Stagnation in India in 1965-1980 due to Sharp Reductions in Public Investment in the Mid-1960s - Case Study Example

Stagnation In India (1965 To 1980) Was Due To Sharp Reductions In Public Investment In The Mid-1960s. The Solution Was Therefore Simple; The Government Should Have Increased Public Investment.’ Discuss. Table of Contents Overview 3 Indian Economy since Independence and During the Period of Stagnation 4 Factors Leading To The Slow Growth Of Indian Economy 5 India’s Macro Economic and Political Economic Scenario During The Period 1964-1991 6 Features of Growth and Structural Transformation in Indian Industry 7 Liberalization, Hindu Nationalism and Popular Democracy in Indian Economy 9 India’s Growing Crisis of Governability 10 Growth In Indian Economy Since Independence 12 India Experiencing Half-Hearted ‘Liberalization’ In The 1980s 13 India’s Pattern of Progress 13 Argument 15 Works Cited 16 Overview India embraced structural programme in the year 1991 and therefore in the recent times, the country is attracting attention from all over the world. The period of mid-1960s as well as early 1970s has been found to be facing numerous economic problems. The reasons behind such problems stemmed from the fact that since India faced wars with its neighboring countries, huge amount of resources were spend towards defense which reduced the amount of public investment, thus significantly affecting the growth of India. The other reason behind the stagnation was the issues related to foreign exchange situation that forced the country to devalue its currency in the year 1966. The production of the food was insufficient because of the rising demand and therefore it became necessary for India to import the food items from other countries (FAO, “India”). It was observed that there was decline in the growth rate of public investment which can be identified as one of the significant factors in the decline of the industrial growth rate after the mid-1960s. The paper tries to identify the state of economy of India during the period of 1965-1980. It will review the impacts of low public investment in the mid-1960s on India and the steps taken by the political leaders to combat the problems (Sridharan, E., “The Political Economy Of Industrial Promotion: Indian, Brazilian, And Korean Electronics In Comparative Perspective 1969-1994”). Indian Economy since Independence and During the Period of Stagnation The main question that arises is related to the performance of India since 1947, the year of its independence. It has been believed that the economy of India was stuck from the times of independence; during that period ‘Hindu rate of growth’ was nearly 3.5% per annum. The period of seventies was commonly referred to as ‘Hindu rate of growth period’. It was revealed that the reason behind the decline in the gross domestic product (GDP) growth during the period of sixties have been due to sharp decline in the growth of agriculture from the middle of sixties. After Green Revolution was introduced, there were important changes in the growth possibility of agriculture. During the period of 1965-1980, the policies were generated as a result of immediate crisis in the economy of India as well as political suitability rather than by economic logic. It has been observed that this period saw disconnectedness in the policies and the procedures of the government. It was found that various strategies adopted by the country for the purpose of the development of the nation failed miserably before the reforms of the nineties. The three components such as too much controls and inward-looking policies as well as substantial and inefficient public sector suppressed the growth during the seventies and to a certain extent in the eighties as well (Virmani, “India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth”). The decline in the growth rate of industries in the economy of India during the sixties has been characterized as provisional downward deviation in relation to trend. However, in the present times, the scenarios are being reflected as long-run tendencies leading to stagnation in the economy. The main reason behind the stagnation had been the misallocation of the resources because of the industrial policies practiced by the government. However, it has also been argued that the reason behind the stagnation in the Indian economy has been the listlessness of agricultural growth which had hindered industrial growth by restraining the supply of wage goods and raw materials and also limiting the markets. Few economists also state that slackening of investment demand because of less public investment has also been one of the reasons behind the decline in the industrial growth during the sixties. It has also been found that during that period inequality in the distribution of income led to low demand for the industrial goods, declined incentives for investment as well as lesser demand (Dutt, “Stagnation, Income Distribution and Monopoly Power”). Factors Leading To The Slow Growth Of Indian Economy According to Desai, one of the powerful political forces in India had been the ‘petty-bourgeois haute-proletarian’ which has been much stronger in comparison to the kulak and the bourgeoisie. They possessed less property as well as very little education. The petty-bourgeois haute-proletarian adopted power from the British. The members belonging to this class flocked the unemployment market and also wanted the propagation of the small as well as public enterprises. The petty-proles had been trying to grasp increased ‘capital-output ratios’ in an increasing rate into an industrial base whose rate of growth had been slow enough. The country was incapable of expansion during this period since the petty-proles had low-work ethics. This class had led to formation of the youth axis of any sort of confrontation in