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BASHAM LECTURE 2000: INDIA: A NEW BEGINNING

Ric Shand

I am honoured by the invitation to present the Year 2000 Basham Lecture, in memory of a most distinguished and learned scholar of encyclopedic knowledge, sensitivity and clarity whom I have long admired and whom made such an indelible mark in his years with The Australian National University.

Introduction

Events, both domestic and international, have been momentous for India over the past decade, and have wrought changes that are yet to be fully played out both nationally and internationally. The Lecture will focus principally on the economic changes, and on some of their implications for India. A final section will review Australia’s bilateral relationship with India in the light of these changes and of related changes in Australia that began a decade earlier. It is argued that the dynamics of new interactions will form the basis for the strengthening and deepening of future linkages.

The five sections of the Lecture are as follows:

  1. Background: India’s Economic Model
  2. The 1990s: from Economic Crisis to Globalisation
  3. India’s Economic Performance in the Nineties
  4. Who is Benefiting from the Reforms?
  5. Australia and India: A New Beginning

 

 

 

  1. Background: India’s Economic Model

India adopted a development strategy at Independence to place herself on the path of planned, self-reliant economic development free of foreign capital domination and dependence. Above all India wished to achieve high growth rates with equity, which could meet the overhanging challenge of poverty. At that point, with a booming population growth rate, the Malthusian spectre loomed as its most serious concern.

Post World War II, the Indian socialist planning model of economic development was seen as the alternative to the totalitarian model of the Soviet Union and China. Hopes were all the higher as India was to undertake her planning within a democratic framework, but with the daunting challenge of a huge population and widespread poverty. Development in India was seen to be the removal of poverty through economic growth and rising income levels.

The route that India’s economic policies took was characterised by heavy government controls over the private sector, preferred growth of the public sector and its enterprises. and an inward-looking trade and investment strategy. From the start of the Second Five Year Plan, India also biased its development effort towards heavy industry, deterred foreign investment, opting for self-reliance and autarky.

India adopted a view of export pessimism in its external economic policies. It discouraged imports with some of the highest tariff levels in the world and discouraged exports in the name of economic security. It discouraged foreign investment and in so doing, choked off the inflow of new technology.

The strategy fell well short of its targets. First, growth rates remained low and only slow progress was made in eliminating poverty. Growth rates of Gross Domestic Product over the decades to the 1980s averaged only 3.7% annually. Given a population growth rate that rose to 2.6% or more by 1970, the additions to per capita income and living standards over this period were modest.

Agriculture remained the dominant sector. Its performance was strongly influenced by the vagaries of monsoons. Several times, in the face of monsoon failure, growth in domestic production was inadequate to meet needs and necessitated international assistance.

It took the Green Revolution in foodgrains, introduced from abroad in the mid-1960s after two severe droughts, to provide the agricultural sector with a technological base to lift its growth rate significantly above that of population. Self-sufficiency in foodgrains was a major success story in post-Independence India, but it was not until the 1980s that the agricultural growth rate was raised high enough to achieve that goal. Regrettably other sectors of the economy, particularly the industrial sector, lagged behind.

Externally, the Indian economy became marginalised in world trade and increasingly isolated.

The main elements that stifled growth and efficiency until the 1980s were identified by the eminent Indian economist Jagdish Bhagwati in his K.R. Narayanan Oration at ANU in 1996 as:

 

"We had started out in the 1950s with:

 

But we ended the 1980s with:

 

2. The 1990s: From Economic Crisis to Globalisation

India experienced an economic crisis in 1991. The proximate reasons were a spiraling budget deficit, heavy external borrowing, which led to diminution of external reserves to a dangerously low level, and a balance of payments deficit with a excessive debt service problem, particularly from short term commercial borrowing. Foreign exchange reserves fell to only two week’s cover at one point. India’s international credit rating was downgraded, and with difficulties in raising credit abroad, India was in danger of default. Inflation hit 17%, industrial production fell sharply and overall economic growth declined to 0.8% in 1992.

The Narasimha Rao government grasped the opportunity, not only to introduce monetary and fiscal policies to stabilize the economy but to launch a far reaching program of reforms to open up the economy internally and externally in order to put India onto a higher growth path.

These objectives were served by the introduction of policies to:

3. India’s Economic Performance in the Nineties

The combination of stabilising and stimulatory policies had both rapid initial and lasting effects. India quickly regained its reputation for prudent macro economic management by stabilising the economy, and gained new respect for setting the economy on a new and higher growth trajectory with its program of liberalisation.

A broad-brush view of achievements during the 8 years since the crisis paints the following picture:

These gains, impressive as they have been, are tempered by constraints. Points of sensitivity in the reform process that need highlighting are political consensus and stability and the role of the states.

