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Overview

B. A. Prakash

The Indian economy had experienced an unprecedented economic crisis during the early 1990s. The balance of payments situation was precarious. There was a sharp decline in foreign exchange reserves and capital inflows through commercial borrowings and non-residents deposits. The country was experiencing large and persistent macro-economic imbalances, low productivity and a low rate of return from investment. The fiscal deficit of the central and the state governments reached an alarming level. There was a steep rise in external and internal debt. The country began to experience double-digit inflation. This was the context in which the then Congress government implemented the Structural Adjustment Reforms in 1991. The thrust of the reform process was to increase the efficiency and international competitiveness of the industrial production, and to utilize foreign investment and foreign technology to a greater degree than in the past for this purpose. The stress was also on increasing productivity, modernizing the financial sector and attaining a technological and competitive edge in the fast-changing global economy.

Though India has been implementing liberalized policies since 1991, many features of the mixed economic system—regulation in monetary and financial sectors, administered prices of public utility services, centralized planning machinery, etc.—were retained. India also retained most of the public sector undertakings on banking, non-banking financial institutions, railways, transport, communications, industry, infrastructure, etc. A large number of educational and health institutions were also retained in the public sector. In agriculture, food grains and other agricultural products were procured and minimum support prices are offered for a number of agricultural commodities. During the year 2008, the world economy experienced the worst global crisis since the world depression of 1930s. But the impact of the global crisis was small in magnitude in India due to the inherent strength of the Indian mixed economy and the effective regulatory framework that existed here. In this context, this volume examines the impact of reforms on various fronts, such as economic performance, employment, unemployment, plan process, financial and fiscal sectors, external sectors, agriculture, industry, infrastructure, health, education, poverty and federal finance. The book also examines the impact of global crisis on different sectors of the economy.

This volume starts with an essay by B. A. Prakash, examining the Structural Adjustment Reforms and the performance of the Indian economy during the post-reform period. After presenting the economic policy framework and a review of economic reforms implemented in the pre- and post-reform periods, the essay examines the performance of the economy up to the year 2008, prior to the period of global crisis. The major conclusions of the study are the following—compared to the 1980s, the economy achieved a steady and sustained growth rate in 1990s and that too, in the first half of the current decade. During the post-reform period, the tertiary sector achieved a higher rate of growth compared to the primary and the secondary sectors. Though the growth of the industrial sector was moderate, the sector underwent rapid structural and technological changes and enhanced its productive base to produce quality products for the international market. The reforms had pushed up inflationary trends in the early years, but the economy was able to achieve price stability in the subsequent period. The most significant achievement of the reforms has been the steady and sustained improvement in the balance of payments position and the accumulation of foreign exchange reserves. However, the reforms have not achieved the desired results on some fronts, like reduction of unemployment and poverty, rural development, improvements in the condition of the rural and the urban poor, expansion of public services and infrastructural development. The reforms have also marginalized the poorer sections of the society, like landless agricultural labourers, marginal farmers, tribals, workers in informal sectors and workers solely dependent on agriculture and allied activities. Likewise, the policies failed to improve public education, health services and public utilities, and to strengthen the network for the Public Distribution System (PDS). Though the reforms did not achieve the desired results in some fronts and resulted in marginalization of some sections of the society, the overall achievements were commendable. On the whole, the reforms have laid the foundation for the transformation of an industrially and technologically backward and inward-looking economy to a modern, industrially and technologically advanced, outward-looking economy.

In Chapter 3, B. A. Prakash discusses the nature and causes of global crisis and its impact on the Indian economy. The chapter starts with a discussion on the origin of the crisis, collapse of investment banks and financial institutions, and collapse of share markets, derivatives and commodity markets in the United States. The impact of global crisis on the domestic economy, external sector, monetary and fiscal fronts is discussed in the second section of the chapter. The major conclusions of the study are the following— (1) The global crisis has created recession in sectors such as industry, electricity, gas, water supply, construction, and trade and commerce. The crisis has produced adverse impacts in the external sector, viz., exports, imports, foreign exchange reserves, exchange rate, etc. There was a fall in money supply and credit, and also in prices of stocks. The crisis also increased the fiscal and revenue deficits of the central and the state governments. (2) The impact of the global crisis was, however, small in India due to the inherent strength of the Indian mixed economy and the effective regulatory framework that existed to regulate the financial sector. (3) Though India had adopted liberalized policies in 1991, the country had retained many of the regulations, controls, administered prices, economic planning and other state interventions in the market. (4) The large size of the economy, the domestic demand-driven growth process, high rates of domestic savings and investment, comfortable foreign exchange position, large earnings from private transfers, etc. have also helped the economy to withstand the crisis. (5) The policy measures implemented by the central government, such as fiscal expansion through tax relief, public spending, special stimulus packages, credit and liquidity enhancing measures, and specific measures taken to increase industrial production and exports also helped to tide over the crisis. (6) The crisis also teaches us an important lesson that a mixed economic system is a better system, capable of facing depression as compared to any other economic systems prevailing in the world.

