Economic Reform at 25


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

                  Twenty Five Years of Economic Reform

GDP

India in 2015 has the third-largest GDP ($7.98 trillion) in the world in purchasing power parity terms after China (19.52 $) and the United States (17.95 $).
 
GDP Growth

India’s annual GDP growth rose from 3.5 percent in 1950–80 and 5.5 percent in 1980–92 to an average of 8 percent from 2003 to 2015, with a peak exceeding 9 percent in the three years 2005–08.
In a depressed global economy, the IMF sees the United States and India as the two bright spots, as the two major economies holding up an otherwise slowing world.

Per capita income is up from $375 per year in 1991 to $1,700 today. India has long ceased to be a low-income country as defined by the World Bank, which uses a threshold of $1,045, and has become a middle-income country.
In 1991, India was a member of the G77 group of developing countries. In 2016, India is a proud member of the G20, the most-powerful countries in the world.

Commercial Finance

Its commercial finance has been spurred by economic reforms that have attracted inflows of foreign exchange other than foreign aid. Total foreign investment (equity plus portfolio inflows) came to $51.2 billion in 2014–15.

Foreign commercial borrowing in the same year came to $68.2 billion gross and $10.4 billion net, whereas remittances from Indians overseas exceeded $70 billion. The remittance boom was a consequence of globalization, of Indians going abroad.
India is became a Donor
 
In 1991, India was infamous as the world’s biggest beggar, a bottomless pit for foreign aid. It soaked up 40% of the funds of the International Development Association (IDA), the soft-loan window of the World Bank. Today, India is as much a donor as a recipient.
It is still a substantial aid recipient in gross terms. But the inflow is barely half-a-billion dollars net of debt service. Meanwhile, India itself has become a substantial donor, including a line of credit of $10 billion to Africa, $2 billion to Bangladesh.
 
Indian Companies became Multinational

In 1991 Indian politicians and industrialists feared that economic liberalization would mean the collapse of Indian industry or its conversion into subsidiaries of multinational companies. Twenty-five years later, Indian companies not only have held their own but also have become multinationals in their own right. Through acquisitions, ArcelorMittal became the biggest steel company in the world. The Tata Group acquired Corus Steel and Jaguar Land Rover and in the process became the largest private-sector employer in the United Kingdom.

Imports and Exports

Imports and exports, of both goods and services, have soared as a proportion of GDP because of India’s opening up and consequent globalization.
Foreign Exchange Reserves
 
In June 1991 at the height of the Balance of Payments crisis, India’s foreign exchange reserves had dipped to a mere $1 billion just sufficient for two weeks of import requirements. Presently (August 2016) India’s foreign exchange reserves have touched $ 366.776 billion – one of the highest in the world. Remittances into the country from abroad and software exports – two major benefits of globalisation – contributed substantially to the accretion in foreign exchange reserves.

FDI

Liberalization of Foreign Direct Investment (FDI) led to sustained increase in FDI. In 2015- 16, India emerged as the largest recipient of FDI among emerging nations with FDI inflows of $55. 56 billion. FDI inflows along with Foreign Portfolio Investment (FPI) enabled India to finance her current account deficit.
 
Spurt in Social Sector
 
A major benefit of the high growth was the spurt in tax- GDP ratio from 8% in 1991 to 11.5% by 2008. This tax buoyancy enabled the government to undertake ambitious social sector projects like MGNREGS, Bharath Nirman etc. The annual outlay for MGNREGS IS higher than the total tax revenue of the central government in 1990-91. The ambitious food security programme being implemented now entails huge expenditure. The insurance programmes targeted at the poor and the Micro Units Development & Refinancing Agency (MUDRA) initiatives are laudable inclusive programmes. For sustaining such ambitious social sector programmes, it is very important that India should sustain a high growth rate for a long time.
 
Poverty Decline (Tendulkar Committee Methodology)

Years               Percentage of Poor
1993–94                          45.3
2004–5                            37.2
2011–12                         21.9
 
India has become a global hub for computer software development.
India is now a low-cost commercial satellite launcher. By October 2015, it had launched 51 satellites for foreign countries, with payloads of less than 1,600 kilograms.
India’s economic success after 1991 has spurred the creation of thousands of private engineering colleges, with estimated admissions of 1.5 million students per year.
 
Challenges Ahead
 
India’s spectacular economic performance since liberalisation is, indeed, a great achievement. India was one of the few large economies of the world, which did not experience recession or sharp economic slow- down during the Great Recession of 2009. However, it is important that some deficiencies of this growth be recognized and addressed. A major deficiency of India’s spectacular growth is that the growth has not been adequately ‘inclusive’. Large number of poor, marginalised, vulnerable sections of the society has been left out of the growth process. This deficiency has to be addressed and growth has to be made more inclusive.
Another major deficiency is the infrastructure deficit, which is becoming a major constraint on sustainable high growth. Land acquisition, environmental clearances and speedy execution of infrastructure projects brook no delay.
Hence, we can say India’s achievements of 25 years of reforms are laudable. The deficiencies, too, are glaring and need to be addressed seriously. Though India has a long way to go in achieving stable, sustainable and inclusive growth, the economy is on the right path.
 
Purchasing Power Parity
 
Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a market "basket of goods" approach. According to this concept, two currencies are in equilibrium or at par when a market basket of goods (taking into account the exchange rate) is priced the same in both countries.


Purchasing power parity is defined as the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as one dollar would buy in the US. 
 
Example
 
 Imagine that the market exchange rate between Dollar and Rupee is 60. One Dollar in the US will buy one liter of milk there. Corresponding money in terms of Rupee i.e., Rs 60 can buy three liters of milk in India.
 Suppose that India’s GDP is Rs 600. This will become $10 in market exchange rate terms. If milk is the only commodity produced in the world (you imagine it for simplicity sake), one will think that India is producing 10 liters of milk, if we use the market exchange rate.
Actually, India produces 30 liters of milk. This higher volume of production in India is not expressed if we use the market exchange rate to measure GDP.
To overcome this defect and to accurately measure the GDP, we can use the Purchasing Power Parity exchange rate.
Under PPP, we measure the GDP of India by measuring how much milk that Rupees 60 can purchase in India and One Dollar can purchase in the US.
Here, one dollar in the US can purchase one liter of milk whereas Rs 20 can purchase one liter of milk in India.
 $ 1    =        Rs 20
This is the purchasing power parity exchange rate we obtained. Using this exchange rate we can calculate that India’s GDP of Rs 600 will become $30.  
Thus, in terms of PPP, India’s GDP is $30 in contrast to the $10 we estimated by using market exchange rate.
The PPP exchange rates help to minimize misleading international comparisons that can arise with the use of market exchange rates.
The World Bank is using purchasing power parity conversion factor to correctly represent the PPP exchange rate. As per the WB estimate, 17.12 Indian Rupee is equal to one US Dollar in terms of purchasing power in 2014
 

 
 



Wednesday, 09th Aug 2017, 05:15:11 PM

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