8 billion) Merchandise exports (estimates): 60,653 crore (US$11 billion) Merchandise imports (estimates): 95,437 crore (US$17.4 billion) Projections for Balance of Payments: Export 60,700 crore (US$11 billion), Imports (-) 95,400 crore (US$17.4 billion), Trade Balance- (-) 34,700 crore (US$6.3 billion)
Under the Seventh Five Year Plan, India strove to bring about a self-sustained economy in the country with valuable contributions from voluntary agencies.
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EIGHTH FIVE YEAR PLAN (19921997)

OBJECTIVES Prioritize the specific sectors which requires immediate investment To generate full scale employment Promote social welfare measures like improved healthcare, sanitation, communication and provision for extensive education facilities at all levels To check the increasing population growth by creating mass awareness programs To encourage growth and diversification of agriculture To strengthen the infrastructural facilities To place greater emphasis on role of private initiative in the development of the industrial sector
ACHIEVEMENTS Rise in the employment level Poverty reduction Self-reliance on domestic resources Self-sufficiency in agricultural production
Industries under the Eighth Five Year Plan In this plan, investment on industries were more than agriculture. Private sector was given more importance than public sector. Foreign companies were given important role.
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Emphasis was on promoting exports of industrial goods. Emphasis on modernisation and renovation. Licensing was liberalized.
198991 was a period of economic instability in India and hence no five-year plan was implemented. Between 1990 and 1992, there were only Annual Plans. In 1991, India faced a crisis in Foreign Exchange (Forex) reserves, left with reserves of only about US$1 billion. Thus, under pressure, the country took the risk of reforming the socialist economy. P.V. Narasimha Rao was the twelfth Prime Minister of the Republic of India and head of Congress Party, and led one of the most important administrations in India's modern history overseeing a major economic transformation and several incidents affecting national security. At that time Dr. Manmohan Singh (currently, Prime Minister of India) launched India's free market reforms that brought the nearly bankrupt nation back from the edge. It was the beginning of privatisation and liberalisation in India. Modernization of industries was a major highlight of the Eighth Plan. Under this plan, the gradual opening of the Indian economy was undertaken to correct the burgeoning deficit and foreign debt. Meanwhile India became a member of the World Trade Organization on 1 January 1995.This plan can be termed as Rao and Manmohan model of Economic development. The major objectives included, controlling population growth, poverty reduction, employment generation, strengthening the infrastructure, Institutional building, tourism management, Human Resource development, Involvement of Panchayat raj, Nagar Palikas, N.G.O'S and Decentralisation and people's participation. Energy was given prioritywith 26.6% of the outlay. An average annual growth rate of 6.78% against the target 5.6]was achieved. To achieve the target of an average of 5.6% per annum, investment of 23.2% of the gross domestic product was required. The incremental capital ratio is 4.1.The saving for investment was to come from domestic sources and foreign sources, with the rate of domestic saving at 21.6% of gross domestic production and of foreign saving at 1.6% of gross domestic production.
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NINTH FIVE YEAR PLAN (1997 to 2002)

Target rate: 6.5% Actual rate: 5.35%
OBJECTIVES to prioritize rural development to generate adequate employment opportunities to stabilize the prices to ensure food and nutritional security to provide for the basic infrastructural facilities like education for all, safe drinking water, primary health care, transport, energy to check the growing population increase to encourage social issues like women empowerment to create a liberal market for increase in private investments
ACHIEVEMENTS A combined effort of public, private, and all levels of government ensured the growth of India's economy.
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Service sector showed fast growth rate
Industries under the Ninth Five Year Plan Private sector was given more importance than public sector. Development of backward areas. Laid special emphasis on foreign investment. More emphasis on modern tech., import of capital goods. Foreign equity was increased upto 100%.
Ninth Five Year Plan India runs through the period from 1997 to 2002 with the main aim of attaining objectives like speedy industrialization, human development, full-scale employment, poverty reduction, and self-reliance on domestic resources. Background of Ninth Five Year Plan India: Ninth Five Year Plan was formulated amidst the backdrop of India's Golden jubilee of Independence. The main objectives of the Ninth Five Year Plan of India are:

to prioritize agricultural sector and emphasize on the rural development to generate adequate employment opportunities and promote poverty reduction to stabilize the prices in order to accelerate the growth rate of the economy to ensure food and nutritional security. to provide for the basic infrastructural facilities like education for all, safe drinking water, primary health care, transport, energy to check the growing population increase to encourage social issues like women empowerment, conservation of certain benefits for the Special Groups of the society to create a liberal market for increase in private investments
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TENTH FIVE YEAR PLAN (2002-2007)

Target growth: 8.1% Growth achieved:7.7%
OBJECTIVES To transform the country into the fastest growing economy of the world targets an annual economic growth of 10% Human and social development The social net
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Industry and services: Industry,Minerals,Energy,Information technology,Tourism,Real estate,Construction,Internal trade Forests and environment Science and technology Special area programs schooling to be compulsory for children Reduction of poverty rate by 5 percentage points by 2007. Providing gainful and high-quality employment at least to the addition to the labour force. Reduction in gender gaps in literacy and wage rates by at least 50% by 2007. 20 point program was introduced.
Industries under The Tenth Five Year Plan Industries faced much stronger international competition. Relative role of public sector declined. The process of DISINVESTMENT has converted many public enterprises to the private one. Development of infrastructure to promote industries. R&D ,tech. upgradadtion were emphasized. SEZs were set up. Import duty on gold, diamond were removed.
ELEVENTH FIVE YEAR PLAN (2007-2012)

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Target growth: 8.33%
Growth achieved: 7.9%.
OBJECTIVES The eleventh plan has the following objectives: 1. Income & Poverty
Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12th Plan in order to double per capita income by 201617 Increase agricultural GDP growth rate to 4% per year to ensure a broader spread of benefits Create 70 million new work opportunities. Reduce educated unemployment to below 5%. Raise real wage rate of unskilled workers by 20 percent. Reduce the headcount ratio of consumption poverty by 10 percentage points.
2. Education
Reduce dropout rates of children from elementary school from 52.2% in 200304 to 20% by 201112 Develop minimum standards of educational attainment in elementary school, and by regular testing monitor effectiveness of education to ensure quality Increase literacy rate for persons of age 7 years or above to 85% Lower gender gap in literacy to 10 percentage point Increase the percentage of each cohort going to higher education from the present 10% to 15% by the end of the plan.
3.Health

Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per 1000 live births Reduce Total Fertility Rate to 2.1 Provide clean drinking water for all by 2009 and ensure that there are no slip-backs Reduce malnutrition among children of age group 03 to half its present level Reduce anaemia among women and girls by 50% by the end of the plan
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4.Women and Children Raise the sex ratio for age group 06 to 935 by 201112 and to 950 by 201617 Ensure that at least 33 percent of the direct and indirect beneficiaries of all government schemes are women and girl children Ensure that all children enjoy a safe childhood, without any compulsion to work
5. Infrastructure
Ensure electricity connection to all villages and BPL households by 2009 and round-theclock power. Ensure all-weather road connection to all habitation with population 1000 and above (500 in hilly and tribal areas) by 2009, and ensure coverage of all significant habitation by 2015 Connect every village by telephone by November 2007 and provide broadband connectivity to all villages by 2012 Provide homestead sites to all by 2012 and step up the pace of house construction for rural poor to cover all the poor by 201617
6. Environment
Increase forest and tree cover by 5 percentage points. Attain WHO standards of air quality in all major cities by 201112. Treat all urban waste water by 201112 to clean river waters. Increase energy efficiency by 20%
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TWELTH FIVE YEAR PLAN (2012-2017)
12th Five Year Plan of the Government of India (2012-17) is under drafting which aims at the growth rate at 9.56%. With the deteriorating global situation, the Deputy Chairman of the Planning Commission Mr Montek Singh Ahluwalia has said that achieving an average growth rate of 9 per cent in the next five years is not possible. The Final growth target has been set at 8% by the endorsement of plan at the National Development Council meeting held in New Delhi. "It is not possible to think of an average of 9 per cent (in 12th Plan). I think somewhere between 8 and 8.5 per cent is feasible, Mr Ahluwalia said on the sidelines of a conference of State Planning Boards and departments. The approached paper for the 12th Plan, approved last year, talked about an annual average growth rate of 9 per cent. When I say feasible...that will require major effort. If you dont do that, there is no God given right to grow at 8 per cent. I think given that the world economy deteriorated very sharply over the last year...the growth rate in the first year of the 12th Plan (2012-13) is 6.5 to 7 per cent. He also indicated that soon he would share his views with other members of the Commission to choose a final number (economic growth target) to put before the countrys NDC for its approval. Though the 12th Plan has taken off, it is yet to be formally approved. The Planning Commission has set a deadline of September for taking the approval of the National Development Council. The council is expected to meet after July subject to the convenience of the Prime Minister. Poverty The government intends to reduce poverty by 10 per cent during the 12th Five-Year Plan. Mr Ahluwalia said, We aim to reduce poverty estimates by 2 per cent annually on a sustainable basis during the Plan period. According to the Tendulkar methodology, the percentage of population below the poverty line was 29.8 per cent at the end of 2009-10. This number includes 33.8 per cent in the rural areas and 20.9 per cent in the urban areas.
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Main Objectives of Fiscal Policy In India

The fiscal policy is designed to achive certain objectives as follows :1. Development by effective Mobilisation of Resources The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by :1. Taxation : Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation. 2. Public Savings : The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises. 3. Private Savings : Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.
2. Efficient allocation of Financial Resources The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is
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designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable.
3. Reduction in inequalities of Income and Wealth Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society. 4. Price Stability and Control of Inflation One of the main objective of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by Reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc. 5. Employment Generation The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generates more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas. 6. Balanced Regional Development Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.
7. Reducing the Deficit in the Balance of Payment

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Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export. 8. Capital Formation The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.
9. Increasing National Income The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country. 10. Development of Infrastructure Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost. 11. Foreign Exchange Earnings Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. The objectives of fiscal policy such as economic development, price stability, social justice,
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etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used. Though there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and growth oriented one. The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.
Major challenges that India face in key areas of fiscal policy