S. Irudaya Rajan and Sabu Aliyar present an analysis of the demographic changes in all the states and the union territories of India. They discuss various trends and levels of population change from 1901 to 2001, by using the most recently published census and Sample Registration System (SRS) data. With more than one billion citizens, India is the second most populous nation in the world after China, with an increasing annual population growth rate of 2 per cent. Currently, India adds more people to the world’s population each year than any other country. Over the last 100 years, the population has increased about five times. Since independence, the numbers have trebled. During the decade of 1990s, the growth rate was 2.14 per cent per year. Union territories have registered a growth rate far lower than India’s growth rate during 1990’s. Detailed analysis indicates that South India (Kerala, Tamil Nadu, Karnataka and Andhra Pradesh) is ahead of other parts of the country in curbing the population growth rate. The sex ratio of the country stood as 972 in 1901, declined to 946 at the time of independence and declined further to 933 in 2001. Though fluctuations were reported during several decades, India is clearly following the South Asian pattern of excess males in its population. Recent evidence indicates an excess of female mortality, coupled with sex-selective abortions and female neglect and infanticide among sections of the Indian population. Among the 28 states and 7 union territories in India, only Kerala has reported the sex ratio which is favourable to females (1,058). Mortality has steadily declined in India over the past three to four decades. Life expectancy at birth improved substantially since the beginning of the century. The paper also presents the religious composition of the country along with the household assets. The authors conclude that India’s population continues to remain young, with about 57 per cent of the total population in the age group of 15–59 years.

B. A. Prakash and M. P. Abraham analyse the trends, patterns and structures of employment during the post-reform period based on the 50th, the 55th and the 61st rounds of the National Sample Survey Organization (NSSO) surveys on employment and unemployment. The chapter starts with a discussion on the concepts used by NSSO to define employment, unemployment, labour force and other measures related to labour force. Based on the analysis of trends in the worker population ratio, growth of employment and changes in the structure of employment, the study arrived at the following conclusions—the worker population ratio indicating the participation of population in economic activities witnessed an increase in the post-reform period compared to the prereform period (1980s). The argument that the Indian economy has been witnessing a jobless growth in the post-reform period has no empirical basis. Though the growth of employment during the second half of the 1990s was lower, the economy witnessed a higher rate of growth during the first decade of the present century. Industry, construction, transport and communication are the subsectors that have been witnessing higher growth in employment during the present decade. The broad structural changes witnessed during the post-reform period were a steady decline in the share of primary employment, on the one hand, and a continuous increase in the share of secondary and tertiary employment, on the other. A notable feature of the structure of employment in India is its informal and casual nature. Except for a small share, the rest of the employment is in the category of self-employed and casual labour in the rural areas.

In the chapter on unemployment, B. A. Prakash and M. P. Abraham examine the trends, characteristics and changing profile of unemployment in India during the post-reform period based on NSSO data. The chapter starts with the four definitions used by NSSO to define unemployment. Based on the NSSO data, the study arrived at the following conclusion about the unemployment trends during the pre- and post-reform periods—it was found that the unemployment rate was lower in the post-reform period compared to the pre-reform period (1980s). This suggests that the economic reforms had accelerated the process of economic growth and employment generation resulting in the absorption of more unemployed labour force in the post-reform period. However, the recent trends in unemployment indicate a marginal increase in the unemployment rate. The high incidence of female unemployment in urban areas, youth and educated unemployment are the notable characteristics of unemployment in India. In the case of various categories of unemployed, we can notice wide variations in the rate of unemployment among the states and union territories.

C. Narayan Lal and S. Rajesh Kumar present a review of the planning in India from the First Five Year Plan and attempt a detailed discussion of the Tenth and the Eleventh Five Year Plans. The Tenth Plan had targeted an average annual GDP growth rate of 8.1 per cent. But the plan was not able to achieve the targeted growth rate. The growth of agriculture and industry was also lower than the anticipated rate. The Eleventh Plan provides an opportunity to restructure policies to achieve a new vision, based on faster, broader-based and inclusive growth. It is designed to reduce poverty and focus on bridging the various divides that continue to fragment the society. The plan also has a special focuses specially on employment generation. The Eleventh Plan ensures a move towards increasing public expenditure in education to 6 per cent of GDP. It must fulfil the constitutional obligation of providing free and compulsory elementary education of good quality to all children up to the age of 14 years. The strategy for faster and more inclusive growth outlined in the Eleventh Plan presents formidable challenges and requires determined action both by the centre and the states. Achieving these targets will not be an easy task, but will definitely be feasible. However, in the context of the global economic crisis, it is difficult to achieve the targeted growth. The chapter also discusses the details of the achievements of the Eleventh Plan, based on the mid-term appraisal.

V. R. Prabhakaran Nair discusses the nature of resource mobilization for augmenting gross fixed capital formation in the corporate sector in India in the post-liberalization period. The chapter starts with a discussion of financial sector in the pre-reform period, and is followed by the measures taken to liberalize financial sector in the post-reform period. The chapter also gives a detailed analysis of financial liberalization and corporate financing. Even though the Indian capital market itself has a long history, there have been innumerable constraints faced by the Indian corporates in the form of licensing, labour laws and constraints faced by banks and financial institutions in financing firms, the ability to expand beyond the geographical boundaries of the country, or even funding political parties, and corruption in the executive machinery. Financial liberalization has witnessed the walls of constraints crumbling down by giving more vitality to firms in achieving optimal capital structure. The sources of corporate financing have been witnessing subtle changes, with a higher earning capacity of firms and hence, more dependency on internal sources of funds rather than external sources. The study concludes that in spite of the booming stock market, there has not been a significant increase in money raised by firms from the capital market. This pattern supports the pecking order theory and the existence of information asymmetry, even after financial liberalization, thus, rendering the financial markets imperfect.

