The Indian Economy in the New Millennium

Learning Outcomes:

1. Understand the impact of economic reforms in India post-1991.
2. Analyze the challenges and achievements of India’s economic growth.
3. Evaluate the sustainability of India’s rapid economic growth in the 2000s.
4. Discuss the relationship between India’s economic policies and global integration.

The Breakthrough in Growth

India faced significant economic challenges at the end of the 1990s, but the reforms and global circumstances shaped its growth in the new millennium. Despite initial struggles, the Indian economy experienced a remarkable turnaround.

1. GDP Growth in the Ninth Plan: Although impacted by global events like oil price hikes and the 9/11 attacks, India managed to sustain a GDP growth of 5.5% per year between 1996–97 and 2000–01.
2. Agricultural Slowdown: The first year of the Tenth Plan in 2002–03 saw only 3.8% growth due to negative growth in agriculture (-7.2%) caused by monsoon failures.
3. Overall Tenth Plan Growth: Despite the poor agricultural performance, India recorded an average growth of 7.6% between 2002–03 and 2006–07, just below the 8% target.
4. India’s Growth Path: Eminent economists like Jeffrey Sachs projected that India could achieve 7% annual growth in GDP, leading to a potential doubling of per capita income in a decade.
5. Impressive Growth in Later Years: The economy grew at 8.6% annually in the last four years of the Tenth Plan, raising the possibility of a 9% or higher growth trajectory.

Important Note:

The rapid economic growth had its limits in terms of equity, with the Human Development Index (HDI) revealing persistent gaps in human development despite economic advances.

Is the Growth Sustainable?

To sustain high growth rates, several economic indicators, particularly savings, investments, and fiscal health, needed to be examined.

1. Gross Domestic Savings and Investment: Savings increased from 23.4% of GDP in 2000–01 to 32.4% in 2005–06, while investment rose from 24% to 33.8%.
2. Investment vs. Consumption: Investment, particularly from the private and corporate sectors, drove growth more than consumption during 2004–06.
3. Public Sector Improvement: Public savings, which had been negative for six years, showed positive figures from 2003–04 onward.
4. Demographic Dividend: The proportion of the Indian population in the working-age group was expected to rise, contributing to a sustained high savings rate.

The Fiscal Deficit Challenge

The fiscal deficit, a significant concern throughout the 1990s, began to show improvement due to reforms and stricter budget management policies.

1. Reduction in Central Government Deficit: The fiscal deficit fell from 6.2% in 2001–02 to 3.8% in 2006–07, reflecting fiscal prudence.
2. Revenue Deficit Reduction: Revenue deficits dropped from 4.4% of GDP in 2000–01 to 2.1% in 2006–07.
3. State Fiscal Health: States also reduced their deficits, with revenue deficits nearly eliminated by 2006–07.

Important Note:

The Fiscal Responsibility and Budget Management Act (FRBMA) played a key role in improving fiscal discipline, targeting both revenue and fiscal deficits.

Sectoral Growth in Industry and Services

India’s industrial and services sectors contributed significantly to economic growth in the new millennium, with both experiencing rapid expansion.

1. Industrial Growth Recovery: Industrial growth picked up after a slowdown in the late 1990s, achieving 10% growth in 2006–07, with an average of 8.8% for five consecutive years.
2. Manufacturing Sector: Manufacturing, especially the capital goods sector, rebounded strongly, showing double-digit growth after a period of stagnation.
3. Services Sector Dominance: The services sector, accounting for 55.1% of GDP by 2006–07, maintained a high growth rate and became the largest contributor to GDP growth.

Relationship with the External World

India’s economic integration with the global market accelerated post-reforms, reflected in increased trade and capital flows.

1. Trade Growth: India’s external trade as a proportion of GDP increased from 15.71% in 1990 to 32.6% in 2004.
2. Export Growth: India’s merchandise exports grew by over 20% annually between 2002 and 2007, doubling in value to over $100 billion by 2005–06.
3. Service Sector Exports: Services exports, particularly in IT and business services, saw exponential growth, contributing significantly to India’s economic success.

