CHAPTER 2: 1947–2016 – A Tour d’Horizon

1. Overview of the Chapter

●​ Time Frame: 1947–2016

●​ Theme:
○​ Tracing India’s economic and political evolution from post-independence to
contemporary times.
○​ Examining the interplay between economic growth, policy shifts, and political
leadership.
●​ Main Focus Areas:
○​ Trends in national income and output growth
○​ Shifts in economic strategies and reform policies
○​ Impacts on poverty, inequality, and human development indicators

2. Two Major Accelerations in Economic Growth

●​ First Acceleration (Post-Independence to ~1980):​

○​ Growth Rates:
■​ Pre-independence/early years: Very low growth (≈1% per annum; 0.2%
per head).
■​ From around 1950: Growth improved to roughly 3.5% per annum (1.4%
per head).
○​ Implications:
■​ A welcome shift from colonial stagnation.
■​ Known as the “Hindu rate of growth” because, despite the improvement, it
lagged behind global and developing country averages.
■​ Limited impact on reducing widespread poverty and improving living
standards.
●​ Second Acceleration (1980–2015):​

○​ Growth Rates:
■​ Accelerated to over 6% per annum (≈4% per head).
■​ Positioned India among the world’s fastest growing economies during this
period.
○​ Emerging Challenges:
■​ Signs later in the phase indicated that rapid growth momentum was
slowing.
 ■​ Concerns about sustaining long-term growth for achieving first-world
prosperity.

3. Key Economic Data and Tables

●​ Table 2.1: Decadal GDP Growth, Investment, and Capital-Output Ratios​

○​ Historical Trends:
■​ 1900/01–1950/51: Growth at 1.0% per annum (0.2% per head).
■​ 1951/52–1959/60: Growth increased to 3.5% per annum (1.7% per head)
with investment at about 11.5% of GDP.
■​ Later decades show significant improvements post-1980, though rising
capital-output ratios point to lower investment productivity.
○​ Investment Trends:
■​ A steady rise in investment as a percentage of GDP over the decades.
■​ Rising capital-output ratios indicate inefficiencies and lower returns on
investment.
●​ Table 2.2: Selected Phases of GDP Growth​

○​ Sub-Period Breakdown:
■​ 1951/52–1964/65: Average growth of 3.9% with a capital-output ratio of
3.2.
■​ 1965/66–1979/80: Decline to 2.9% growth, with the capital-output ratio
increasing (up to 5.7), highlighting inefficiencies.
■​ 1980/81–1992/93: Recovery to an average growth rate of 5.2%, setting
the stage for later acceleration.
■​ Later periods (1993/94–2014/15): Continued increases in both growth and
investment rates, though vulnerabilities persisted.
●​ Table 2.3: Comparison of Key Social Indicators (China, India, South Korea)​

○​ Indicators Tracked:
■​ Life expectancy at birth, infant mortality rates, and adult literacy.
○​ Findings for India:
■​ India’s improvements in these social indicators lagged behind those of
China and South Korea, underscoring a limited focus on human
development.
●​ Table 2.4: All-India Poverty and Inequality​

○​ Poverty Trends:
■​ In the 1950s, over 50% of the population was below the poverty line.
■​ Despite rising savings and investments, the poverty headcount ratio
remained largely unchanged for three decades—resulting in a significant
 increase in the absolute number of poor (e.g., from about 210 million to
over 329 million).
○​ Inequality Trends:
■​ Gini coefficients (rural and urban) reflect persistent inequality despite
some improvements in economic performance.

4. The “Ancien Regime”: Political and Economic Narrative (1947–1980)

●​ Political Leadership and Key Figures:​

○​ Jawaharlal Nehru (1947–1964):

■​ Stabilized the country post-partition and initiated planned economic
development.
■​ Introduced the First and Second Five Year Plans, with detailed
inter-sectoral planning beginning in the Second Plan.
○​ Lal Bahadur Shastri (1964–1966):
■​ Faced significant challenges, including droughts and the 1965 war with
Pakistan.
■​ Initiated the Green Revolution to modernize Indian agriculture.
○​ Indira Gandhi (Post-1966):
■​ Implemented measures like devaluation and trade liberalization in 1966
under international pressure.
■​ Shifted towards a populist-socialist model with heightened state control.
■​ Imposed the Emergency (1975–1977), suspending individual rights and
centralizing power; lost the 1977 election but returned in 1980.
●​ Economic Policy Characteristics During This Era:​

○​ Command and Control Model:

■​ Extensive state regulation over investment, pricing, credit, employment,
and market entry/exit via permits and licenses.
■​ Heavy reliance on public sector enterprises for industrial growth, often
leading to inefficiencies and fiscal burdens.
○​ Neglect of Social Sectors:
■​ Inadequate investment in primary health care and education, limiting
human development and worsening poverty.
○​ Consequences:
■​ Low productivity of investments (as seen in rising capital-output ratios)
and persistent high poverty despite increasing investments.

