introduction & background of indian economy

8/12/2019 Introduction & Background of Indian Economy

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Background of Indian EconomyDr. R. Jayaraj, COMES, UPES

Indian Economy and Trade Policies


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Course OutlineMBCE 704: INDIAN ECONOMY & TRADE POLICIES

o Background of Indian Economy

o Reforms in Indian Economy Stage I and II

o Government EXIM Policies

o Procedures for Imports

o Foreign Exchange Regulations

o Documentation - Custom and Shipping Clearances

o

Schemes and Incentives Imports and Exportso Govt. Policies & Procedures for Duty Free Imports

o Export Marketing

o Maritime Insurance


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India: An Introduction

Population: 1.13 billion(2007)

Federal State with 28 Statesand 7 Union Territories

GDP USD1.2 trillion (2007)

External Trade USD 528billion (2007)

Forex Reserves USD 247billion (end Nov 2008)

Market capitalisation (asend Nov 2008): USD 560billion (50% of GDP).


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4

Indias Geography

India has one-third the land mass of the United States;and nearly four times its population.

India therefore must develop strategies for sustainablegrowth and livelihood which suits its requirements, whilecontinuing to integrate with the world economy and

moving towards a knowledge-based society Economic efficiency in the use of scarce resources,growth and social cohesion promoting institutions,

socio-political norms are therefore imperatives.

Country Population Land mass

India 1.13 b 3.2 m sq km

USA 0.30 b 9.6 m sq km


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Historical Structure of Indian Economy

Colonialism: The first European power to arrive in India wasthe army of Alexander the Great in 327326 BC. The Dutch,English, French and Danes established trading posts in Indiain the early 17th century.Vasco da Gama became the first European to re-establishdirect trade links with India since Roman times, by beingthe first to arrive by circumnavigating Africa. Having arrivedin Calicut, which by then was one of the major trading portsof the eastern world.

Establishment of political and administrative control byforeign states in 1757 ( France) and in 1858 (Britain).

Economic interests reinforced by political control

Laws and regulations imposed by colonial power, includingpowers to raise revenue through taxation


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British Rule Exploitation of India Colonial Exploitation Merchant Capital

Primary objective is to earn profit through overseastrade. Company was given authorization to export

gold & silver bullion and coins of these metalsworth of 30000 per annum.

After battle of Plassey, they got political powerwhich ensiled pressure to tilt the balance ofexchange in its favour and secure maximum goods

for minimum payment. Margin between trade andplunder- Palme Dutt.



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Land revenue was an instrument of plunder. Cornwallisintroduced Permanent Settlement in 1773, landrevenue was fixed at 34,00,000. They had surplus of 40,37,000 from Bengal alone.

Officers of East India were unscrupulous and corrupt.They adopted all possible means to make largefortunes. For instance, Clive himself, had nothingwhen he came to India, but accumulated large wealth.He went home with 2 Lakhs of pounds, acquired an

Indian estate which brought him 27,000 pounds perannum.



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Industrial Capital Colonial Exploitation1. Export of Machine-made goods to India

Destroy textile industry

2. Development of Jute Industry and plantations

East India Company established jute industryin Bengal-Monopoly-Huge profits-interestsin tea, coffee & indigo plantations.

3. Revenue & Expenditure policies by Britishimperialists (adherents)

Large army-1/3rdof NI in army



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Finance Capital Colonial Exploitation Peoples investmentsas British capital-public debt system to raise funds

1. State Sector

All the expenditures in India treated as loans granted toIndia

2. Railways

British capital was imported for construction of IndianRailways.-Burden of interest to be paid by Indian Taxpayers.-Indian railways helped to create huge demand forIron, coal, equipments- This is used for the developmentof British industries.

3. Investment in plantations

Tea, coffee& rubber plantations- total investments around24.2 million in 1909.

4. Other sectors

Mining, oil, banking, finance and industries such as rubber,match box, paper, engineering, sugar, cotton, etc..



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Indias underdevelopment duringBritish period

National Income estimates

No data-roughly 340 Rs crores in 1867-68

Nature and extent of poverty

No statistical information-Dadabhai Naoroji afterBritish rule India suffered seriously and sinking inpoverty.-Indian Natives were worse than Americanslaves. British people lived luxurious life.

Trends in real wage No data till 1938- but decline in real wages of

unskilled laborers.


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Occupational Distribution of Population

Data not clearly available for last 70 yrs of British.-roughly61% in 1881-73 % in 1921

Traditional Agriculture

1757-1947 over 190 yrs there was hardly any change infarm technology-commercialization of agriculture hardlyhelped-British was not ignorance of importance ofirrigation but they didnt.

Weak Industrial Structure

Crafts were fairly developed pre-British period. Afterdecline of handicrafts people shifted to agriculture-modern industries not began in mid-19thcentury. In the

first half of 20th

century some industries were establishedand wave of industrialization never came in India.

