UNIT-2:(PART-2)

MOVING INDIA TO A NEW TRAJECTORY

(RAKESH MOHAN)

CHAPTER-The Indian Economy: A Story of Consistent Growth

about India's economic growth, its aspira6ons, and historical context.

India's GDP growth, per capita income goals, and comparisons with other countries, emphasizing the
need for sustained high growth to reduce poverty and improve living standards.

1. India's Economic Status in 2017:

o India's per capita GDP was about $1,800, much lower than China's $8,700.

o India's total GDP was $2.6 trillion, while China's was $12.2 trillion.

o This shows India was far behind China in economic size and individual income.

2. Growth AspiraPons for the Future:

o India aims to double per capita income every 10 years for the next 20 years.

o This requires a per capita growth rate of ~7% per year and overall GDP growth of ~8%
per year.

o By 2035, this could lead to:

§ Per capita income of ~$6,000 (in 2011-12 prices).

§ Total GDP of ~$10 trillion.

o Even with this growth, India's per capita income would s6ll be:

§ Lower than China's current levels.

§ About 10% of the current US per capita income.

3. Why This Growth MaRers:

o Achieving $6,000 per capita income would help eliminate poverty and ensure a decent
standard of living for most Indians.

o This growth is ambi6ous but reasonable, given India's progress over the past few
decades.

4. Historical Context:

o From 1975 to 2005, East Asia's GDP grew 10 6mes in 30 years. India could achieve similar
growth over three decades with the planned rates.

o Only a few countries have sustained high growth for so long, escaping the "middle-
income trap" (where countries struggle to move from middle to high income).

o India's large size and diversity make sustained 7% per capita growth challenging and not
"normal."
 5. Policy Focus:

o Economic growth must be the top priority, even over other goals, as it drives poverty
reduc6on and social welfare.

o A "business-as-usual" approach won't work; bold policies are needed.

6. India's Growth History:

o Early post-independence (1950s-1960s) growth was slow, called the "Hindu rate of
growth," but it was s6ll beaer than the stagna6on of the previous century.

o From the 1950s to the late 2000s, growth accelerated consistently, except for a
slowdown between 1965 and 1981.

o The past decade (before the document's 6me) saw another slowdown, but recent years
show some recovery.

o The challenge now is to push annual GDP growth back to 8-9% sustainably.

QuanPtaPve Data Table

The following table summarizes the key numbers from the document for easy reference.

Metric Value in Goal by 2035 Comparison

India's Per Capita $1,800 ~$6,000 (2011-12 Lower than China's $8,700 in 2017
GDP prices)

India's Total GDP $2.6 trillion ~$10 trillion Much less than China's $12.2 trillion
in 2017

Per Capita Growth - ~7% per year Needed to double income every
Rate decade

Overall GDP Growth - ~8% per year Needed to reach $10 trillion by 2035
Rate

China's Per Capita $8,700 - Far ahead of India in 2017

China's Total GDP $12.2 - Far ahead of India in 2017

• India's Goal: Double per capita income every 10 years to reach $6,000 by 2035, growing the
economy to $10 trillion.

• Why It’s Important: High growth can end poverty and improve living standards for most Indians.

• Challenges: Sustaining 7-8% growth is tough for a large, diverse country like India and requires
strong policies.

• History: India has grown faster since independence, but slowdowns (like 1965-81 and recently)
show growth isn’t guaranteed.

• Comparison: India lags behind China and the US but can achieve East Asia-like growth with effort.
 The Golden Era of Growth: 2003-08

the Indian economy grew strongly between 2003 and 2008, ofen called the "Golden Era of Growth."

1. Strong Economic Growth (2003-08)

- Afer 2003-04, India's economy grew quickly.

Reasons for Growth:

- BeRer DomesPc Industry: Businesses became more efficient and compe66ve during 1997-2003.

- Low Interest Rates: Borrowing money became cheaper for businesses and individuals.

- Improved Government Finances: The government reduced borrowing and managed taxes beaer.

- High Global Demand: Many countries wanted Indian goods and services.

- Favorable Monetary CondiPons: Investments became easier and more profitable.

- This created a good environment for businesses to invest and make profits.

- All major sectors contributed:

- Agriculture: Farming and related ac6vi6es.

- Industry: Manufacturing and factories.

- Services: IT, banking, tourism, etc.

- Growth rates (2003-08):

- Overall GDP growth: ~8.8%.

- Manufacturing: ~9.7%.

- Services: ~9.8%.

