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Mainstream, Vol XLVI, No 12

Prospering India, But For Whom?

Monday 10 March 2008, by Ch. Paramaiah, Vinod Anand


Economists and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants—India and China.

For the year 2006-07 India’s GDP grew at an impressive 9.2 per cent. The share of different sectors of the economy in India’s GDP is as follows: Agriculture—18.5 per cent, Industry—26.4 per cent, and Services—55.1 per cent. The fact that the service sector now accounts for more than half the GDP is a milestone in India’s economic history and takes it closer to the fundamentals of a developed economy. Over the past four years India’s GDP growth has clocked up an average annual pace of more than eight per cent, compared with around six per cent in the 1980s and 1990s and a measly 3.5 per cent during the three decades before 1980. India seems to be reaping the rewards of reforms that were made in the early 1990s. By 2025 India’s economy is projected to be about 60 per cent the size of the US economy. India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become the third major economic power within the coming 10 years.

According to the economic data for the financial year 2006-07, agriculture accounts for 18 per cent of India’s GDP. From a nation dependent on food imports to feed its population, India today is not only self-sufficient in grain production but also has a substantial food reserve. The progress made by agriculture in the last four decades has been one of the biggest success stories of free India. The inflation rate is only a bit higher than the target of three per cent set by the Reserve Bank of India.

There has been a surplus in India’s BOP in both current and capital accounts. The main driver behind India’s current account surplus has been invisible inflows, particularly private transfers comprising remittances, along with software service exports. The surplus in both accounts since 2002 has resulted in accumulation in the foreign exchange reserves of the country. The trend is consistent with that of most economies of developing Asia, particularly the East Asian economies. A strong BOP position in recent years has resulted in a steady accumulation of foreign exchange reserves. The level of foreign exchange reserves is around US $ 200 billion. The capital inflows, current account surplus and the valuation gains arising from appreciation of the major non-US dollar global currencies against the US dollar contributed to such a rise in forex reserves.

Money Supply (M3) has grown by a robust 22.5 per cent (year-on-year) as of October 26, 2007 compared to 18.4 per cent last year. The annual inflation rate in terms of WPI was 2.97 per cent for the week ended October 29, 2007 as compared to 5.35 per cent a year ago. Fiscal deficit and revenue deficit decreased by 6.1 per cent and 11.8 per cent during April-September 2007-08 over the corresponding period last year.

With the domestic savings rate or the ratio of gross savings to GDP at 32.4 per cent in 2005-06 and the gross domestic investment rate at 33.8 per cent in 2005-06, currently the GDP investment ratio is 35 per cent which is in line with other developed nations. Exports grew by 18.5 per cent in dollar terms during April-September 2007. Imports increased by 25.5 per cent in April-September 2007.

The Fiscal Responsibility and Budget Manage-ment Act in India has resulted declining deficits both at the Centre and in the States. Some deficit indicators are expected to decline by 0.7-0.9 per cent of the GDP for the year 2006-07. The fiscal deficit in India has declined in recent times. The tax collections of the government have increased, particularly such taxes as Income Tax, Corporation Tax and the Service Tax.

India is tremendously progressing in the field of science and technology. It has the third largest scientific and technical manpower in the world. The Council of Scientific and Industrial Research runs 40 research laboratories that have made some significant achievements. In the field of missile launch technology, India is among the top five nations of the world. It is heartening to note that it has recently launched the first commercial satellite.

India has less income inequality than China or America. But it has much more poverty. Some 260 million people still live on the equivalent of less than $ 1 a day. Half of all children under five are malnourished. Better infrastructure and education are needed to make the rural poor more mobile so that they have an escape route. Better infrastructure and improved public services can not only increase growth, but also spread the rewards.

India was the fourth largest recipient of FDI during 2005-06 and was instrumental in FDI inflows to South Asia surging by 126 per cent, amounting to US $ 22 billion in 2006, reveals UNCTAD’s World Investment Report. In India FDI equity flows were US $ 5.5 billion in 2005-06, these increased almost three times to US $ 15.7 billion in 2006-07, representing a growth rate of 184 per cent. In fact, calculating the total FDI inflows into India by international best practices places the total inflow at US $ 19,531 million. This huge inflow of FDI has in turn reversed the past trend, with FDI inflows overtaking the portfolio investment inflows by almost US $ 5.6 billion in 2006-07, according to the RBI’s report on International Investment Position. Cumulative FDI inflows during the period August 1991 to July 2007 amounted to US $ 60,242 million. Between 2001-02 and 2006-07, inflows increased by about two-and-a-half times.

