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India’s Economic Growth story and the

  Jan 19, 2023

India’s Economic Growth story and the future roadmap

Q What is the context  ?

  • By 2047, India will complete 100 years after Independence. By that time, India strives to achieve the status of a developed economy, which means achieving a minimum per capita income equivalent to $13,000.

Q What was Economic growth during the British period ?

  • Poor state of economy: It is not realized often that India’s economic progress in the first half of the 20th century under British rule was dismal. According to one estimate, during the five decades, India’s annual growth rate was just 0.89%.
  • Negligible growth in per capita: With the population growing at 0.83%, per capita income grew at 0.06%. It is not surprising that immediately after Independence, growth became the most urgent concern for policymakers.

Q How has been Economic growth after Independence ?

  • In the early period, India’s strategy of development comprised four elements:
  1. Raising the savings and investment rate;
  2. Dominance of state intervention;
  3. Import substitution, and
  4. Domestic manufacture of capital goods.
  • Modest growth till 1970: India’s average growth till the end of the 1970s remained modest, with the average growth rate being 3.6%. With a population growth of 2.2%, the per capita income growth rate was extremely modest at 1.4%.
  • Improvement in social indicators: On certain health and social parameters, such as the literacy rate and life expectancy, there were noticeable improvements.
  • The success of green revolution: While India had to rely on the heavy imports of food grains on a concessional basis, initially, there was a breakthrough in agriculture after the Green Revolution.
  • Industrial base widened: The industrial base expanded with time. India became capable of producing a wide variety of goods including steel and machinery.
  • Unsustainable fiscal policy: Plan after plan, actual growth was less than what was projected. The Indian economy did grow at 5.6% in the 1980s. But it was accompanied by a sharp deterioration in the fiscal and current account deficits, and the economy faced its worst crisis in 1991-92.

Q What is the Statistics of economic growth after 1991 ?

  • Rapid economic growth: Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%. Between 2001-02 and 2012-13, it grew by 7.4% and the growth rate between 2013-14 and 2019-20 was 6.7%.
  • Sustained period of high growth rate: The best performance was between 2005-06 and 2010-11 when GDP grew by 8.8%, showing clearly what the potential growth rate of India was. This is the highest growth experienced by India over a sustained period of five to six years. This was despite the fact that this period included the global crisis year of 2008-09.
  • Rising investment rate: There was a corresponding increase in the savings rate. The current account deficit in the Balance of Payments (BOP) remained low at an average of 1.9%.
  • Setback to growth after 2011-12: However, the growth story suffered a setback after 2011-12. The growth rate fell to 4.5% in 2012-13 according to the 2004-05 series. The growth rate since then has seen ups and downs. The growth rate touched the 3.7% level in 2019-20.

Q What is Roadmap for Future Growth ?

  • Keeping the sustained growth rate: The first and foremost task is to raise the growth rate. Calculations show that if India achieves a 7% rate of growth continuously over the next two decades and more, it will make a substantial change to the level of the economy. India may almost touch the status of a developed economy.
  • Maintaining the incremental capital output ratio: If India maintains the incremental capital output ratio at 4, which is a reflection of the efficiency with which we use capital, India can comfortably achieve a 7% rate of growth.
  • Investment must be increased: Raising the investment rate depends on a number of factors. A proper investment climate must be created and sustained.
  • Private investment is crucial: While public investment should also rise, the major component of investment is private investment, both corporate and non-corporate. It is this which depends on a stable financial and fiscal system. The importance of price stability in this context cannot be ignored.
  • New technologies must be embraced: India needs to absorb the new technologies that have emerged, and that will emerge. Its development strategy must be multidimensional.
  • Strong Export and manufacturing: India need a strong export sector. It is a test of efficiency. At the same time, India needs a strong manufacturing sector. The organized segment of this sector must also increase.
  • Strengthened the social safety nets: As output and income increase, India must also strengthen the system of social safety nets. Growth without equity is not sustainable.

Q What are the Challenges for India’s growth ?

  • Low per capita income: India today is the fifth largest economy. This is an impressive achievement. However, in relation to per capita income, it is a different story. In 2020, India’s rank was 142 out of 197 countries. This only shows the distance we have to travel.
  • Declining growth in developing countries: The external environment is not going to be conducive. The Organization for Economic Co-operation and Development reports a secular decline in growth in developed countries.
  • Climate change may affect the growth: Environmental considerations may also act as a damper on growth. Some adjustment on the composition of growth may become necessary.

Q What can be the way forward ?

  • Considering the India’s population, India has no option but to grow continuously. Government has undertaken major structural reform and policy initiatives like GATI-SHAKTI to give fillip to growth of economy. These are the steps in the right directions and more such liberalizing initiatives need to be encouraged.