Indian Economy: An Introduction

Dr. K. Narayanan
Professor of Economics
Department of Humanities & Social Sciences, IIT Bombay
knn@iitb.ac.in
 Overview
• State of the Economy @ Independence
• Strategies adopted for economic growth and development
• Changing paradigms in the approach to development
• Major Issues confronting the economy
• Policy instruments used – a critical view
• Trends and pattern, sectoral shares and composition,
constraints and contradictions
• India and the world economy
 State of the economy @
independence
• Slow and sluggish rate of growth in savings,
investment and national output
• Highly unequal distribution of the fruits of
Development
• Measurement of national income
• Railways
• De-industrialization
• Historical origins of Indian poverty
 Basic concepts
• Concept of Growth and Development
– Growth referring to rate of progress of an
economy [mostly in terms of GDP, GNP,
national income, Per capita income, etc]
– Development is a broad based concept referring
to, among others, the improvement in the
capability of an economy to accelerate the
growth process.
 Select related concepts
• Capital
• Capital formation
• Financial and Physical capital
• Human capital
• Full employment
• efficiency
• Optimal utilisation of resources
• Equity & social justice
 Planning
• Ascertain and evaluate the type of reasoning
that has gone into the formulation of a Plan
• Understanding a development Plan must
take into account:
– The socio-economic landscape
– Informal constraints the the planners had to
respect
 Understanding Indian Plans
• “Often being judged only by the adequacy,
or otherwise, of the models which
constituted their analytical underpinning,
although these by no means exhaust their
full set of implications.”
– Chakravarty, S. (2007)
 Understanding – cont.
• Theoretical understanding at a given point
in time [based on perception of objectives
and constraints]
• Actions and policies [adequacy and changes
in them with learning]
 Three reasons for discussion
• Nature of the ‘structural break’ that
planning represents in India’s development
experience
• ‘analytical’ ideas underlying Indian plans as
contributory factors to the growth of
‘development economics’
• Market vs. Plan
 Alternatives
• Choice between a market based approach
and planning for development
– Consensus was for a large role for the State
– Setting the goals [short vs. long term]
• Closed Vs Open economy models
• Identification and removal of structural
constraints
 Structural Constraints &
Development Strategy
• The underlying causes of structural
backwardness were perceived as follows:

• 1. acute deficiency of material capital,

which prevented the introduction of more
productive technologies.
 Structural Constraints – cont.
• 2. The limitation on the speed of capital
accumulation was seen to lie in the low capacity to
save.

• 3. Even if the domestic capacity to save could be

raised by means of suitable fiscal and monetary
policies, there were structural limitations
preventing conversion of savings into productive
investment.
 Structural Constraints – cont.
• 4, Whereas agriculture was subject to
secular diminishing returns,
industrialization would allow surplus labour
currenty underemployed in agriculture to be
more productively employed in industries
which operated according to increasing
returns to scale.
 Structural Constraints – cont.
• 5. If market mechanism is accorded
primacy, this would result in excessive
consumption by the upper-income groups,
along with relative under-investment in
sectors essential to the accelerated
development of the economy
 Structural Constraints – cont.
• 6. While unequal distribution of income was
considered to be a ‘bad thing’, a precipitate
transformation of the ownership of
productive assets was held to be detrimental
to the maximization of production and
savings.
– This implies a tolerance towards income
inequality, from growth point of view.
 From Strategy to Policy
• Belief - Economic theory indicated that the
basic questions relating to how much to
save, where to invest, and in what forms to
invest could be best handled with the help
of a plan.
• Supply side view point.
• Demand was considered as a constraint.
 Public Investment:
• 1. would be concentrated in the area of
infrastructure.
• 2. could be directed primarily towards
agriculture.
• 3. could be directed towards industrial
development.
 Issues in Policy making
• Capital-Output Ratio, especially ICOR
• Interdependence between Agriculture and
Industry
• Technology, Capital goods and Growth
• Foreign Trade: performance and prospects
• Resource Mobilization and Public Sector
Investment
 Growth Models
• Harrod – Domar [warranted and actual
growth rate]
• P.C. Mahalanobis
– Development strategy
– 2 and 4 sector models
– Capital vs consumer goods sector led growth
– Critique of the model
 Input-Output transaction matrix
• Input-Output model for Indian Economy

• Rudra & Mane

• Growth with Redistribution