The biggest danger of today’s rampant economic optimism is that it could breed complacency about the need for reforms. That would be a sure recipe for a future slowdown. India needs faster growth to create more jobs for its expanding population and to make it easier to relieve poverty. On the supply side, the indications are not too good. Crude oil prices touched an all-time high in 2007 and are expected to stay high in the coming year. One of the obstacles to growth in manufacturing is India’s labour laws, which are among the most restrictive in the world. The big problem is the dreadful quality of public services, from education and health to the provision of water. Half of urban households lack drinking water within the home; one quarter have no access to a toilet, either public or private. Many public services in cities have worsened in recent years.

EMPOWERING the population through universal education and health care, India needs to improve its HDI rank, as at 127 it is way below many other developing countries’ performance. The UPA Government is committed to furthering economic reforms and developing basic infrastructure to improve the lives of the rural poor and boost the economic performance. The government had reduced its controls on foreign trade and investment in some areas and has indicated more liberalisation in civil aviation, telecom and insurance sector in the future.

Since independence the Indian economy has striven hard for improving its pace of development. Notably in the past few years the cities in India have undergone tremendous infrastructure up- gradation but the situation is not similar in most parts of rural India. Likewise in the realm of health and education and other human develop-ment indicators, India’s performance has been far from satisfactory, showing a wide range of regional inequalities with the urban areas getting most of the benefits. In order to attain the status that currently only a few countries in the world enjoy and to provide a more egalitarian society to its mounting population, appropriate measures need to be taken. Currently the Indian economy is facing these challenges.

India needs to invest three-to-four per cent more of its GDP on infrastructure to sustain the eight per cent growth. Reforms need to be accelerated in all sectors. Difficult issues such as rationalising user fees for services need to be faced. The country’s consolidated fiscal deficit has been persistently large for many years. While recent efforts to tackle the deficit have paid off in substantial progress, it remains a continuing concern. India’s existing labour regulations are among the most restrictive and complex in the world—they protect only the insiders, the small number of workers who are already working in the organised sector, while hobbling the creation of manufacturing jobs for the tens of millions unemployed or working in poor quality jobs.

Nobody will refute the fact that a large number of poor people in India are not able to afford an adequate diet especially in terms of calorie intake. This is well supported by a recently conducted survey by the NSSO, according to which around one- fifth of rural India survives on Rs 12 a day.

There is another important aspect that our government normally ignores. This relates to the fact that in a mixed economy like India there are three sectors, namely, the private, public and judicial sectors. Apart from many other roles each one of them has one basic role. If the private sector fails (say, because of market failures) then the public sector intervenes, and when the public sector fails (because of many reasons), the judicial sector intervenes. In this way, the economy goes on. But unfortunately in India, leaving the private sector, these roles are not fully performed both by the public and judicial sectors. There is another paradox that exists in the context of India which completely distorts the working of the economy in a big way. In reality, the government sector, the political sector and the public sectors are completely separate and independent entities. But in the case of India, the three sectors fully overlap each other. In fact the ruling party dominates the whole show, particularly both the public and government sectors (the latter includes administra-tors and bureaucrats at all levels). If they work separately and independently and have a separate identity, the economy will work much more efficiently and effectively, and, apart from many other benefits, this would lead to an effective trickle-down and percolation effect.

In terms of what we have said above, there is no doubt that India is almost a booming economy, but the big question is: for whom? The plight of the common masses remains almost the same. The trickle-down effect does not work, the percolation effect is fully absent. There is still abject poverty, and the extent of poverty below the poverty line is still severe. Other equity issues are also serious. The so-called policy-makers should divert their attention to the lot of the proletariat. Once this is done, India will become a superpower. Let us wish the country well.


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The authors presently teach at the National University of Lesotho in Southern Africa.

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