An Example Of Transition Economy Economics Essay

Around 1.21 billion people currently living in India, which is about 17.4% of the global population or one, can say 2.4 per cent of world GDP in US dollar terms and 5.5 % in PPP terms.

The universal wellbeing too is linked to progress in India as reflected in the eager global interest in India. But, India seems to instigate and disappoint at the same time.

Where some countries raced ahead in the development process, India lagged behind. It took 40 long years for India’s real per capita GDP to double from 1950-1951 to 1990-91. But, for India 1991-92 was a significant moment in modern economic history because of a severe balance of payments catastrophe prompted far accomplishment economic reforms, unlocking its growth potential, and the result was that in only 15 years, India’s per capita income doubled again by 2006-07. If India will maintain its current growth rate then, India’s per capita income could definitely double by 2017-18 in next some years.

The key policy reforms since 1991-92, reviewing the economic progress made so far

Policy Reforms before 1991

Macroeconomic crisis of 1991 discernible a turning point in India’s economic history for two reasons.

First, fiscal arrears driven external payment mishap with a dip in foreign exchange reserves to below US$ 1 billion in 1991.

Second, concurrently efforts were made towards wide ranging structural reforms surrounding areas of trade, management of exchange rates and industry, public finance as well as financial sector.

The main objective was to create a competitive environment to improve output and efficiency. New industrial policy fostered competition by

Abolishing monopoly restrictions

Terminating the phased manufacturing programmers

100% foreign direct investment

Import of foreign technology

De-reservation of sectors till then reserved for the public sector.

Only five industries are under licensing presently, mainly on account of environmental, health, safety and strategic consideration and two industries are reserved for the public sector and those industries are:

ATOMIC ENERGY

RAILWAY TRANSPORT

Reservation of industrial products for the small scale sector is still an enduring issue. FDI i.e. Foreign Direct Investment up to 100% is allowed under the automatic route in most sectors, but with a few exceptions.

The infrastructure sector is being in the hands of private sector. Because of the large requirements of funds for infrastructure, 100% FDI has been allowed in all infrastructure sectors. There are unmitigated tax holidays to encourage the business of development, operation, and maintenance of infrastructure facilities.

The monetary policy framework and its operating procedures in India have evolved over time with the changes in the macroeconomic structure and financial markets development.

After the deregulation of the financial sector, the stability of money demand became deduce. Because of that, Reserve Banks switched from monetary targeting framework, to a multiple indicator approach. In this approach, many indicators available on a high frequency basis. The various indicators are:

Rates of return in different markets

Movements in currency, credit, fiscal position, inflation rate, exchange rate etc

Refinancing and transactions in foreign exchange

The objective for the financial sector was to provide operational litheness and functional self-sufficiency to all the financial institutions so that they could allocate resources more efficiently. Some of the important initiatives in the financial sector were:

Reduction in statutory preemptions so as to release greater funds

Interest rate deregulation to enable price discovery

Allowing new private sector banks to create a more competitive environment

The trade policy reforms comprised

withdrawal of the quantitative restrictions on exports and imports

phasing out of the system of import licensing

Lowering the level of nominal tariffs and its dispersion as well.

India embarked on a well sequenced opening up of the capital account. Its framework was based on a preference for non-debt creating capital inflows like foreign direct investment and foreign portfolio investment.

Economic Progress after 1991

After 1990, India saw gradually breaking free of the low growth trap which was known as the “Hindu growth rate” of 3.5% p.a. Real GDP growth was increased from 5.7% p.a. to 7.3% p.a. in 1990 to 2000s. The main reason of this growth acceleration was that the growth rate of industry and services increased. Till the end of 1990, the “green revolution” had died down.

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The growth patterns altered the structure of the Indian economy with a decline in the share of agriculture from 28.4% to about 15 per cent in 2009-11. There was an increase in services, including construction, from 52% to 65%. The share of industry has remained unchanged at around 20 per cent of GDP.