2. Increased Savings and Investment

- The government reduced its borrowing (lower fiscal deficit), leaving more money for private
businesses to invest.

- How this happened:

- The government collected more taxes (higher tax-to-GDP ra6o).

- Subsidies were controlled, saving money.

- Savings in the economy increased:

- Public sector (government) saved more.

- Private corporate sector (businesses) saved more.

- Household savings stayed stable.

- More savings meant more money for investments, boos6ng the economy.

- Household savings were enough to meet the financial needs of both the government and businesses.
3. Controlling InflaPon

- Despite a lot of foreign money coming into India, infla6on (price rise) was kept under control.

- How infla6on was managed:

- The government and Reserve Bank of India used a "mul6ple instrument approach."

- A special tool called the Market Stabilisa6on Scheme was used to manage large and unstable capital
flows.

- Infla6on during 2003-08 was similar to the earlier period (1997-2003), even though global commodity
prices (like oil, metals) were higher.

- Infla6on was measured using:

- Wholesale Price Index (WPI): Prices of goods in bulk.

- Consumer Price Index (CPI): Prices of goods for regular people.

- The government's agricultural price policy helped:

- Minimum Support Prices (MSP) for crops were kept lower than market prices.

- MSP increases during 2003-08 were smaller compared to 1997-2003 and 1991-97.

- This helped control infla6on but was also supported by lower global infla6on since the late 1990s.

4. Strong Financial Sector

- Banks and financial ins6tu6ons performed well during this period.

- Improvements included:

- Beaer asset quality (fewer bad loans).

- Higher efficiency (banks worked more effec6vely).

- This supported economic growth by providing loans and financial services to businesses.

5. Infrastructure Development

- Investment in infrastructure (roads, ports, power, etc.) increased by about 1% of GDP.

- Both public sector (government) and private sector (businesses) contributed equally.

- Key areas of investment:

- Roads: Significant increase in road-building projects.

- Railways: Investment stayed the same (no growth as a share of GDP).

- Beaer infrastructure helped manufacturing (factories) and trade (buying/selling goods) grow faster.

CONCLUSION:

The period of 2003-08 was a "Golden Era" for India's economy because:

- All sectors (agriculture, industry, services) grew strongly.

- Lower government borrowing and higher savings boosted investment.

- The financial sector improved, suppor6ng businesses.

- Infrastructure, especially roads, saw more investment, helping trade and manufacturing.

This combina6on of policies and global condi6ons created a strong and balanced economic growth
phase for India.

The Current DeceleraPon: 2012-18

India's economy slowed down between 2012 and 2018.

1. What Happened to India's Economy (2012–2018)?

- India’s economy grew fast for many years, even afer the 2008–09 global financial crisis.

- But from 2012 to 2014, growth slowed down a lot.

- This slowdown happened because of several problems, explained below.

2. Why Did the Economy Slow Down?

five main reasons for the slowdown-

a. Too Much Help from the Government

- Problem: To fix the 2008–09 crisis, the government gave a lot of money (called s6mulus) through low
interest rates and spending.

- What Went Wrong:

- They gave too much money, which caused prices to rise (infla6on) and problems with foreign
payments (current account).

- To control infla6on, the government raised interest rates, which slowed down businesses and
growth.

- Food prices kept rising because the government paid farmers more for crops (Minimum Support
Prices or MSP) compared to general prices (Wholesale Price Index or WPI).

b. Wrong Kind of Government Spending

- Problem: The government’s s6mulus included tax cuts and subsidies (like cheaper fuel) instead of
building things like roads or power plants.

- What Went Wrong:

- Afer 2010, spending on roads and power dropped, which hurt industries like manufacturing.

- Fixing It: The government was slow to stop this spending, making things worse.

c. Less Money for Private Companies

- Problem: The government kept spending too much, leaving less money for private businesses.

- What Went Wrong:

- High interest rates and slow growth hurt company profits.

- Companies had to spend more on loan interest, leaving less money for growth.

- Good News: Things started improving slightly afer 2016.

d. Problems with Foreign Money (Current Account Deficit)

- Problem: By 2012–13, India was spending more on imports than it earned from exports (called
Current Account Deficit or CAD).

- What Went Wrong:

- World Problems: Global trade slowed down, so India’s exports dropped.

- India’s Problems:

- High prices (infla6on) and low bank interest rates made people buy more gold from other countries.

- Fuel prices in India didn’t match global prices, so more fuel was imported.

- Too much foreign money came in, making India’s currency stronger, which hurt exports.

