Impact of economic reforms on inclusive growth in India

India’s economic health has passed through major changes in the last 60 years and with the GDP is touching the double digit growth rate with a wider objective of inclusive growth. The 11th plan defines inclusive growth as a growth process which talks about the broad based benefits and the equal opportunity for all citizens of India. This indicated about an equitable resource of allocation to all sections of the society, especially for the poor, which is obviously a Utopian concept. Inclusiveness involves four attributes: opportunity, capability, access and security. In short, inclusive growth is a process in which economic growth is determined by a sustained expansion in GDP and contributes to an enlargement of the scale and scope of all dimensions. State intervention and control over economic activity has been reduced significantly and the role of private sector entrepreneurship increased. To varying degrees, liberalisation has touched on most aspects of economic policy including industrial policy, fiscal policy, financial market regulation, and trade and foreign investment.

Objective

The objective of this report is to analyse the impact of economic reforms on inclusive growth in the Indian economy. We have tried to analyse the forces like poverty, unemployment etc. that contribute to inclusive growth, what are the challenges and how the policies have been implemented to achieve national welfare.

Inclusive growth

The five interrelated elements of inclusive growth are:

Reduction in poverty and increase in quantity & quality of employment

Agriculture Development

Social Sector Development

Reduction in regional disparities

Protecting the environment

PROBLEMS BEFORE INCLUSIVE GROWTH STRATEGIES IN INDIA

The following problems are the major concerns for developing countries like India to achieve the inclusive growth. They are:

Poverty (The World Bank estimates that 456 million Indians (42% of the total Indian population) now live under the global poverty line of $1.25 per day (PPP))

Employment (Unorganized employed people in India are around 85%)

Agriculture (land allotment problem, natural calamities, shortage of rain etc.)

Problems in Social Development (127th rank among 170 countries on Human Development index)

Regional Disparities (Per capita income is highest at Rs.16,679 in Punjab and lowest per capita income is at Bihar with Rs.3557. Female infant mortality varies from 12 in Kerala to 88 in Madhya Pradesh. Female literacy varies from 33.6% in Bihar to 88% in Kerala. Richer states grew faster than the poorer states)

Sector-wise implementation of 11th plan

Industry

The Eleventh Plan proposes an annual growth rate of the industrial sector to 10% and manufacturing to 12%. Lack of adequate infrastructure and dearth of skilled manpower are the main focus of the Eleventh Plan.

Following initiatives have been prioritized:

1) Taxes and duties to be made non-distortionary and competitive

2) Encourage Special Economic Zones (SEZs) and Special Economic Regions

(SERs)

3) Technological modernization

4) State Governments to create investor friendly climate

5) Labour intensive mass manufacturing based on relatively lower skill levels to provide opportunities for expanding employment in the industrial sector

6) Creation of an enabling environment for village and small enterprises

7) Review of the mineral policy to eliminate constraints in the way of investments in mining activities

Services

The service sector accounts for 54 per cent of GDP and is currently the fastest growing sector. India has about 65% share of global offshore of IT services and 46% of global business process outsourcing. This sector is estimated to have the potential for generating 40 million jobs by 2020. Therefore, the XI Plan has a special focus on this sector so that its potential is fully realized. Emerging skill constraints would be tackled by way of enhancing the standard of higher and technical education which would be accorded high priority in the XI Plan. The issue of enlarging the scope of Foreign Direct Investment in construction, housing and real estate, expansion of adequate tourism infrastructure would be considered.

Infrastructure

Infrastructure inadequacies in both rural and urban areas are a major factor constraining India’s growth. PPPs are increasingly finding their way in rendering infrastructure services and State Governments have also been advised to adopt a similar approach.

Energy

The XI Plan aims to set up a robust energy R & D system to develop relevant technology and energy sources to enhance energy security and lead to energy independence in a cost effective way in the long run. A number of technology missions covering areas such as in-situ gasification, solar energy, energy

storage, etc. are proposed to be launched. The scope for production and use of renewable energy sources such as wind energy, bio-fuels, etc. would also find a place in the plan. It also emphasizes the need for a regulatory structure across all energy sub-sectors.

