(Check the earlier article Macro Economics 101 before you start this one...)
The most important objective of the national policy is to increase the growth rate of the economy, represented as the GDP (gross domestic product). This article will give you an exciting insight into the growth of the Indian Economy since independence.
Introduction to Growth
Everyday in the papers, you read about GDP and the concept of "inclusive growth" - a phrase coined by the government to get a buy-in of the Left parties. Growth itself, is always inclusive. If India grows at the existing rate of 8-10% for the next 15-20 years, the economy will bring down unemployment to zero, and result in unemployable people getting trained and employable. This growth, if not sustained though, will only result in sucking out the unutilized potential in the country, and not create more opportunities for training and employing the trainable unemployed.
In the last few years, informal and small/cottage industries have resulted in huge increases in employment - it is interesting to note that the dire employment growth numbers come only from the registered, formal employment sectors like large industries which have trade unions, and hence are the vote banks of the left parties. This is less than 10% of the total manufacturing and services industry!
Check these numbers - employment has been growing at 2.49% per year, while the population is growing at 1.7%. Backlog of unemployedis thus being utilized at > 0.8% per year. In 10 years, there will be no backlog left to utilize. Is this inclusive growth? Decide for yourselves - poverty rates in India are down from > 50% to around 20% today.
Growth Rates in India
Upto the 1980s, we were growing at 3.5% per annum. While even most of the western economies grew at a similar rate, our rate of growth soon came to be called the "Hindu Rate of Growth". Why? Because in every 5-year plan, the government was promising 5%, for 30 long years, and always under-performing. Yet, the country returned the same family to power, never punishing it for its failures. Foreign observers confirmed that the elections were free and fair - and no one could explain why the electorate was OK with these failures, year after year. At the end they concluded it was because we were a Hindu nation, a population of under-achievement and complacency... a result of the voluntary poverty and renunciation of riches advocated in Hinduism.
Between 1981 and 1990, we targetted, AND achieved 5.5%, and finally caught the attention of the world. Between 1991 and 2006, this had shot up to 6.5%. In the 2001-10 decade, we are targetting 8%, and are all set to achieve a phenomenal 9-10% in 2011-2020.
Why? Because our so called biggest liability - our huge population- is coming to our rescue today. We are the only significantly sized country in the world with a steadily increasing population in the productive 15-64 age band. This will continue to rise till 2026-30, when it might touch a high of around 68-70%.
What does this mean? Larger labour force, falling dependency rates, higher savings - from 30% today, to around 38%. Where will this money go? Into investments - if you want to raise money, you now know where to go for it!
A Bit of History
Nehru strongly believed that trade with the British took away our freedom. His basic tenet for India was self-sufficiency. This, along with his Marx-influenced socialistic pattern of society, screwed India for a whole 4 decades.
Self-sufficiency meant that you should consume only what you can produce. Socialism meant that no individual would be allowed to be big enough to influence economics. If you cannot bring everyone above the poverty line, bring some below it, to achieve a more equal society. These two tenets fuelled his self-fulfilling prophecies - his actions and policies brought the Indian economy down to its knees.
His idea - to protect our freedom, take away the freedom to trade! Consume only what can be produced in India. Put barriers for foreign trade - high import duties, sometimes as high as 600%! Socialism knocked out private enterpreneurship and growth. Policy dictated everything through the license raj - not only what you can produce, where you can produce, but also how much! The government consistently planned for over installation and under utilization - after all, India was a poor country, and we couldn't consume all that we could produce - and we did not want to trade! The country planned for wastage of resources, while all the time maintaining that we were a resource-scarce country!
Trade was disallowed, but aid was OK!
To consume anything, you needed to produce it first. You needed raw materials and heavy industries to produce those raw materials like steel and copper! There was no private industry, so the government created the public sector. Remember, they could only produce limited quantities, and were operating at very low capacities, automatically resulting in high average cost, much lower than world prices. But we did not want to encourage trade! So the government put in exorbitant import duties, sometimes as high as 600%, to make imports and trade unviable!
Now, someone (the government) had to finance these heavy industries since they required huge investments - where will it get the money from? By taxing commodities through customs and excise duties - thereby hitting the very poor it was trying to protect! Indirect taxes, the worst form of taxation, became necessary. The government was also a constant borrower from the RBI, and that meant it couldn't be given autonomy.
Nehru started saying no one would buy from us, and then implemented policies like quotas in production, and high import duties that ensured exactly that - no one bought from India, because we had priced ourselves out of the world market. In 40 years, India's share of global trade came down from 2.4% in 1951, to 0.4% in 1991! Nehru had proved himself right!
The Turn around
The early nineties saw a few events that proved critical in India's turn around story. The Soviet Russia collapsed, and India lost over 25% of its miniscule trade in one stroke. Bush attacked Iraq, and our entire workforce in the Middle East beat a hasty retreat back to India, chocking off a critical source of revenues! At the same time, the imports bill was steadily increasing - specially the expensive oil!