M. R. Anand presents an overview of fiscal reforms and the developments on the fiscal front during the reform period. The paper starts with an overview of the structure of union government finances and the changes therein during the 1990s. The financial resources during the 1990s and the pattern of expenditure along with the effectiveness of the reform process are discussed in subsequent sections. The fiscal reforms that followed have primarily focused on improving resource mobilization through tax revenue and the growth of expenditure. Though summary fiscal indicators have improved in relation to the GDP (over the course of a decade), tangible improvement is visible only with respect to the growth in direct taxes. Even though several reforms on the revenue side remain to be implemented, the roadmap for improving resource mobilization has been chalked out. However, the changes that have occurred in the composition of expenditure raise concerns about the sustainability of public expenditure, particularly on account of the growing internal debt. Reducing the fiscal deficit and the revenue deficit is essentially a macroeconomic target. However, the underlying task of reforming the expenditure of the government is more complex. This is because the changes in the composition of public expenditure (in the context of the economic reforms) directly reflects a change in the role of the state vis-à-vis its subjects. On the whole, the study suggests that fiscal reform process needs to pay more focused attention to addressing issues on the expenditure front.

V. R. Prabhakaran Nair examines the reforms in monetary and credit policy of India in the post-reform period in Chapter 10. The chapter starts with the features of the monetary and credit policy in the pre-reform period such as administered interest rate regime, high statutory preemptions and monetization of fiscal deficit and prominence of credit channel transmission mechanism. In the subsequent sections, major reforms implemented during the post-reform period are discussed. The reforms include elimination of automatic monetization of deficit, reduced dependency of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), interest rate liberalization, credit policy reforms, etc. The study concludes that the use of monetary instruments in India has undergone a shift from direct to indirect instruments. The process has been facilitated by reforms in the monetary and financial system. The increasing openness of the economy and a market-determined exchange rate means that the focus of policy should increasingly be to ensure an orderly movement in exchange and interest rates. There is growing evidence of a strengthening of the interest rate channel of the monetary transmission mechanism, which would imply that interest rates could be used as effective targets of monetary policy. Although the Reserve Bank of India has been relying on broad money targets as a guide for conducting monetary policy, the focus of short-term monetary management in recent times has thus been on interest rates and the exchange rate.

V. K. Vijayakumar analyses the reforms and the emerging trends of the capital market in the post-liberalization period. The paper starts with a discussion on the role of the stock market followed by the role of the securities market in India. The reforms introduced in the capital market have resulted in an increase in the size of the market and have improved efficiency since 1991. The major reforms implemented are the following—the Securities and Exchange Board of India (SEBI), set up in 1989, was empowered in 1992 with the responsibility of protecting the interests of investors and promoting and regulating the development of the securities market. Another major reform was the replacement of the ‘open outcry’ system with the modern open electronic order book market. The problem of counter-party risk has been removed through a major reform—the establishment of the Clearing House Corporation that guarantees each trade. From July 1996, the National Securities Clearing House Corporation (NSCC) guarantees each trade, thereby, removing the counter-party risk and its cascading consequences. The problems arising from physical certificates have been solved through the system of depositories. Depositories are the institutions that dematerialize securities. Dematerialization is the process of converting securities from physical to electronic form. The rolling settlement, which was introduced, substantially reduces the risk of large open positions with their high-volatility potential. Another reform was the corporatization of stock exchanges. Under corporatization, ownership, management and trading membership are segregated from one another. Other reforms introduced are the opening of the mutual fund industry to the private sector, code for takeovers, acquisitions and mergers, stock buyback facility for companies, stock lending, and disclosure and investor protection guidelines. These reforms have resulted in reduction of transactions costs and have improved price recovery; introduced market-determined pricing, ensured an efficient electronic settlement, led to better risk management, eliminated counter-party risk possibilities of hedging, led to integration of markets within the country; removed price discrepancies through arbitrage operations, ensured the global integration of markets with the Euro issue and Foreign Portfolio Investment (FPI), and triggered a substantial improvement in liquidity. Vijayakumar concludes the essay with the following observations—the reforms have substantially improved market efficiency through a drastic reduction in transactions costs; institutional and trading reforms along with the modern systems of demutualization and risk management have transformed the market from an oligopolistic, broker-controlled system to a modern, transparent system incorporating the world’s best standards.

S. Narayanan discusses the trends in inflation in India during the post-reform period using the wholesale price index and consumer price index. The chapter starts with a discussion of the conceptual and theoretical issues of inflation and measures of inflation in India. The chapter gives a historical account of the changes in the Wholesale Price Index in India from 1942 to 2009. The study arrived at the following conclusions—the trends in inflation during the post-reform period showed that the rate of inflation was very high in the first half of 1990s. The rate of inflation registered a fall in the second half of the decade 1990s and the first half of the present decade. However, the rate of inflation registered an increase during the second half of the present decade. During the first decade of the 21st century, the year 2009 witnessed spurt in inflation. This was mainly due to the spurt in the price of food items comprising both of primary articles and manufactured food items.