Indias underdevelopment duringBritish period

S P li i & E i


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State Policies & EconomicUnderdevelopment

Incident of land taxes, land tenure & stagnation in agriculture

1. Zamindari system by Cornwallis in 1793-The zamindar was considered a lord, and would collect alltaxes on his lands and then hand over the collected taxes tothe British authorities (keeping a portion for himself). Noownership of lands-no harm to state & farmers-zamindarsenjoyed

1. Ryotwari system-temporary -land settlement (Madras,Bombay, and Assam)

These revenues included undifferentiated land taxes andrents, collected simultaneously. Where the land revenue wasimposed directly on the ryots -- the individual cultivators

who actually worked the land

3. Mahalwari system-small part of the country

This was the system in North India. There was zamindarisystem in Northern India. Their land and crops wereinspected, their rights and customs were observed and then

Taxes were charged. "Mahal" meant a village. So, this systembecame to be known as Mahalwari System.


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Industrial & Commercial policies

1. Transformation of British India-to create market inIndia for the products of British Industries

2. After Industrial Revolution , Britain levied protectivetariffs on imports of Indian manufactures goods -70to 80% failed to imports of Indian textiles.

3. Shift in policy after WW I-discriminating protection-some products allowed.

Drain of Wealth

1. Wealth from India to England was equal to the excessof exports over imports.- some charges and interestpaid on British investments in India-from 1829-1865

it was 2 crores

State Policies & EconomicUnderdevelopment


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Historical Nature of Indian Economy Low per capita Income

Inequitable distribution of wealth & high incidents of poverty

Predominance of Agriculture

Rapid population growth

Low level of human development

1. Longevity: life expectancy at birth

2. Knowledge: literacy, primary, secondary & territoryratios

3. Standard of Living: real GDP ( in PPP)

Unemployment

Scarcity of capital

Technological backwardness

Lack of entrepreneurs


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India constitutes nearly 17 percent of the worldspopulation, but even in PPP terms its GDP share is only5 percent.

In all good things (eg, agricultural production, GDP,patents, tourists, FDI) Indias share is at least one-sixthof the worlds total.

Indias Share in World GDP


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Indias Share in World GDP

Conversely, in bad things, India has a muchsmaller share, India, can not feel a sense ofaccomplishment. There is therefore no room forcomplacency.

India must continue to be outward oriented, andcultivate a mindset that absorbs ideas and goodpractices from all parts of the globe an applythem to meet Indias challenges.

Yashend Huang (2008) has argues that if Indiacan grow, then no other poor country must facea Faustian(gain without cost) choice betweengrowth and democracy


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25% 23% 24%16%

13%

9%

4%

3%


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18

Evolution of Global and Per Capita GDPin the Last 2,000 Years

Source: Commission on Growth and Development (2008)


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Key Demographic Indicators in Asia

Sources: Population Division of the Department of Economic and Social Affairs of the UnitedNations Secretariat, World Population Prospects: The 2006 Revision, http://esa.un.org/unpp, 23November 2007; 3:48:26 PM; UN Statistics Division, http://unstats.un.org/unsd/demographic,28 November 2007; 6:29 PM.

Country Total

Population

(millions)

Average

annual rate

of change ofpopulation

Total

Fertility Rate

(TFR)

Median Age Life Expectancy

at Birth

Medium Variant

2007 2050 2005-

2010

2045-

2050

2005-

2010

2045-

2050

2005 2050 2005-2010 2045-2050

World 6671.2 9191.3 1.17 0.36 2.6 2.0 28.0 38.1 67.2 75.4

China 1328.6 1408.8 0.58 -0.32 1.7 1.8 32.5 45.0 73.0 79.3

India 1103.4 1592.7 1.55 0.30 3.0 1.8 24.3 38.7 63.1 75.9

Indonesia 231.6 296.9 1.16 0.10 2.2 1.8 26.5 41.1 70.7 78.6

Korea 48.2 42.3 0.33 -0.89 1.2 1.5 35.0 54.9 78.6 83.5

Malaysia 26.6 39.6 1.69 0.41 2.6 1.8 24.7 39.3 74.2 80.1

Philippines 87.9 140.5 1.90 0.50 3.2 1.8 21.8 36.3 71.7 78.7

Singapore 4.4 5.0 1.19 -0.38 1.2 1.6 37.5 53.7 80.0 84.6

Sri Lanka 19.7 18.7 0.47 -0.55 1.9 1.8 29.5 43.4 72.4 77.6

Thailand 63.9 67.4 0.66 -0.27 1.8 1.8 32.6 44.3 70.6 78.1

Vietnam 87.4 120.0 1.32 0.21 2.1 1.8 24.9 41.6 74.2 80.3
http://esa.un.org/unpphttp://unstats.un.org/unsd/demographichttp://unstats.un.org/unsd/demographichttp://esa.un.org/unpp


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2

Country Life Expectancy at

age 60, 2000-2005

Percentage of

total population

aged 60 and

above

Medium Variant

Population aged 60

and above (millions)

