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Wednesday, May 12, 2010

INDIA AS A DEVELOPING ECONOMY

India’s economy had suffered a long period of stagnation under the British. After Independence, this long spell of stagnation was broken. With the beginning of economic planning, an era of economic development was ushered in. Economic development in India has broadly two facets:

· Quantitative

· Structural

From the point of view of the business enterprises both are relevant. For assessing the development process in quantitative terms national income trends are to be examined. But still more necessary is to take note of the structural changes in the economy. The two together, in fact, broadly indicate the business prospects in the country.

NATIONAL INCOME TRENDS:

Immediately after independence, India was bogged down in problems created by the partition of the country. World War II had also left certain problems such as inflation and food shortages. Moreover, the country caught in ‘the low level equilibrium trap’ during the British period had no easy way out to tread on a high growth path. This was a dismal situation from the point of view of the business.

Aware of its own limitations the business community in India expected effective intervention of the government in the economy. The government thus adopted economic planning in the capitalist framework. The Indian plans which were indicative in nature did transform India’s stagnant economy into a developing economy. The rate of economic growth, however, remained low in the first 3 decades of economic planning. Since 1951 the net national product (NNP) increased at a the

Increase in per capita income in this period was as low as 1.2% per annum. This obviously did not provide any scope for rapid growth of business. The situation drastically changed in the eighties. The trend rate of growth suddenly picked up and for 10 years the NNP increased at the rate of 5.6 % per annum. In the 2 years 1990-91 and 1991-92 the country was caught in a deep economic crisis and as a result growth rate declined steeply. The new economic policy which was adopted in 1991, temporarily put the Indian economy on a high growth path. During the eighth plan period the rate of increases in the NNP was 6.7% per annum. The per capita income also registered an impressive growth rate in this period as it was as high as 4.6 % per annum. There was a slow down during the 9th plan period and in the 5years of the plan the rate of increase in the national income had come down to 5.5% per annum. This was definitely not an encouraging situation. The performance of the Indian economy was most disappointing in 2002-2003 as national income rose by only 4.2%.however,9.0 % increase in national income in 2003-04 created false hope that the Indian economy had finally treading a high growth path. But high economic growth in this year was illusory because it was an outcome of remarkably good monsoon performance resulting in 9.6% increase in an agricultural production. The performance of the Indian economy ever in the recent years compared with that of china is par behind the latter. The business in India has not accomplished all that it has achieved in countries like South Korea, Singapore, and china.

STRUCTURAL CHANGES

Structural changes indicate that the process of development which began in the early fifties is still continuing. However the speed of change is slow and in certain spheres one cannot say with confidence whether changes have really occurred. Let us now specifically consider whether importance of agriculture in India s economy has declined over the year and the occupational distribution of the population has improved and whether basic industries have developed and infrastructure and the financial sector have grown.

Sluggish sectoral changes in the Indian economy: An important index of development is a steady decline in the importance of agriculture and allied activities in the economy in terms of their contribution to gross domestic product. In 2003-04 the share of agriculture and allied activities in the gross domestic product was 24.0% as against 39.6% in 1980-81 and 45.8% in 1970-71.The share of the output in secondary sector comprising industries, construction, electricity etc .In the GDP from 22.3% in 1970-71 to 24.4% in 1980-81 and as fluctuated around that level since then. Territory sector is not a homogeneous category. This includes trade transport communication and services. During the past three decades the shares of this sector in the GDP as risen from 31.9% in 1970-71 to 51.4% in 2003-04 . The Indian economy is no longer a subsistence agrarian economy. Now its structure provides beyond any doubt a for more congenial environment for business activities as compare to about two decades ago.

The occupational distribution of population in India however raises some doubts about the validity of these observations. In developing economy occupational distribution of population steadily changes in favour of secondary and tertiary sectors. This happens as a result of decline in the importance of agriculture from which transfer of population to other sector take place. The occupational distribution of workforce in 2001 and compare it with that in 1951 to see if there was any change in the position. We find that in India agriculture accounted for 64.8% of the workforce in 2001 as against 69.7% in 1951. This implies that the occupational distribution of workforce had not changed significantly during the 50 year period from 1951 to 2001 through the economy had recorded a not too insignificantly growth. V.K.R.V Rao went a step further and asserted that the census data show a structural retrogression in occupational terms

In most of the European countries industries were established at a time when there was massive inflow of capital in these countries from colonies. This had enabled them to accelerate the pace of industrialization which eventually transformed their agrarian economies into industrial economies. Since this course was not open to India the government thought of relying on the instrument of democratic planning. The Indian economic planning was not very effective due to its indicative nature and accordingly the industrial sector failed to grow at the desired pace. In the absence of fast industrialization the growth of the tertiary sector was also sluggish.

