Peculiarities of the Indian Economy

Indian Economy

Economists all over the world agree that a country in its developmental trajectory gradually moves from primary sector or agricultural dominance, towards industrial prowess, and finally the dominance of the service sector. India has been an exception to this norm.

At the time of independence, the contribution of the primary sector to GDP was 53.1% which gradually declined to 29% in 1991 (when the LPG policy was introduced) to around 18% in 2016. Services, whose contribution was almost negligible at the time of independence, has reached a contribution of around 54%. However, a phase of dominance of industries has been missing for the most part — The contribution of industries to the GDP was 17% at the time of independence, and while it jumped to around 28% in 1991; the figure hovers at around 29% as of today. Clearly, the Indian economy has jumped straight from a phase of primary sector dominance to service-led growth. This data reflects that till 1991, India seemed to be treading the ‘normal’ path of evolution — it was only after 1991 that services’ have really taken the driver’s seat, pushing industries to the back. The slow growth of industries and fast growth in services has been the characteristic of Indian economy in the past 25 years.

Policies before 1991

A major reason for industrial growth experiencing a free fall has been the faulty policies of pre-1991 era. Many people misunderstand this position as being an argument against the Nehruvial policies of 1950s and 1960s, which is clearly not the intent. The socialistic policies of Nehru, which included a conception of planned and mixed economy with a strong public-sector driving the economy in 1950s and early 60s, were the need of the hour. The fault was not in his intentions. At the time of Independence, the private-sector was either absent or restricted to a handful of players. In such a situation, where even the government had scarce resources and institutions were at a nascent stage, monopolies would have been established. Nehruvian ideas were prudent.

However, the policies of licensing, public sector reservations, etc.,  were exploited under Indira Gandhi’s leadership, as patronage and cronyism became the rule. Licensing ensured that there were few suppliers. The focus of enterprises shifted towards procuring licenses. Once a license was obtained, these handful of players knew that they had no competition. As a result, no efforts were made to modernize and incentivize production. By 1990, these ‘corrupt and degenerated’ policies had finally shown their result, pushing the Indian economy into its worst crisis. Finally, when competition was introduced, it came as a shock to ‘uncompetitive’ native industries that were destined to crumble under foreign competition.

It was not too late…

Things were not yet completely out of control. Necessary changes would have made resuscitated the Indian economy. These necessary changes were the improvement in physical and human infrastructure. This brings us to the second major reason for slow industrial growth that is the high logistical costs in India. World over, after waterways, railways is considered as the cheapest mode of transportation. But in India, almost 70% of bulk transportation takes place through roadways. This is because India lacks a dedicated freight corridor or network, high freight costs, and the use of open containers by railways for transportation. These problems have ‘compelled’ the industrial manufacturers to switch to road transportation which is much more expensive apart from being detrimental to environment. Similarly, lack of world class port facilities acts as a major hindrance.

Lack of ‘doing ease of business’

Entry barriers, exit barriers, and irrational taxation policies capture the business atmosphere in India. In 1991, license quota raj was replaced by inspector raj, whereby excessive government regulation emerged as the worst impediment for investors. To make it worse, this was accompanied by the multiplicity of laws and overlapping legalities that made doing business in India extremely difficult. There exist around 144 different kinds of state and centre labour laws today. Around 44% infrastructure projects remain stalled since 2007 due to ongoing court cases. Single window clearance and a swift trial of cases is a must to encourage investors. Rigid labour and land laws hit not only businesses, but also hurt labour and consumer interests.

In recent years, another problem of Non-Performing Assets has been added to this long list of dried up investments.

Looking forward

It could be safely argued that India cannot bank only upon service-led growth. Jobless growth and rising inequality are only few of the problems associated with service-led growth. Thus, in India what is urgently required is a strong push for industrialization, especially in labour-intensive industries such as textile and garment sector, leather industry etc. It must be recognized that manufacturing promotion in India is not a zero sum game with services. The growth in manufacturing will ultimately provide a clientèle for services thereby contributing to its growth — They both have to go hand in hand. At present, let us hope for some good news in November 2017, which is when the current government plans to bring out its industrial policy.

-Contributed by Kunwar Suryansh

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