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Indian Economy Through the Years: An Understanding of Three Decades of Growth Post the Lpg Reforms

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Macroeconomics

Title - Indian economy through the years: An understanding of three decades of growth post the LPG reforms

GROUP 5  

Karan Bathla (D010)

Natasha Chadha (D015)

Manu Gupta (D023)

Mayank Jaiswal (D030)

 Sonal P (D047)

Rohit Ravikumar (D051)

Introduction

India is a land of diversity with 1.3 billion people, 29 states and 22 languages yet a single and strong economy. Since independence our country has been a ‘mixed economy’ i.e. a combination of public and private sectors that had been driven by agriculture during the nascent stage of its post-colonial growth. Presently, India is being driven further jointly by the services and the manufacturing sector with an added emphasis on domestic production.

India’s journey began from the first half of the 19th century. The journey from then to the present has not been easy. Being a British colony to becoming a Republic and having a constitution of its own in 1950, to demonetisation and GST in 2016, India has seen a lot.  Successive policy changes and government reforms during the ever ambitious 12-five year plans (FYP) has moulded the Indian economy in a strategic and a planned way, but there were always unforeseen hurdles.

Taking this journey into the account, the main purpose of this project is to understand the economy of India over the past few decades and to get a glimpse of how India has evolved as an economy. The study focuses on the years 1990 and forward till the present.  

Methodology

We have considered the economic history of India as the periods of study and analysis.

  • Phase 0 Pre-LPG era
  • Phase 1 1991-1999
  • Phase 2 2000-2009
  • Phase 3 2010-Present

Starting from the pre LPG reforms period (1985-90) as a precursor to the scope of project to get a brief idea of the pre liberalisation era.

We then talk about the Annual Plans (1990-92) and how the crisis of Balance of Payments, the effects of it and how it led to the monumental LPG reforms. And finally, the study and the development of the economy from the years 1992 to 1999 i.e. the 19th century. We then talk about the next decade i.e. 2000 to 2009 and talk about the economic scenario then. And we finally move to the current period i.e. 2010 to present. During the course of our project we throw light on various reforms that took place and the global/local events that transpired.  

In this analysis we shall use the following economic indicators:

  • GDP
  • Inflation

Phase 0 Pre-LPG Era

a. Background of Indian Economy before 1990’s

It’s imperative to look back at the past and historical facts to understand what the situation of economy presently. Before 1990 the Indian economic structure was influenced by the USSR (now Russia) model. There was “Licence Raj” in India which basically meant that the private players could manufacture goods only with official licences and the quantity of goods they were allowed to produce was determined by government itself, not by the free-market demand. Also, there were limited free trade practices across the borders of the country which meant very low scope of growth of manufacturing sector with the enactment of acts like Monopoly Restriction & Trade Practices Act 1979 (MRTP Act). (Fig.1) below shows the same.

The growth rate in India was recorded to be very low, lingering around 2% to 3.5% in 1960s and 70s and went close to 5% in the late 1980’s. This, low and stagnant growth rate of decades was termed as the “Hindu growth rate”.

             [pic 2]

(Fig.1)

It is not exactly true, that liberalisation happened post 1990. In fact, India made its first attempt at economic liberalization much earlier- in 1966 under the then PM Mrs Indira Gandhi and once again, in 1985 under Rajiv Gandhi, but failed on both occasions, due to politics taking precedence over economics.

The first oil crisis in the 1970’s made the economists in India realise the importance of liberalization and the benefits of trade and the need of foreign exchange. This encouraged India to relax its trade policies in 1970s to some degree thus, mild liberalization happened way before 1990s. But it was still not good enough. This can be understood from the fact that multinational companies like Coca-Cola and IBM existed in India but eventually had to exit the markets because tough and stringent policies were not giving them enough scope of profitability. The second oil crisis hits us and we deregulate the system further in the 1980s during the Rajiv Gandhi regime. Eventually, the global oil scenario and our trade deficit got worse and we had to face a balance of payment (BOP) crisis.

This period is considered as the ground work for the post 1991 reforms that took place in India. The objective of this plan included establishment of the self-sufficient economy and opportunities for productive employment. It was during this plan the private sector got the priority over public sector for the first time.

GDP Growth in pre LPG era

Period

Target

Actual

1969-74

5.70%

3.30%

1974-79

4.40%

5.20%

1980-85

5.20%

5.30%

1985-90

5.00%

5.80%

During the 1960-80 period, the above table shows the progress of the economy from the “Hindu growth rate” to a formidable one. But it wasn’t enough for a country like ours with such a huge demographic and a booming population.

Phase 1 1991-1999

a. Annual Plans (1990-91 & 1991-92)

The political situation in India during this period got unstable. A five year plan that was due, could not be formalised and instead two annual plans were formulated to steer through the unstable economic environment. It was during this time that India faced it worst Balance of payment crisis.

b. Balance of Payment Crisis (BOP - 1991)

Government runs into a deficit when its expenditure is more than its receipts. To meet the additional expenditures a government has three options. Either to print more money, draw money from its forex reserves or to borrow from foreign or domestic establishments. All these steps when enacted influence various other economic factors.

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