V. R. Prabhakaran Nair presents the policy measures implemented in the current and capital account of external sector in India during the pre- and post-reform periods. The chapter starts with a review of external sector reforms implemented since early 1950s. Between 1950s and 1970s the core policy of external sector was import substitution, export promotion or a combination of the above two policies. But after 1991 balance of payment crisis, the government of India switched over to market-oriented policies such as import liberalization, removal of exchange rate controls and other policies to improve the balance of payment situation. The major conclusions of the study are the following—Though import growth recovered and boosted in the later years of 1990s, the current account deficit has not gone up to disturbing levels. India could maintain current account deficit well below the 2 per cent of GDP mainly due to increase in exports and net invisible earnings. Regarding foreign borrowing, the share of external assistance, NRI deposits and IMF financing have declined, while that of net external commercial borrowings has fluctuated and reached peak levels. The external debt indicators in the post-reform period are stable, which clearly reflect the success of India’s external sector policies. The transition from a controlled to a market-based exchange rate policy has succeeded in fostering India’s international competitiveness and in containing day-to-day market volatility.

Manu J. Vettickan and Anil Varma analyse the trends and patterns of merchandise exports and imports of India in the post-reform period. The essay starts with a brief discussion of India’s foreign trade policy followed by an analysis of the trends and patterns of exports, imports and direction of trade. The major conclusions of the analysis are as follows—the post-reform period witnessed significant changes in the trend, pattern and structure of India’s external trade. The assertion that trade liberalization would help diversification of the structure of exports and outputs in favour of manufactured goods has not materialized. The growth of services was more pronounced in GDP growth and is reflected in the increasing share of services in exports. The fall in the share of textiles reflects the fact that India is not being able to get full benefits from the removal of the Multi Fibre Agreement (MFA). Another feature of India’s trade in the last two decades was the overwhelming importance of Asia and Oceania. In the post-reform period, imports grew at a faster rate than exports. The demand for imports is bound to increase due to the envisaged growth of the economy—raw materials, capital goods, components and energy. The opening up of import of a variety of consumer goods is also likely to add to the import basket. India has also been required periodically to depend on external sources for mass consumption items like edible oils. Though India has been able to withstand the global slowdown with minimum damages, it will have to try and achieve a robust growth in its exports by expanding its share in major markets. High dependence on few markets and few exportable products will make India vulnerable to any future slowdowns.

Sarat kumar and A. Srija discuss the trends and patterns of Foreign Direct Investment (FDI) in India in the post-1991 period. They say that FDI is preferred over other forms of foreign savings and investments because it is not debt-creating; it promotes new entrepreneurial talents through the demonstration effect, introduces new products and technologies and secures a larger market for the host economy. Based on the inflows of FDI to India, the authors point out that the maximum investment has gone to electrical (including computer software and electronics) telecommunications, transportation and automobile industries between 1991 and 2002. They argue that these industries have attracted a larger investment on account of policy reforms, such as de-reserving them from the exclusive domain of the public sector, moving them from the route of government approval to the automatic route thus enhancing the foreign equity limits. On the other hand, food processing, infrastructure and hotels and tourism, which did not have such restrictions and for which 100 per cent foreign ownership is permitted, failed to attract much investment. They suggest that a way for promoting more FDI into the sectors is to attract the transnational companies operating in India to expand their operations.

Archana S. Mathur presents the various agreements signed by India under the trade liberalization programme of the World Trade Organization (WTO) and examines the major areas of concern and their impact on India’s tariff and trade. Apart from the General Agreement on Tariffs and Trade, 1995, India signed 10 other agreements pertaining to trade in goods. These included—the Agreement on Agriculture (AoA), the Agreement on Application of Sanitary and Phytosanitary Measures, the Agreement on Textiles and Clothing, the Agreement on Technical Barriers to Trade, the Agreement on Trade Related Investment Measures (TRIMS), the Agreement on Rules of Origin, the Agreement on Preshipment Inspection, the Agreement on Import Licensing Procedures, the Agreement on Subsidies, and Countervailing Measures and Agreements on Safeguards. During the implementation of WTO agreements during the last eight years, India experienced certain imbalances and inequities. It is found that some of the developed countries have not fulfilled their obligations in the letter and spirit of the WTO agreements, and many of the special and differential treatment classes favouring developing countries were not implemented. The market access of goods from developing countries is constrained by the high tariff in developed countries on items of interest to these countries. The high domestic support and export subsidies in developed countries make goods from less-developed countries uncompetitive in the global market. While the agreements favour the removal of constrains on the movement of capital, the barriers on the movement of persons from developing countries continue to exist. WTO has not been able to ensure the abolition of non-trade barriers being imposed on labour and the linking of environmental considerations, including the linkage in certain Generalized System of Preferences (GSP) schemes to these issues. India has taken several steps to implement the commitments made under the agreements. The average bound duty rate agreed in the Uruguay round was 29 per cent, while the applied average total duty rate was 64 per cent in 1994–95. The average total duty has come down for all commodities to 22.8 per cent in 2004–05. The substantial reduction in customs tariff has resulted in the increase of imports and exports.

B. A. Prakash examines the issue of Fuller Capital Account Convertibility and the desirability of Capital Account Convertibility in India. The chapter starts with a review of lessons from the currency crises in other countries. In the second part, the chapter gives the major recommendations of the Tarapore I committee on capital account convertibility and the measures taken since 1997 to liberalize capital account convertibility. The major recommendations of Tarapore II committee and the desirability of the capital account convertibility are discussed in the third section. In the last section, global crisis and the issue of fuller capital account convertibility are discussed. The chapter concludes that India has to move cautiously in the matter of capital account convertibility. The East Asian crisis and the global crisis of 2007 and 2008 and their consequences gave ample evidence against moving towards fuller capital account convertibility. A major external sector policy, which helped India from the collapse of external sector transactions, balance of payment crisis, fall in exchange rate and unhealthy outflows of finance capital, was the policy against capital account convertibility. The chapter concludes that it is not desirable to implement the Tarapore II committee recommendations on capital account convertibility.