GROWTH OF BASIC CAPITAL GOODS INDUSTRIES:

At the time of independence, not only India’s industrial structure was underdeveloped in a general way, its backwardness was more clearly manifested in the absence of basic capital goods industries. During the British period very few basic industries were established. Consequently, when the country got independence, the share of basic & capital goods industries in the total industrial production was roughly one-fourth. From employment point of view, the importance of large-scale industries was not much. Out of the total 1.5 crore workers employed in the whole of industrial sector, large-scale industries accounted for just one-fourth of it. Since independence, pattern of industrialisation has been determined by the policies of the state. Under the second plan, a high priority was accorded to capital goods industries, as their development was considered a prerequisite to overall growth of the economy. This strategy of development was at the heart of India’s economic planning for about two & a half decades- beginning from 1956. Consequently, a large number of basic industries which produce capital equipment & useful raw materials have been set up making the country’s industrial structure pretty strong. Among the large number of industries which have developed over the past five decades, iron & steel, heavy chemicals, nitrogenous fertilizers, heavy engineering, machine tools, locomotives, heavy electrical equipment, aluminium, & petroleum products are of strategic importance. These industries now account for more than fifty percent of the industrial production


DEVELOPMENT OF INFRASTRUCTURE

Infrastructure includes transport facilities, energy production and telecommunication system. Their development creates favourable conditions for business growth and also for better human living. Therefore, when these facilities expand in some country, it can be assumed that the country is undergoing a change for the better.

In India, though presently infrastructure is a major constraint on business growth, at the same time the fact remains that over the years it has registered an impressive growth. The transport system over the past four decades has grown both in terms of capacity and modernization.

Indian Railways has one of the largest and busiest rail networks in the world, transporting 20 million passengers and more than 2 million tonnes of freight daily. The railways traverse the length and breadth of the country, covering 6,909 stations over a total route length of more than 63,327 kilometers.

India has the third largest road network in the world as a result of spectacular development of roads under various plans. India has a large road network of over 33.14 lakh kilometers of roadways in 2009 as against 24.8 lakh kilometers in 2001-02.

Progress of shipping and civil aviation has been equally impressive. There has also been a massive increase in installed electricity generating capacity in the country. In March 2009, the installed power generation capacity of India stood at 1,47,000 MW against 1,31,400 MW in 2003-04. The Indian government has set an ambitious target to add approximately 78,000 MW of installed generation capacity by 2012.

After the announcement of new telecom policy in India, there has been a spectacular progress in telecom in India. As per December 2009 the overall tele-density in India is 47.89 compared to 6.9 in December 2003.

India can unleash its full potentials, provided it improves the infrastructure facilities, which are at present not sufficient to meet the growing demand of the economy. Failing to improve the country’s infrastructure will slow down India’s growth process. Therefore,

Indian government’s first priority is rising to the challenge of maintaining and managing high growth through investment in infrastructure sector, among others.

PROGRESS IN BANKING AND FINANCIAL SECTOR:

Since Independence significant progressive changes have taken in the banking and financial sector of India. In this period organization of money and capital market has improved, specialized industrial financial institutions have been set up, banking services have increased and modern banking have reached small town and villages. The growth of commercial bank and cooperative credit societies has been really spectacular and as a result of it the importance of indigenous bankers and money lenders declined. During the British period, the whole banking development had taken place in the private sectors. Even Reserve Bank of India a shareholders’ bank. The process of nationalization was initiated after Independence. First the Reserve Bank was nationalized in 1949. Thereafter in 1955 the Imperial bank of India , a leading commercial bank of the time was nationalized and converted into State Bank of India. Since commercial banks were reluctant to open branches in the countryside, the State Bank of India was assigned the task of opening a large number of branches in small towns and villages. In 1969, fourteen big commercial banks were nationalized. This act of the government undermined the control of big capitalists on the financial capital. Since nationalization, for about two decades these banks radically changed their credit policy. They made more funds available to priority sectors such as agriculture, small-scale industries, trans-credit has been abandoned and the credit flow to priority sectors has declined.

The Indian economy, though economically still backward, is no longer caught in a ‘low level equilibrium trap’ where it remained for a long period under the British. Since Independence, it has recorded a not too insignificant increase in the national income and per capita income, though one cannot be equally sure of the trickle down effects of growth. We further notice that the Indian economy during the past five and a half decades has progressed structurally when we consider the growth of capital goods industries, expansion, the infrastructure, performance of the public sector, changes in the financial organization and the progressive transformation of the agrarian scene. These factors over the years are believed to have created an element of dynamism in the country’s economy and one can now hopefully say that it would sustain development in the future.

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