The Vision of a Precocious, Cleavaged India

Indian economy from 1947 to 1991 has been under the vision of socialism and so the Government and the public sector commanded the economy and micro managed the decisions of the private sector like their investing, producing and trading. All this was done to ensure that the benefits of economic growth reached the common people and not just a handful of capitalists.

This model of socialism was however abandoned and a more open economy was formed after 1991. Thus the Washington Consensus model was developed where Open economy, open trade, reliance on private sector was seen. This model has suited even the East Asian economies with exception of China.

The Economy of India has seen growth and so this can be measured with the following indicators:

1.Openness to trade.

2.Openness to foreign capital

3.Trade to GDP ratio

4.Share of government spending to overall spending

5.Extent to which PSU's dominate commercial activities.

The larger countries tend to trade less as the benefit of trading with outsiders is less as they have a large domestic market. But for smaller countries the benefits of trading with outsiders is more as they have a small domestic market. India's trade to GDP ratio is higher than China, US, Brazil. This has been a turnaround compared to the pre 1991 levels.

Weakness in the Indian Economy

The country however has some standard weaknesses too:

Private sector is still not accepted in sectors like railways. The preference to public sector in areas like telecom, manufacturing, mining is seen. The country ranks low even in the public perception to the private sector and majority of the surveyed feel that the private sector should occupy a small place in the economy. The unwillingness to privatize the National carrier and privatize airports by awarding management contracts instead of changing ownership is an example.

The Government is also unwilling to sell its stake in the Banks as it feels that they are tools to allocate and redirect resources.

The fertilizer sector is also rigidly controlled and inefficient firms continue to operate on public subsidies instead of being allowed to exit.

A market economy believes in free markets and private property. But India's stand on protecting private property is ambiguous.

The state capacity to deliver services has remained poor and there has been a lack of exit of public sector from domains which are best left to private enterprises.

The twin balance sheet problem where the private sector and the public sector banks have become involved with large debts needs to be resolved. A way to do so might involve taking tough decisions like forgiving private sector loans and the government is wary of taking this approach as it may seem like favoring the private sector.

Weaknesses in the State capacity

The Indian state has low capacity to deliver services to the people effectively. This is seen even today and is in sharp contrast to other nations where the state capacity was weak initially but grew faster to bridge the gap. In contrast the Indian state is still involved in corruption, delay and red tape.

The Political leadership has become too cautious in making decisions. It does not want to be seen favoring a particular side over the other. This is evident from the fact that telecom resources were auctioned at high rates to the bidders. This shall go against the consumers as the price rise shall be passed on to them. The price also means that there are less resources with Telecom companies to spend on capacity building and improving service and coverage.

The judiciary imposed restrictions on telecom which led to auction of spectrum in order to ensure transparency was a reason for this. In redistribution of this public assets like minerals or spectrum the auction route may not always be optimal.

The cautiousness of the political leadership also was seen in administration as the PSU bank managers were reluctant to write off loans made to borrowers due to the fear of being harassed by the 4 C's [CBI, Courts, CAG and CVC]. This led to evergreening of loans i.e. lending of more money to overcome current crisis and postponing the problem.

Redistribution of Wealth

Redistribution involves taking money from the rich and giving to the poor. The Indian government does this via large number of schemes such as NREGA, Food subsidies, kerosene subsidies etc. However even though a large sum is spent on this the inefficiency in redistribution is high. A comparison reveals that the regions with large number of poor is also the region with lowest impact of such schemes. This leads to exclusion of genuine beneficiaries and inclusion of others who don't need subsidies.

Reasons for India's Economic story

India has remained a very different type of economy. It granted a full universal political and economic rights from the beginning of its creation. This was unlike that seen in today's advanced economies which were either limited democracies or very authoritarian. Even those that had full democracy from the start India alone is the one which was the poorest. Thus its economic growth model has been different from other nations.

The country also has deep social fissures right from the beginning and these were further widened under the colonial rule. Hence a country suffering from colonial rule of exploitation and having deep fissures would obviously pick the USSR model for growth. The national leaders had seen how the USSR transformed from an agrarian state to a industrial powerhouse within decades. On the other hand the private sector led model had failed in many country's.

The Country also committed itself to redistribution very early when it had little resources. As redistribution was a priority it spent little on other indicators like health and education. This made us unique since other advanced countries spent on redistribution on such a large scale only after their purchasing power had increased.

A country that follows redistribution as a priority than public service delivery shall face a bigger problem soon - that of an exiting middle class. The middle class shall not be a party to the redistribution if it feels that it doesn't derive any benefits from the state. Therefore before beginning with redistribution a state should always spend on public services. The situation in India is that very few tax payers are present and their growth rates are also not increasing. This is exactly the problem seen in the middle class exit. The government should now make it a priority to increase the spending of public welfare to counter this problem.

Chapter Review

Score more than 80% marks and move ahead else stay back and read again!

Q1:Washington Consensus model was advocating

  • Open economy
  • open trade
  • reliance on private sector
  • all


Q2:Answer the following

  • The larger countries tend to trade less
  • benefit of trading with outsiders is less as they have a large domestic market.
  • both are true and B explains A
  • both are false


Q3:Which is true?

  • Private sector is still not accepted in sectors like railways.
  • The Government is also unwilling to sell its stake in the Banks as it feels that they are tools to allocate and redirect resources.
  • Both
  • none


Q4:Problems with allocation of public assets via auction is

  • lack of transparency
  • benefit to PSU
  • rise in prices for public
  • all
  • Q5:Political leadership is cautious as

  • judicial restraint
  • does not want to be seen favoring a particular side over the other
  • both
  • none