5. Partial Reforms and the Political Backdrop from 1980 Onward

 ●​ Early 1980s Transition:​

○​ Rajiv Gandhi’s Administration:

■​ Adopted a modern, managerial style and introduced early liberalizing
measures.
■​ However, corruption scandals (e.g., the Bofors affair) and communal
tensions diluted the reform momentum.
●​ The 1990 Crisis and 1991 Economic Reforms:​

○​ Economic Crisis Context:

■​ Characterized by high inflation, a large current account deficit, dwindling
foreign reserves, and soaring external debt.
■​ The crisis necessitated a major rethinking of economic policies.
○​ Crisis Response:
■​ Under Prime Minister P. V. Narasimha Rao and Finance Minister
Manmohan Singh, the government implemented:
■​ Fiscal retrenchment and a devaluation of the rupee.
■​ Securing a standby credit package from the IMF.
■​ These measures led to a brief recession followed by a robust recovery,
with growth averaging around 5.2% per annum.
○​ Liberalization:
■​ Initiated reforms in trade and investment that gradually reduced state
controls and improved economic efficiency, despite resistance from
various political quarters.

6. Political Developments from the 1990s to 2016

●​ Rise of New Political Forces:​

○​ Emergence of the BJP:

■​ Gained prominence from the mid-1980s, experiencing short-lived coalition
governments in the 1990s and a stable term under Atal B. Vajpayee
(1999–2004).
■​ Key events include the 1998 nuclear tests and continued efforts toward
economic liberalization.
○​ Congress and the UPA Era:
■​ The Congress-led United Progressive Alliance (UPA) came to power in
2004, with Manmohan Singh serving as Prime Minister for two
consecutive terms (2004–2014).
■​ Notable achievement: Negotiating a nuclear deal with the United States.
●​ Economic Performance in the 2000s:​
 ○​ Growth Surge:
■​ Between 2003/04 and 2010/11, India experienced “super-fast” growth
(≈8.5% per annum overall, or 7% per head) driven by robust domestic
consumption and investment.
○​ Subsequent Slowdown:
■​ Post-2010/11, growth decelerated to around 5% per annum
(2011/12–2013/14), influenced by the global credit crisis and domestic
challenges.
●​ 2014 Elections and New Leadership:​

○​ BJP’s Electoral Victory:

■​ Narendra Modi’s leadership secured an absolute majority in the Lok
Sabha (the lower house) in the 2014 elections, with a promise of clean,
strong, and coherent governance.
■​ Despite this, the BJP remained in the minority in the Rajya Sabha (the
upper house), indicating potential challenges in future policy
implementation.

7. Key Takeaways and Underlying Themes

●​ Economic Policies and Their Outcomes:

○​ Early heavy state intervention (command–control model) resulted in low
productivity, inefficiencies, and a persistently high poverty ratio despite increased
investments.
○​ The 1991 crisis served as a catalyst for overdue liberalization and reforms, which
spurred a period of higher growth.
●​ Political Leadership and Policy Shifts:
○​ Dominant figures (Nehru, Shastri, Indira Gandhi) significantly shaped early
post-independence policies.
○​ The gradual transition toward a market-oriented economy was marked by crises,
political upheavals, and resistance to change.
●​ Social Development and Poverty Alleviation:
○​ Neglect of essential social sectors (health and education) severely limited human
development, contributing to persistent poverty and inequality.
○​ Even during periods of rapid economic growth, the benefits did not fully translate
into improved living standards.
●​ Modern Challenges:
○​ Despite rapid growth and progressive reforms, fiscal imbalances, inflation, and
structural challenges continue to impede sustainable and inclusive development.
Below is the final, comprehensive set of notes in a narrative-plus-bullet format. This version not
only lists the key points but also provides contextual paragraphs to help you understand the
evolution of reforms, growth, poverty, and inequality in India since 1980. You can copy this text
into your preferred document editor and export it as a PDF.

