Economic Development in India

Introduction• Since independence, significant improvement in India’s

economic and social development.• In the post-reform (since 1991) period, India has done

well in some indicators such as balance of payments, resilience to external shocks, service sector growth,

• significant accumulation of foreign exchange, Information technology (IT) and stock market, improvements in telecommunications etc.

• GDP growth was around 8 to 9% per annum in the period 2004-05 to 2007-08. Investment and savings rates were quite high 32 to 36%.

Need for Inclusive Growth• However, exclusion continued in terms of low agriculture

growth, low quality employment growth, low human development, rural-urban divides, gender and social inequalities, and regional disparities etc.

• There is now recognition that inclusive growth should be achieved in order to reduce poverty and other disparities and raise economic growth.

• 11th Plan (2007-12) advocates for inclusive growth.• Even at international level, there is a concern about

inequalities and exclusion and now they are also talking about inclusive approach for development.

• In this presentation, I will be discussing issues and challenges for achieving inclusive growth.

Elements of Inclusive Growth

• Five interrelated elements of inclusive growth.

• Poverty Reduction and increase in quantity and quality of employment

• Agricultural Development• Social Sector Development• Reduction in regional disparities• Protecting the environment

Trends in Poverty (%): India

YearYear RuralRural UrbanUrban TotalTotal

1973-741973-74 5656 4949 5555

19831983 4646 4141 4545

1993-941993-94 3737 3232 3636

2004-052004-05 2828 2626 2828

Number of poor (in million)

YearYear Number (million)Number (million)

1973-741973-74 321321

19831983 323323

1993-941993-94 320320

2004-052004-05 302302

Poverty• Income poverty declined from 55% in the early

1970s to 28% in 2004-05. • Although there has been progress in decline, still

more than 300 million below poverty line.• World Bank Estimates: 42% below $1.25 poverty

line. ADB 65% with $1.35 poverty line• 80% of the poor are from rural areas.• Poverty concentrated in few states (Bihar, Uttar

Pradesh and Madhya Pradesh and Orissa, Chattisgarh and Jharkhand)

• Concentrated among agricultural labourers, casual workers, Scheduled Castes and Scheduled Tribes

Determinants of Rural Poverty

• Agricultural Growth• Relative food prices• Rural non-farm sector• Rural wages• Governments’ development expenditure• Infrastructure• Human Development

Percentage budget share of cerealsYearYear RuralRural RuralRural UrbanUrban UrbanUrban

Bottom Bottom 30%30%

Top 30%Top 30% Bottom Bottom 30%30%

Top 30%Top 30%

1970-711970-71 53.753.7 29.529.5 38.938.9 13.413.4

1990-911990-91 39.439.4 18.218.2 27.627.6 9.59.5

1993-941993-94 35.735.7 15.715.7 25.625.6 8.28.2

2004-052004-05 29.329.3 12.512.5 20.620.6 6.36.3

Percentage budget share of food (cereals+non-cereals)

YearYear RuralRural RuralRural UrbanUrban UrbanUrban

Bottom Bottom 30%30%

Top 30%Top 30% Bottom Bottom 30%30%

Top 30%Top 30%

1970-711970-71 84.184.1 71.371.3 80.080.0 62.562.5

1990-911990-91 73.773.7 59.459.4 70.770.7 48.148.1

1993-941993-94 69.869.8 52.652.6 66.466.4 43.843.8

2004-052004-05 66.166.1 47.547.5 59.959.9 34.534.5

Movement in Indices of Commodity Prices India vs International:Cereals

106.7

114.1 118.6 120.4122.6

100

257.9

231.1

100

237.4

121.3

158.7

50

100

150

200

250

300

2005 2006 2007 2008 Qtr I 2008 Qtr II 2008 Qtr IIIYear

India WPI International (IMF Indices)

Movement in Indices of Commodity Prices India vs International:Wheat

100

128.8125

124.6120.7

113

167.4

125.8

269.9

100

208.4

227.3

50

100

150

200

250

300

2005 2006 2007 2008 Qtr I 2008 Qtr II 2008 Qtr IIIYear

India WPI International (IMF Indices)

Movement in Indices of Commodity Prices India vs International:Rice

100

117115.8113.5

108.4102.1

115.5105.5

179.2

100

261.5

331.1

50

100

150

200

250

300

350

2005 2006 2007 2008 Qtr I 2008 Qtr II 2008 Qtr IIIYear

India WPI International (IMF Indices)

Reasons for low domestic food prices

• India insulated domestic food prices from the recent high global food prices

• Reasons are the following

-- high oil and fertilizer subsidies

-- Duty cuts, export bans

-- Administrative measures on hoarding, ban on futures markets

-- Procurement, buffer stock and public distribution of food

Policies for Poverty Alleviation• India adopted two pronged approach-- Growth approach: all three sectors contribute

agriculture, industry and services-- Direct approach : Safety nets or anti-poverty prog.-- Self employment progra. (women’s groups), wage

employment progra, food subsidies, nutrition programmes for children, old age and maternity benefits

-- Public Distribution System – Subsidized food-- National Rural Employment Guarantee Scheme