India. During the period when the system comes to a halt and government investment is just capable of maintaining the industrial base but is incapable of expanding the industrial employment, the petty-proles class erupted in insurgency against such system that employed them but is not capable of exploiting them (Desai, “Factors Underlying the Slow Growth of Indian Industry”). India’s Macro Economic and Political Economic Scenario During The Period 1964-1991 During the year 1965, agriculture accounted for 44 percent of output, industry accounted for 22 percent of the output, and service accounted for 34 percent of the output. There was rise in the manufacturing sector from 16 percent to 18 percent of GDP. There was rise in the output being exported, however from one very low level to another very low level. There was also rise in the exports of goods as well as nonfactor services from 4 percent of the Gross Domestic Product in the year 1965 to 8 percent in the year 1989. There were major alterations in the patterns of imports because of two significant motives. The first reason had been the success of the country in producing more amounts of food grains. It was only in the 1980s that the country was self-sufficient in terms of cereals however during the 1960s the country was completely dependent upon imports. The second reason behind the changes in the patterns of import had been the burgeoning price of oil all over the world. Although there were few discoveries as well as production, there had been rise in the fuel imports from 5 percent to 17 percent of the total imports (Joshi, V. & Little, I. M. D., “India: Macroeconomics and Political Economy”). The period of 1980s had been quite difficult in comparison to the previous periods. In the year 1973, during the period of oil shock, it was noted that India had equipped itself with reserves of food as well as foreign currency. It also declined foreign debts and during this period the rate of inflation was also low which was in noticeable dissimilarity to inflation in most of the developing countries of the world. However, it was during 1980s when the country discarded its fiscal conservatism and faced the issues related to high fiscal shortages. India focused on borrowing heavily from domestic markets as well as internationally. During this period the central and state government’s total debt had been 41 percent of the GDP. On the other hand, the total foreign debt of India had been 136 percent of the value of exports. In the year 1988/1989, India experienced rise in the domestic debts to 55 percent of GDP while the foreign debts had increased to 265 percent of exports. The reason behind the rise in the figures had been that central government’s borrowing requirement was more than 10 percent of GDP (Joshi, V. & Little, I. M. D., “India: Macroeconomics and Political Economy”). Features of Growth and Structural Transformation in Indian Industry It has been because of the indifferent performance demonstrated by the agrarian sector in the 1980s; India is self-confident for an economic take-off since the industry is serving as one of the drivers for a new period of growth. There is some sort of basis for such optimism because statistics reveal that after many years of deceleration, during the first decade and half of planned economic development, the industrial sector had been demonstrating huge growths. It has however been noted that the evidence is ambiguous. According to the official Index of Industrial Production, the decline in the industrial growth that started in the 1960s, continued for longer period. The index stated that the praiseworthy 7.2 percent rate of growth per annum which was recorded in between the year 1951 to 1965 ended with successive droughts of the mid-1960s. It has been noticed that after this phase the economy was into the phase of secular stagnation. In between the year 1966 and 1975, the rate of growth of index saw a fall to 4.0 percent. After that period there was recovery in the economy with figure of 4.8 percent (Chandrasekhar, “Aspects of Growth and Structural Change in Indian Industry”). If the figures of mining, quarrying as well as electricity are not taken into index while the figures of manufacturing is sought then it is viewed that there has been incredible decline in growth, thereby reducing from 7.1 percent during the period of 1951-65 to 3.7 percent in between the year 1966-75. It had further fallen to 3.8 percent during the period of 1976-85. It can be noted that such pace of deceleration offered break to the development during first 15 years of post-independence thereby leading to stagnation in the economy. During the quarter of century ending 1975-1976, there was rise in the net output of big industries by approximately 280 percent which had been almost equivalent to the magnitude of rise between 1920-21 and 1945-46. However, according to two different sources of information based on industrial production, one being the industrial index with base year as 1970-71 and the other most reliable source of information being obtained from annual survey of industries, demonstrated different trends. In lieu of this fact the government adjusted the index in order to accommodate, apparently for the alteration in the industrial structure that has taken place in the current years. The government argued that industrial productions earlier index operating with base year of 1970-71 did not bear in mind most of the critical structural transformations occurring in the recent years. The most significant among them had been the speedy growth of the industries like petrochemicals, electronics, garments, chemicals and gem cutting (Chandrasekhar, “Aspects of Growth and Structural Change in Indian Industry”). Other changes that had taken place during that period included the supposed major progress made by the small scale sector