Fiscal policy plays an increasingly important role in India. Decisions on fiscal policy, especially if properly synchronised with monetary policy, can help smoothen business cycles, ensure adequate public investment and redistribute incomes. The four main components of fiscal policy are: (i) Ependiture, budget reform (ii) Revenue ( particularly tax revenue) mobilization (iii) deficit containment/ financing and (iv) determining fiscal transfers from higher to lower levels of government. Fiscal policy works through both aggregate demand and aggregate supply channels. Changes in total taxes and public expenditure affect the level of aggregate demand in the economy, whereas, the structure of taxation and public expenditure affect, among others, the incentive to save and invest ( at home and abroad), take risks, and export and import goods and services.
Tax and Expenditure Profiles of India The pressures for high and growing government expenditure in developing countries are manifold. Because of their low per-capita incomes and high incidence of poverty, developing countries face an urgency to have high rates of economics growth. This places a strong burden on policy to ensure rapid economic growth whereas, at the same time, the limited efficacy of policy instruments and governance inadequacies imply that the effective scope for policy is constrained. This mismatch between expectations from and actual effectiveness of policy is particularly acute in developing countries, as compared to developed countries. In the former with the perpetual weakness of institutions to mobilize and direct savings, the role of the state is crucial in harnessing resources for development. With weak regulatory apparatus and imperfect market signals, the state plays an important, even dominant, role in allocating investment funds and in anti-poverty programs as well as in their design. Pressures for populism through price controls and the like are considerable.
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Fiscal Deficit Issues in India The exercise of fiscal policy in developing countries has its limits. The combination of low revenues and inelastic expenditures means that expenditures routinely, and even increasingly, outpace revenues. With poor credit and bond markets and downwardly inflexible fiscal expenditures, some of the financing of the resultant deficit spills over onto the external sector and the central bank. Given financing constraints many developing countries have to opt, to a considerable extent, on non-bond (monetary) financing of the deficit. This then establishes a direct links between fiscal policy and the monetary base of the central bank, blurs the distinction between fiscal and monetary policy and compromises central bank independence. If high public expenditure is financed by issuing government bonds there is a possibility of crowding out of private investment. By contrast, low and stable levels of the fiscal deficit by sending a positive message on a governments ability to service its debt, may attract private investors and reduce the risk of economic crises. This, in turn, yields further benefits in terms of higher rates of investment, growth, educational attainment, increased distributional equity and reduced poverty. If the link between fiscal deficits and monetary expansion were quantitatively strong, there would be a link between the fiscal deficit and inflation particularly if seignorage revenues were used to close the budgetary gap. However, in developing countries this association is weak. de Haan and Zelhorst (1990) and Easterly and Schmidt-Hebbel (1993) find a positive correlation between inflation and the fiscal deficit only when the inflation rate is high and there is a clear seignorage motive to get additional revenue from money creation. Even if fiscal deficits are sustainable these could impact on economies. Of particular interest to economists is the impact of fiscal deficits on the prospects for economic growth. The financing of fiscal deficits by reducing the amount of funds available for private investment, commonly known as crowding out could, it is argued, hurt the prospects for economic growth. A contrary view argues that public investment, irrespective of how it is financed, by building infrastructure and providing support services creates a more conducive climate for private investment and, hence, improves the prospects for economic growth. Ultimately, thus, whether public deficits impede or spur economic growth becomes an empirical question. In this context Adam and Bevan (2005) examine the relation between fiscal deficits and growth for a panel of 45 developing countries over the period 19701999. Public expenditure is permitted to be both growth enhancing as well as growth inhibiting and there are distortionary taxes in place. The government budget is not required to be balanced and fiscal deficits are permitted. It is shown that the impact of the deficit depends upon the mode of financing it. Deficits can be growth enhancing if financed by limited seigniorage but it is likely to be growth inhibiting if financed by domestic debt; and to have opposite flow and stock effects if financed by external loans at market rates. These opposite effects, in turn,
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define a threshold effect before attaining which fiscal deficit has growth enhancing effects and after which the effects of fiscal deficits are growth inhibiting.
Norms for Tax and Expenditure Reforms in India One of the principal aims of a meaningful tax/expenditure reforms policy would be to bolster the savings and investment rates in the economy in order to raise growth rates. A higher growth rate, it is widely accepted, is the best way to lower poverty over the medium term. Empirical evidence on the determinants of effects of savings among a panel consisting of both developed and developing countries presented by Loayza, Schmidt-Hebbel and Serven (2000a & b) indicates that most important determinant of savings is the level of per capita income and the rate of growth of the economy. This effect is particularly strong in developing countries. Thus raising the rate of savings and the rate of growth of the economy becomes a circular issue the higher the rate of savings the higher the rate of growth of the economy and the higher the rate of growth the higher the rate of savings at least at low absolute levels of per capita income. Their results also point to the possibility of incomplete Ricardian Equivalence. In other words, a given rise in public savings is accompanied by a less than commensurate drop in private savings. Had Ricardian equivalence obtained, consumers would realize that any increase in public expenditure would be paid for by taxes and adjust private saving commensurately. Since the prime determinant of the saving rate appears to be the level and rate of growth of per capita income, all tax-induced distortions that create inefficiencies and lower the potential rate of economic growth should be eliminated. Thus there is urgent need for tax reforms. The basic tenets of tax reform are well known and far too elaborate for a complete analysis to be attempted here. An important canon of tax reform is that as an economy develops reliance on indirect taxation, as a source of revenue should decline. This is because indirect taxes typically have an excess burden (or deadweight losses) associated with them (Jha 1998, chapter 13). Furthermore efficient indirect taxation (one that minimizes excess burden to the representative consumer, for example) can be quite regressive.1 One can make indirect taxes more progressive by sacrificing some amount of efficiency but the extent of the redistribution possible through such means is quite limited (Sah 1983). This principle applies to indirect taxes that are differentiated and distortionary. If, however, indirect taxes can be levied on final consumption alone it would be possible to avoid the taxinduced changes in relative prices that characterize production taxes such as excise duties.
Expenditure Reform Tax reforms should be complemented with appropriate adjustment of government expenditures. Typically this calls for reduction of current subsidies and augmentation of
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subsidies for well-defined capital projects. The impact of public expenditure is usually ascertained through an ex-post incidence analysis. The question typically asked, is given some tax or public expenditure: i) who pays or receives the benefits of public spending; ii) how much does everyone receive in accounting terms; iii) how much does everyone receive when taking into account behavioral responses to taxes or the free delivery of public services; iv) what are the indirect effects of the program. Such analyses enable the researcher to ascertain the actual distribution of the amount budgeted as a tax receipt or a public expenditure and helps decide whether public expenditures are worth their cost. A problem with this methodology is that only existing taxes or public programs may be analyzed. We must evaluate not what does exist but what might exist. This is the theme of benefit incidence analysis. Such analysis is marginal (because it should capture differences from the status quo) and behavioral (because of the need to generate counterfactuals).
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Reforms in the Indian Monetary Policy During 1990s

The Monetary policy of the RBI has undergone massive changes during the economic reform period. After 1991 the Monetary policy is disassociated from the fiscal policy. Under the reform period an emphasis was given to the stable macro economic situation and low inflation policy. The major changes in the Indian Monetary policy during the decade of 1990. 1. Reduced Reserve Requirements : During 1990s both the CashReserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) were reduced to considerable extent. The CRR was at its highest 15% plus and additional CRR of 10% was levied, however it is now reduced by 4%. The SLR is reduced form 38.5% to a minimum of 25%. 2. Increased Micro Finance : In order to strengthen the rural finance the RBI has focused more on the Self Help Group (SHG). It comprises small and marginal farmers, agriculture and non-agriculture labour, artisans and rural sections of the society. However still only 30% of the target population has been benefited. 3. Fiscal Monetary Separation : In 1994, the Government and the RBI signed an agreement through which the RBI has stopped financing the deficit in the government budget. Thus it has seperated the Monetary policy from the fiscal policy. 4. Changed Interest Rate Structure : During the 1990s, the interest rate structure was changed from its earlier administrated rates to the market oriented or liberal rate of interest. Interest rate slabs are now reduced up to 2 and minimum lending rates are abolished. Similarly, lending rates above Rs. Two lakh are freed. 5. Changes in Accordance to the External Reforms : During the 1990, the external sector has undergone major changes. It comprises lifting various controls on imports, reduced tariffs, etc. The Monetary policy has shown the impact of liberal inflow of the foreign capital and its implication on domestic money supply. 6. Higher Market Orientation for Banking : The banking sector got more autonomy and operational flexibility. More freedom to banks for methods of assessing working funds and other functioning has empowered and assured market orientation.
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Evaluation of the Monetary Policy in India During the reforms though the Monetary policy has achieved higher success in the Monetary policy, it is not free from limitation or demerits. It needs to be evaluated on a proper scale. 1. Failed in Tackling Budgetary Deficit : The higher level of the budget deficit has made the Monetary policy ineffective. The automatic monetization of the deficit has led to high Monetary expansion. 2. Limited Coverage : The Monetary policy covers only commercial banking system leaving other non-bank institutions untouched. It limits the effectiveness of the monitor policy in India. 3. Unorganized Money Market : In our country there is a huge size of the unorganized money market. It dose not come under the control of the RBI. Thus any tools of the Monetary policy dose not affect the unorganized money market making Monetary policy less affective. 4. Predominance of Cash Transaction : In India still there is huge dominance of the cash in total money supply. It is one of the main obstacles in the effective implementation of the Monetary policy. Because Monetary policy operates on the bank credit rather on cash. 5. Increase Volatility : As the Monetary policy has adopted changes in accordance to the changes in the external sector in India, it could lead to a high amount of the volatility. There are certain drawbacks in the working of the Monetary Policy in India. However, during the economic reforms it has got different dimensions.
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India Economy: Effects of the US Financial Crisis in India