(NREGS) – Giving 100 days of wage employment to the poor

Employment

Sector 1961 2004-05

Agriculture 75.9 56.4

Industry 10.6 18.2

Tertiary 12.4 25.4

Total 100.0 100.0

Problems in Employment

• Share in Ouput and Employment of different sectors• Agriculture: 20% in GDP, 57% in Employ.• Industry: 23% in GDP,18% in Employ.• Services: 57% in GDP, 25% in Employ.• Employment growth increased in recent years but

quality is low.• Problem of working poor• Poverty is much higher than unemployment

Problems in Employment• There are 458 million workers in India in 2004-05• Out of this 423 million workers are

informal/unorganised workers (92%).• Growth in employment more in unorganised sector. • Thus, quality of employment is a problem• Workers in this sector do not have social security.• Government is trying to provide minimum social

security to unorganized workers

Inclusive Growth: Agriculture• Concerns in Agriculture--Deceleration in growth from 3.5% during 1981-

97 to 2% during 1997-2005. Decline in yield growth.

-- Land and water problems, vulnerability to world commodity prices, farmers’ suicides, 45% of farmers want to leave agri but no where to go.

----Disparities in growth across regions and crops: growth rate declined more in rainfed areas.

Problems in Indian agriculture

• Long term factors: Steeper decline in per capita land availability. Shrinking of farm size

• Slow reduction in share of employment (still 55%)

• Main problem is low labour productivity in agriculture. Gap between agri. and non-agri. is widening.

• We should blame non-agriculture (industry and services) for not absorbing workers from agriculture.

Three Goals of Agricultural Development

• 1.Achieve 4% growth in agriculture and raise incomes. Increasing productivity (land, labor), diversification to high value agri. and rural non-farm by maintaining food security.

• 2.Second goal is sharing growth (equity): focus on small and marginal farmers, lagging regions, women etc. On lagging regions, focus on Eastern India and other rainfed areas.

• 3. Third is to maintain sustainability of agri. by focusing on environmental concerns.

Deficits in Agriculture Growth

• Six deficits in agriculture• :(a) land and water management

deficit• (b) investment, credit and

Infrastructure deficit, • (c) research and extension

(technology) deficit, • (d)market deficit, • (e) institutions deficit, • (f) education/skil l deficit

Rural non-farm sector• Poverty can not be removed with 55% of

workers in agri. Need to promote rural non-farm sector.

• India currently produces about 50 million tonnes of fruits and 90 million tonnes of vegetables. Only 2% of these are processed as against 23% in China, 78% in Phillippines, 83% in Malaysia.

• Half of those engaged in agriculture are still illiterate and just 5% have completed higher secondary educ.

• Even in 2004-05, around 60% of rural male workers and 85% of rural female workers are either i l l i terate or educated upto primary level.

• In other words, education and skil ls are constraints

Lessons from China• India leap frogged from agriculture to services with

less focus on manufacturing.• The share of employment in manufacturing in

Malaysia is 50%, in Korea 62%, in China 31%. On the other hand, the share of employment in manufacturing in India is only 12%

• Diversification towards rural non-form sector in China is one of the important factors responsible for rural poverty reduction (poverty 3%).

• This was partly due to high agricultural productivity and investment in physical and human capital.

Social Development

• In social sector, significant achievements in education and health

• However, Human development index rank is 127 out of 170 countries.

• Social indicators are much lower for Scheduled castes and Scheduled tribes

• Malnutrition among children is one major problem (46% of children suffer from malnutrition

Six problems in Social Sector: education and health

• There have been significant achievements but there are problems

• Low levels of social indicators• Slow progress• Significant regional, social and gender disparities• Low level and slow growth in public expenditures

particularly on health• Poor quality delivery systems• Privatization of Health and Education

Regional Disparities

• Significant Regional Disparities in India.• Per capita income : Highest per capita income

Rs.16,679 in Punjab; lowest per capita income state Rs.3557 in Bihar

• Female infant mortality varies from 12 in Kerala to 88 in Madhya Pradesh

• Female literacy varies from 33.6% in Bihar to 88% in Kerala

Regional Disparities• Inter-state disparities in the growth of Gross

State Domestic Product (GSDP) increased in the post-reform period compared to the eighties.

• In general, richer states grew faster than the poorer states.

• Causes for disparities;

• Investment in physical and human capital

• Technology

• Institutions including governance

Environment

• Degradation of land, water. Increase in pollution levels

• Challenges of climate change• Consumption patterns of rich• Higher economic growth should not lead to

decline in our environment

What Should be done to improve inclusive growth?

• Equity is important for economic development• Agricultural Development• Economic reforms are important. But macro-poor

policies (fiscal, trade, financial, monetary etc.) should have pro-poor focus

• Structural change should have followed agriculture-industry-services sequence

• Development of manufacturing sector is important for creation of productive employment

• Equality of opportunities (education)• South East Asian and East Asian experience

What should be done? (contd.)

• Role of Technology• Shift focus of reforms to delivery systems• Importance of women’s economic and social

empowerment• Decentralization• Economic reforms in relation to socio-political

environment• Rights approach (civil, political and economic)