A speculative gaze

Rakesh Mohan

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WE have come a long way since Independence (see Table 1). 1947 marked a major departure from almost a thousand years of political, economic and social subjugation. The country was then literally in darkness. Compared with today’s 85,000 mw of installed power generation capacity, the total installed capacity in 1947 was 1362 mw. The life expectancy at birth was 32 and overall literacy was 17%. By 1991 life expectancy had increased to 60 and literacy to 52%.

The evidence, though not yet conclusive, suggests that literacy rates have finally begun to accelerate in North India as well and that the overall level of literacy may have risen to about 60% now. Official poverty estimates hovered around 50% in the first three decades after Independence but have declined since to about 35%. The 1960s witnessed a serious bout of food insecurity but measures taken since then have resulted in almost 30 years of relatively comfortable food self-sufficiency.

Although most of us are justifiably disappointed at the progress made by India since Independence, we must recognise the positive achievements that have been accomplished. After a century or more of zero economic growth, the first three decades of the post-Independence period laid the foundation for sustained economic growth of a kind not seen in our recorded history. But this growth, at less than 1.5% annual growth in per capita income and 3.5% in national income was clearly inadequate to make any dent in the high poverty levels prevalent in the country. However, the foundations for modern economic growth were well laid and we saw significant acceleration in the 1980s and 1990s. The higher annual growth of per capita income at about 3.5% achieved in the 1980s become palpable and major poverty ratios fell significantly.

The progress achieved in the 1980s should have taught us the lesson that higher economic growth must be the key objective of economic policy, and that it is only higher economic growth that can reduce poverty and provide sustainable economic security. No distribution can take place when there is nothing to distribute.

It is useful to look at the long-term decline of both China and India. India began its decline as an economic power from the early part of the 18th century, while China’s decline perhaps began in the early part of the 19th century (see tables 2a and 2b). It would appear that the India accounted for about 16% of world income in the early 1800s whereas China was about double that at 32%. The share of both these countries declined over the next century and a half and fell to about 4% for India and 5% for China by 1950. Correspondingly, it was Europe and the United States that gained substantially over this period.

India’s improved economic performance since the early 1980s has substantially increased its share of world income from about 3.4% in the late 1970s to about 4.6% now. However, during this period Chinese superior economic performance doubled its share of about 5% in the late 1970s to about 11% now. This has been achieved by a major step up in investment and economic efficiency brought in through the active implementation of economic reforms throughout this period. Thus the achievement of long term and sustainable acceleration in Indian economic growth over the next 10 to 20 years requires substantial enhancement of overall investment levels and improvement in economic efficiency.

The countries which have achieved high annual growth in excess of 6% in per capita income in the last three decades have done so through significant increases in their gross investment rates (see table 3). The achievement of per capita income growth of 6% in India over the next 10 years will require a GNP growth rate of over 7.5% per annum. Even if this were achieved, Indian per capita income in the year 2010 would not exceed what the per capita income of countries such as Thailand was before 1985. In other words, even if we are able to achieve a significant step up in our economic growth we will still be substantially behind most East Asian countries.

As may be seen from table 3, all countries which have succeeded in stepping up their growth rates to about 6% were able to do so by substantial increases in gross domestic capital formation in excess of 30% of GDP. The current Indian investment ratio is hovering around 25% to 27%. This needs to be stepped up to more than 30% within the next few years. A primary driver of higher economic growth is investment in infrastructure. The India Infrastructure Report had projected that the achievement of GDP growth of over 7% will require an increase in investment in infrastructure from the prevalent levels of about 5 to 5.5 of GDP in the mid-1990s to about 8% of gdp by 2005-06.

It had concluded that it would not be possible to achieve this unless the public sector kept up its existing rate of investment in infrastructure amounting to about 4.5% to 5% of GDP, while increasing private sector investment in infrastructure substantially to account for the balance. Private investment in infrastructure would have to increase from about 0.5 to 1% of GDP in the mid-1990s to 2.5% to 3% of GDP by about 2005. Thus, the achievement of higher growth requires the maintenance of public investment in infrastructure facilities at a high level while policies are changed to facilitate increasing levels of private investment.

