Revisiting Regional Growth Dynamics in India in the Post Economic Reforms Period

B. Misra

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137303684
• Topic: Économie
• Subtopic: Macroéconomie

The post 2000 period for India has been quite eventful for Indian economy. The Book examines the implications of growth for inequality and some of the major drivers of growth like infrastructure, health and credit. The book discusses the key challenges as well the game changer initiatives that will shape India's growth in the medium term.

1

Introduction

India’s economy at present is characterized by subdued growth performance. Economic growth¹ was only 6.5 per cent in fiscal year 2011–12, the lowest in nine years, and projected to be a still lower 5 per cent in 2012–13. This low economic growth has created a sense of gloom about the Indian economy. While the recent past has not been encouraging, growth performance has been more assuring from a medium-term perspective. If we take a medium-term view, after economic reforms were introduced in July 1991, a growth rate of 5.7 per cent per annum was recorded during the first decade (1991–2001). The growth rate accelerated to 7.6 per cent per annum during 2002–11, the subsequent decade. If we take a long-term view, the acceleration in economic growth was sharper after economic reforms were introduced in 1991. Economic growth of 4.1 per cent per annum during the first four decades of planned development (1951–52 to 1990–91) increased to 6.7 per cent per annum between 1991–92 and 2011–12.

The robust growth performance in the post-2000 period, especially during 2004–8, prompted a number of reports from investment banks and international consulting firms which envisioned India playing a larger role in the global arena. For instance, the Pricewaterhouse Coopers (PwC) report titled ‘World in 2050’, published in January 2011, labelled India as a ‘growth tiger’ which will increase its share in world GDP from 2 per cent to 13 per cent, to emerge as the third-largest economy after China and the United States at market-exchange rates in 2050, from 11th position in 2009. In PPP terms, India is projected to be the second largest economy after China in 2050, up from its fourth position in 2009. The PwC report was followed by the ‘India Super Cycle Report’ published by the Standard Charted Bank in May 2011. The PwC report projected India to be a star performer in the next growth super cycle and can become the third-largest economy of the world by 2030 with around 10 per cent of the world’s GDP. Backed by its creative potential, emergent middle class and demographic dividend, India was predicted by the report to grow at more than 9 per cent in the coming two decades, faster than China. These reports created a sense of euphoria – and it was not long ago that the prime minister envisioned India growing at 10 per cent per annum.

Both of these reports also cautioned the downside risks to India’s emerging as an economic power house arising out of poor infrastructure, regulatory burden, fiscal laxity and, above all, growth-supporting policies. Not much heed was paid, however, to these downside risks, which led to a policy stasis leading to growth pessimism in the years 2011–13. This growth pessimism was echoed by the Planning Commission in the 12th Five-Year Plan document, where it has revised downwards the growth projections for India to 8 per cent per annum (in the best-case scenario) from 9.5 per cent per annum as outlined in the plan document’s Approach Paper. It is now widely believed that, India might be caught in the middle-income trap unless a swift course correction in policy and its implementation is made in right earnest.

The theme of this book is to study regional growth dynamics in the post-2000 period. However, as the recent drop in India’s growth rate has been quite dramatic, questions such as what has led to the dismal growth performance in 2011–12, and how the India growth story is going to unfold in the coming years, are matters of interest to many. As such, before considering growth at the spatial level, the macro dimensions of growth and the key challenges to achieving higher rates of growth are discussed in Chapter 2. Apart from sorting out the macroeconomic concerns, the scope for growth would be enhanced significantly through better centre-state and inter-state relations. As such, this addresses the political economy of growth by studying the evolution of centre-state and inter-state relations. This chapter will also discuss some of the game-changer initiatives that the government has taken up in the post-2000 period. Thus, the remit of Chapter 2 is to address three broad themes.

First, the chapter provides a broad overview of the evolution of the macro economy, characterized by growth euphoria in the recent past to the subsequent situation of growth pessimism and the key macroeconomic challenges to attaining reasonable growth in the foreseeable future. Second, the chapter discusses the forces shaping centre-state and inter-state relations, which will have a bearing on the growth outcome. Third, the chapter discusses the various game-changer initiatives which will impart sustainability and acceptability to the growth process.