in relation to its contribution in industrial production. The old index failed to take into account these trends and therefore gave high significance to sunset industries such as mill-produced textiles. According to the statistics provided by the Index of Industrial Production, a growth rate of approximately 7 percent per year for the period of 1985-1986 was demonstrated. It is often believed that recovery in the economy can take place because of the growth in the small-scale production. In order to comprehend the factors fundamental to the recovery, it is essential to turn attention towards the expansion in the industrial sectors over the four decades since the period of independence. The economy of India during the times of independence had the features of backward ex-colonial country (Chandrasekhar, “Aspects of Growth and Structural Change in Indian Industry”). Liberalization, Hindu Nationalism and Popular Democracy in Indian Economy Since the past 20 years, the political economy’s development in India had been challenged by two intellectual movements. The critiques relating to dirigisme was obtained from an increasing neoliberal orthodoxy and the other critiques were obtained from the populist relating to state in defense of civil society. Those on the left have followed the common cause with the antistatism related to neoliberal right had been confusing because of numerous reasons. It was not for the failure of the leftist political parties in order to offer national substitutes to the Congress party as well as Nehruvian planning or for spreading of Hindutva or Hindu nationalism. The lead of Hindutva politics, The Bharatiya Janata Party had been forced to generate a decentralized Hindu Facism. The reason behind this had been that there was increasing flood of public action from numerous India’s backward classes, scheduled classes as well as scheduled tribes. Although both kinds of antistatism reacted to an absurd developmental state, the views of the neoliberals as well as populists had been optimism stating that dispersed social forces either it is related to market or related to popular culture will act as an appropriate alternative to the significance of the state in the economic developments (Corbridge & Harriss, “Reinventing India: Liberalization, Hindu Nationalism, and Popular Democracy”). India’s Growing Crisis of Governability It is well known fact that sooner or later it becomes tough to govern each and every country and this has been the case with India since past two decades. This trend had been in opposition to the situation of India during the period of 1950s and 1960s. During that period the country was regarded as one of the most stable democracies among the non-western countries. India is a democratic country till date. However, there are accusations that the country is not well governed. There are many evidences of corroding political order. The social groups have demanded numerous varied political demands in demonstrations thereby leading to violence. It has been found that the democracy of India has been the reason behind over politicization of the Indian politics. This does not mean that democracy should be limited in India. However, the reasons behind the political turmoil need to be gauged. In order to improve the quality of democratic government of the country i.e., India, it is quite significant to strengthen party organisation and therefore realizing and bringing the state’s capacity in line with its commitments (Kohli, A., “Democracy and Discontent: India’s Growing Crisis of Governability”). The crisis related to governability in any developing democratic country such as India can be analyzed either from the views of modernization or from the views of Marxist. It may as well be viewed from a standpoint that focuses upon the roles of the state and politics in these particular societies. It is the political factors that contribute to the emergence of this crisis. The problems related to governmental legitimacy is partly a function of socioeconomic environment. It is the pervasive presence of the state that can improve the importance of the politics as well as the political variables in developing democratic country. Superiority of the states leadership can also be significant in generating as well as mitigating crises of governability (Kohli, A., “Democracy and Discontent: India’s Growing Crisis of Governability”). Growth In Indian Economy Since Independence The growth rate of India during the period in between 1950 to 1990 may seem to be more or less normal. However, it is difficult to believe the fact that the economic development of India after 1990 had been anything like usual. It was in the 1990s when India was remarked as one of the rapidly mounting nations of the world. It can be evident that the pace of growth rate in the 1990s and the pace of growth before 1980 were extraordinary. The rise in the economy of India was because of shift of the government of Narashimha Rao as well as that of Dr. Manmohan Singh towards the ‘neoliberal economic reforms’. It has been propounded by few economists that Jawaharlal Nehru who had been the first Prime Minister of India took a wrong road when the economic development is concerned and therefore the country faced the period of economic stagnation. The economists further perceive that the breakdown of economic growth prior to the reforms of early 1990s had been because of two main reasons. They are cultural reasons as well as political reasons (DeLong, “India Since Independence: An Analytic Growth Narrative”). India Experiencing Half-Hearted ‘Liberalization’ In The 1980s A few economists had stated that after the assassination of Rajiv Gandhi, the Prime Minister of India during in the late 1980s, Indian democracy had a better chance to flourish and progress. In addition to these, the liberal institutions were