It is often said that when the US sneezes the rest of the world catches a cold. This three-part series looks at how India, China, and Russia have been affected by the US financial crisis. Before we get into detail about how much this US problem is spreading globally, we should understand the severity of it and the possible consequences in the US. How sick is the US? Some have compared the situation in the US with the Great Depression of 1929, but this situation is far from a depression in fact its not even a recession. In the Great Depression there was no work and there was widespread poverty. People struggled through the winter with no heating and no food. We are not seeing such extensive suffering in the US. In the US, August 2008 unemployment figures were at 6.1%, according to the US Bureau of Labor Statistics. In the Great Depression unemployment was higher than 25%. The Commerce Department reported that GDP growth was at 2.8%, hardly indicative of a recession, although this was revised down from the 3.3% figure it projected a month ago. But one cannot ignore yesterdays 777 point drop in the Dow Jones Industrial Average after the $700 billion bailout plan failed to pass through Congress. These paper losses of more than a trillion dollars may be the sneeze that disrupts global markets. Even before this controversial rescue plan was shot down, Indian markets took a dive of their own on Monday 29 September. The stock market sank to an 18-month low and the rupee a 5-year low. The stock market dropped 5.3% to 12,595.75. According to Business Standard, vice-president of Karvy Stockbroking Ambareesh Baliga, said, We are advising our clients to stay away from trading till selling by Foreign Institutional investors(FIIs) stops. Also, there is no support to the markets from any domestic institution. While markets are below their fundamental levels, fear has gripped investors and there is panic selling. While US investors and consumers are concerned about who will foot the bill for this $700 billion plan, to Indian and non-US markets that doesnt matter. They just want it to happen so as to restore confidence and of course liquidity. Sify.com reported Jagannadham Thunuguntla, head of the Delhi-based SMC Group saying, "The first major point of nervousness is that the US bailout plan will now be in three tranches of $250 billion, then $100 billion and finally $350 billion and the second and third tranches will require further Congressional approval. This means effectively, only $250
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billion is now available for buying troubled assets of banks instead of $700 billion outright. This doesn't really solve the problem of liquidity." Crowds gathered outside the Bombay Stock Exchange to watch the markets drop, with many investors angry. Why should failure of the worlds most advanced financial system hurt individual Indian investors? But the fact remains that the Bush administration's failed economic policies as speaker of the House Nancy Pelosi described it, is everybodys business. Charles Cole, EconomyWatch.com
India: Economic Crisis Forces Businesses To Focus On The Poor In India, the economic crisis may actually be good news. During the salad days of the past decade, India's entrepreneurs grew fat selling gas guzzlers and palatial homes to the country's new rich, while ignoring the needs of the biggest segment of Indian consumers: the poor. It was an expatriate Indian, the University of Michigan's C.K. Prahalad, who first posited that there were millions to be made selling to the "bottom of the pyramid." Now that's starting to happen. The rich aren't buying, and Indian businessmen are finally starting to look at the teeming masses as something more than cheap labor. The result could be the solution of some of India's most persistent problems -- an abysmal housing shortage, chronic underemployment and an unsustainable rate of rural-urban migration, for instance. "The slowdown was a great thing to happen to India," affirmed management consultant Harish Bijoor, who said the downturn has encouraged companies to look beyond the "lowhanging fruit" in the urban market to the vast multitude of consumers in India's rural heartland -- which still accounts for more than two-thirds of the country's population and some 60 percent of its gross domestic product. "There are a whole slew of energy products, both solar and thermal, and cook stoves and all types of things, all of which are aimed at reducing fuel consumption or replacing traditional fuels," said Vijay Mahajan, founder of BASIX, a microfinance company that provides credit to more than a million poor customers. "And there's a whole slew of clean drinking water products. These have both health and economic benefits." The best example of the upside of the downturn, so far, comes from the real estate sector. Throughout the boom years, posh high rises were the name of the game in Indian real estate. But as the buyers for $200,000 to $1 million apartments have dried up and falling property values have left builders scrambling to finance the completion of existing projects, a dozenodd companies have begun to take interest in building housing for the nearly endless market represented by the urban poor. Led by Tata Housing's so-called "Nano homes," which will go for as little as $8,000, these ventures represent the entrance of respected business leaders into the low-income housing market, including figures like Jaithirth Rao (founder of outsourcing heavyweight Mphasis),
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Ramesh Ramanathan (founder of the citizen's action group Janaagraha) and established companies like Bangalore's CSC Constructions. The trust factor that these players bring has given this sector new viability, according to Subir Gokarn, chief economist at Crisil, the Indian arm of Standard & Poor's. "The focus on the base of the pyramid to create scale businesses was overdue," Jaithirth (Jerry) Rao said. "You can sell millions of homes in this category, whereas in the upscale category you can only sell tens of thousands." But real estate isn't the only sector where the financial crisis has had an unexpected upside for India's future. Almost every type of business -- from refrigerators to motorcycles to computers to mobile phones -- is now looking to the vast market represented by India's urban poor and the legions living in its villages. By increasing competition, this expansion lowers prices, connects the dispossessed to the broader economy and makes new, income-generating products affordable. "Telecom is a great example. The kind of price at which a rural poor person can now talk to their migrated family members and so on is incredible," said Mahajan. "That's all happened because of the penetration rush and price competition, and the same thing is beginning to happen in microfinance, it's beginning to happen in solar energy. The volumes attract new suppliers and as more suppliers come in, then competition sets in, and it's a win-win for all sides." The push to widen the footprint of broadband internet and boost the average revenue per user from low-income mobile subscribers, for instance, has put more muscle behind the networkbased computing devices like Novatium's NetPC -- which provides a computer, broadband access, software and support to consumers for a bundled price as low as $25 a month. Recently Airtel, India's largest integrated telecommunications company, launched a similar service, while Nokia has rolled out its Nokia Life Tools range of agriculture, education and entertainment services for consumers in small towns and rural areas. Samsung has launched Solar Guru, a solar-powered mobile phone. The sales network for fast-moving consumer goods and products like motorcycles and refrigerators is also expanding into the rural hinterland. Motorcycle maker Hero Honda, for instance, has boosted its "touch points" in rural areas from 2,000 in 2006 to 3,500 in 2008, while Godrej Consumer Products Ltd. will appoint 1,500 wholesalers in small towns and villages this year, up from 500 last year. Eventually, Godrej plans a presence in 50,000 of India's 650,000 villages. And the impact of this expansion on Indian villagers goes beyond simply being able to buy a greater range of products closer to home. With the purchase of a motorcycle or mobile phone, for instance, a rural Indian gets much more than a leg up on the Kapurs next door. He gets a "prosperity creator" that connects him to the job market 28 miles away, said Bijoor. Next on the docket: clean drinking water, cheap electricity, basic healthcare and other bottom of the pyramid products and services that may attract the attention of big firms, as marketers "rob the rich" for premium products so they can also sell basic necessities to the poor. "It's a Robin Hood marketing which is going to capture the hearts and the emotive imaginations of the largest numbers of consumers in this country," Bijoor said.
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ECONOMY OF CHINA