The main impediment to the achievement of this scenario is the deteriorating fiscal situation of both the central and state governments in India. The government’s ability to invest has been declining continuously since the late l980s because of its deteriorating fiscal position (see table 4). What is encouraging, of course, is the increase in private corporate sector investment levels subsequent to the 1991 reforms. The reforms have therefore succeeded in encouraging higher levels of private investment as envisaged. But further increases are constrained by declining public investment levels.

India adopted an economic policy based on self-sufficiency and trade protection in the context of a planned economy from the immediate period after Independence in the 1950s. This policy remained relatively unchanged until the late 1970s. The first glimmer of change began in the 1980s with some liberalisation of the tight industrial regulatory system, some liberalisation of imports and more focused export promotion. This was also accompanied by a stepped up public investment programme focused on enhancing the infrastructure facilities in the country.

These measures seemed to have broken the low growth trajectory of the Indian economy and increased the rate of GNP growth to almost 5.5% per year for the 1980s as a whole. However, this growth was bought to a certain extent by widening fiscal deficits incurred to finance the higher public investment programme. The resulting higher growth also widened the current account deficit as imports grew faster than the exports. Thus, although the Indian economy achieved a higher growth path in the 1980s, it ran into a serious economic crisis in 1991.



It was against this background that the economic reforms were initiated in 1991. We have, accordingly, gone through a wide ranging reform process covering the areas of macro economic and fiscal stabilisation, industrial policy, trade policy, exchange rate determination, public sector policy, financial sector policy, capital markets and agriculture. The effort has been to eliminate existing controls in all areas which had distorted resource allocation and inhibited entrepreneurship. It was thought that these measures would nudge the economy towards the attainment of even higher productivity and efficiency.

The results so far have been mixed. After an initial downturn in 1991-92 the economy recovered and attained a growth rate in excess of 7.5% per year between 1993-96. The external balance has been restored, inflation is at a record low, banks are subject to new prudential discipline, and the capital market has become deeper and more vibrant. But the fiscal deficit has remained stubbornly high at about 6% of GDP after an initial adjustment. After three years of buoyant growth in 1993-96 the economy has experienced a slow-down and has now come back to the kind of growth path achieved in the 1980s.

Although a great deal of economic reform has taken place in the 1990s, much remains to be done. In many areas reform has been halfhearted and in others it has not really begun. Fiscal adjustment has been very partial and the fiscal situation in both the centre and the states is now becoming unsustainable. Consequently, public investment has fallen sharply, which is also constraining the higher growth feasible in the private corporate sector.

Industrial de-regulation has been quite comprehensive except in the case of small-scale industry. More than 800 items continued to be reserved for production in the small-scale sector. Among the objectives of economic reforms was an acceleration in the generation of industrial and other employment. The items reserved for the small-scale sector are typically those which are easy to manufacture and are labour intensive. This measure may have been useful when it was put in place to encourage the entry of new entrepreneurs into the industrial sector. It has now become obsolete and acts as a brake on the expansion of the many small-scale units that were set up in the last three decades.

Moreover, it also inhibits the growth of industrial employment which would otherwise takes place if such growth impediments did not exist. Many of the items such as clothing, shoes, plastic goods, sports goods, toys and the like are exactly those in which India would be extremely competitive globally. The restrictions on investment level in these items does not allow for quality and technology upgradation on a consistent basis, so essential for a continued and sustainable expansion in exports.

The result is that India is unable to experience sustained long term export growth, so vital for attaining an overall higher growth path. We experience short bursts of rapid export growth whenever significant real devaluation enhances our price based low end competitiveness. Such growth peters out as soon as this advantage is exhausted.

