Download The Returns to Acquiring Privately Held Firms: Costly Value Addition

India: Economic Overview
FIN 680V/ FIN 360
Spring 2012
P.V. Viswanath
Economic History: 1950-1990
Post-independence India had a mixed economy,
i.e. including both private and public sectors.
The reasons for a strong public sector were:
– Greate inequality in income distribution – doubts as
to the viability of free markets
– Free trade would probably have led to exploitation by
stronger foreign countries
• Exports were seen as a drain of resources from the
country.
Post-independence economy
Foreign Investment was seen as foreign domination.
The quickest path to economic development was seen
to be rapid industrialization, which would probably not
happen without government intervention
– Capital goods and heavy industry were seen as particularly
needed.
– Planning was needed to ensure industrial growth and the
concomitant agricultural and service growth, as well as
employment growth
Objectives
The broad objectives were:
– Rapid growth in production with a view to achieving
a higher level of national and per-capita income.
– Full employment
– Reduction of inequalities in income and wealth
– Socialistic pattern of society with a democratic
framework, based on equality and justice and
absence of exploitation.
Policy Measures for Industrial
Development
Trade and Regulatory Regimes designed to
shield industrial producers from competition
– High tariffs
– Industrial licensing of production and investment
– Monopoly and Restrictive Trade Practices (MRTP)
Act
– Foreign Exchange Regulation Act (FERA)
– Export Restrictions
Industrial Policy
Directed allocation of subsidized credit through
the commercial and developmental banking
system
Administered interest rates and financial
institutions required to lend for specific purposes
at the administered rates.
Fixed, overvalued exchange rates; this ensured
cheap imports for the government.
Industrial & Agricultural Policy
Price control for many products
Rigid labor laws that made it difficult to lay off
workers.
Direct public investment in industrial activities.
Management of the agricultural sector to ensure
reasonable supplies of food grains, edible oils,
sugar and cotton to the domestic market.
Agricultural Policy
Procurement prices were fixed, which , in times
of surplus, worked as a minimum support price.
At times of deficit, the government mandatorily
procured a part of the grain at the procurement
price and distributed it to poorer people through
ration shops.
Fertilizer, irrigation, power and credit were
subsidised for the agricultural sector.
Agricultural and Fiscal Policy
The need to mop up excess production led to
trade restrictions.
– Quantitative restrictions on exports and imports,
through licensing
– Canalization – the use of a single parastatal for
imports and exports; the use of minimum export
prices.
– High income tax rates
Social Policies
Higher education was emphasized (IITs and
IIMs)
Growth-oriented strategy as a means of
mitigating poverty and unemployment.
However, structural inequalities in land
ownership, availability of water, access to credit
etc. led to growth without income and
employment growth for poorer people.
Social Policies
Land reform; however, it required the cooperation of
the states, which was not always forthcoming for
political reasons.
Alleviation of poverty through special programs and
policies, such as asset creation programs,
employment generation programs, minimum needs
programs.
Intervention programs to solve the problems of
malnutrition and hunger.
Did the policies work? Industry
Industry grew 6% p.a. between 1951 and 1989
There was little competition; hence there was
little R&D.
The capital-input ratio went up considerably;
total factor productivity dropped. Capacity
utilization fell.
Deeply entrenched interest groups.
Agricultural Progress
Between 1950 and 1980, food grain production
increased by 2.8% p.a., due primarily to productivity
gains and multiple cropping.
But, investment growth slowed.
R&D suffered, development of irrigation lagged behind
plan targets.
There was a substantial rise in subsidies for food and
fertilizer and for credit, water and electricity.
India became more or less self-reliant, but at great cost.
Social Progress
From 1970-88, the proportion of population below
poverty dropped from 46.17% to 37.76% in urban areas
and from 58.75% to 48.69% in rural areas.
Average life expectancy improved from 32.1 in 1950-51
to 58.7 in 1990-91. The death rate dropped from 27.4
to 12.5 during the same period.
Literacy was 52.2% in 1990-91 compared to 18.33% in
1950-51.
But compared to other developing countries, this was
not good.
The crisis and the change
A massive rise in the government deficit spilled
over to the current account deficit because it was
financed by external debt.
External shocks, such as increased oil prices,
decreased access to concessionary loans from
abroad
Structural rigidities in the Indian economy made
Indian products non-competitive, globally.
The solution
A twofold solution:
– Make the economic structure more competitive
– Contain the government deficit
Effects:
– Structural Change and
– Fiscal stabilization.
Initial Reforms
Trade policy reforms have done away with most
quantitative restrictions and reduced tariff levels
Industrial policy has removed barriers to entry
and limits on growth in the size of firms
Regimes for foreign investment and foreign
technology have been liberalized considerably
Domestic tax structure has been rationalized.
The financial sector is being deregulated.
Second-generation reforms
Privatization of public sector undertakings
– Very slow, but steady. BHEL
Exit policy for labor
Reforms of the agricultural sector
Reforms of the state government
GDP from 50-51 to 2008-9
GDP at Factor Cost
6000000
5000000
4000000
3000000
2000000
1000000
0
GDP: Post Liberalization
GDP at Factor Prices
6000000
5000000
4000000
3000000
Series1
2000000
1000000
0
Industrial Production
Index Nos of Industrial Production (1993:94 Base)
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
Mining & Quarrying
Manufacturing
Electricity
General
Growth in Industrial Production
Atul Kohli, “Politics of Economic Growth in India, 1980-2005,”
Economic and Political Weekly, April 2006, pp. 1251-1259 and
1361-1370
Changes post-1991
Disparity in growth across states
Move towards service sector
Lack of industrial growth
Income inequalities
High poverty in the rural sector – farmer suicides
Continued casteism, gender inequality,
communal unrest
Change in the structure of the economy
Year
Agriculture
and Allied
Industries
Manufacturing
Services
1952-53
55
11
10
34
1964-65
47
15
13
38
1980-81
38
17
14
45
1987-88
32
19
15
49
2004-5
19
20
15
60
2010-11
14
20
16
66
Source: Table 3, Components of Gross Domestic Product, Handbook of Statistics on the Indian Economy