Notwithstanding the recent dip, India’s growth in the post-2000 period has been a respectable 7.7 per cent. How the different states have fared in the post-2000 period is a matter of empirical investigation. The dispersion of this high growth across the states would convey a broad sense of the states’ participation in the growth process. In view of this, Chapter 3 discusses attributes of growth at the state level, such as which sectors have been the drivers of growth, whether the structural composition of output in the states has undergone any major change, and how the contribution of different states to national-level growth has changed over time. As the growth experience in the post-2000 period has been one of relatively low growth during 2000–3, followed by a phase of rapid growth, 2004–8, and then by another phase of relatively low growth, 2009–12, it would be interesting to study how the different states have performed in these three time periods. The inequality in income across states is the theme of Chapter 4. Specifically, this chapter attempts to find out how the relatively poorer states have performed compared to their richer counterparts. Further, is there any evidence of poorer states catching up with their richer counterparts in the post-reform period? This is broadly the theme of discussion of Chapters 3 and 4.

The availability of quality infrastructure makes life more comfortable, apart from aiding the growth process. Anecdotal evidence suggests that high growth states have better infrastructure. Does the evidence on the ground validate the anecdotal evidence? The lack of consistent data on the status of infrastructure is a critical gap in the spatial growth literature. We have constructed an infrastructure index at annual intervals for different states, encompassing in Chapter 5 both the economic and social dimensions and the relationship between infrastructure and growth.

The federated states of the Indian Union are in different positions in the income spectrum and have varied achievement in social parameters. Health care falls under the purview of states. The Thirteenth Finance Commission has discontinued the health equalization grants recommended by the Twelfth Finance Commission. Will this have an adverse impact on health outcomes in the state? Judging by the health outcomes of the population and by the critical infrastructure in place, the situation has not been very encouraging. There is a wide disparity among states. With growing consciousness, more demand and policy shift in favour of the social sector, it would be instructive to study the impact of public expenditure on health outcome. One obvious and oft-used indictor of health outcome is the Infant Mortality Rate (IMR). Chapter 6 is devoted to studying the growth dependency of public expenditure on health and whether the health expenditure is really effective in making a dent in the IMR at the level of states in India in the post-reform period.

Credit in an economy plays the same role as blood in the human body. In a bank-dominated financial system such as India, the banking sector plays a crucial role in promoting regional equity in mobilizing resources and channelizing the same for financing production activity across the states. While the focus of banking sector reforms in the 1990s was to promote a diversified, efficient and competitive banking system, the emphasis in the post-2000 period has been on financial inclusion. In order to promote financial inclusion in a sustainable manner, the weaknesses in the multi-agency architecture has been addressed through consolidation in the Regional Rural Bank (RRB) space and revitalization of credit cooperatives, and commercial banks have been prodded to expand their reach to the rural hinterland through a number of policy measures. How far the access to banking has improved, and how the credit–growth relationship has evolved in the new dispensation at the state level, are matters of interesting enquiry. This is the subject of discussion in Chapter 7 .

Before proceeding to the chapters, we briefly discuss the policy initiatives for reducing regional disparity in the post-2000 period.

Approach to addressing regional disparity

The period after 2000 has seen three planning documents. While redressing regional disparity was a concern all through the planning period, it gained added importance in the 11th and 12th five-year plans. This is because, unlike in the 10th five-year plan, both the 11th and 12th five-year plan documents contain a separate chapter on ‘Regional Inequality’. The changing approach to promoting regional equality across these three plans is briefly discussed below.