K. P. Mani discusses four crucial areas of agricultural policy, viz., price, external trade, and fiscal, monetary and institutional reforms in Chapter 18. In a developing country like India, the three major objectives of agricultural policies are (1) to ensure a price that would cover the cost, (2) to contain the prices of inputs used in agriculture and (3) to contain the prices of agricultural products consumed by the vulnerable sections of the society. The chapter also presents a discussion on the National Policy for Farmers 2007. The major policy provisions of the policy include provisions for asset reforms, water use efficiency, use of technology, inputs like services, social health, good quality seeds, disease free planting materials, support services for women, credit, insurance, etc. Provisions have also been made for National Agriculture Bio-security System, setting up of farm schools in the fields of outstanding farmers to promote farmer-to-farmer learning and to strengthen extension services and expanding food security basket to include nutritious crops like bajra, jowar, ragi and millets mostly grown in dry land areas. A comprehensive National Social Security Scheme for the farmers for ensuring livelihood security by taking care of insurance needs on account of illness and old age is also included.

K. P. Mani examines the overall performance of agriculture and its significance in the Indian economy in the essay on agriculture growth. The chapter starts with an examination of the features of Indian agriculture. The essay also gives the various phases of agriculture development since independence. After independence the successive governments in India had given high priority for agriculture development. The sector underwent rapid structural changes in the pre- and post-reform periods. The share of agriculture to GDP declined from 59.2 per cent in 1951 to 34.9 per cent in 1991 and to 17.8 per cent in 2009. But in spite of the structural changes, majority of Indian population depend on agriculture for livelihood. In order to achieve a high rate of growth, the author emphasis the need for promoting the factors like, agriculture input supply, selection of location specific crop, precision farming, fertilizer use efficiency, extension of irrigation system, supply of short-term and long-term credit and suitable agriculture policies. For attaining a higher growth of GDP, the pre-condition is to achieve a higher growth in agriculture.

P. M. Thomas analyses the changes in land use and cropping pattern of agriculture sector of India in the pre- and post-reform periods in the context of reforms. The essay starts with a review of the overall performance of agriculture followed by a detailed analysis of the changes in land use and cropping pattern in India. The broad changes taking place in the Indian agriculture are a decline in the share of agriculture to GDP and share of agriculture in gross capital formation of the economy. There is no valid evidence to suggest that the introduction of economic reforms had played any crucial role in enhancing the productivity of major agricultural crops in India. However, it may be noted that the reforms had accelerated the process of the commercialization of Indian agriculture. During the post-liberalization period, areas under commercial crops like oilseeds and cotton have substantially increased. At the same time, areas under food crops like coarse cereals and pulses showed declining growth trends. Generally, a shift in favour of non-food crops is a discernible change in the cropping pattern. In spite of the strenuous efforts made so far to expand the coverage of irrigated area under different crops, the quantum of annual rainfall and its seasonal and spatial spread continue to be crucial factors that determine the fortunes of Indian farmers. In spite of a declining tendency in the average size of operational holdings, the country has made noteworthy achievements in the use of fertilizers and adoption of high-quality seeds. Another distinct notable feature of the performance of agricultural sector during the post-reform period is the accelerated growth rates in private sector capital formation and the simultaneous decrease in the proportion of public sector capital formation in the gross capital formation of the agriculture and allied sector of the economy.

In the essay on agriculture trade, K. P. Mani discusses the trade policies and the trends in the trade of principal agricultural commodities in India. The objectives of reforms in trade policy have been providing a self-corrective mechanism to rectify the imbalances between exports and imports, which have resulted in deterioration in the balance of payments position during the latter half of the 1980s. Both the exports and imports related to the farm sectors have continuously gone up during the period from 1950 to 1980. A notable point is that while the percentage share of farm sector in the total exports from India has fallen from 70 per cent in 1950–51 to 40 per cent in 1980–81, the percentage share of farm imports has fallen much more sharply from 40 per cent to mere 4 per cent during the same period. More importantly, the sectoral balance of trade for the farm sector has always shown a positive balance as against a negative balance experienced by the overall foreign trade of the country for the period under reference. Thus the farm sector has been financing the general development of India through exports. Another change is the decline in the share of cereals and cereals preparations in total exports and increase in the share of fertilizers. But it is pointed out that the competitive strength of Indian agricultural products in the international markets came down since 1991. A number of measures were suggested to improve the competitive strength of the Indian agricultural export. Exports should be encouraged more in value-added and processed form rather than in raw form because primary commodity prices in the world markets are unstable and also have unremunerative terms of trade. A higher growth in agriculture thus needs a comprehensive revamp of agriculture policy with reorientation towards rapid diversification of this sector.

