Suhas Saxena 200269197 Economics 480 Dr.

Marion Jones October 12, 2010 Theory and Methodological Framework Institutional comparison of Old vs the New Indian economic policy 1. DRIVERS OF POLICY CHANGE From the time of the independence Indian economy has been undergoing a profound and momentous shift. The end of 20th Century was undoubtedly dominated by the consequences of New economic policy. It was a policy which was considered to put Indian economy back on its track. With Indias growing dependence on imports, its greater reliance on dept and the consequent greater susceptibility to outside pressures of Indias economy collectively be characterized as the Drivers of policy change from old to the New economic policy. This change was made to radically transform regional and global economic, political and social interactions and to have a major impact on the economical environment of India. This critical change in the policy was made in order so that India would never face financial crises. This change reshaped the Indian economy as we know it. There were several reasons why Indian economy poses as a major and distinct challenge at the time of transforming from old to the new economic policy. The growth rate of the Indian economy between 1871 and 1946 was barely sufficient to keep pace with the growth of the population. The rate of growth during the period 195184 was about 3.8 per cent per annum and 4 per cent up to 1989-90. This rate of growth was lower than that of developing countries. Per capita income growth in India was less than 2 per cent per annum during the four decades after independence. With population growing at 2.15 per cent per annum as compared with 1.21 per cent per annum in the preceding three decades. This largely offset the benefit of higher growth in the post independence period. Government accorded the central role to industrial development in Indias planning, industrial growth was 5.3 per cent per annum from early 1950s to the early 1980s. The share of the industrial sector in GDP increased from 15 to 23 per cent over the whole period but its share of the labour force rose only from 12.6 to 13.8 per cent. Thus deceleration in the growth rate of industry since early 1960s up tp 1980s was

particularly striking. The annual growth rate of GDP in the manufacturing sector declined from 7.4 per cent before the drought years of mid 1960s to only 4.3 per cent between 1967 to 1981. The growth of agricultural output was also slow. The annual growth of income of agriculture between 1950-51 to 1984-85 was 2.12 per cent per annum and per capita agricultural income hardly increased. The growth rate in agriculture, particularly food output, was barely ahead of population growth. Indias export performance was relatively poor, by the 1950s there was a virtual stagnation of exports. Exports grew faster at 3.3 per cent annually in the 1960s and 7.5 per cent per annum in the 1970s. Indias exports were 7.8 per cent of the GDP in the 1980-81 which was almost the same portion as in 1950-51. The fall in Indias share of world trade fell more dramatically from 2.4 per cent at the time of the independence to 0.4 per cent in the 1980s. India experienced continuing balance of payments problems, which made the task of economic management and planning extremely difficult . The capital output ratio increased from 3.89 in the 1950s to 5.46 in 1960s and 6.04 in the 1970s. A part of this increase was also due to lower productivity and higher capital intensity. All these factors contributing with Indias poor record in health, education and other social indicators has remained far from satisfaction. Human development report of the UN in 1990 recorded India as one of the lowest in human development index with a value of 0.44. The basic constraint on development was seen as being an acute deficiency of material capital and low capacity to save. Agriculture was believed to be subjrct to secular diminishing returns. Industrialization was seen as an essential to absorb surplus labour in agriculture. It was also believed that industrialization, under the prevailing world market conditions and domestic structural constraints was feasible only if the state took the lead in setting up industries which require large investments.

2. IMPACT OF IMF ON INDIAN GOVERNMENT At the time of economic crises World Bank and the IMF stepped in to make sure that Indian economy doesnt go Bankrupt. They proposed several changes to the Indian economy. Here we can identify those development related questions which the government of India had when a new policy was proposed. 1. What are the consequences of an open economy would do to the planning and development? 2. Who are likely to be the losers and winners from home grown industries? 3. How is the Liberalization and globalization going to affect the Indian markets? Would the Indian industries survive the competition from the multinational companies? 4. Would the Privatization of the economy would result in losing control over the most important sectors of the Indian economy. 5. What effect will the shift in global power in institutions of regional and global Government and in private organization have on the Indian economy? These questions are relevant to all developing economies. But for India they represent an especial challenge. On one hand, after years of declining FDI (Foreign Direct Investment) , rapidly growing inward investment in India became the fresh source of resources to an investment starved context. Opening its doors to the world economy also ment arrival of multinationals which helped to create a stronger economy. On the other hand, this economic policy change had a major threat. What would have happen if the FDI didnt flow into the economy? Or would the economy be able to recover from the crises? Would the domestic industry be able to compete against multinations? And even the boon from rising commodity prices poses its own threats since the consequences of high commodity prices often are more a resource curse than a resource boon. Their unquestioned support for questionable political regimes threatens to undermine drives for better governance and democracy. What is required is a synthetic framework which provides a way of sorting out threat from opportunity and identifying winners and losers so that Indian government, firms and civil society organisations can maximise the potential of the new opportunities offered by the rise of the New economic policy.

