INDIAN
ECONOMY
Unit-5:Agriculture, Industry,
Services and International
Trade by Nagaraj
Presented by-
Dhwani Bhanot 22/51035
Divyanshi 22/51038
Prerna 22/51079
Introduction
Economic reforms refer to deliberate changes in a country's economic
policies and structures to improve efficiency, foster growth, and enhance
overall economic well-being. These reforms typically involve adjustments to
government regulations, fiscal policies, trade practices, and financial systems.
After independence, the economic policies in India were inward looking with
massive involvement of government in the secondary sector.
The main elements of India’s policy framework that hampered efficiency and
growth until the 1970s, and somewhat less so during the 1980s as limited
reforms began to be attempted, are as follows:
Extensive bureaucratic controls over trade via permit/licences
Inward-looking trade and foreign investment policies
A substantial public sector, going well beyond the conventional confines
of public utilities and infrastructure.
Manufacturing Growth 1991-2014
Manufacturing output grew 7%–
8% annually since 1991, with a
marked improvement in the
variety and quality of goods
produced.
Yet, its share in gross domestic
product has practically stagnated,
with a sharp rise in import
intensity.
Liberal policies were expected to
boost labour intensive exports
and industrial growth.
India’s share in global Trade India’s share in global
2000-2015 merchandise trade has moved
up from nearly 0.5% in 2000 to
1.5% by 2015.
The share of services exports
rose from 1% to 3% during the
same period (Figure 2).
Industrial production has
diversified with perceptible
improvements in the quality and
variety of goods produced with
growing domestic competition.
Share of GDP of Manufacturing Industry
(1981-2013)
Yet, the manufacturing (or industrial)
sector’s share has stagnated at about
14%–15% (26%–27%) of gross domestic
product (GDP) after the reforms (Figure 3).
Though India has avoided deindu-
strialisation— defined as a decline in the
manufacturing (industrial) sector’s share in
GDP, or share in workforce—it stares at a
quarter century of stagnation.
In contrast to many Asian economies that
have moved up the technology ladder
with a rising share of manufacturing in
domestic output and global trade (Rodrik
2015).
Around 1950, both the large Asian giants were roughly at
the same level of industrialisation (or lack of it); if anything,
India had an edge.
World’s Top
Manufacturing
By 2010, however, China became the world’s second-
largest manufacturing nation, and India ranked 10th, Countries 2000-2010
producing one-third of China’s industrial output (at the
current market exchange rate) (Figure 4).
India surely rode the boom during its “dream run” for five
years from 2003 to 2008, to clock an unprecedented
annual economic growth of about 9%, to be counted as
among the world’s fastest-growing large economies.
If China came to be known as the world’s factory, India was
reckoned, as its back office. After the global financial crisis,
as with the rest of the world, India’s boom went bust, with
industrial deceleration, rising import dependence, and
growing short-term capital inflows (or, simply, hot money)
financing the balance of payments deficit.
Why did the
manufacturing sector fail
to realise these goals?
01.
It is widely believed
02.
Critically examining such a
03.
Further, there is a need to re-
view, it is suggested that the
that India needs to imagine the role of the
long-term constraints on
“complete” the reform development state to realise
industrialisation perhaps lie in
agenda to realise its goals, as the experience of all
poor agricultural productivity
potential. successful industrialising
and inadequate public
nations suggests.
infrastructure.
·
Why did India fail to catch up with the Asian
economies to cement its reputation as a
successful industrial nation with rising
manufactured exports?
Perhaps, with booming services exports, India dreamt of skipping
the industrialisation stage to be counted as the world’s back offi
ce, leveraging its large “educated” English-speaking workforce,
and ignoring outsourcing services’ narrow emp loyment base
domestically, and even the slender market segment it was tied to
in the fi nancial services sector in the United States (US).
The reforms were built on the initial success in
delicensing and import liberalisation (that is, a switch
from quotas to tariffs) in the 1980s. ·However, the
deepening of the reforms since the 1990s—as part of
the broader stabilisation and structural adjustment
programme—meant a clear departure from a capital
goods-focused, “heavy” industrialisation strategy,
towards a market-friendly regime, as advocated by
most mainstream economists and development
agencies, such as the World Bank.
Industries Trend 1991-2014
The manufacturing sector
witnessed an annual trend growth
rate of 7.7% according to the
Annual Survey of Industries (ASI)
or 7.2% as per the Index of
Industrial Production (IIP).
