India and Economics -1

What i learnt during last few days were some amazing concepts. Some concepts which were murky and cloudy, some concepts which were discrete. So i thought let me string all those concepts together.

We plundered from economic growth to current issues in the economy. So What determines a country's growth. It is its GDP or Gross domestic product. GDP refers to the country's ability to consume as well its ability to spend. More you consume or more you spend your GDP increases. For a developing country like India GDP per capita comes into the picture. It means GDP divided by the population of the country.  So GDP per capita helps to compare countries like India and Luxembourg which have a huge difference in population.

India's economic growth can be divided into three eras 1947 to 1980 (Inward looking era ), 1980 -1990 (Mild liberalization era) and 1991 onwards (Extensive liberalization era). When India got independence JawaharLal Nehru thought creating wealth and removing inequality through investment in public sector was the only way out. There was huge emphasis to reduce imports and to get import substitutions. India followed what as known as Nehru Mahalonabis model. This model was the framework of second five year plan formulated in 1955.

There were several reasons for this inward looking behaviour.
Firstly the historical factor. British had come to India as a traders as East India company. Slowly and steadily they started expanding and started taking keen interest in India's governance. They exploited India and  its resources a lot.People started believing that British had capitalist interests who had exploited them and had pushed  them towards the bowels of darkness. Due to this particular reason people thought with private sector and also with foreign investment the social welfare could not be achieved.
Second reason was the Industrial factor, India's private industrial sector was primarily led by Tatas' and Birlas'. At that time they met in Bombay (presently in Mumbai) and formed the Bombay plan. They were also of the opinion, that at that time the private enterprises were not capable enough to carry the burden of social welfare of  the nation.
All these reasons contributed to thinking of investment in public sectors, import substitutions and export reduction. What eventually these alignments brought were the concept of bureaucracy or license raj in India. Corruption got settled like a comfortable dust in a corner in the viens of the India's bureaucratic systems. Foriegn direct investment (FDI) was restricted.  Any kind of import had to undergo lot of hassles.  Narayana Murthy (co-founder of Infosys) even mentioned that to import simple computers he had to undergo lot of hassles and it costed a lot.

Entrepreneurship was almost a luxury .To setup anything it took ages and ample amount of bribe to the officials.  The growth rate achieved during that period was also known as Hindu rate of growth .It could be seen that the initial vision of Nehru had taken an incorrect turn. To give the policies some credit , few achievement of it were India's recovery, India's self belief, green revolution and no occurrence of famines.

Though in 1970s Indira Gandhi tried to do some reforms  But she had to face a lot of problems like famine, war ,emergency etc. for which she could not complete the reforms. Her son Rajiv Gandhi though led the era of what is known as Mild reform era.

In this era Rajeev Gandhi reduced import costs and started spending more on government expenditure. The salary of the government officials increased. This resulted in the consumption power of the people which in turned helped to raise the GDP. Rajeev Gandhi also forged alliances with Maruti for industrialization. But he had to face setback due to the Bofors scam.

Next came the extensive liberalization era. In the next part of this series i will discuss how the reforms took place, what were the results etc.