economic model for india

economic model for india

in 1947, india was predominantly an agricultural country. more than fifty percent of gdp was from agriculture. in the name of industry, the two leading ones were based on agricultural products – textiles and jute. major area of jute was lost to pakistan. with cheaper substitutes for textiles and jute coming up, even that advantage was being lost. eighty percent of manufactured goods were imported. in order to have a rapid economic growth, the industrialization was the only alternative available. but this involved large scale import of machines. though attempts were made to encourage heavy industries capable of manufacturing machines but there was limitations like gestation periods. the industrial growth was thus highly import oriented.

to prevent the leakage of scarce resources, soviet style plans were introduced. this enabled the authorities to control which sector would get how much investment. first the insurance and later the banks were nationalized to enable resources to be channelled as per planning exercise. there were severe restrictions on non plan expenditure and talking about increasing it became sort of blasphemy. banks rates were doctored to favour proper industries. import licences governed the imports. foreign exchange rates were fixed. with growing demand for food grains, it was necessary to take steps to ensure price stability. consequently public distribution system for food grains etc. was launched. to enable this, the food grains were procured from the farmers at fixed rates. in short, it was a controlled economy all around.

since the earnings from exports were limited, the entire effort was based on import strategy and loans cum assistance. some of the foreign assistance was in grants but most of the foreign exchange came in the form of tied loans that is to say one had to buy goods from the loan giving country. so long as the agricultural growth was maintained (mainly by increasing the area under cultivation and dependence on traditional technology), the situation remained under control and the growth rate was not unsatisfactory. the years 1965-66 and 1966-67 were years of severe drought. the war with pakistan in 1965 further served to dry up the foreign grants and loans. this had adverse effects on economy. while agriculture over most of the period 1965-66 to 1975-76 registered negative trend, the position in industry was also not good. (it was negative in 1973-74)

during the period after 1971-72,(bangla desh war) dependence on foreign loans and grants was sought to be reduced. the high yielding varieties of food grains were given fresh impetus but this required assured irrigation which was available only in some parts of the country. this led to regional imbalance in growth but overall the dependence on import of food grains was contained. in industry import substitution was encouraged. but still the import of petroleum products dominated the import bill and no substitute could be available. a new feature of these years was attractive interest rates offered to non resident indians to tide over the balance of payment position. nevertheless the foreign exchange reserves declined till it reached an alarming stage.

the critical dependence on foreign resources for sustaining its growth is revealed in these years. the growth rate in eighties was more than warranted by the available resources and this led to the 1991 crisis. the self reliance strategy, where all things were to be prepared internally, was narrowly interpreted. there was little effort to increase the technology base of the country. it was overlooked that technological independence is pre requisite of self reliance. instead of wholly concentrating on machine based industries, the small scale, agriculture based, handicraft based and village based  industry would have been a better alternative but it received only token appreciation.

in the post reform period, the reliance on foreign resources has considerably increased. the dependence on foreign technology has also increased. the strategy in the previous two decades has been to open up newer sectors to foreign investment. though there is some attention paid to non petroleum based power generation, the effort are at best half hearted. the emphasis is still on the organized sector. the skewed situation can be gauged by the fact that only 6 percent of population is engaged in organized industrial sector which accounts for 43 % of national domestic product. their per capita income is 19 times the per capita income of remaining sectors. this inequality is alarming. populist measure like almost free rations and non productive labour drives (mnrega) may contain the discontent to some extent but ultimately a serious situation is likely to arise.

neither the nehru mahalanobis strategy (of soviet style planning) nor the international monetary fund sponsored new economic policy are going to help. the earlier policy imposed (in effect due to emphasis on major industries) serious restrictions on development of local industries. the new economic policy envisages removal of control over production, investment and imports which leads to same results with more emphasis on the consumer goods. the resource allocation cannot be left to market forces. these do not create a level playing ground. state intervention is necessary. such intervention does not mean government entering in the business of production but only for looking at the basic needs of the economy.

it is argued in some quarters that india should bypass the secondary sector and straightway move to the service sector and the knowledge era. this is hardly feasible without adequate manufactured goods which, unlike united states cannot be passed on to less developed countries. the move to service sector has to be paced properly. a national sample survey in the service sector in 2006 found that of the 1.5 million enterprises in service sector, the 626 largest enterprises have 38 percent of services output but employ only 2 percent of persons in that sector. considering this, how such a strategy is going to improve matter in terms of employment  generation is a serious aspect to be considered.

the only solution appears to be that the dominance of non essential items has to be curbed. it must be reemphasized that export potential is still extremely limited. curbing the consumer consumption is thus clearly indicated. in addition, there is urgent necessity to look at the traditional village based industries. the urban consumption both in terms of land utilization and resource utilization has to be curbed.

it is in these circumstances that the skill india movement and make in india movement are to be seen, the former for generating opportunities for self employment and the latter for increasing export potential by letting things be manufactured in india and exported to earn the much needed foreign exchange. the necessity to encourage the unorganized sector (or the small scale sector as some would prefer to call it) has to be at the centre of concerns of the government.