In the chapter on agriculture credit, K. P. Mani examines the types and sources of credit, capital formation in agriculture and other measures taken to provide credit to farmers. Cooperative banks in India hold an important position especially in the rural credit scenario and have played a pivotal role in the development of rural credit over the years. Cooperative credit system covers over 76 per cent of rural credit outlets and has a market share of about 20 per cent (2008) of total rural credit in the country. However, the cooperative structure has not developed uniformly and there are states where it has started decline. The gross Net Performing Assets (NPS) of the State Cooperative, Rural Development Banks and Primary Cooperative have also been fairly high at 19.19 per cent and 16.05 per cent, respectively. The high incidence of loan defaults, accumulation of losses, high ratio of NPS, etc. have affected the receipts of deposits as well as borrowings. The commercial banks are the second category, which provide agriculture credit. During the post-reform period, there had been an increase in the amounts of credit supplied by commercial banks. Compared to long-term credit, short-term credit constituted a major part of commercial bank credit for agriculture. However, it may be noted that since 1990 the commercial banks initiative in providing agriculture credit is gradually coming down. Mounting overdue of agriculture loans and shift in the priority of lending have led to this decline. The Regional Rural Banks (RRB), a new entrant into the banking scenario, provides only a small share of institutional support for agriculture. K. P. Mani concludes that the sustainable agriculture progress can be achieved only through increase in the volume of credit, especially long-term credit. Unless the institutional agencies give priority for the supply of agriculture credit, the problem cannot be solved.

C. S. Sundaresan and P. V. Rajeev present the issues and problems of food grains production, trade, distribution and food security in India. At the household level, food security implies having physical and economic access to food that is adequate in terms of quantity, quality and safety. The status of food deprivation in India and other South Asian neighbours is not encouraging. The depth of hunger, measured by average dietary energy deficit of under-nourished people in the four South Asian countries (in terms of kilocalories), stands at—Bangladesh, 340; India, 290; Pakistan, 290; and Sri Lanka, 260. Though agriculture remains the significant contributor to the GDP, and the sector absorbs chunk of the labour force, India still is in the grip of food insecurity in varying degrees in different locations. Due to the deficiencies of the markets and its inability to meet the requirements of the poor, PDS can be a better mechanism to ensure food access to consumers in less-developed countries like India. With a network of more than 4.62 lakh fair price shops distributing consumption items worth more than Rs. 30,000 crore to 16 crore families, the PDS in India is the largest distribution network of the sort in the world. The authors, examining the complexities in international trade in agricultural commodities argue that sponsored PDS is the most reliable source to achieve a reasonable level of food distribution in India. The authors forecast that India will have to rely on imports to solve the food deficit in the near future. Trade forecasts for 2020 suggest that the net trade in most of the food commodities in India may be negative in the long run. The threat of market distortions and its domestic political and economic implications are foreseen as new issues for the national economy to tackle. Keeping this in mind, one strategy may be to evolve a sustainable market-driven farming approach to prosper with the liberalization drive and economic growth initiative with food security.

Sunil Mani examines the effects of the industrial policy reforms implemented since 1991 on various dimensions of the industrial sector. The paper discusses issues such as growth performance of the industrial sector, the structure of the manufacturing sector, foreign investments in industrial sector, foreign technology imports, domestic technology generating efforts in Indian industries and the public sector enterprise reforms. The study attempted a detailed analysis of the above issues and arrived at the following conclusions: The reforms does not appear to have increased the growth rates of the overall manufacturing sector although some sub-segments of it such as the consumer goods and the intermediate goods sector have shown some significant increases in growth performance. It is not very clear whether reforms have increased the extent of domestic competition between firms, although there has been a significant reduction on the barriers to entry. The country has attracted substantial FDI; although the evidence on foreign companies promoting exports and bringing in modern technology and improving overall productivity levels through technology spillovers is not clear. Finally, the policy on privatization as expressed through deregulation has produced some wonderful results in certain industries such as the telecommunications services industry.

M. Rajesh discusses the emergence of Information and Communication Technologies (ICT) in India and the various policies pursued for its promotion at the national and state levels. India has attempted to profit from ICT growth through a series of institutional innovations and export-oriented policy measures, based on the implicit assumption that a market-oriented ICT production strategy will also result in the diffusion of new technology and ICT-induced development. The policy-level analysis shows that in the 1970s, 1980s and 1990s, unintentional outcomes of restrictive governmental policies and pure technological accidents contributed in shaping India’s ICT future. However, this windfall gains have been properly used by the Government of India during post-reform regime. The economic reforms have built a strong base for ICT production and diffusion in India. Reforms that took place in banking and finance, telecom and ICT infrastructure fuelled the growth of Indian ICT sector. As an outcome of the policy, the empirical evidence shows that India’s strategy on ICT is mainly focused on export of software goods and services, and it has made a significant contribution to the economy. In the post-reform regime, the economy has witnessed growth and development through the growth of ICT. However, regional disparity in the production of ICT is high and the industry is clustered in a few locations of the nation. To understand this setting, it also tries to analyse various policies that were envisaged at major ICT producing states in India. In the state-level analysis, Kerala has shown a typical picture as compared to the other major ICT producing neighbouring states.

In the chapter on small-scale industries (SSIs), V. R. Prabhakaran Nair analyses the trends and patterns in the growth of SSIs in the pre- and post-reform periods. The chapter starts with a discussion on the changes in the definition of SSIsince independence. It is followed by a review of the growth of SSIs in the pre- and post-independence periods. Though there had been a growth in the number of SSIs in the decade 1980s and 1990s, the rate of growth was higher in the pre-reform period. This indicates that the protective policies pursued in the 1980s helped to achieve a higher growth in SSIs compared to the post-reform period. The chapter also gives the impact of SSIs on the creation of output, employment, exports and export earnings. The problem of inadequate finance for the small industries is identified as the biggest problem faced by the SSIs in India. The recent measures to promote the availability of credit such as credit guarantee scheme (2000), credit policy package for stepping up credit for small and medium enterprises (2005), scheme of small enterprises financial centre (2005–06). Micro finance programmes (2003 and 2004) are also discussed in the chapter. Based on the available evidences, the study presents the causes for the sickness of SSIs in India. The major causes identified are obsolete technology, lack of managerial skill, unavailability of raw materials, lack of credit, marketing problems and inadequate infrastructure.