When Narsimha Rao took up the reins of the country, we were on the brink of bankruptcy, and no politician was ready to take the mantle of the MoF. In stepped an academician, an economist, a professional - Dr. Manmohan Singh! (ps: My original article read Dr Manmohan Desai :) Thanks to kartz for pointing it out :))
In his first budget speech, Manmohan reiterated his commitment to the Gandhi/Nehru family - and then uttered the magic words - India would emphasize self-reliance (and not self-sufficiency). No one understood it at that time, but the message was clear - henceforth, we should be able to buy whatever we want to consume. India now had a clear make versus buy choice. While self-sufficiency enforced make, self-reliance allowed you to buy if it was cheaper to buy than to make. And we could buy only if we could sell - India was thus required and encouraged to produce what we could most efficiently and cheaply compared to the world market, and this money could then be used for buying what we could not make!
No aid, but trade!
To enable lower rates - the government needed to open the private sector to areas hitherto restricted to the public sector. This was privatization - and is very different from the left-propagated notion of selling off public sector industries to the private sector! He demolished the license raj - you now had the freedom to manufacture what you wanted, and how much you wanted! He demolished MRTP - the monopolistic and restrictive trade practices act, enacted to promote the socialistic pattern of society by discouraging private enterprise and growth. The planning commission no longer made the yes/no decision - it was now free to think, to plan!
This cycle, from opening up the economy to private players, to increased competition, to reduced costs, reduced import tariffs and trade barriers, to making the economy and industry globally competitive - this is what globalization is all about.
The other objective of the national policy, which goes hand in hand with growth, is inflation. Growth will always be inclusive, as long as inflation is low. The RBI continues to remain in charge of controlling inflation.
In the next article, we will see what our national targets for GDP and Inflation are, and what it means to all of us.
The most important objective of the national policy is to increase the growth rate of the economy, represented as the GDP (gross domestic product). This article will give you an exciting insight into the growth of the Indian Economy since independence.
Introduction to Growth
Everyday in the papers, you read about GDP and the concept of "inclusive growth" - a phrase coined by the government to get a buy-in of the Left parties. Growth itself, is always inclusive. If India grows at the existing rate of 8-10% for the next 15-20 years, the economy will bring down unemployment to zero, and result in unemployable people getting trained and employable. This growth, if not sustained though, will only result in sucking out the unutilized potential in the country, and not create more opportunities for training and employing the trainable unemployed.
In the last few years, informal and small/cottage industries have resulted in huge increases in employment - it is interesting to note that the dire employment growth numbers come only from the registered, formal employment sectors like large industries which have trade unions, and hence are the vote banks of the left parties. This is less than 10% of the total manufacturing and services industry!
Check these numbers - employment has been growing at 2.49% per year, while the population is growing at 1.7%. Backlog of unemployedis thus being utilized at > 0.8% per year. In 10 years, there will be no backlog left to utilize. Is this inclusive growth? Decide for yourselves - poverty rates in India are down from > 50% to around 20% today.
Growth Rates in India
Upto the 1980s, we were growing at 3.5% per annum. While even most of the western economies grew at a similar rate, our rate of growth soon came to be called the "Hindu Rate of Growth". Why? Because in every 5-year plan, the government was promising 5%, for 30 long years, and always under-performing. Yet, the country returned the same family to power, never punishing it for its failures. Foreign observers confirmed that the elections were free and fair - and no one could explain why the electorate was OK with these failures, year after year. At the end they concluded it was because we were a Hindu nation, a population of under-achievement and complacency... a result of the voluntary poverty and renunciation of riches advocated in Hinduism.
Between 1981 and 1990, we targetted, AND achieved 5.5%, and finally caught the attention of the world. Between 1991 and 2006, this had shot up to 6.5%. In the 2001-10 decade, we are targetting 8%, and are all set to achieve a phenomenal 9-10% in 2011-2020.
Why? Because our so called biggest liability - our huge population- is coming to our rescue today. We are the only significantly sized country in the world with a steadily increasing population in the productive 15-64 age band. This will continue to rise till 2026-30, when it might touch a high of around 68-70%.
What does this mean? Larger labour force, falling dependency rates, higher savings - from 30% today, to around 38%. Where will this money go? Into investments - if you want to raise money, you now know where to go for it!
A Bit of History
Nehru strongly believed that trade with the British took away our freedom. His basic tenet for India was self-sufficiency. This, along with his Marx-influenced socialistic pattern of society, screwed India for a whole 4 decades.
Self-sufficiency meant that you should consume only what you can produce. Socialism meant that no individual would be allowed to be big enough to influence economics. If you cannot bring everyone above the poverty line, bring some below it, to achieve a more equal society. These two tenets fuelled his self-fulfilling prophecies - his actions and policies brought the Indian economy down to its knees.