THE PARTIAL REFORM MODEL: GROWTH

SINCE 1980
(Context and Analysis)

In the late 1970s, as India faced increasing comparisons with the rapid progress seen in East
Asia, reformist ideas began gaining traction. Recognizing that past policies had left the economy
far from its efficiency frontier, the Congress government started introducing business-friendly
measures. When Mrs. Gandhi returned to power in 1980, she not only learned from earlier
left-leaning approaches but also reached out to the business community to foster a more
conducive environment for growth. Although the reforms of the early 1980s were cautious and
limited in scope, they set the stage for future changes. Alongside a significant fiscal expansion,
these policies managed to raise the growth rate to 5.6% per annum during the decade—even if
much of that was driven by over-expansionary fiscal policies and increased foreign borrowing.

Key Points and Context:

●​ Emergence of Reformist Ideas:

○​ By the late 1970s, the stark contrast between East Asian economic success and
India’s underperformance was impossible to ignore.
○​ Early changes were modest and cautious, often described as “business-friendly”
rather than fully market-oriented.
●​ Mrs. Gandhi’s Return in 1980:
○​ She sought to rebuild credibility by learning from previous policy mistakes and
forging alliances with the business sector.
●​ Impact on Growth:
○​ The fiscal expansion and reform measures raised growth to 5.6% per annum in
the 1980s.
○​ However, this growth was partly fueled by over-expansionary fiscal policy:
■​ Fiscal deficits rose from about 5% of GDP in the 1970s to 8% in the early
1980s, and eventually to 10% by the decade’s end.
○​ The shallow nature of these reforms meant that without more radical changes (as
seen post-1991), the acceleration in output might have ended prematurely.
DECISIVE REFORMS AND THE 1991
CRISIS
(Context and Analysis)

The economic crisis of 1991 proved to be a watershed moment for India. Faced with a
near-default on its foreign loans, India was forced to accept an IMF package that came with the
condition of deep structural reforms. The crisis shifted the political and economic mindset: the
old command–control model was abandoned in favor of a more market-oriented strategy. The
reforms rolled back numerous controls, abolished import restrictions, reduced tariffs, and
opened the door to foreign investment. The transformation was not immediate—it came with
initial pain—but ultimately, it unleashed a dynamic entrepreneurial spirit. By dismantling the
“license raj,” the reforms allowed more nimble businesses to emerge, leading to a significant
boost in productivity. Growth averaged around 6% per annum in the decade after 1993,
compared to 5.2% in the previous ten years.

Key Points and Context:

●​ Crisis as Catalyst:
○​ The 1991 crisis provided a clear signal that drastic changes were needed.
○​ India secured IMF support only by committing to structural adjustments.
●​ Major Reform Measures:
○​ Removal of quantitative import controls on capital goods and raw materials.
○​ Significant tariff cuts and the scrapping of investment licensing in most industries.
○​ Opening up the economy to both foreign direct investment and portfolio
investment.
●​ Results of the Reforms:
○​ Initially painful adjustments led to long-term benefits, including:
■​ Outpacing old-style conglomerates by nimble start-ups.
■​ Sharply rising corporate savings and investments.
○​ The decade following 1993 saw an improvement in the average growth rate to
6% per annum.

SUPER-FAST GROWTH AND THE

BURSTING OF THE BUBBLE
(Context and Analysis)
Between 2003 and 2010, India experienced a remarkable period of “super-fast” growth. During
these years, the GDP accelerated to 8.5% per annum. This growth was supported by the
cumulative benefits of the 1991 reforms, robust domestic consumption, and favorable external
conditions such as low oil prices and good harvests. However, this boom was built on a high
level of corporate borrowing. When the bubble burst after 2010, a collapse in corporate
investment was observed. The slowdown was not solely due to deleveraging; it was also a
consequence of a deteriorating investment climate. Governance failures, major scandals, and
stalled clearances contributed to investor uncertainty, while persistent inflation and a widening
current account deficit further dampened growth prospects.

Key Points and Context:

●​ Boom Years (2003–2010):

○​ Growth reached 8.5% per annum.
○​ High levels of corporate capital spending and favorable external conditions
played crucial roles.
○​ Most states outpaced their growth from the previous decade.
●​ After the Bubble Burst:
○​ Post-2010, corporate investment collapsed as firms deleveraged.
○​ Governance failures and policy paralysis created a sour investment climate.
○​ Macroeconomic issues such as 10% annual inflation and a widening current
account deficit (up to 4.5% of GDP) further inhibited growth.
●​ Current Situation:
○​ Although macro-stability has been restored since 2014, investment and overall
growth remain subdued.