more likely to be sustained and strengthened. Rajiv Gandhi’s own inconstancy damaged his own interest as well as those of his parties (Harriss, “The State in Retreat? Why has India Experienced Such Half-hearted ‘Liberalization’ in the 1980s?”). It has been since 1980s, both India as well as China had obtained remarkable development in their economies as well as poverty reductions. The per capita incomes of both India as well as China had been too low in the 1980s. Since 1980s, India as well as China has been capable of sustaining impressively rapid development (Bosworth & Collins, Accounting for Growth: Comparing China and India). India’s Pattern of Progress The characteristics of the policies that India followed after independence in the year 1947 generated exclusive specializations preceding to the economic reforms starting in the year 1980s. The influence of the pre-1980s’ policies along with decentralization reveal that Indian states are accountable for their own economic fortunes which brought significant deviation in their growth rates. There has been rising trends in the private investment as well as falling trends in the public investment during the stagnation period (Kochar & Et. Al., “India’s Pattern of Development: What Happened, What Follows?”). A person can differentiate among the two different characteristics of the growth process in the industrial sector. One of them is related to the eruption of the vital quantum of unutilized manufacturing capacity. The other is related to reduction in the growth rate of industrial output since the period of 1960s in India. The issues related to the emergence of the unutilized manufacturing capacity as well as sharp reduction in the rate of growth of the productivity are matters of concern. In such context, it becomes significant to undertake an analysis of the factors that govern the demand for the manufactured products (Raj, “Growth and Stagnation in Indian Industrial Development”). Argument During the period of economic stagnation the economy of India required public investment which could have boosted the economy. It could have assisted in raising the outputs of the private capital stocks and furthermore by generating demands for output belonging to the private sector, it could have also enhanced the output expectations and the investment need of the private sectors (Sundararajan & Thakur, “Public Investment, Crowding out, and Growth: A Dynamic Model Applied to India and Korea”). On the contrary, it has been noted that there was sharp fall in the average growth of public investment to 2.8% per annum between Phase I (1950-1 to 1979-80) and Phase II (1980-1 to present). However, there was rise in the growth of private investment from 4.3% to 8.4% per annum. Therefore, this makes it evident that although there was decline in the growth rate of public investment it did not have a negative impact upon the growth and therefore it may have developed a positive influence by generating space for quickening of private investment. It is the private investment that played a major role in the acceleration of the economy. Therefore, it can be concluded that during the period of stagnation in India, public investment was not the only solution. Focus upon other factors as well could have assisted in increasing the pace of development. It is to be remembered that it is not always important to deal with the externalities with the production of the goods and the services in the public sector. It is also significant to make use of the financial instruments whenever they are found to be effective (Virmani, “Lessons of Government Failure: Public Goods Provision and Quality of Public Investment”). Works Cited Bosworth, Barry. & Collins, Susan M. “Accounting for Growth: Comparing China and India”. Journal of Economic Perspective 22.1(2008): 45– 66. Chandrasekhar, C. P. “Aspects of Growth and Structural Change in Indian Industry”. Economic and Political Weekly 23.47 (1988): 2359-2370. Corbridge, Stuart. & Harriss, John. “Reinventing India: Liberalisation, Hindu Nationalism, and Popular Democracy”. Annals of the Association of American Geographers 92.2 (2002): 349-352. Desai, Ashok, V. “Factors Underlying the Slow Growth of Indian Industry”. Economic and Political Weekly 16.12 (1981): 381-392. Dutt, Amrita, K. “Stagnation, Income Distribution and Monopoly Power”. Cambridge Journal of Economics 8 (1984): 25-40. DeLong, Bradford, J. “India Since Independence: An Analytic Growth Narrative”. December 01, 2011. Abstract, 2001. FAO. “India”. December 01, 2011. Economic Review, No Date. Harriss, John. “The State in Retreat? Why has India Experienced Such Half-hearted ‘Liberalisation’ in the 1980s?”. IDS Bulletin. 18.4 (1987): 31-38. Joshi, Vijay & Little, Ian, Malcolm. D. India: Macroeconomics and Political Economy. World Bank Publications, 1994. Kohli, Atul. Democracy and Discontent: India’s Growing Crisis of Governability Cambridge University Press, 1990. Kochar, Kalpana & Et. Al. “India’s Pattern of Development: What Happened, What Follows?”. December 01, 2011. IMF Working Paper, 2006. Raj, K. N. “Growth and Stagnation in Indian Industrial Development”. Economic and Political Weekly 11.5 (1976): 223-236. Sundararajan, V. & Thakur, Subhash. “Public Investment, Crowding out, and Growth: A Dynamic Model Applied to India and Korea”. Staff Papers-International Monetary Fund 27.4 (1980): 814-855. Sridharan, Eswaran. The Political Economy Of Industrial Promotion: Indian, Brazilian, And Korean Electronics In Comparative Perspective 1969-1994. Greenwood Publishing Group, 1996. Virmani, Arvind. “Lessons Of Government Failure: Public Goods Provision and Quality of Public Investment”. December 01, 2011. Introduction, 2006. Virmani, Arvind. “India’s Economic Growth:From Socialist Rate of Growth to Bharatiya Rate of Growth”. December 01, 2011. Abstract, 2004. Read More