Important Note:

The transformation of India as a global player in IT services and business process outsourcing (BPO) helped elevate its standing in the global economy.

Capital Inflows and Foreign Exchange Reserves

India’s capital account saw a steady inflow, with rising foreign direct investment (FDI) and portfolio investments, contributing to a strong foreign exchange position.

1. Foreign Direct Investment (FDI): Net FDI inflows averaged $3.7 billion per year from 2000 to 2005–06, reaching $4.2 billion in the first half of 2006–07.
2. Foreign Portfolio Investments (PFI): Portfolio investments increased dramatically, with record inflows of $12.5 billion in 2005–06.
3. Foreign Exchange Reserves: Reserves surged from $42.3 billion in 2000 to $185.1 billion in 2007, creating a buffer against global financial fluctuations.

India’s Debt Management

India’s external debt levels remained manageable in the new millennium, reflecting prudent economic management.

1. Debt to GDP Ratio: India’s external debt as a proportion of GDP fell from 28.7% in 1990–91 to 15.8% in 2005–06.
2. Debt Service Ratio: Debt servicing as a proportion of external receipts improved, falling from 35.3% in 1990–91 to a comfortable 6.1% in 2004–05.

The Question of Neo-colonial Development

Critics argued that India’s path of development post-liberalization was moving towards dependence on foreign capital, leading to potential neo-colonial patterns of growth. However, the evidence suggested otherwise.

1. Indigenous Industry Growth: Indian industries, particularly in sectors like automobiles and pharmaceuticals, showed resilience and success in global markets.
2. Limited Foreign Dominance: The share of foreign firms in Indian manufacturing remained limited, growing only marginally from 9.5% in 1990 to 12.63% in 2001.
3. Global Presence of Indian Firms: Indian companies like Tata and Hindalco made significant international acquisitions, signaling the globalization of Indian business.

Important Note:

Unlike China’s growth model, which was largely driven by foreign capital, India’s growth had a higher domestic content and ownership, as argued by several scholars.

Challenges in the New Millennium

India’s rapid economic growth posed new challenges, particularly in addressing poverty, inequality, and ensuring inclusive growth.

1. Poverty Reduction Debate: While there was consensus that poverty fell between 1999–2000 and 2004–05, there was disagreement over the rate of reduction during the 1990s.
2. Rural Poverty Decline: Despite slow agricultural growth, rural poverty showed a sharp decline in the new millennium due to increased employment and lower inflation.
3. Rising Inequality: Although higher growth contributed to poverty reduction, rising inequality limited its effectiveness.

The Role of Civil Society and Governance

Civil society movements played a critical role in ensuring that economic growth translated into benefits for the poor, especially through initiatives like the Right to Information Act (RTI) and National Rural Employment Guarantee Act (NREGA).

1. RTI and NREGA: These legislative measures deepened India’s democracy, ensuring greater transparency and accountability in governance.
2. **Emp

owerment of the Poor**: Popular mobilization, particularly at the grassroots level, ensured better implementation of these Acts, leading to positive outcomes in areas where civil society was active.

Education and Human Development Challenges

Despite economic growth, India continued to lag in key human development indicators like education, health, and immunization.

1. Low Literacy and Education Levels: Over one-third of children aged 6–14 did not attend school, and educational outcomes remained poor, despite government initiatives.
2. Health and Immunization: Immunization coverage improved only marginally, from 42% in 1998 to 44% in 2006, and underweight children under three years old remained high at 46%.

Important Note:

India’s low ranking on the Human Development Index (HDI), falling from 124 in 2000 to 126 in 2004, reflected the inadequacy of its efforts to translate economic growth into social development.

Conclusion

The Indian economy made significant strides in the new millennium, with high growth rates and increasing integration into the global economy. However, the challenges of poverty, inequality, and inclusive growth persisted, requiring continued focus on governance, human development, and effective use of civil society movements.

MCQ: What was the average growth rate of India’s economy during the period 2002–03 to 2006–07?
A. 5.5%
B. 7.6%
C. 9.4%
D. 10.0%
Answer: B. 7.6%