3. ASSESSING THE IMPACT OF THE POLICY DRIVER ON THE NEW ECONOMIC POLICY How might we assess these impacts? We can distinguish three sets of structuring principles to aid this analysis the channels of policy driver interaction with the old economy, the distinction between complementary and competitive impacts.

Channels of Interaction There are a variety of different channels through which old economy interact with New economy, in their regions. Clearly, these channels are contingent they change over time, and vary in importance depending on factors such as location, resource endowment, trade links, and geo-strategic significance. Key channels stand out in importance. The first of these are the trade links between the old and the New Economy. Indias share of global merchandise trade was basically stable at 6.7 per cent in 2004. Indias share of global service trade, particularly IT services grew by 4.3 per cent as compared to 1988-9. INDIAN TRADE ($bn and per cent) 1948 1953 1963 1973 INDIA 2.2 1.3 1.0 0.5 1983 0.5 1993 0.6 2003 0.8 2004 0.8

The second major channel of interaction is FDI. Already the Indian economy has become the major share of global inward FDI. But the Indian drivers are increasingly also a source of outward FDI. There are four primary types of FDI technology-leveraging, resource seeking, market seeking and cost reducing. outward investment clearly fits-into the first three of these. Technology leveraging investments, and resource-seeking and market-seeking investments predominantly in other developing economies. The third channel is finance. Large trade surpluses in India coupled with its ability to attract FDI and other categories of capital flows have led to a build-up of large foreign reserves, estimated at more than $1trillion in 2006. A significant change in how Indias capital (also inclusing Chinas) surpluses are managed could cause an abrupt adjustment in the US interest rates and the dollar and thereby destabilise the entire world economy. It could also accelerate a slow-moving structural change which is the gradual weakening of the role of the dollar as the worlds main reserve currency. Both of these developments have significant indirect implications for other developing countries, affecting the structure of global financial markets and the competitiveness of their exchange rates.

The fourth channel of interaction arises in relation to institutions of global and regional governance. The emerging strategies of India towards multilateral institutions such as the WTO, the UN, World Bank and IMF, and the global climate regime and the bilateral interactions between the US, Europe and the new economic policy drivers will profoundly change the international context for other developing countries (Chan 2006, Messner 2006). This could create new options for developing countries if India were to play the role of voices of the South in global politics. However, if they look primarily to their own interests first. The sixth and final major channel of impact on other economies arises from environmental spillovers. Rapid growth in India, consumes natural resources and generates crossborder environmental damages within the Asian region. Problems with the use of natural resources would be widely documented. Complementary and competitive impacts The interactions between the Indian drivers, the global economy and individual region and county can be seen in a binary framework as comprising a range of complementary or competitive impacts. In each of these channels of interaction, we can observe a mix of complementary and competitive impact. For example, with regard to trade, the Indian economic drivers may both provide cheap inputs and consumer goods, and be a market for the exports from other developing countries. On the other hand, imports from the Indian economic drivers can readily displace local producers. In relation to FDI, the Indian economic drivers may either be a direct source of inward FDI or crowd-in FDI from third countries as parts of extended global value chains. But the Indian economic drivers may also compete with other economies for global FDI. The rising power of the Indian economy in a western dominated global governance system may strengthen the voice India in international organizations. 4. CONCLUSION: MUCH WE DONT KNOW What the drivers of old economic policy would have the implications on the New economic policy and how it is going to turn out. We know that this impact is likely to be large. We also know that this impact can be transmitted through a variety of channels, and have identified some important channels. We also know it can have a big impact. It might also have a combination of complementary and competitive impacts. We also know that these impacts may be direct and indirect (still working on it) . If so then, most attention is placed on the direct impacts, since these are more visible through bilateral relations. But the indirect impacts may often be more important, and much more difficult to unravel. The four major questions which answere the question for the transformation from the old to the New policy are Economic growth, Income distribution, Relations of power and governance and the environment. Policy makers do not only comprise governments. They include other stakeholders such as the Business Community, NGOs

and also external aid donors and technical assistance institutions. They too need to be informed about the significance and complexity of the impacts that the economic policy has made.

References 1.Vaidynathan. The Indian Economy. Delhi: Orient Longman ltd., 1995 2. Jalan. Indias Economic Crisis. Delhi: Oxford University Press., 1991 3. K.R.Gupta. Liberalisation and Globalization of Indian Economy. Delhi: Atlantic Publishers., 1997 4. Piya Mahtaney. The Indian ,China and Globalization Delhi: Mcmillan Publications., 2007 5. Dietmar Rothermund. The Indian:The rise of an Asian Gaint. Delhi: Yale University Press., 2007