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OVERVIEW: China is second to the US in the value of services it produces. Still, per capita income is below the world average. The Chinese government faces numerous economic challenges, including: (a) reducing its high domestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy's rapid transformation. Economic development has progressed further in coastal provinces than in the interior, and by 2011 more than 250 million migrant workers and their dependents had relocated to urban areas to find work. In 2010-11, China faced high inflation resulting largely from its credit-fueled stimulus program. Some tightening measures appear to have controlled inflation, but GDP growth consequently slowed to near 9% for 2011. The government's 12th Five-Year Plan, adopted in March 2011, emphasizes continued economic reforms and the need to increase domestic consumption in order to make the economy less dependent on exports in the future. FISCAL POLICY: New figures out last week showed that the pace of growth for Chinas fiscal revenues slowed sharply by almost 50 percent in 2012. More public projects were in need of cash injections last year, which further widened the fiscal deficit of the worlds second largest economy. Chinas fiscal deficit reached a ten-year high of 850 billion yuan in 2012, breaching the governments target of 800 billion yuan. The countrys financial position has now been in the red for five years in a row. A lagging fiscal income and higher government spending widened the deficit, with education, public housing and the pension system still in need of large cash injections. However, experts say the slowdown of Chinas growth has also brought down the fiscal revenue. Chinas fiscal deficit equals 1.5 percent of its GDP, which, experts say, is still far away from the financial cordon of 3 percent in GDP, and the situation is much better than some of the developed economies. But experts also note that a runaway fiscal deficit is one of the key factors that triggered the eurozone debt crisis, and that China has to learn from that. State-owned Bank of Communications estimate that Chinas fiscal budget deficit may hit a new high of 1.2 trillion yuan in the 2013 fiscal year to shore up the slowing economy.
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The bank says an increasing deficit will go towards key infrastructure projects, which will benefit tax payers in return and make room for tax cuts, and as a result speed up the economic recovery. In recent years, fiscal policy in China has been prudent. Fiscal deficits have been lower than budgeted, because revenue over performances relative to the budget targets was not fully spent and the stock of government debt has remained low and even declined in 2004 and 2005. The budget deficit has declined from a peak of 3.7 percent of GDP in 1999 to 1.3 percent of GDP in 2005. This consolidation was achieved through revenue increases of more than 5 percent of GDP during this period; strong growth in tax collections, in particular income taxes and value-added taxes, was driven by both buoyant economic activity and improvements in tax administration. At the same time, spending grew by about 3.5 percent of GDP, mostly in the areas targeted by the governments development policies. For example, capital expenditures expanded by about 3.5 percent of GDP over the period; expenditures on pension and social welfare programs increased by almost 2 percent of GDP, reflecting the transfer of some social expenditure mandates previously assigned to state-owned enterprises back to the government. Fiscal consolidation over the past few years contrasts sharply with the performance in the years immediately following the Asian financial crisis. At that time, the Chinese authorities attempted to boost domestic demand by stimulating the economy; as a result, the budget deficit widened by about 1.3 percentage points in 1998 and by 1 percentage point of GDP in 1999the largest consecutive deficit increases recorded in the past two decades. MONETARY POSITION: Chinas growth rate has been slowing in the past quarters as a result of strong external headwinds and only limited policy easing and stimulus action by the Chinese government. We must remember that back in late 2010 and in 2011, Chinas economic policies were aimed at slowing down the economy, as economic overheating was perceived as the main risk at the time. Monetary policies were tightened throughout 2011 as a result, including five 25bps benchmark interest rate hikes, and no less than nine 50bps increase of the reserve requirement ratio (RRR). Inflation peaked at 6.5% mid-2011, well above the central banks 4% target, and remained stubbornly high in the months thereafter. Monetary policies were, therefore, still tight in the first half of 2012, aimed at slowing inflation. Inflation fell below the 4% target in February 2012 and continued to ease. However, policy easing remained limited. Monetary policy easing was restricted to finetuning only. The reserve requirement ratio (RRR) was cut three times to a still high 20% for large banks, down from 21.5%. In June and July 2012, the benchmark interest rates were cut to 6% for loans up to 1 year and 3% for 1 year deposits, down from 6.56% and 3.5% respectively (see figure 1). Fiscal support was marginal, amounting to tax breaks for smalland-medium-sized enterprises and lower taxes on environmentally friendly consumer durables. In addition, the investment stimulus response from the government was smaller than expected in 2012. A repeat of the massive 2009 stimulus program was not anticipated. However, even with this in mind, the governments response was smaller than expected. The external environment also weakened substantially, mainly on the back of the weak performance of the eurozone economies, which are adversely affected by the sovereign debt crisis in the eurozone periphery, and lackluster performance in the US. The slowdown of external demand is adversely affecting the Chinese economy, with especially small-andmedium sized manufactures taking a hit. In September, export growth unexpectedly
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accelerated to 9.9% y/y, up from 2.7% y/y in August, on the back of strengthened demand from emerging markets in Asia. However, export growth is very volatile and Septembers export growth can still be considered weak when compared to September 2011, when exports grew by 17% y/y. Real GDP has slowed further in the first three quarters of 2012. Real GDP expanded by 8.1% in the first quarter, but fell below 8% in the second quarter, slowing to 7.6% y/y. In the third quarter real GDP growth slowed further and even fell below the governments official growth target of 7.5%, at 7.4% y/y. 2013 Growth expected to accelerate, albeit only slightly. Forecasting Chinas economic performance in 2013 is somewhat more of a challenge, as it will depend on factors that are difficult to predict. First of all, the performance of the external sector. If demand from Europe and the US would pick up, this would significantly boost growth in China. The developments in the eurozone will be a key determinant in this respect, but are very difficult to predict and subject to substantial downside risks. The outlook for Chinas export performance is thus uncertain. In 2013, although the global economy will still be in complex situations and some deep level problems of China's economy will remain unresolved, there are many conditions in favor of China's stable and rapid growth. The growth rate of China economy will depend on the global economic conditions and the progress of domestic deep level structural adjustment. Remaining stable growth is a key target of current China's economic operation. Meanwhile it is also important to deal with the relationship between the stable growth and the economic structure adjustment, and between the structural transformation and the deepening reform. We should optimize the investment structure by stabilizing the investment growth, and maintain stable and rapid GDP growth by reducing the VAT rate appropriately and expanding the structural tax cuts. Also, we should cultivate the long term economic growth potential by improving the technical and institutional innovation and enhancing the labor force's quality. The trade surplus is estimated to narrow from around 3% of GDP in 2012 to an estimated 2.5% of GDP in 2013, reducing the current account surplus to roughly 1.6% of GDP in 2013, down from 2.1% in 2012. With inflationary pressures expected to rise to an average of around 4% in 2013 on the back of utility price reforms, slightly increased economic activity and higher input prices, this is a sensible approach in spite of the risk of running behind the curve if developments disappoint strongly. The governments budget deficit is relatively small at around 2.4% of GDP while the governments debt stock is low at around 17% of GDP. It could, as it has done before, speed up investments scheduled in the current 5-year plan. Although the government has the means to finance these directly, financing investments with commercial banks loans, as it has done in the past, would likely be the preferred approach. In addition, the real estate measures could be eased. With pent-up demand for real estate present, this would provide a quick and strong boost of the economy. However, any major easing of these measures will only be taken in an extremely negative scenario, as they strongly increase risks in the longer term. However, some tailor-made easing of real estate measures in areas that have been less affected by real estate bubble formation is a possibility. In addition to inflationary pressures, more investment stimulus would increase risks to the banking sector in the medium-term, as it would likely add to the