Similarly, reforms in other areas have been half-hearted. Although a great deal of discussion has taken place in the last four years or so over private investment in infrastructure, the economic and regulatory conditions in place have not been conducive to significant increase in private investment in infrastructure. Reforms in the financial sector were also begun with a great deal of enthusiasm with the entry of a handful of private banks and some expansion of foreign banks along with the promulgation of new prudential requirements and interest rate deregulation. These initial reforms have not continued and the financial sector has therefore some distance to go before it becomes as efficient as it is in other countries.

The greatest failure of Indian economic policy has been in the area of human development. As the state gave greater attention to the production of goods and services in the public sector, areas such as education and health never received the attention that they should have. Thus, though significant improvements have taken place in these areas since Independence, our achievements are still quite a distance away from those in East Asian countries. Investment in human development would require much greater spending for education and health by both the public and private sectors and the assurance of a minimum level of nutrition to all citizens of the country.

Such an increase in expenditure can only be achieved if the government can reduce or eliminate unnecessary subsidies and re-allocate expenditure directly to such social necessities. Detailed calculations on the returns to public sector investments suggests that the average returns at present are not very different from zero. The cost of current borrowing is in the region of 10-12%. This then is the extent of inefficiency in the allocation of investible resources available with the government at present. Thus, an improvement in public sector functioning is a key requirement for both achieving higher growth in the economy and for finding the resources necessary for higher investment in social services.

The healthy growth achieved by the economy in the 1980s and 1990s has not only reduced poverty significantly but also expanded the market for goods very substantially. The NCAER has conducted annual household surveys since 1985-86, covering a sample of about 300,000 households to provide data on profiles of consumers for a variety of consumer goods, both durables and non durables. These surveys also provide relatively detailed information on the income distribution of households in both urban and rural areas.

We have been able to track the movement of households across income groups for almost 15 years. In examining these data we attempted to understand the expansion of the market as also to project how this expansion will take place over the next decade or so. The results are quite startling. If we believe that the way the economy has gone in the past 20 years has been healthy and that market expansion has been very large, the prospects for the future are quite staggering.

For convenience, we have classified all households into five income classes: low, low middle, middle, upper middle and high. The cut-off points for each income class is adjusted for inflation so as to make income groups comparable over time. The high income group comprises households who have income above Rs 110,000 per year at 1995-96 prices. The low income households are those with income less than Rs 25,000 per year. Although it is likely that the observed income is understated significantly, the comparisons over time are valid since the sampling is done on the same basis every year.

The data show that low income households declined from about 65% in 1985-86 to about 54% in 1994-95; the proportion of the high income households increased from about 1.1% in 1985-86 to 2.9% in 1994-95. During this period the GDP grew at an average rate of about 5 to 5.5%. We, therefore, observed that the change between the mid-1980s to mid-1990s was significant but slow.

What is of great interest is the acceleration in this change that is expected over the next decade or so if GDP grows at about 6.5% plus during this period. The proportion of low income households is projected to decline sharply from the 54% in 1994-95 to less than 15% by 2010. In fact, in urban areas they would become negligible at 2% or less. The growth in high income households is then more than dramatic from 2.9% in 1994-95 to more than 15% by 2010. In terms of actual magnitude the number of low income households would fall from about 85 million in 1994-95 to 25 million by 2010. Similarly, high income households will increase from 4.6 million in 1994-95 to almost 30 million by 2010. These are indeed dramatic changes that are expected over the next decade if the economy can actually grow at over 6.5 % per year.

The striking conclusion is that there is a possibility of poverty being eliminated in India within our lifetimes.



The decline of low income households from 65% in 1985-86 to less than 15% by 2010 means that non savings households and non-consuming households will decline precipitously and there will be huge accretions to low, middle, and upper middle income households who will also save and consume more and more.