Political Consensus and Stability

A remarkable political consensus on the need for reforms has been forged across the spectrum of political parties at the Centre since 1991. But the impact of this consensus has been diluted by continued political instability. The short life of coalition governments and the compromises needed to prolong them have made it difficult to take hard reform decisions and have led governments resort to populist measures.

While there is now no substantial political party-based opposition to reforms and globalisation, there are some influences from groups with vested interests in the perpetuation of elements of the status quo, which temper the pace of reforms including:

 

 

 

 

 

 

4. Who is Benefiting from the Reforms?

The momentum on reforms has moved importantly to the states where the record on commitment to reforms is more chequered than at the Centre. It is in this area that I wish to spend some time in this Lecture, for it is there that we can gain important insights into the mosaic of development that has emerged since reforms began.

Some of the features of diversity in development across the major 14 states of India are shown in Table 1:

TABLE 1

Selected Development Features of the 14 Major States: Census 1991

State

Annual

Population

Growth %

Literacy

(% of

7 yr+)

Work

Participation rate (%)

Population

Life expectancy

at birth (years)

Rural

Urban

Urban as %

of total

Andhra Pradesh

2.2

44.1

45.1

48.6

17.9

26.9

61.8

Bihar

2.1

38.5

32.12

75.0

11.4

13.1

59.3

Gujarat

1.9

61.3

40.2

27.1

14.3

34.5

61.0

Haryana

2.4

56.9

31.0

12.4

4.1

24.6

63.4

Karnataka

1.9

56.0

42.0

31.1

13.9

30.9

62.5

Kerala

1.3

89.8

31.4

21.4

7.7

26.4

72.9

Madhya Pradesh

2.4

44.2

42.8

50.8

15.3

23.2

54.7

Maharashtra

2.3

64.9

43.0

48.4

30.5

38.7

64.8

Orissa

1.8

49.1

37.5

27.4

4.2

13.4

56.5

Punjab

1.9

58.5

30.9

14.3

6.0

29.5

67.2

Rajasthan

2.5

38.6

38.9

33.9

10.1

22.9

59.1

Tamil Nadu

1.4

62.7

43.3

36.8

19.1

34.2

63.3

Uttar Pradesh

2.3

41.6

32.2

111.5

27.6

19.9

56.8

West Bengal

2.2

57.7

32.2

49.4

18.7

27.5

62.1

14 STATES

2.1

52.2

37.5

628.7

217.6

25.7

60.3

Source: Ministry of Finance, Economic Survey, 1997-98. New Delhi: Government of India.

There are stark contrasts in the distribution of population and size of state economies:

TABLE 2

Regional Variations in the Size and Income of the Indian Economy, 1996-97

State

Population

(million)

Share of Total Population

(%)

Net State Domestic Product (NSDP)

(US $billion)

Share of NSDP

(%)

Per capita NSDP

(US $)

Bihar

97.3

10.3

10.5

3.3

108.0

Orissa

35.0

3.7

6.3

2.0

180.9

Uttar Pradesh

153.2

16.2

29.1

9.1

189.7

Madhya Pradesh

73.8

7.8

15.5

4.8

209.7

Rajasthan

49.4

5.2

11.8

3.7

238.0

Kerala

31.4

3.3

8.0

2.5

255.4

West Bengal

74.7

7.9

19.9

6.2

265.9

Andhra Pradesh

73.2

7.8

20.3

6.3

277.9

Karnataka

48.9

5.2

14.2

4.4

289.6

Tamil Nadu

59.0

6.3

19.5

6.1

329.8

Gujarat

45.6

4.8

17.9

5.6

392.5

Haryana

18.5

2.0

8.5

2.6

456.3

Maharashtra

88.0

9.3

42.9

13.3

487.2

Punjab

22.5

2.4

11.6

3.6

513.0

ALL INDIA

943.0

100.0

321.4

100.0

340.8

Source: Ric Shand and Shashanka Bhide (2000) "Sources of Economic Growth: Regional Dimensions of Reforms", Economic and Political Weekly, Vol XXXV, No. 42, October 14, 2000, pp.3747-3757.