ASI data exhibited wider yearly
fluctuations compared to IIP,
indicating variations in growth
rates over shorter periods
Phases of Growth:
Phase 1 Phase 2 Phase 3
1992–96 1997-2003 2003-2004
Initial phase marked by phase 2 saw deceleration in Characterized by a significant
industrial growth amidst global growth spurt, particularly during
euphoria of reforms,
economic challenges like the India’s dream run from 2003–04
accompanied by booming to 2007–08. Manufacturing
Asian financial crisis and dot-
output and investment growth matched the outsourcing
com bubble burst.
anticipating faster growth services boom, reaching a 10%
and exports. annual growth rate.
Boom and Bust Period
From 2003 to 2014, India experienced a notable economic cycle marked by periods of growth and
decline. Notably, from 2003 to 2008, the country enjoyed five years of robust economic expansion
driven by the booming exports of outsourced services, particularly in IT and BPO sectors. This growth
was fueled by factors like India's skilled workforce, cost competitiveness, and favorable regulatory
environment.
Manufacturing sector exhibited a remarkable 10% annual growth rate during the boom period.
Capital formation rate surged, reaching close to 40% of GDP at the peak of the boom in 2008.
However, the global financial crisis of 2008–2009 led to a slowdown in growth rates in subsequent
years. Overall, this period highlighted India's emergence as a key player in the global services industry.
Post-Financial Crisis Recovery:
Recovery Post Financial Crisis:
Following the global financial crisis of 2008–09, India's economy began to recover, albeit at a slower pace
compared to the pre-crisis period.
The government implemented various stimulus measures to mitigate the impact of the crisis, leading to a
gradual improvement in economic indicators. However, the recovery was not as rapid as the initial growth
phase.
Average Growth Rate:
In the four years following the financial crisis until 2011–12, India's annual growth rate averaged at 7.3%.
Despite the recovery efforts, the economy experienced a period of moderate growth, reflecting the
lingering effects of the global downturn and domestic challenges.
Subsequent Deceleration:
However, growth rates began to decelerate significantly after 2011–12.
Various factors, including domestic policy uncertainties, global economic headwinds, and structural issues,
contributed to the slowdown in economic growth beyond the immediate post-crisis period.
Industrial Trends and Policy
Implications (2004–2013)
1. Dominance of Foreign Firms:
Foreign companies and brands began to dominate many markets, particularly in consumer durables and
capital goods sectors.
This trend indicates the growing influence of multinational corporations and foreign investment in
India's industrial landscape, potentially reshaping market dynamics and competition.
2. Rise in Import Dependency:
Import to domestic output ratio witnessed a significant increase across various industries during this
period.
The surge in imports, particularly in sectors dominated by foreign firms, highlights the rising
dependence on imported goods and technology, posing challenges for domestic industries and trade
balance.
3. Industrial Policy Shifts:
Introduction of special economic zones (SEZs) and liberalization of the land market for private industrial
and infrastructure investment marked significant industrial policy shifts in the 2000s.
Explanation: These policy changes aimed to stimulate industrial growth and attract foreign investment
by facilitating land acquisition and creating favorable business environments. However, they also led to
concerns regarding land acquisition practices and the impact on local communities.
Foreign Direct Investment
Trends in India:
1. Predominance of Non-Traditional FDI Forms:
Private equity (PE), venture capital (VC), and hedge funds (HF) dominate recent FDI inflows.
These forms of investment are loosely regulated and often categorized under shadow banking.
2. PE Funds as Major Contributors:
PE funds, in particular, constitute a significant portion of these inflows.
They typically acquire existing assets and divest them after a few years, primarily targeting
short-term gains.
3. Misalignment with India's Industrial Needs:
Contrary to traditional FDI, these investments do not focus on technology acquisition or
industrial capability enhancement.
Instead, they largely contribute to domestic consumption through foreign debt.
Labor Market Rigidity
Contesting the labor market rigidity hypothesis: Recent literature reviews challenge the widely held belief
regarding the rigidity of labor market laws.
Limited support found for the notion of rigid labor market laws: Studies cited in the paragraph indicate a lack of
substantial evidence supporting the argument that labor laws impede flexible labor practices.
Recent evidence from Larsen & Toubro's layoffs contradicts the hypothesis: The reported layoffs by Larsen &
Toubro, a major Indian firm, suggest that the "hire and fire" policy effectively governs the organized labor market.
Significance of the "hire and fire" policy in the organized labor market: The instance of significant layoffs
demonstrates the prevalence of policies allowing employers to terminate workers without significant constraints.