As a consequence of such income changes the market for goods will expand massively. For example, if the demand for two wheelers in the late 1990s is between 3 and 4 million per year, this may well grow to 7-10 million by 2010. The number of cars sold per year has already increased from about 30,000 a year in the early 1980s to more than half a million now. This may also expand by a factor of four over the next decade. Similarly, if the number of refrigerators sold is about 2.5 million per year these will increase to more than 6 million by 2010. Wristwatches have already achieved the penetration rate of more than one watch per household in the country. By the end of the next decade there could well be almost two watches per household.



Such an expansion of consumer demand will necessitate a corresponding increase in manufacturing investment, infrastructure investment and expansion of trade. Each of these elements of economic expansion contributes to a virtuous circle of higher consumption, higher investment, higher income growth, higher consumption and higher investment. This is the kind of rapid change process that East and South East Asian countries have traversed over the past 30 years; India is now poised to make a similar jump into the future.

Such income growth brings about changes in food habits and therefore in food production. The share of cereals in food expenditure of households has fallen sharply since the early 1970s in both rural and urban areas. Fruits, vegetables, milk, processed foods, poultry, meat and fish have all increased their share in peoples’ diets. We can also expect significant changes in clothing patterns and corresponding clothing production. There will also be a massive increase in the demand for what may be called modern housing which will again lead to significant changes in the production pattern of housing and of building materials. With the increase in modern housing there will be further expansion in the demand for all the goods which fill up kitchens, bathrooms, and bedrooms of peoples homes.



Along with such changes in demand and production there will also be corresponding changes in the transportation and distribution of goods. As the volume of retail markets of consumer goods expands there will have to be a transformation in the pattern of retailing. The movement of massive volumes of goods will lead to the kind of distribution change though as has already taken place in Asian countries. The cultural attachment to small stores with personalized services will become a feature of the past and we will see an increasing number of large modern departmental stores and super markets in most big cities. For example, it is estimated that almost half of all grocery sales in Thailand are now made from stores which may be described as having modern retail trade structures. This proportion was zero as late as 1980s, just as it is in India now.

If such changes take place, the urban form will also undergo corresponding change. As the urban consumers become more harried in their shopping habits they will demand goods of consistent quality at low prices while expending a minimum of transaction costs. Branding will become even more important than it is today. However, looking at the Indian income levels and distribution today and in the foreseeable future, manufacturers will need to cater appropriately to each market segment. Even by the year 2010 almost two-thirds of households will be in the low to upper middle income ranges demanding goods at low prices but of consistent quality. The current patterns of new market entrants catering only to the rich will not have as much success as those who cater to the mass market.

With the massive increase expected in the volume of goods that will need to be moved, expected expansion in trade, increase in personalised vehicles, and the overall increase in transportation demand, major problems will be encountered unless there is a corresponding expansion of all elements of infrastructure services – roads, railways, ports, airports, power, telecom and the like. The India Infrastructure Report had estimated that investment in such activities amounted to about 5.5% of GDP in the mid-1990s.

To cope with the kind of growth mentioned, it estimated that such investment would have to increase to almost 8% of GDP by 2006 or so. As it happens, the increase in investment that had been expected by the end of the current decade have not fructified. Thus, if the kind of economic vision that has been sketched above is to become a reality, there would have to be even faster growth in all aspects of infrastructure investment in the coming decade, in both the public and private sectors.



We have already witnessed relatively rapid urbanisation over the last 2-3 decades. It is expected that the urbanisation level is likely to be around 30% by the year 2001, with the urban population increasing to about 300 million. We already have more than 300 cities with more than 100,000 population and 23 cities with more than 1 million population. As the pressure on housing increases and people become more mobile, we will also observe pressures mounting on the social front and possibly a breakdown of the familiar joint family system.

Second, although we have not done as well as many other countries in health, the life expectancy in India has increased from less than 32 at the time of Independence to about 62 now. At medium and higher income levels, people are living to higher and higher ages into their ’80s and even ’90s. With this increase in longevity and pressures on housing, it is becoming more difficult for parents to stay with and be looked after by their children. We can, therefore, expect an increase in demand for social security instruments which provide adequate resources for people in their old age to live reasonably comfortably and with dignity. This demand will only intensify in the future.



