From UPSC perspective, the following things are important :
Prelims level : Key trends in India's economic history
Mains level : Paper 3- Analysing India's economic progress
The article analyses India’s economic trajectory after independence and divides it into five phases. India’s progress is also compared with Pakistan’s as both countries have had much in common.
What drives economic growth
- Examining the experiences of different countries to analysing the growth may seem a promising approach.
- However, generalising from specific experiences can be misleading since ground conditions vary hugely across countries.
- There are two ways to avoid the pitfalls of generalising from specific cases.
- 1) The first is to examine the same country over time to look for changes in outcomes at specific points in time.
- 2) A second approach is to compare countries with shared history, culture and geography.
- If there are stark differences in outcomes between them, then there may be some policy lessons to be drawn.
The Indian subcontinent provides lessons from both approaches. The 73 years of post-Independence India has generated a lot of evidence across different political-economic regimes. This period has also provided us with the contrasting experiences of India and Pakistan, two countries that share history, geography and socio-cultural mores.
5 phases of India’s economic progress in 73 years: first approach
- 1) The first phase was the period 1950-65. This was the Nehruvian period of state-led industrialisation.
- Starting in 1950 annual per person GDP growth averaged 2 per cent during this period.
- This translated to aggregate annual GDP growth of around 4 per cent since the population was growing at close to 2 per cent.
- 2) The second phase of post-Independence India was during 1965-84.
- This period was an unmitigated economic disaster with negative per capita growth.
- The phase was marked with increasing state control of the economy, nationalisation of industry, closing of the economy to trade and a systematic weakening of institutions.
- 3) The third phase is 1984-91 when the government ushered in the first round of economic reforms by liberalising capital goods imports as well as starting industrial de-licensing.
- These reforms were rewarded by a growth take-off. India’s annual per capita GDP growth averaged 3.1 per cent while aggregate GDP grew at 5.2 per cent during 1984-91.
- 4) The period 1991-2004 is typically classified as the liberalisation phase.
- The reform effort was reflected in the 4.9 per cent annual per capita GDP growth during 1991-2004.
- 5) India embarked on a distinctive phase of faster growth post-2004 on the back of large investments in infrastructure.
- Per person GDP growth in the period 2004-2015 averaged 7.7 per cent.
- The corresponding aggregate GDP growth averaged 9 per cent.
- This came at a cost, as a number of these infrastructure projects later caused problems in the banking sector on account of burgeoning NPAs, a problem that continues till today.
Comparison with Pakistan
- In 1950, Pakistan’s per person GDP was almost 50 per cent greater than India that year.
- Due to political uncertainty, Pakistan stagnated throughout the 1950s while a politically stable India grew.
- As a result, by 1960, India had almost caught up with Pakistan in per capita GDP terms.
- Unfortunately, from 1964, India went into two decades of economic stagnation while Pakistan opened up to foreign capital.
- By 1984, Pakistan’s per capita income was more than double that of India’s.
- Pakistan’s slowdown began in the 1980s.
- This period coincided with the reforms in India.
- Nevertheless, it wasn’t till as recently as 2010 that India’s per capita GDP finally overtook Pakistan.
- First, openness to trade and private enterprise usually has positive effects on growth.
- Second, rapacious and exploitative democratic systems do not necessarily promote growth. Pakistan in the 1950s, 1990 and post-2010 is a good example.
- Third, the socio-economic environment surrounding religious fundamentalism may be inimical to growth.
- Fourth, degradation of institutions that regulate, arbitrate and enforce laws can be costly.
India’s growth when analysed from both the perspective offers valuable lessons for India and these lessons must guide India’s future economic trajectory.