In the chapter on infrastructure development, V. R. Prabhakaran Nair presents a detailed account of the development of railways, telecommunications, roads, ports and air transport. It is seen that except railways, the other sectors have grown tremendously in terms of network over the years. Among these, the expansion of telecom facilities was the most significant one. After 1991, infrastructural facilities registered a higher pace in growth compared to the early decades. This may be due to the policy initiatives adopted as a part of the new economic policy in 1991. There has been considerable progress in the last 10 years in attracting private investment into infrastructure sectors, first in telecommunications, then in ports and roads, and in individual projects in other sectors. To encourage participation of the private sector in the development of roads, several initiatives have been taken by the government. These include the declaration of the road sector as an industry, the provision of capital subsidy of up to 40 per cent of the project cost to make projects commercially viable, 100 per cent tax exemption in any consecutive 10 years out of the first 20 years of a project and provision of encumbrance-free site for work. To develop ports, the sector has been opened to private participation. The policy shift in air transport sector, such as the entry of Low Cost Carriers (LCCs) offering non-frills flights, which are 30–35 per cent cheaper than the regular flights, has changed the profile of air passengers. However, the sector has not been able to keep pace with the rising demand and is proving to be a drag on the economy.

N. Vijayamohanan Pillai examines the power policy and power development in India during the post-liberalization period. He starts with a brief review of the power policy prior to the implementation of the reforms. Even though the State Electricity Boards (SEBs), established for the rationalization of power development at the state level, were statutorily required by the Electricity (Supply) Act of 1948 to function as autonomous corporations, they were in effect regarded as promotional agencies, expected to sub-serve the social, political and economic policies of the governments and hence expected not to view every aspect of developmental activities exclusively from the point of view of profit or return. Thus, there was no compulsive requirement till the late 1970s for the SEBs to breakeven, even to provide for full depreciation and for interest payable on government loans. This unaccountability culture in turn led to gross inefficiency at all levels—technical, institutional and organizational as well as financial. Since 1991, a number of amendments have been made in the Indian Electricity Acts. In 1991, an amendment was made to introduce the concept of the generating company as a distinct entity. In 1998, similarly, the Electricity (Amendment) Act, 1998 treated transmission as a separate entity, which could be licensed and could thus facilitate private participation. A natural corollary to these measures was the provision in the Electricity Regulatory Commission Act, 1998, for setting up Central and State Electricity Regulatory Commissions (SERCs) with powers to determine tariffs so that the governments are distanced from tariff determination. The most significant of the reforms is the Electricity Act, 2003 which stands to replace the existing three Acts. The objective of the Act is to introduce competition, protect consumer interests and provide power for all. The Act provides for a National Electricity Policy, rural electrification, open access in transmission, phased open access in distribution, mandatory SERCs, license-free generation and distribution, power-trading, mandatory metering and stringent penalties for theft of electricity. Though a number of measures were taken to promote private investment, the government was not able to attract much investment to bridge the gap between power demand and supply.

D. Varatharajan and S. K. Godwin discuss the health care financing in India during the post-reform period. The authors examine economic reforms and its vision, impacts of reforms on health care, implication of reform for health, commercialization of health and urban-rural disparity. The major conclusions of the study are the following: Economic reform is expected to have close linkages with health outcomes through its impact on health risks, health system, the level and distribution of household income and other sectors closely related to health sector. Available evidences suggest that there had been a decline in the government share in total health expenditure during the post-reform period. Private resources dominate the Indian health care scene whereas government accounts for the maximum contribution in other countries. Health financing reforms undertaken in India further privatized and commercialized the health care delivery system than making it more inclusive. The implications of the changes are not encouraging. Firstly, increase in health care spending by households is more pronounced in rural areas than in urban centres, which raises concerns of inequity in access and fairness in health outcomes. Secondly, even poor households are willing to spend more on health care due to increased value of health care. Thirdly, due to decline in capital expenditure by governments and supplies running out, there is deterioration in quality provided by public health services. Fourthly, with increased use of high-end technologies, health care has become costlier. Finally, as a consequence of increased user charges in public health care institutions, individuals are forced to pay more for health care.

G. Karunakaran Pillai analyses the issues, problems and prospects of the higher education system in India. The chapter starts with a review of the progress of higher education in the pre- and post-reform period. Pillai points out that a majority of students of the higher education system in India are at the undergraduate level, and in the affiliated colleges. Another notable development was the phenomenal growth in the enrolment of women in the higher education since independence. The paper also examines the changes in other sectors of higher education system in India, like technical education, teacher education, distance higher education, etc. It is pointed out that the country witnessed an unprecedented growth of technical institutions in India. But in the case of research, its quality is not high enough to produce path-breaking results. The policy on higher education is discussed in Part II of the paper. The author feels that the education policy has suffered from a number of inconsistencies and contradictions. In India, public expenditure on education, especially on higher education, and expenditure as a proportion of GNP is very low due to the fiscal pressure and high priority assigned to primary education. The grants from the government constitute the bulk of the funds of universities. Students’ fees in India are the lowest in the world. The author points out that governmental support to higher education is declining. The main problem of university financiers is the increasing expenditure on salaries, maintenance and financial concessions. The author says that the major problems of the education system relate to access, equity, relevance of quality and resource crunch. Pillai concludes that the state-protected educational system cannot withstand the pressure of competition arising out of liberalization and globalization. The paper also presents the recent measures taken by the Government of India to reform the higher education, viz., Constitution of Knowledge Commission (2007), Committee on the Renovation (2007) and Rejuvenation of Higher Education (Yashpal Committee, 2009), Foreign Educational Institution Bill (2010) and establishment of National Commission on Higher Education and Research (NCHER).