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bad debt related problems already affecting the banking sector as a result of the 2009 stimulus program. The risk of a real estate bubble would increase sharply if the real estate measures are eased significantly. Significant further monetary easing is less likely, though. Deposit rates cannot be lowered much further without having a negative effect on the amount of deposits placed at banks, which, given the restrictive loan-to-deposit ratio of 75% that Chinese banks have to adhere to, are vital to fund credit growth. Lowering lending rates further without reducing deposit rates would hurt bank margins, which are badly needed to allow banks to continue to build up capital that they will need to deal with an anticipated increase of bad debt in the coming years. In addition, lower lending rates will also provide a boost to the real estate market, which the government is trying to cool down. Domestically, stress in the banking sector could result from rising non-performing loans. Repayment of the commercial bank loans used to finance the 2009 stimulus effort is being jeopardized by the weakening financial position of local governments, and slower economic activity, which hurts the creditworthiness of creditors in general. Higher than expected inflation could result from higher international commodity prices, increased credit growth or weather induced food price volatility. This would, in turn, reduce the scope for government stimulus and could force the government to take actions that would slow down the economy, such as monetary tightening. A solution to the eurozone problems, or stronger than expected growth in the US would greatly benefit Chinas economic performance next year. EXCHANGE RATE: China has allowed greater exchange rate appreciation, especially in the weeks preceding Hu's visit, the United States argues that much more needs to be done on a sustained basis. Moreover, Washington stresses that faster appreciation in the currency is in China's best interest. It will help deal with China's growing inflation problem and will, along with other needed policy changes and economic reforms, facilitate a speedier rebalancing of China's economy away from heavy dependence on investment and exports toward greater reliance on consumption to drive economic growth. China, for its part, has established rebalancing of its economy as a policy objective, but it stresses the need for a gradual transition to avoid disruptions in continued rapid economic growth and employment in China. A more rapid-paced rebalancing of China's economy over the next few years with a substantially faster rate of yuan appreciation is also not seen by the Chinese as necessary. In their view, China did not create the problems that led to the economic and financial crisis and faster appreciation of the yuan will not solve the woes of the advanced economies. China's exchange-rate policy poses a more serious problem, giving China an unfair competitive advantage and creating distortions in the pattern of trade. This policy also contributed to the severity of the economic and financial crisis as China's international reserves rose sharply and China poured money into U.S. assets, helping to sustain easy credit conditions in the United States. GDP (official exchange rate): $7.298 trillion note: because China's exchange rate is determine by fiat, rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China's output; GDP at the official exchange rate substantially understates the actual level of China's output vis-a-vis the rest of the world; in China's situation, GDP at purchasing power parity provides the best measure for comparing output across countries (2011 est.)
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Old China New Economy The Conquest By a Billion Paupers The first question that comes to ones mind when you read the title is, 'How relevant is this book today in the face of a tsunami called Recession?' A read of the book reveals that the relevance is on a high note; the reason being that the author has made a very dedicated attempt to trace the transformation of Old China to modern China. He begins with a historical perspective on why China is hungry for high Growth (Chapter 1-4). In the 1970s, China was totally isolated from world politics. It was following a path towards socialist transition. The painful repercussions of this path emerged in various forms of social catastrophes like the Great Famine of 195961 which left around 30 million Chinese dead. However, post 1976, after the death of Mao Zedong, the whole system underwent an overhaul and this is reflected in the New China of today. The launch of the economic reforms of 1978 put China on the path to high growth. Also, the competitive prowess of China came to the fore, much to the alarm of many big nation players. But what has really propelled China on the road to development is the intolerant attitude of the Chinese people towards poverty. This is one of the most powerful statements that the author has made in this book. His theory is that, the average Chinese, because of long periods of low conditions of life, now does not depend on the government to alleviate his/her situation. Instead, they have taken the initiative to better their material well-being. This is definitely grist for thought and could very well be the answer to the question that is often asked of China: How did it become such a phenomenal economic power? Towards the end of the book (Chapter 8) the author shifts his focus to the role of leadership in this growth path and more importantly questions the insularity of Beijing. China opened to the world economically but not politically. Somewhere along the way, this has definitely helped it to grow economically without being hindered by political alliances and ties. Since the launch of the economic reform, especially in the 1990s, China has been the most favored country for global investors. This, in turn, has played a leading role in Chinas rising growth graph. China has a role to play in the global economy also - but does China feel responsible enough? Chinas rise has rekindled the possibility of an East Asian monopoly bloc. But
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Chinas relation with Japan is a critical issue here. Similarly, on the other end of the spectrum, Chinas expanding trade surplus vis--vis USA and the EU runs the risk of an east-west face off. The author rightly points out that the USA and the EU really cannot pressure China into coming to trade agreements as the existence of various MNCs and their agreements have given China the firewall against trade frictions. This book signs off on a high note, predicting a sustained 10.5 % growth well beyond the Eleventh Plan. Will this figure stand the test of recessiontimes? Media reporting suggests it will; China is actually relatively debt-free. The government has announced a huge bail-out stimulus to stem the tide and fears of a slowdown. Also, the deficit in exports will be breached with state funds. Beijing still continues to buy U.S. Treasuries. Economists in China are divided over the growth rate % of China. Some feel that China should stop buying American treasury bonds in view of the growing fiscal deficit of the U.S. government and some feel they should sell U.S. treasury bonds in hand. Following developed countries, the economic downturn in emerging markets is also dragging down China's exports, posing a possible severe export climate for China. But the destructive adjustment of real estate could give a deadly blow to Chinas economy. In other words, a year down the line, the authors projections could well bottom out. But all said and done, this book is a must read especially because of the sheer time frame of the story of China from the 17th century and the data analysis. China Vs India: Where Does India Beat China and Why When the global consultancy major, Goldman Sachs, coined the phrase BRIC in 2003 and predicted its pre-eminence, it seemed premature. In the last two years however, the term which can be expanded to mean Brazil, Russia, India and China, has been increasingly used by columnists, and with a great deal of respect. The Goldman Sachs report posited the theory of a future economic bloc comprising the four and dominating the world economy by 2050. In India however, the tendency on the part of the media, politicians and the general public has been to compare the country with China. It is not difficult to see why. Of the four, China is India's immediate and most powerful neighbour. A brief war between the two in 1962, ended in the humiliating defeat of the latter. India is home to the Tibetan spiritual leader Dalai Lama and also to thousands of political refugees from Tibet. The two nuclear armed nations also have long standing border problems. China is also the only challenge to Indian economic hegemony in the region. With a far more developed infrastructure and with the resources to make it the largest manufacturing base in the world, China seems to have the edge. The BRIC concept states that while Russia and Brazil would provide the raw material, China and India with their low costs and other numerous advantages would produce goods and services. This concept seems to have great merit; Russia is now the world's largest producer of oil and natural gas, while Brazil leads in such industrial essentials as iron ore and ethanol.
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But while China has the edge in manufacturing goods, India clearly leads in the services space. What stands in India's favour is its huge English speaking work force, second only to the US. Add to that lower costs and India clearly has the advantage in the services sector. The key to India's advantage in the sector is not just low labour costs, but also its highly skilled human resources; else the country would be losing out to lower cost competitors like the Philippines. That the country possesses a work force with the necessary skills in programming, engineering, biotechnology, research, mathematics or the English language can be attributed to its educational system a system, which has allowed India to produce more scientists and engineers than even China. This is a fruit of its past; a blessing derived from the Nehruvian era, which resulted in the development of institutes like the IITs and an educational system that placed very high stress on mathematics and the sciences. For its English speaking populace, India can thank its far sighted, even if occasionally chauvinistic, ex-colonial masters who introduced English as a medium of instruction and governance. India's lower GDP and growth rate vis--vis China may be attributed to the fact that liberalisation or economic reforms started a full decade later than in China. FDI was also far less forthcoming, though India is now second only to China in that regard. However, capital has been more efficiently used in India. Both private and public sector firms raise capital via the stock markets or debt and are pressurised to ensure higher returns than in China where FDI is abundant and savings rates are high. A capital market run by free market forces as opposed to excessive and arbitrary state control is another Indian attribute. With India's software industry booming, Bangalore and Hyderabad are the new Silicon Valleys. The outsourcing industry has embraced everybody from engineers and doctors to lawyers, architects and accountants. India also has a much more vibrant private sector than China with more world class home grown companies from the private sector. Corporate Governance is another Indian forte, with Indian entrepreneurs and managers being among the most highly respected in the world. One would be hard pressed to find entrepreneurs like Ratan Tata, Dhirubhai Ambani, Narayana Murthy or KP Singh in China. Because of its democracy, India possesses a legal system far superior to China. In India, there is rule of law, even if the legal system is overstretched, occasionally corrupt and inefficient. In China, rule of law is arbitrary and subject to the whims of the party. Herein lies the contradiction: a true market economy can be sustained only in an open society. While China is willing to let go of its stranglehold on the people, albeit very slowly, one never knows the challenges it will face in a country which is already rife with internal tensions.