- Mistakes: The government didn’t save enough foreign money (reserves) and allowed risky foreign
loans.
e. Industries Grew Slowly

- Problem: Industries (like factories) slowed down a lot since 2011.

- What Went Wrong:

- Different reports show different growth numbers, making it confusing.

- One report (Index of Industrial Produc6on or IIP) says growth was low (3–4%).

- Another report (Na6onal Accounts) says growth was higher (6–6.5%), which doesn’t make sense
with other problems.

- Challenge: Confusing data makes it hard to plan solu6ons.

- Solu6on: To grow fast again, industries (especially manufacturing) need to grow much faster, like 10%
or more.

CONCLUSION

- The 2012–18 slowdown happened because of:

- Too much government spending and slow fixes.

- World trade slowing down.

- High prices, more imports, and a strong currency in India.

- To grow fast again, India needs strong industries, especially manufacturing.

A POSSIBLE FUTURE HIGH GROWTH SCENARIO 2020 TO 2035

1. Goal: High Economic Growth

• Needs more savings and investment in factories, roads, and power.

2. How to Achieve High Growth

a. Saving and InvesPng More

• Save more money from households, companies, and government.

• Invest more in building things (33–35% of GDP by 2025, 35–38% by 2035).

• Use some foreign money (2–2.5% of GDP).

Time Savings (% of Investment (% of

2007–08 37% 33%

2012–18 31% 31%

2020–25 31–33% 33–35%

2030–35 33–36% 35–38%

b. Using Resources Efficiently

*ICOR measures how much capital investment is needed to produce an addiPonal unit of economic
output (GDP)

• Efficiency (Incremental Capital Output Ra6o ) should be 4.2 (beaer than recent 5).

• Matches fast-growing countries like China.

Country ICOR (2000–07) ICOR (2008–17)

China 3.7 5.6

India 4.2 4.9

Korea 5.9 9.9

Vietnam 4.7 5.0

c. Growing Manufacturing

• Factories must grow 10% per year.

• Fix land/labor rules, keep infla6on low, improve power and transport.

Sector Growth Needed Why It’s Important

Agriculture 4% per year Food supply

Manufacturing 10% per year Jobs, exports, GDP growth

a. Household Savings

• Dropped from 24% to 17% of GDP.

• Goal: Financial savings to 10% (soon), 13% (2035).

• Use bank accounts (Jan Dhan) and mobile banking.

Time Period Household Financial Savings (% of GDP)

2007–08 11–12%

2016–18 7%

2020–25 10% (target)

2030–35 13% (target)

b. Company Savings

• Goal: Keep savings at 10–12%, investment at 12–15% of GDP.

• Low infla6on and interest rates help.

Time Period Company Savings (% of GDP) Company Investment (% of GDP)

2008–11 7.9% High

2020–35 10–12% (target) 12–15% (target)

c. Government Savings

• Goal: Slightly posi6ve government savings, 3–4% from public enterprises.

• Reduce subsidies to 1% of GDP.

Type of Savings 2007–08 2016–18 2020–25 (Target) 2030–35 (Target)

Government 1.1% Nega6ve Slightly posi6ve Slightly posi6ve

Public Enterprises 3–4% 2.5% 3–4% 3–4%

Total Public Savings 5% 1.5% 3% 3.5%

4. Fixing Government Borrowing

• Borrow less (4–5% of GDP) so companies can use savings.

Time Period Government Borrowing (% of GDP)

2007–08 4–5%

Post-2008 7–9%

2020–25 4–5% (target)

• Increase taxes from 10.9% to higher levels.

• GST and more income tax from rich people.

Tax Type 2007–08 2018–19 Future Goal

Total Tax (% of GDP) 12% 10.9% Increase

Personal Income Tax 2% 2% 3% (target)

Corporate Tax 4% 3.5% Increase

6. BoosPng Exports

• Grow exports to 30% (2025–30), 35% (2030–35) of GDP.

Time Period Exports (% of GDP) Growth Rate (Target)

2008–12 25% 20–25% per year

2016–18 16% Slow

2025–30 30% (target) 11–12% per year

2030–35 35% (target) 11–12% per year

7. Building Infrastructure

• Spend 8% of GDP on roads, power, ports.

Time Period Infrastructure Spending (% of GDP)

Recent Years 5–5.5%

2020s 8% (target)

8. Key Points to Remember

• Grow economy 8–9% with more savings and investment.

• Factories need 10% growth with beaer rules and infrastructure.

• Households, companies, and government must save more.

• Collect more taxes, borrow less, and boost exports.

• Hard but possible with focus and effort.