Real economy

Items

199-2000

2001-2010

2004-2008

Share in GDP

Agriculture

28.4%

19.4%

18.9%

Industry

20.1%

20.0%

20.1%

Services

51.5%

60.6%

61.1%

The growth acceleration was accompanied by a sharp lift up in the rate of growth of gross fixed capital formation which had more than doubled from an annual average of 7.2 per cent in the 1990s to 15.7%.

The structure of Indian economy also underwent a change. Exports and imports of goods and services have more than doubled from 23% of GDP to 50 per cent in 2011.

The high growth was achieved in an environment of price stability as headline wholesale price index inflation dropped to an annual average of 5.5% in the 2000s from 8.1 per cent in the 1990s. Subsequently, in the post-crisis period the inflation trend has reversed with the headline WPI inflation averaging over 7% and the consumer price inflation crossing double digits during 2009-11.

The uptick in food price inflation was particularly sharp during 2009-11.

Inflation

Item

1991-2000

2001- 2010

2004-2008

2009-2011

(Annual Average Percentage change)

Wholesale Price Index

8.1

5.4

5.5

7.1

Food Articles

10.2

5.8

5.2

13.3

Fuel Group

10.6

8.9

7.3

7.2

Non-Food Manufactured Products

6.8

4.0

5.0

4.0

CPI- Industrial Workers

9.5

5.9

5.0

10.6

CPI- Industrial Workers Food

9.8

6.2

5.5

12.5

No power on earth can stop an idea whose time has come.

India has launched wide ranging structural reforms and has made noteworthy economic progress over the past two decades. Some of them are:

India’s industrial environment has become more competitive and open

Infrastructural gaps have been sought to be bridged through public-private initiatives with both domestic and foreign sources of funding

Current account has become fully convertible while capital account which is virtually free for non-resident.

As interest rates deregulated, banks gained operational autonomy for commercial lending. If India could maintain the current pace of growth it will elevate millions out of poverty and augment the global economy. While India has come a long way, maintaining the current pace would itself be challenging and require continued reform efforts.

India will continue to face “stagflation-type” situation for some more time. The main reason for this are:

the government’s loose fiscal policy and persistent strong rise in real rural wage growth without an increase in productivity growth

Stagflation means when economic growth of a country stagnates while inflation is rising. RBI lowered the economic growth projection for the current fiscal to 6.5 percent from its earlier estimate of 7.3 percent, stating rising government expenditure poses risks to economic stability.

Its inflation forecast for the fiscal ending March, 2013 has also been raised to 7 percent from earlier projection of 6.5 percent. According to reports, monetary policy has a limited role in this stagflation-type environment. Moreover, the inflation outlook remains challenging. Indeed, given the poor progress of the monsoon, in reality food and overall inflation will likely accelerate in the coming months.

Measures to control Indian stagflation:

India may have progressed on paper and on screen but do we see the progress on the streets of India?

There are millions of people still surviving in India on an income of less than one dollar a day. India can never be considered a developed country unless and until the poverty, hunger and pain of the poor on the streets and those living in the slums is curbed.

Lately the government of India has come up with several developmental plans and no doubt it has helped boost the economy of the Country in some ways. But the long term impact of these plans do not seem to serve the purpose, or what should be the purpose of any government, that is, prosperity of the common man. Investment is pouring in from within the Country and abroad, but the poor man is getting poorer.

In order to be considered a developed Country, India needs to focus on the common man.

It is not only the Government’s role to make India a developed nation. People of the country should also take responsibility.

Improve infrastructure

Liberalize financial markets

Increase agricultural productivity

Increase quality and quantity of universities

More importance to rural household

Proper health facilities in rural and urban areas

Raise educational achievement

Citizens must do charity with enough disposable income

Job creation

Raise educational achievement

Introduce a credible fiscal policy

Improve governance