Medium Variant

Men Women 2005 2050 2005 2050

World N.A. N.A. 10.3 21.8 672.8 2005.7

China 20 17 11.0 31.1 144.0 437.9

India 16 18 8.0 21.0 89.9 329.6

Indonesia 18 16 8.3 24.8 18.9 73.6

Korea 23 18 13.7 42.2 6.6 17.8

Malaysia 19 17 6.7 22.2 1.7 8.8

Philippines 19 17 6.0 18.2 5.1 25.5

Singapore 23 20 12.3 39.8 0.5 2.0

Sri Lanka 17 21 9.7 29.0 1.9 5.4

Thailand 20 17 11.3 29.8 7.1 20.1

Vietnam 20 18 7.6 26.1 6.5 31.3

Key Demographic Indicators in Asia


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Demographic Trends

Asia is set to experience rapid ageing in the 21stcentury. China, Indonesia, Korea, Malaysia, Philippines,Singapore and Thailand will have nearly as many elderlyby 2050 as in the world in 2005.

Asia in 2050 will account for nearly three-fifths of theworldspopulation.


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Demographic Trends

The rapid ageing of Asia is a result of reduction in fertilityrates and increased life expectancy at birth and at age 65.By 2045-50, the above countries will have Total FertilityRate (TFR) below the replacement rate as compared to onlyfour in 2005-10.

Replacement fertility rate is the total fertility rate at whichnewborn girls would have an average of exactly onedaughter over their lifetimes. That is, women have justenough female babies to replace themselves (or,equivalently, adults have just enough total babies to replacethemselves.

As is well known, increased longevity raises social securitycosts disproportionately. Uncertainty about longevity trends(example, due to uncertain impact of medical technology) isincreasing the complexity of designing pension programs.


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Source: United Nations, 2002, World Population Ageing 1950-2050 Sales NoE02XIII.3, Department of Economic and Social Affairs, Population Division, NewYork: United Nations Publications.

Population Aged 15-59 for Asia-Pacific Economies1950-2050


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New jobs in thedeveloping

worldIn millions % of world

increaseDeveloping Asia 315.5 67

China 65 13.8

India 142.4 30.2Latin America 45 9.5

United States 12.5 2.6

EU 25 8.4 1.8

Total 471.3 100

New Jobs in the World Economy 2005-2020

Source: Economist Intelligence Unit


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Panagariya (2008) identifies four distinct phases inIndias growth and economic reforms sinceindependence.

1. Phase I (1951-65): Takeoff under a liberal regime

2. Phase II (1965-81): Socialism Strikes with aVengeance

3. Phase III (1981-88): Liberalization by Stealth

4. Phase IV (1988-06): Triumph of Liberalization

The Four Phases


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The Four Phases

Phase Time Period Growth Rate

Phase I 1951-65 4.1 %

Phase II 1965-81 3.2 %

Phase III 1981-88 4.8%

Phase IV 1988-06 6.3%

Indias real GDP grew at 6.9% pa during 2000-2007(RBI Handbook 2008)


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Composition of GDP

2004-05

Agriculture

and Allied

Industry

Manufacturing

Service

1950-51

Agricultureand Allied

Industry

Manufacturing

Service

Declining share of agriculture; increasing share ofindustry and services


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Food grain production

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The governmentswheat stocks on August1 were up 102%, rice wasdown 6%

Rice procurement is stillon and the governmentwill be able to buy about1.2 mt in the last twoquarters of 2008

The governments ricestocks have fallendespite higherprocurement, as several

states have kept stocksfor their own use.


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Merchandise Exports and Importsas Proportion of GDP

Y ear E x p o rts/GDP Im p o rts/GDP

1965-66 2.9 5.1

1975-76 4.8 6.31985-86 3.9 7.1

2005-06 20.5 22.6


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Merchandise Exports and Importsas Proportions of GDP

Merchandise Exports and Imports as Proportions of

GDP

0

5

10

15

20

25

1965-66 1975-76 1985-86 2005-06

%o

fGDP

Exports/GDP

Imports/GDP


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External Sector Data

In 2007, Indias total external trade in goods andservices was USD 528 billion (47.9% of GDP)

This is one of the important indicators of Indiasrapidly integration with the world economy.

India plans to achieve a target of USD 1000 billionbefore 2015 in its external trade. This will be ahuge challenge in view of the current global crisis.

The others are inward Foreign Direct Investment (

$32.3 billion in 2007-08), and remittances (~$ 30billion in 2007)

Indias outward investment is also growing.

31


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Official Poverty Estimates


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Poverty Decline under LiberalizationReforms


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Growth in Per-

Capita NetState DomesticProduct

Wide variation

among states


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Major Challenges

Ensuring that good economics is good politics (this willrequire a shift from ruling to governing mindset, andadministrative and civil service reforms).

Environmental challenges.

Energy and Food Security.

Managing Urbanization.

Accelerating physical and social infrastructure

investments.Developing human capital for sustainable livelihoods

through application of knowledge economy .

Coping with demographic challenges.

introduction & background of indian economy

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