Poverty and Employment

India adopted two pronged approach

1. Growth approach: all three sectors contribute agriculture, industry and services

2. Direct approach: Safety nets or anti-poverty program.

Self-employment program. (Women’s groups), wage employment program, food subsidies, nutrition programmes for children, old age and maternity benefits

— Public Distribution System – Subsidized food

In cognizance of the nutrition problem Government introduced Targeted Public Distribution System (TPDS) to benefit the people below poverty line.

— National Rural Employment Guarantee Scheme (NREGS) – Giving 100 days of wage employment to the poor

The strategy of doubling the rate of growth of agriculture is expected to reduce poverty further if a steady expansion of schemes aimed at supporting incomes and welfare of poorer sections, viz., National Rural Employment Guarantee, Bharat Nirman, National Rural Health Mission, etc. is achieved. It is evident that a greater stress is laid on agricultural growth for overall development. To provide gainful employment, the XI plan pays special attention to labour intensive manufacturing sectors such as food processing industry, textiles, medium and small enterprises (SMEs), tourism and construction apart from focusing on employment generating schemes that yield results in the short term.

Agriculture

Achieve 4% growth in agriculture and raise incomes. Increasing productivity (land, labour), diversification to high value agri. and rural non-farm by maintaining food security.

Sharing growth (equity): focus on small and marginal farmers, lagging regions, women etc. On lagging regions, focus on Eastern India and other rain fed areas.

To maintain sustainability of agri. by focusing on environmental concerns.

Economic Reforms

After independence, annual per capita growth experienced a sluggish trend and ranged between 1 to 1.5 per cent. By 1990, the balance of payments came under severe pressure, fiscal deficits increased significantly followed by inflationary pressure. The 1991 Balance of Payments [BOP] crisis forced India to procure a $1.8 billion IMF loan and acted as a “tipping point” in India’s economic history. This resulted in a process of economic reform.

Macroeconomic Reforms and Fiscal Stabilisation

Fiscal System:

Tax Reforms: The high rates and complexity of the tax system led to large scale evasion. During the reform period, the rules were simplified and the taxation levels were brought down to 30%. This led to an increase in collection of personal income tax and corporate tax rates.

Indirect taxes also witnessed rationalization where the high levels of domestic excise duties and customs were considerably slashed. The customs duties were reduced from an average of 110 per cent in 1991 to 12.5 per cent.

Source: http://dor.gov.in/writereaddata/TAX%20COLLECTIONS/tax_gdpratio.html

The excise tax structure has been simplified to achieve a “central” rate (CENVAT) of 10.3 per cent (Feb, 2010). Excise (which is levied at the manufacturing stage) has been replaced by VAT (Value Added Tax) to avoid cascading. Service tax has been introduced for equitable taxation of whole economy and to bring down the excessive load on the manufacturing sector.

Responsibility and Budget Management Act (FRBM) was introduced in 2004, which targeted the elimination of revenue deficit and reduction of fiscal deficit to 3 per cent of GDP by 2009.

Source: CSO, MoSPI, GoI

State level sales taxes have been transformed to the Value Added Tax (VAT), which has led to uniformity and rationality in tax system of the state.

Monetary Policy:

Elimination of automatic monetization of fiscal deficit

Reduction of statutory pre-emption of the lendable resource of banks

Source: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12737

Interest rate deregulation

External Sector Reforms:

Removal of quantitative restrictions

Rationalisation of the tariff structure

Devaluation of the exchange rate in 1991 and a move of the exchange rate regime from that of restrictiveness of import quotas towards a market determined one

Source: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12838

Macroeconomic Impact

As we know, Y = C + I + G + NX

i.e., Y = AD

AD = C+I+G+NX

As G improves, AD will increase by the multiplier,

The economic reforms have aimed to increase the consumption. This is achieved through rationalization of tax structure and increased government spending. In order to analyse the relation between the consumption and GDP, the tool of regression was used. Two variables, GDP at factor cost (base year 1999-2000) and Consumption pattern from 1991-92 to 2008-09 was taken. The result is as follows.

Source: http://data.worldbank.org/indicator/NE.CON.TOTL.KD

The figure given shows a high R2 value of 0.8478 which is a clear indicator that GDP is highly dependent on consumption. An improvement in consumption will lead to an improvement in GDP.