The 10th-year plan, which was in currency during 2002–7, laid down the reduction of regional imbalance as one of its prime objectives. The approach to ameliorating regional backwardness prior to the 10th plan was one of development of states through a favourable disposition of central assistance to less developed states and through special area programmes. The 10th plan introduced a new initiative to address the problem of regional disparity, in the form of ‘Rashtriya Sam Vikas Yojana’ (RSVY). RSVY focused on reducing regional imbalance by providing additional grants for developmental programs only if the concerned state government undertook an agreed set of reforms. The Backward Districts Initiative (BDI) under the RSVY identified 147 backward districts – on the basis of an index of backwardness comprising three parameters with equal weight as to value of output per agricultural worker, agriculture wage rate and percentage of SC/ST population of the districts – to address the problems of low agricultural productivity, of unemployment and to fill critical gaps in the physical and social infrastructure. The BDI was a three-year programme in which each district received Rs. 45 crores to address backwardness. However, a new government had been instituted just after two years of the 10th plan being in currency. Based on the experience gained in running the BDI in the first two years, the Backward Regions Grant Fund (BRGF) was prompted to make the process of implementation more participative and holistic. The Panchayati Raj Institutions (PRIs) were involved in choosing the schemes and their implementation and in the preparation of a district plan to address backwardness. The scope of application of BRGF was extended to 250 districts in the 11th plan in 2012 with the provision of Rs. 29,100 crores.

The 12th plan document was published with the broad theme ‘Faster, More Inclusive and Sustainable Growth’. The 12th plan recognizes that local governments can play a crucial role in ensuring efficient and accountable delivery of services and hence, emphasizes capacity-building in PRIs in terms of both human resources and systems of implementation. The approach in the 12th plan towards BRGF is to focus on district, sub-district and supra district levels for effective realization of outcomes. While the bulk of the programme will be implemented through PRIs, flexible funds will be provided at the district level to address infrastructure gaps. The 12th plan has revised the criteria of backwardness in four dimensions – economic, social, educational and infrastructural² – for the selection of districts for focused attention to identify the 200 most backward districts and the 1,500 most backward sub-districts, and has raised the allocation to Rs. 67,500 crore. The restructured BRGF aims to strengthen the institutional structure of governance.

2

Key Challenges

As alluded to in the Introduction, this chapter has three broad themes. India’s GDP growth dropped to 6.9 per cent in 2008–9 because of the negative externalities arising out of the global financial crisis. India made a strong comeback in the subsequent two fiscal years, viz, 2009–10 and 2010–11, when growth could be maintained at around 8.5 per cent, but growth again dipped to 6.5 per cent in 2011–12. The policy responses to tackling the after-effects of the global financial crisis were quite successful at protecting growth in the first two years but have not been able to protect growth subsequently. As the drop in growth was quite dramatic in 2011–12 and 2012–13, the macroeconomic management since the onset of the global financial crisis and the key macroeconomic challenges to reviving growth in the medium term is the first theme.

In a federal setup like India’s, on many occasions there is no dearth of solutions, but the real problem is to get the states on board for implementing them. For instance, there is general acceptance in the academic and policy circles of India in favour of replacing the present sales tax system with the goods and services tax system. However, consensus is elusive between the centre and the states on its implementation. The states often complain that their concerns are not addressed in the centralized planning process. Recently, the chief minister of Tamil Nadu walked out of the National Development Council (NDC) meeting – convened to ratify the 12th plan – for not being given adequate time to put forth the state’s concerns. On a broader plane, the reaction of the chief minister of Tamil Nadu, signifies the discontent of the states to the approach of the centre in handling centre–state and inter-state relations to foster development. The entire approach to development in India since independence is steered by extra-constitutional bodies such as the Planning Commission and mechanisms such as the NDC. The success of the various initiatives from the centre in making the growth process more sustainable and inclusive will, to a great extent, depend on the response of the states in a federal setup. The centre has to play the role of friend, philosopher and guide to the states in facilitating the growth process. The centre should take the initiate in activating the constitutionally approved institutional mechanism so that states acquire a platform to voice their concerns and find solutions to problems afflicting them. We discuss, as the second theme, the approach to securing better inter-state and centre–state coordination through institutional mechanisms so that the country achieves not only higher growth, but harmonious growth.

While growth per se is important, equally important is the process of growth. Beyond macroeconomic management, the government has initiated a number of game-changer initiatives to make the growth process sustainable and more inclusive in the post-2000 period. The government introduced a limited employment guarantee programme, made huge expenditures in building the rural infrastructure, has made government business more transparent by allowing citizens access to information on its conduct of business, has taken specific initiatives to increase the access to banking and has made education a fundamental right. The government has also begun the process of replacing the present subsidy system by a cash-transfer system for better targeting of government spending on welfare schemes. These initiatives will shape the quality of growth in the future. Brief discussions on each of the game-changer initiatives is the third theme.

