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Indian Economy: Where next? - Views on News from Equitymaster
 
 
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  • Dec 5, 2006

    Indian Economy: Where next?

    The history of the post-independence India through its ten Five-Year Plans has been a mixed story. In the first thirty years, the average GDP growth hovered around 3%. Government made rapid strides in building up centers of educational excellence, creating a strong industrial base and achieving self-sufficiency in foodgrains. The process of economic liberalization in the 1980s enhanced the growth rate to over 5%, but it was only in the 1990s that the growth rate of around 6.5% for a decade was achieved. And now, Indian GDP growth is making global waves. India's real GDP Growth in the past 3 years has been hovering around the 8% mark and this trend is expected to continue going forward.

    Let us see what factors led the change...

    The period 1965 to 1981 saw the Indian economy going through periods of prolonged crises, all largely caused by exogenous factors. The three major crises - of 1965-76, 1973-75 and 1979-81 were the result of war, oil shocks or drought. The result was high inflation and a severe balance of payments crisis coupled with low growth. Fortunately for India, after the crisis, it bounced back within a short span of time.

    However, in harsh contrast to the economic crises of the 1960s and 1970s, the one that hit the Indian economy in 1990-91 (1 in the chart) was primarily the result of flawed policies during the preceding years. The events in Middle East and consequent run up in oil prices, deterioration of the current account due to slowdown in the growth of the trading partner and the political uncertainty, all led to the 1991 crisis. 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. This trend led to a further 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.

    The 1990s also saw a major policy of deregulation and reforms (period between 1 and 2 in the chart). The trade sector was fully liberalized with removal of quantitative restrictions and major reductions in peak tariff rates, deregulation of the industrial sector, reforms in banking and financial sector and plans on the future of the privatisation programme.

    The reforms had two broad objectives. One was the reorientation of the economy from a centrally directed and highly controlled economy to what is referred as a 'market friendly economy'. Reduction in direct control and physical planning was expected to improve the efficiency of the economy. It was to be made more 'open' to trade, through a reduction in trade barriers and liberalization of foreign investment policies. A second objective of the reform measures was macro-economic stabilization. This was to be achieved by substantially reducing fiscal deficits and the government's draft on society's savings.

    India's economic was constantly described by questions like Will it be a Giant or a Pygmy? A Hare or a Tortoise? A Tiger or an Elephant? Luck also seemed to smile on India, as the impact of these policies has been positive and significant. The economy performed well during this period. The balance of payments position also substantially improved.

    Also the growth rates with respect to different sectors were not same. The growth rates of agricultural and industrial production did not increase at all in the nineties, compared with the eighties. The increase in overall growth in the 1990s is overwhelmingly driven by accelerated growth of the 'service' sector. The service sector includes some very dynamic fields, such as uses of information technology and electronic servicing, in both of which India has made remarkable progress. This was largely a result of the liberalization policies.

    In the last five years, India has been on the radars of global investors. Growing integration of the Indian economy with the world, strong growth across the sectors, FDIs in infrastructure, retail, services, WTO impact on services and textiles, strong credit growth, large reservoir of skilled manpower, increased domestic savings and investments among other developments suggest that the growth momentum is likely to sustain.

    The expected growth makes Indian market a long-term play. It is today the fastest growing economy after China. In terms of purchasing power parity (PPP) it is the four largest economy. India is expected to be the 3rd largest economy in the world by 2050.

    % share of world GDP
      2003 2025 E 2050 E
    China 4% 17% 27%
    USA 32% 31% 21%
    Japan 13% 9% 4%
    UK 5% 4% 2%
    India 2% 5% 17%
    Source: Goldman Sachs

    In the end, the future always belongs to those who earn it, and, as Eric Hoffer had said, that the only way to predict the future is to have the power to shape the future. With India on the right track, it does have the power to shape up the future.

     

     

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