 

TABLE 3

Annual Average Growth Rates (%) of Net State Domestic Product (real)

State

1970-80

1980-90

1993-99

Karnataka

3.1

5.7

8.1

Maharashtra

4.3

6.3

7.7

Tamil Nadu

1.8

5.6

7.4

West Bengal

3.1

4.3

6.9

Gujarat

3.9

6.4

6.8

Andhra Pradesh

3.3

6.7

6.3

Kerala

2.2

3.3

6.3

Haryana

4.7

6.3

5.6

Madhya Pradesh

3.2

4.3

5.4

Rajasthan

1.3

7.2

5.3

Orissa

2.3

5.4

5.1

Punjab

4.4

5.7

5.0

Uttar Pradesh

3.2

5.0

4.3

Bihar

2.7

4.4

4.0

14 STATES

3.0

5.4

6.1

ALL INDIA

3.0

5.7

6.6

Source: Central Statistical Organisation, Government of India, New Delhi, available at the website of the India States' Reform Forum 2000: Fiscal and Governance Reforms for Poverty Reduction, November 23-25, 2000, Taj Palace Hotel, New Delhi (www.statesforum.org).

Average annual growth rates of state product per head of population show the broad trends in living standards. These are presented for the 1970s, 1980s and for the reform period of the 1990s in Table 4.

TABLE 4

Average Annual Growth Rates of per capita NSDP (real) at State Level

State

1970-80

1980-90

1993-99

Gujarat

1.5

4.4

5.1

Maharashtra

2.4

3.9

6.0

Kerala

0.1

2.0

5.1

Tamil Nadu

1.7

4.0

6.2

Rajasthan

-1.9

4.6

3.0

West Bengal

0.4

2.0

5.2

Orissa

-0.3

3.5

3.8

Punjab

2.5

3.8

3.3

Madhya Pradesh

-1.9

1.8

3.3

Andhra Pradesh

1.0

4.4

4.9

Karnataka

1.4

3.7

6.5

Haryana

1.1

3.8

3.6

Bihar

-0.2

2.2

2.3

Uttar Pradesh

-1.2

2.6

2.1

14 STATES

0.4

3.2

4.3

ALL INDIA

0.6

3.5

4.7

Source: Central Statistical Organisation, Government of India, New Delhi, available at the website of the India States' Reform Forum 2000: Fiscal and Governance Reforms for Poverty Reduction, November 23-25, 2000, Taj Palace Hotel, New Delhi (www.statesforum.org).

 

 

A further perspective is given to the regional distribution of growth by contributions of states in each of the three periods (Table 5). Growth rates of net state product and the initial size of the state economies determine the contributions. These distributions are skewed in each of the three periods, but increasingly so over time.

 

TABLE 5

State Rankings in terms of Percentage Contribution to Growth in NSDP

State

TE72-82

%

TE72-82

Ranking

State

TE82-90

%

State

TE95-99

%

TE95-99

Ranking

Maharashtra

19.2

1

Maharashtra

18.3

Maharashtra

20.6

1

Uttar Pradesh

14.4

2

Uttar Pradesh

13.4

Gujarat

10.4

2

Andhra Pradesh

9.2

3

West Bengal

8.2

Uttar Pradesh

9.7

3=

Gujarat

8.1

4

Tamil Nadu

7.5

Tamil Nadu

9.7

3=

West Bengal

7.8

5

Gujarat

7.4

Karnataka

8.8

5

Punjab

6.3

6

Rajasthan

6.5

West Bengal

8.7

6

Karnataka

5.9

7

Andhra Pradesh

6.4

Andhra Pradesh

6.6

7

Bihar

5.7

8

Bihar

6.0

Madhya Pradesh

5.5

8

Madhya Pradesh

5.6

9

Karnataka

5.7

Rajasthan

5.1

9

Haryana

4.1

10

Madhya Pradesh

5.5

Bihar

4.8

10

Tamil Nadu

3.9

11

Punjab

4.7

Punjab

3.7

11

Rajasthan

3.2

12

Haryana

4.1

Kerala

3.4

12

Kerala

2.1

13

Orissa

2.8

Haryana

1.6

13

Orissa

2.0

14

Kerala

2.1

Orissa

1.5

14

14 STATES

100.0

   

100.0

 

100.0

 

Note: (i) TE = Average of the three year period ending;

(ii) Growth in NSDP is estimated between the period demarcated by TE.

Source: Ric Shand and Shashanka Bhide (2000) "Inequalities in Income Growth in India Before and After Reforms", South Asia Economic Journal, Vol. 1, No. 1, March, pp.19-52 and updated from Central Statistical Organisation, Government of India, New Delhi, available at the website of the India States' Reform Forum 2000: Fiscal and Governance Reforms for Poverty Reduction, November 23-25, 2000, Taj Palace Hotel, New Delhi (www.statesforum.org).

 

The trend in income inequality in the Indian economy is an important issue relating for the process of development in India. Our analysis shows that there has been a widening trend over time. But importantly, this occurred both before and after economic reform in the 1990s.

5. Australia and India: A New Beginning

In 1990, a Senate Committee Report on Australia India Relations: Trade and Security concluded that:

This largely pessimistic assessment reflected the view frequently expressed at that time, that the bilateral relation "lacked substance".