Employment of non-permanent workers by large enterprises challenges the perception of rigid labor laws:
Despite the perception of rigid labor laws, large enterprises like Larsen & Toubro employ a significant number of
non-permanent workers.
Lack of uniform application of labor laws across different segments of the organized workforce: The paragraph
highlights disparities in the application of labor laws, indicating that they may not be as rigid as commonly
assumed.
Conclusion: Based on the analysis of recent evidence and observations, it can be concluded that labor laws are
not the primary barrier to flexible labor practices in India.
Challenges and Prospects for Industrial
Growth: A Critical Examination
1. Looking Beyond Industrial Stagnation:
If we accept the validity of the arguments presented and the credibility of the evidence, it becomes
apparent that the root causes of industrial stagnation lie elsewhere.
Structuralist economic arguments and long-term constraints are suggested as alternative explanations
for the stagnant industrial growth.
2. Role of Agriculture Performance:
Poor performance in agriculture post-reforms is identified as a significant long-term constraint affecting
industrial growth.
Despite some improvements, land productivity in agriculture remains below the global average,
indicating persistent challenges.
3. Impact of Inadequate Infrastructure Investment:
Insufficient public infrastructure investment, particularly in power generation capacity, is highlighted as a
factor impeding industrial growth.
The lack of adequate infrastructure hinders the expansion and efficiency of industrial activities.
4. Post-Financial Crisis Challenges:
Following the global financial crisis, Indian industry faces challenges such as excess
capacity in major sectors like steel and coal.
Investment rates and exports have declined, contributing to a decrease in the fixed capital
formation ratio from nearly 40% of GDP in 2008.
5. Need for Public Investment Revival:
Given the financial constraints faced by the private corporate sector and the banking
sector burdened with non-performing assets, there is a pressing need to revive public
investment.
Revitalizing public investment is seen as essential for stimulating overall investment and
domestic output, thereby addressing the current industrial stagnation.
State support for
industrialisation
the the role of state support for industrialization,
especially in light of the rush to open up markets after
1991 which may have negatively impacted long-term
industrial and trade prospects.
the planning era from 1950 to 1980 had many
acknowledged shortcomings, It suggests the need to
rebalance the role of the state and the market,
considering strategic considerations.
Finding a Balance
between the State
and the Market
By finding the right balance, countries can harness the
positive externalities of faster manufacturing sector
growth, promote economies of locational agglomeration,
and address market failures through state intervention
when necessary.
The experiences of countries like Japan, China, and
Vietnam provide empirical support for the effectiveness
of industrial policy in achieving these goals. Overall,
finding a balance between the state and the market is
crucial for shaping effective industrial and investment
policies that foster sustainable economic development.
Impact of
Industrialization
on the
Economy
Faster growth in the manufacturing sector can
stimulate economic growth .
It can also drive technological advancements and
increase productivity.
Growth in employment.
Key Areas for Attention in
Industrial Policy
Long-term Domestic Research
and Bilateral Investment
Finance Development (R&D) and Trade Treaties
Ensuring access to stable and Investing in R&D to foster innovation • Establishing favorable agreements
affordable financing for industrial , improve product quality , and enh- to attract foreign investment and
projects. ance competitiveness. promote international trade.
Encouraging the development of Promoting collaboration between • Facilitating the exchange of goods,
financial institutions that cater to Industries research institutions ,and services, and technologies to support
the needs of industries. academia. industrial growth.
Conclusion
- Liberal economic reforms and market-friendly policies haven't benefited the
manufacturing sector in India.
- Despite economic growth and output diversification, India hasn't achieved rapid
industrialization or competitiveness in international trade.
- "Make in India" and the National Manufacturing Policy of 2011 haven't resulted in
effective policies or suitable implementation instruments.
- Concerns exist about the easy entry of foreign capital, especially in defense
production, and reliance on liberal reforms.
- The global financial crisis has prompted a rethinking of unbridled globalization.
- A new vision for the development state is needed, integrating strategically with the
global economy and reinventing industrial policy.
- State intervention, increased domestic savings, and public investment are necessary
to revitalize the manufacturing sector.
- Long-term credit for capital-intensive industries, infrastructure, and exports should be
provided by domestic financial institutions.
- Addressing low levels of domestic R&D expenditure compared to China is crucial.
- A careful reevaluation of the liberal model is necessary in light of global uncertainties,
aligning with long-term national goals.
Thank
you very
much!