The rest of the chapter is structured as follows: The macroeconomic challenges are discussed in Section 2.1. Section 2.2 covers issue of centre–state and inter-state relations from a growth perspective. The essential features of the various game-changer initiatives are discussed in Section 2.3. Section 2.4 provides the concluding observations.

2.1Macroeconomic management

The roots of the present growth pessimism can be traced back to the policy response to protect growth following the global financial crisis of 2007–8. The domestic consumption backed high growth, witnessed during the four years before the global financial crisis, had led to the belief that India’s growth is decoupled from the economic fortunes of the advanced countries. The crisis brought home the sombre reality of interconnectedness in a globalized world through the trade, finance and confidence channel as growth decelerated to 6.8 per cent in 2008–9. In order to limit the adverse impact of the contagion on the Indian economy, a combination of loose monetary and fiscal policies was pursued. The central bank took a number of conventional and unconventional measures to ease liquidity. These included augmenting domestic and foreign exchange liquidity and a sharp reduction in the policy rates. The Reserve Bank of India (RBI) infused primary liquidity amounting to Rs. 5.6 trillion (10.5 per cent of GDP) and reduced policy rates from 8 per cent to 4.75 per cent within a short span of six months, between October 2008 and April 2009. These measures were effective in ensuring speedy restoration of orderly conditions in the financial markets over a short time span. Monetary policy measures were complemented by a fiscal stimulus package in 2008–9 in the form of tax cuts, investment in infrastructure and increased expenditure on government consumption to support aggregate demand. As a result, the growth of Indian economy was relatively less impacted because there was space for monetary and fiscal manoeuvrability when the crisis struck. The pursuit of swift expansionary monetary and fiscal policy restricted the drop in the growth to 6.9 per cent in 2008–9. The fiscal space was created from the high growth in the three years preceding the crisis. The space on the monetary front was created because RBI had gradually increased the key policy rate by 300 bps between April 2005 and August 2008 to prevent overheating of the economy. It would be pertinent to mention here that in July 2005 the central bank could sense the building up of asset price bubbles in the property sector. Accordingly, in that same month, the Reserve Bank raised risk weights on exposures of banks to commercial real estate as well as for credit risk on capital market exposures. RBI also more than doubled provisioning requirements on standard loans for the specific sectors in April 2006. The prudential measures which appeared then to be restraining in nature, in hindsight turned out to be masterstroke of a matured central bank.

The broad-brush economic weakness in major parts of the world resulted in a dip in India’s exports in 2009–10. However, the expansionary fiscal stance continued during 2009–10 negated the dip in external demand, and the Indian economy registered a growth rate of 8.0 per cent. Thus, the growth of 8 per cent in 2009–10 and 8.4 per cent in 2010–11 was achieved by pursing a combination of easy monetary and expansionary fiscal policy. Though growth could be sustained above 8 per cent, it was with the help of the ‘steroids’ of expansionary policy. The undesirable consequences of misdirected policy were found in high and persistent levels of inflation at one end, and ballooning of fiscal deficit on the other. Fiscal deficit, which was on a correction path until 2007–8, shot up to 6 per cent in 2008–9 and 6.4 per cent in 2009–10. In 2010–11, the fiscal deficit turned out to be 5.1 per cent, lower than budgeted (5.5 per cent) because of one-off revenue from the auction of 3-G spectrum at one end and high levels of inflation pushing the nominal GDP to a much higher level. The artificially lower deficit indicators gave rise to fiscal laxity at one end, and higher levels of inflatio...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• List of Illustrations
• Preface
• Foreword
• Acknowledgements
• List of Abbreviations
• 1. Introduction
• 2. Key Challenges
• 3 Growth Performance
• 4 Income Inequality
• 5 Infrastructure and Growth
• 6 Health and Growth
• 7 Credit and Growth
• Notes
• Bibliography
• Index