The record and the attitude of pessimism should be judged against the political and economic environments of past decades since World War II.

The Political Environment

The advent of the Cold War soon after the end of the Second World War polarised the World into camps. In joining the alliance of Western democracies, and more particularly, in establishing a close alliance with the USA, Australia became party to many international policy stances on issues with which India has disagreed. The two countries have diverged on many international issues, e.g. on Korea, Vietnam etc. This in itself did not sour bilateral relations, as the two democracies otherwise hold many values in common. Also, both countries respect each other’s sovereign rights to take foreign policy decisions in keeping with their own national interests, so relations remained warm and cordial politically throughout the fifty years of the Cold War despite the differences. Inevitably though these differences have put a limit to the depth and intimacy of association on international political and security issues.

The Economic Environments

India’s chosen strategy of economic autarky and self-reliance up till the 1990s, fuelled by an attitude of export pessimism, was inimical to the development of global trade linkages. It was not an environment in which Australia could significantly expand its export trade links with India. India adopted a national development strategy of state-led import substitution industrialisation from early post-independence. Policies emphasised industrialisation through direct government intervention as a way of ending "economic dependence". This strategy produced a highly regulated economy, discouraged foreign investment and marginalised the country in world trade. It erected high barriers to international trade in the form of quantitative restrictions and high tariffs. At the same time, exports were taxed or given little encouragement. This was consistent with the prevailing pessimistic view of export prospects.

But on the other hand, Australia had comparable barriers. Traditionally, Australia has been highly protectionist with respect to its manufacturing sector. This caused problems in its expanding Asian partnerships, e.g. with Japan because of the strong trade imbalance in Australia’s favour. It was not until 1983 and the Hawke government that Australia began to open its markets to regional manufacturers by reducing tariff barriers. This led to a further strengthening of bilateral relationships as the countries of Northeast and Southeast Asia took advantage of these opportunities.

Most Indian manufacturers, long isolated from international trade, were not in a position to compete during the 1980s. This further marginalised India’s importance as a trading partner with Australia. It was not until India herself began to open up in the early 1990s, when manufacturing could begin to take on an export orientation that India could begin to share in Australian markets of manufactures.

The relevance of the Australian experience is that, in relation to development of ties within the bilateral relationship, the economic environment was very discouraging to the expansion of trade and investment for India, just as Australia found it difficult to expand trade with India.

Small wonder that in 1989-90, Australia’s exports to India amounted to only a little more than AUD 0.5 billion, while India’s exports to Australia were even lower, at a little more than AUD 0.25 billion.

Thus in view of the foreign policies and international trading and investment regimes of Australia and India during the decades to the 1990s, it is hardly surprising that the bilateral relationship was regarded as "lacking substance".

Two momentous events combined in the early 1990s to alter this bilateral environment for both countries:

The end of the Cold War and the collapse of the Soviet Union removed crucial policy differences between the Western democracies (including Australia) and India. The most public gestures of reconciliation between the USA and India after decades of estrangement were the reciprocal visits of President Clinton and Prime Minister Vajpayee. The Clinton visit, with its Vision Statement and its attached "Agreed Principles" has institutionalised a multi-layered dialogue and established the basis for a new understanding with Western democracies by removing residual mutual suspicions about political and strategic motives.

The nuclear tests of Pokhran II in 1998 set back the re-assessment of relations between India and Western powers, and checked the process and pace of development of new links. But in the two years since the tests, India’s regional security concerns have won recognition, as has the irreversibility of her emergence as a nuclear power.

Australia has accepted the new reality of India as a nuclear power. It now treats the bilateral relationship in a wider context of common political, strategic and economic interests and concerns and is in the process of institutionalising dialogue at all levels.

Future Prospects: A New Beginning

The new beginning for Indo-Australian relationships has a number of dimensions:

These dramatic changes in the relationship between the two countries during the 1990s moved a Joint Standing Committee on Foreign Affairs, Defence and Trade to conclude in its Report on Australia’s Trade Relationship with India in 1998 that

"In the past six years, bilateral trade has more then doubled. On current growth

rates, this trade level is set to double again in the next five years, making India

one of Australia’s largest export markets. Equally, important is Australian investment in India which has increased dramatically since 1991."

There is now a solid basis for optimism about the future potential for the bilateral relationship both through closer political ties and through the expansion of economic linkages.

The "New Beginning" for Australia and India commenced in the early 1990s as India joined Australia in outward-looking, market-oriented policies of liberalisation and globalisation, - a new era of rapid economic growth and trade expansion. There is no foreseeable limit to this era as both countries forge ahead.



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