B. A. Prakash examines the trends and patterns of poverty in India since the early 1970s based on the official poverty data. The chapter starts with a discussion of the general concept and methodology used to define poverty line and poverty ratio. The chapter also discusses the concepts and methodology used by the two expert groups of Planning Commission—Expert Group 1993 and Expert Group 2009—to define the official poverty line in India. Major conclusions of the study are the following: During the last three decades there has been a decline in urban and rural poverty in India, but the reduction in poverty was not uniform throughout the country. States like Jammu and Kashmir, Punjab, Kerala, Himachal Pradesh, Haryana, Goa, Delhi and Andhra Pradesh achieved rapid poverty reduction in the last three decades. On the other hand, in states like Odisha, Bihar, Chhattisgarh, Jharkhand and Uttarakhand, the incidence of poverty is very high. Also, the decadal reduction in the poverty was different. The poverty reduction in the decade 1990s (post-reform period) was higher compared to the decade 1980s (pre-reform period). This suggests that the economic reforms had accelerated process of economic change, which was favourable for poverty reduction. But the recent estimates of poverty are disturbing. The Planning Commission Expert Group (2009), which revised the poverty norms, estimated that 42 per cent of the rural and 26 per cent of the urban population are poor.

Jose Sebastian presents an overview of the centre-state financial relations in the postliberalization era with special reference to the reports of the Finance Commissions (FCs)— Tenth (10th), the Eleventh (11th) and the Twelfth (12th) FCs—and their implications for the finances of the centre and the states. The major conclusions of the essay are the following: The structural adjustment programme initiated by the Government of India in the early 1990s had a profound impact on centre-state relations. Though the constitutional provisions have not undergone drastic changes, except those relating to Additional Duties of Excise, the centre has sent the message to the states to be competitive on their own to attract domestic and foreign investments. The terms of reference of the 10 th, 11th and 12th FCs relating to reduction in fiscal deficit and public debt reflect the concerns of the central government on the alarming debt position, the interest burden of the states and their inability to maintain existing assets and invest in infrastructure. In the face of increasing fiscal strain at the central level, the states can no longer expect the centre to meet their fiscal needs through transfers. The scheme of rewarding fiscal discipline and tax effort, introduced by the 10th FC and continued by the 11th and 12th FCs, are aimed at checking fiscal profligacy. Another area where innovative measures have been introduced relates to contingent liabilities. Several states have taken the initiative to fix a ceiling on guarantee. The recommendations targeted to local self-government institutions visualize a strong and more decentralized polity. These changes have redefined the role of the centre and the states as partners in development, thereby, ushering a new era in India’s fiscal federalism.

In Chapter 33, R. Shyama Nair gives an overview of the important recommendations of the 13th FC. The chapter also examines the recommendations of the 13th FC in comparison with the 12th FC in major areas like tax devolution, grants-in-aid, fiscal consolidation, etc. The chapter starts with a discussion of the terms of reference of 13th FC followed by an analysis of its major recommendations relating to sharing of union taxes, allocation of grants-in-aid and measures to achieve fiscal consolidation. The 13th FC has been loaded with additional terms of reference like considering the impact of implementation of the goods and services tax, taking account of the gross budgetary support to the central and state plans as a demand on the resources of the centre, considering the need to manage ecology, environment and climate change, etc. The recommendations with respect to tax devolution are similar to that of the previous commission except that the weights assigned to the variables differ. In the case of grants-in-aid, special grants are recommended as performance incentives, improving outcomes and grants as compensation to states on account of implementation of Goods and Services Tax. Recommendations of the present commission regarding fiscal consolidation are almost in line with that of the previous commission. The commission expects the states to get back to their fiscal correction path by 2011–12, taking into account 2010–11 as an adjustment year to overcome the global recessionary trends of 2008–09 and 2009–10. Relating to the recommendations of 13 th FC, R. Shyama Nair is of the view that the commission has tried to fulfil its mandate within the various limitations that the FCs are exposed to.

E. M. Thomas’s essay discusses the evolution of Panchayati Raj and decentralized planning in India, the performance of various Indian states in the implementation of decentralized planning and the issues and problems related to the practice of decentralized planning. One of the epoch-making events in post-independent India was the 73rd and the 74th Constitutional Amendment Acts, which paved the way for democratic decentralization in the country. The author concludes that the new Panchayati Raj system enabled India to transform automatically from the least representative democracy to the largest democracy with maximum representation of people. Several Indian states could show marvellous performance in the field of decentralized planning, but their success stories were confined to certain sectors and projects. Hence, it is suggested that for strengthening Panchayati Raj and decentralized planning in the country, we have to overcome various challenges related to the election reform, the techniques of decentralized planning, fiscal decentralization, financial accountability, monitoring and vigilance, administrative decentralization and retreat from devolution.