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While China may lead in all important indicators like GDP, GDP growth rate, per capita income, birth control and literacy, it is in India that an individual has a free will and is rewarded for taking the initiative. If it is in any one area that India clearly beats China, it is this. It is a democracy and that is what matters in the end. Economic growth, foreign investment, a primary regional role et al are secondary. World Bank expects Indias GDP to chase Chinas JANUARY 16, 2013 While the trade deficit between India and China yawns wider to US$29 billion in December, as Indian exports drop in both volume and value, analysts are predicting both nations to grow at 7-8 percent GDP by 2015. With India expected to rise from her 5 percent GDP growth rate, China is expected to consolidate growth. According to the World Banks recently released issue of Global Economic Prospects 2013, Chinas growth rate would be 7.9 percent and that of India 7 percent. According to the bank, at factor cost (excluding government interventions such as indirect taxes and subsidies) India will grow from 5.1 percent in 2012 to 6.4 percent in 2013-14, 7.1 percent in 2014-15 and 7.3 percent in 2015-16. In contrast, from a near 9 percent growth in 2012, China is expected to grow 8.4 percent, 8 percent, and 7.9 percent in the successive three years. On a more global scale, the World Bank forecasts that global gross domestic product (GDP) will inch up 2.4 percent this year, from 2.3 percent in 2012. In its last forecast in June, the bank projected global growth would reach 3 percent in 2013. China is growing at a phenomenal rate right from 1978 or 1980 and you cant grow at 10 percent for more than a couple of decades. China has done it for 30 years and this has been expected in China and expected by us that China will continue to grow very rapidly but it will probably come down from these great highs, World Bank Chief Economist, Kaushik Basu told a news conference. If it comes down to 7.9 percentI think not. India was growing from 2003 to 2008 at close to nine per cent per annum, with the last couple of years actually over nine per cent, and we expect that India, having taken off only about 10 years ago, to have some still to go. So, there is going to be a catch-up of Indias growth getting closer to Chinas growth and, who knows, a couple of years down that road, they may be completely neck to neck, Basu said in response to a question. Counting on their developing world counterparts, the World Bank feels that in order to reach pre-financial crisis rates of growth, developing countries including China and India will need to focus on productivity-enhancing domestic policies, to assure robust growth in the longterm. This includes organizing their houses in the government, social, healthcare, women and education departments. Recent out-crys by the people of both nations has proved significantly that both China and India need to get their homes in order before burdening themselves with global pressures. Expecting developed nations to grow slightly over the next 12 months, from a very weak 1.3 percent this year, weighed down primarily by spending cuts, high unemployment and weak
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consumer and business confidence, the World Bank expects activity to strengthen next year to 2 percent and 2.3 percent in 2015. India Is Losing the Race As recently as 2006, when I first visited India and China, the economic race was on, with heavy bets being placed on which one would win the developing world sweepstakes. Many Westerners fervently hoped that a democratic country would triumph economically over an autocratic regime. Now the contest is emphatically over. China has lunged into the 21st century, while India is still lurching toward it. Thats evident not just in columns of dry statistics but in the rhythm and sensibility of each country. While China often seems to eradicate its past as it single-mindedly constructs its future, India nibbles more judiciously at its complex history. Visits to crowded Indian urban centers unleash sensory assaults: colorful dress and lilting chatter provide a backdrop to every manner of commerce, from small shops to peddlers to beggars. That makes for engaging tourism, but not the fastest economic development. In contrast to Chinas full-throated, monochromatic embrace of large-scale manufacturing, India more closely resembles a nation of shopkeepers. To be sure, India has achieved enviable success in business services, like the glistening call centers in Bangalore and elsewhere. But in the global jousting for manufacturing jobs, India does not get its share. Now, after years of rocketing growth, Chinas gross domestic product per capita of $9,146 is more than twice Indias. And its economy grew by 7.7 percent in 2012, while India expanded at a (hardly shabby) 5.3 percent rate. Chinas investment rate of 48 percent of G.D.P. a key metric for development also exceeded Indias. At 36 percent, Indias number is robust, particularly in comparison with Western countries. But the impact of that spending can be hard to discern; on a recent 12-day visit to India, not many rupees appeared to have been lavished on Mumbais glorious Victoria Terminus, also known as Chhatrapati Shivaji Terminus, since it was constructed in the 1880s. Parts of Mumbais recently built financial district Bandra Kurla Complex already look aged, perhaps because of cheap construction or poor maintenance or both. Its hardly a serious competitor to Shanghais shiny Pudong. China has 16 subway systems to Indias 5. As China builds a superhighway to Tibet, Indian drivers battle potholed roads that they share with every manner of vehicle and live animal. Indias electrical grid is still largely government controlled, which helped contribute to a disastrous blackout last summer that affected more than 600 million people. Yet Morgan Stanley stands resolutely behind its 2010 prediction that India will be growing faster than China by the middle of this decade. It isnt going to happen, Indias better demographics notwithstanding. For one thing, many of Indias youths are unskilled and work as peddlers or not at all. For another, despite all the reforms instituted by India since its move away from socialism in
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1991, much more would have to change. Corruption, inefficiency, restrictive trade practices and labor laws have to be addressed. Democratic it may be, but Indias ability to govern is compromised by suffocating bureaucracy, regular arm-wrestling with states over prerogatives like taxation and deeply embedded property rights that make implementing China-scale development projects impossible. Unable to modernize its horribly congested cities, Indias population has remained more rural than Chinas, further depressing growth.
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China and corruption may be almost synonymous to many, but India was ranked even worse in corruption in Transparency Internationals annual Corruption Perceptions Index. At its best, the Indian justice system a British legacy grinds exceptionally slowly. To be sure, summary executions dont occur in India, and its legal system is more transparent and rule-based than Chinas. But a recent visit coincided with the tragic gang rape of a young Indian woman that led to her death; the governments ham-handed initial response was to ban protesters from assembling and impound vans with tinted windows like the one in which she was abducted. Indias rigid social structure limits intergenerational economic mobility and fosters acceptance of vast wealth disparities. In Mumbai, where more than half the population lives in slums often devoid of electricity or running water, Mukesh Ambani spent a reported $1 billion to construct a 27-story home in a residential neighborhood. Dont get me wrong I am hardly advocating totalitarian government. But we need to recognize that success for developing countries is about more than free elections. While India may not have the same eye on the prize so evident in China, it should finish a respectable second in the developing world sweepstakes. It just wont beat China.
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ANNEXURE
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THE EMPLOYMENT RATE IN INDIA PRE AND POST LIBERALISATION
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GLOBSYN BUSINESS SCHOOL