It is imperative therefore that the financial sector be opened up to provide more opportunities for households to save in secure insurance and pension funds instruments in order to ensure their future. We would then complete another virtuous circle of high economic growth, high savings, high investment, high infrastructure investment, and high economic growth. The opening up of insurance and other segments of the financial sector is crucial for providing a social safety net for all our citizens while at the same time providing a mechanism for the funding of new infrastructure entities that are likely to come up in both public and private sectors. It is mainly institutional investors who can be expected to have the capability of assessing the credit quality of the different infrastructure entities, be they private companies, public sector companies, state governments or local governments.

Almost all infrastructure services have in the past been provided by the public sector. The pattern and organisation of the provisions of such infrastructure services has been done in such a way that the public has got used to not paying the economic charges for these services. This includes key services such as power, water supply, irrigation, and transport among others. The argument for not charging appropriate user charges is essentially been on the basis of the inability of poor to pay for such services. This argument has little basis in fact since most such services are essentially consumed by the better off sections of society.



The key issue which is vital for the sustainability of the kind of economic growth sketched above is the need for a major campaign to bring up the levy of user charges to economic levels. Infrastructure entities in both public and private sectors would then be able to get adequate returns for their investments. At present, both the central and all state governments are facing severe fiscal pressure because of the many hidden subsidies that have got embedded in the system. The fiscal balance of both the central and state governments would improve dramatically if user charges are imposed appropriately for all public services. It is only then that we would be able to invest adequately in the provision of such infrastructure services which are essential both for economic growth and for social justice.

There are two kinds of geographical divisions that are becoming apparent in the country. In general, the western part of the country has greater economic dynamism than the eastern part. Second, the southern, non-Hindi speaking states are showing much larger improvements in human development indices than the northern Hindi speaking ones. If current trends continue it is likely that the economic distance between the northern and the eastern states on the one side and the western and southern states on the other will increase significantly.

The key issue for the next decade is for the country to find practical ways in which the problems of these northern and eastern states can be addressed adequately and particularly in the sectors of health, education and nutrition. There would have to be some kind of special package for these states in order to help them begin to catch up with the better-off states. However, this is not merely a question of throwing resources. The problems are too complex to be dealt with merely through an improvement in resource allocation to the states. These issues will pose a challenge to the federal structure of the country and great political and social skills will be demanded of the leadership.



The decade of 1990s has been dominated by economic policy attempting to liberate the private sector from interference by the government. The objective has been to allow for restructuring and re-allocation of resources within the private sector, and from the public sector to the private sector in order to achieve higher levels of efficiency and productivity. During this period, however, there has been little attempt to improve the workings of the government and of the associated public sector.

The economic reforms in the next decade would have to focus especially on making government more effective, efficient, productive and responsive to the needs of citizens as they become increasingly more vocal. This will involve massive privatisation of public sector entities at both the central and state levels in areas where the private sector is competent to take over such enterprises. Liberation from running such enterprises will enable the government to focus on those core areas such as law and order, health services, education services and essential infrastructure which the government and public sector alone can provide. This is the real challenge for the next decade.




Progress Since Independence: Key Indicators





Life Expectancy

Power Capacity


(per cent)

(per cent)































Share of World GDP, 1700-1995 (per cent)





































United States


















Rates of Growth of World GDP, 1700-1995

(annual average compound growth rates)



























United States









– 5.56






Source: Angus Maddison, Chinese Economic Performance in the Long Run.

Paris: OECD, 1998.




Gross Investment Rates in Current Prices:

Selected Countries (1952-1994)



Gross Investment/GDP (per cent)

































United Kingdom




United States




Source: Angus Maddison, Chinese Economic Performance in the Long Run.

Paris: OECD, 1998; * 1978-91; ** 1960-77




Declining Public Investment

Gross Capital Formation (per cent of GDP)




Private Corporate Sector

Public Sector

















Source: Government of India: Economic Survey (various issues).