His idea - to protect our freedom, take away the freedom to trade! Consume only what can be produced in India. Put barriers for foreign trade - high import duties, sometimes as high as 600%! Socialism knocked out private enterpreneurship and growth. Policy dictated everything through the license raj - not only what you can produce, where you can produce, but also how much! The government consistently planned for over installation and under utilization - after all, India was a poor country, and we couldn't consume all that we could produce - and we did not want to trade! The country planned for wastage of resources, while all the time maintaining that we were a resource-scarce country!
Trade was disallowed, but aid was OK!
To consume anything, you needed to produce it first. You needed raw materials and heavy industries to produce those raw materials like steel and copper! There was no private industry, so the government created the public sector. Remember, they could only produce limited quantities, and were operating at very low capacities, automatically resulting in high average cost, much lower than world prices. But we did not want to encourage trade! So the government put in exorbitant import duties, sometimes as high as 600%, to make imports and trade unviable!
Now, someone (the government) had to finance these heavy industries since they required huge investments - where will it get the money from? By taxing commodities through customs and excise duties - thereby hitting the very poor it was trying to protect! Indirect taxes, the worst form of taxation, became necessary. The government was also a constant borrower from the RBI, and that meant it couldn't be given autonomy.
Nehru started saying no one would buy from us, and then implemented policies like quotas in production, and high import duties that ensured exactly that - no one bought from India, because we had priced ourselves out of the world market. In 40 years, India's share of global trade came down from 2.4% in 1951, to 0.4% in 1991! Nehru had proved himself right!
The Turn around
The early nineties saw a few events that proved critical in India's turn around story. The Soviet Russia collapsed, and India lost over 25% of its miniscule trade in one stroke. Bush attacked Iraq, and our entire workforce in the Middle East beat a hasty retreat back to India, chocking off a critical source of revenues! At the same time, the imports bill was steadily increasing - specially the expensive oil!
When Narsimha Rao took up the reins of the country, we were on the brink of bankruptcy, and no politician was ready to take the mantle of the MoF. In stepped an academician, an economist, a professional - Dr. Manmohan Singh! (ps: My original article read Dr Manmohan Desai :) Thanks to kartz for pointing it out :))
In his first budget speech, Manmohan reiterated his commitment to the Gandhi/Nehru family - and then uttered the magic words - India would emphasize self-reliance (and not self-sufficiency). No one understood it at that time, but the message was clear - henceforth, we should be able to buy whatever we want to consume. India now had a clear make versus buy choice. While self-sufficiency enforced make, self-reliance allowed you to buy if it was cheaper to buy than to make. And we could buy only if we could sell - India was thus required and encouraged to produce what we could most efficiently and cheaply compared to the world market, and this money could then be used for buying what we could not make!
No aid, but trade!
To enable lower rates - the government needed to open the private sector to areas hitherto restricted to the public sector. This was privatization - and is very different from the left-propagated notion of selling off public sector industries to the private sector! He demolished the license raj - you now had the freedom to manufacture what you wanted, and how much you wanted! He demolished MRTP - the monopolistic and restrictive trade practices act, enacted to promote the socialistic pattern of society by discouraging private enterprise and growth. The planning commission no longer made the yes/no decision - it was now free to think, to plan!
This cycle, from opening up the economy to private players, to increased competition, to reduced costs, reduced import tariffs and trade barriers, to making the economy and industry globally competitive - this is what globalization is all about.
The other objective of the national policy, which goes hand in hand with growth, is inflation. Growth will always be inclusive, as long as inflation is low. The RBI continues to remain in charge of controlling inflation.
In the next article, we will see what our national targets for GDP and Inflation are, and what it means to all of us.
6 comments:
Really nice and informative blog. Socialistic pattern really saw the economy crawling in the first 40 years of our independence!
But what is remarkable to notice here is that - We are a democratic country! And yet, just one individual's decision changed our destinies so much? (first Nehru and then Dr. Manmohan).
Just one family decided what is best for us for the first 35-40 years?
Although Dr. Manmohan brought in the new policies, in a recent speech he too went into a regressive mode asking not to cause a social divide by having highly paid professionals (something to that effect).
Anyway, we have definitely come a long way today.. and for the better in many ways.
The moot point is, we had choices, we didn't take them. Maybe we should blame it on our religion!
And what Manmohan was talking about wasn't about not paying professionals - it was about corporate honchos not over paying themselves - and in some sense, when you realise that the money they use also "belongs" to the share holders, it's not that strange!
Remember Enron? They screwed up investors, but each and every executive went away a multi-millionaire. While the company suffered, none of them did! They stuffed themselves with the shareholder's money!
overpaid corporates -
Well yes, I agree with that point!
>In stepped an academician, an >economist, a professional - Dr. >Manmohan Desai!
I'm guessing you mean Dr. Manmohan Singh (it'd have been pretty interesting though to see where the director would have taken the country!)
Thanks kartz, for pointing that out :)
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