STUDY OF THE INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

THE INDIAN ECONOMY

7- 15 16- 20 21- 29 30- 56 57- 63 64- 65 66-68

STUDY OF INDIAN AND CHINA ECONOMY

Indian Economy Overview

STUDY OF INDIAN AND CHINA ECONOMY

Growth Potential Story

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

Indian Economy before Colonial Period

STUDY OF INDIAN AND CHINA ECONOMY

Indian Economy during Colonial Period

Post-Colonialism: Definition, Development and Examples from India

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

2. The post-colonial experience in India

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

Indian Economy before Liberalization

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

INDIA'S ECONOMIC REFORMS

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

The 1991 Devaluation

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

THE GOALS OF FIVE YEAR PLANS

STUDY OF INDIAN AND CHINA ECONOMY

ACHIEVEMENTS OF FIVE YEAR PLANNING

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

WEAKNESS OF FIVE-YEAR PLAN

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

FIRST FIVE YEAR PLAN (1951-55)

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

development of only a few industries private industry had not developed

SECOND FIVE YEAR PLAN (1956-1961)

STUDY OF INDIAN AND CHINA ECONOMY

Total budget: Rs. 4,800 crore

STUDY OF INDIAN AND CHINA ECONOMY

STUDY OF INDIAN AND CHINA ECONOMY

THIRD FIVE YEAR PLAN (1961-1966)

STUDY OF INDIAN AND CHINA ECONOMY

Decentralization Organizations formed -Panchayat -Zila Parishads

Laid emphasis on -oil conservation -irrigation -Afforestation