POVERTY, DEPRIVATION, AND

INEQUALITY SINCE 1980
(Context and Analysis)

For India, reducing poverty is the ultimate measure of success. Over the decades since 1980,
significant improvements in economic growth have contributed to poverty alleviation. However,
the pace of poverty reduction has been slow, especially when compared with countries like
China. While the poverty ratio declined after 1980 and further accelerated during the super-fast
growth period (2003–2010), the absolute numbers remain high. Furthermore, regional
disparities persist, with some states faring much worse than others. Disadvantaged
groups—such as Scheduled Castes, Scheduled Tribes, and Muslims—continue to experience
higher poverty rates. Beyond income poverty, India’s performance on broader deprivation
measures in health and education is unimpressive, with alarming figures in child malnutrition,
immunization coverage, and school dropouts.

Key Points and Context:

●​ Poverty Reduction Trends:

○​ In 1973, the poverty ratio was 55% (old definition).
○​ Post-1980, there was a significant decline in poverty ratios, but the pace was
slower compared to China.
○​ During the super-fast growth years (2003–2010), poverty reduction accelerated.
●​ Absolute Poverty Figures:
○​ Until 2004, the absolute number of poor did not decline.
○​ Estimates in 2011 indicate 269 million (Tendulkar definition) and 363 million
(Rangarajan definition) poor.
○​ Poverty ratios are approximately 21.9% and 29.8%, respectively.
●​ Regional and Social Disparities:
○​ Wide variations exist among states (e.g., 40% in Chhattisgarh vs. 7% in Kerala).
○​ Northern and Eastern states have higher poverty rates than Southern and
Western states.
○​ Disadvantaged groups face even higher poverty levels.
●​ Broader Deprivation Indicators:
○​ Persistent challenges in health (child malnutrition, low immunization, poor
sanitation).
○​ Education issues include high dropout rates and poor quality in both primary and
secondary schooling.
○​ Figures are particularly dire among backward states, poor households, and
socially disadvantaged groups.

INEQUALITY TRENDS IN INDIA

(Context and Analysis)

While conventional measures based on consumption suggest that India’s inequality levels are
relatively low, these measures significantly underestimate true income inequality. Direct
measurements show much higher disparities, with Gini coefficients comparable to those of
high-inequality regions like Latin America. Recent decades have seen a noticeable increase in
inequality, especially in urban areas. Consumption in urban centers has risen much faster than
in rural areas, and the income share of the top 1% has notably increased. Additionally, regional
inequality has widened, as the income gap between richer and poorer states has grown
significantly.
Key Points and Context:

●​ Measurement Issues:
○​ Consumption inequality, commonly measured, underestimates true income
inequality.
○​ Direct income measures yield Gini coefficients above 50%.
●​ Trends in Consumption Inequality:
○​ Stable Gini coefficients in the low 30s from the 1960s to early 1990s.
○​ An increase of about six percentage points (from ~30 in 1993 to ~36 in 2011) in
recent decades.
○​ Urban areas have seen a disproportionate increase in inequality.
●​ Additional Indicators:
○​ Rapid urban consumption growth versus slower rural growth.
○​ A rising premium on higher education and skills.
○​ Increasing share of total income held by the top 1% (from 5% in the early 1990s
to 10% by 2002).
●​ Regional Disparities:
○​ The gap between richer and poorer states has widened, with the income ratio
between the richest and poorest states increasing significantly over the decades.

OVERVIEW OF 1980-2014
(Context and Analysis)

Between 1980 and 2014, India’s economic performance saw marked improvements compared
to the pre-1980 era. However, fiscal management has been a persistent issue. While fiscal
policies were relatively disciplined until the late 1970s, the subsequent decades witnessed a
rapid deterioration in fiscal discipline due to rising deficits and borrowing. Although the 1991
reforms helped improve the fiscal situation somewhat, the overall fiscal position remains fragile.
This fragility has led to the crowding out of public spending on essential infrastructure and social
services. Additionally, while growth and poverty reduction have advanced, the improvements in
inclusion have lagged behind, raising serious questions about whether India can sustain the
high-quality per capita growth needed for a rapid ascent to prosperity in the coming decades.

Key Points and Context:

●​ Overall Economic Improvement:

○​ Post-1980, India has experienced significantly better economic performance.
●​ Fiscal Management Issues:
○​ A marked rise in fiscal deficits and foreign borrowing in the 1980s led to a severe
crisis in 1991.
 ○​ Public sector inefficiencies and massive subsidies contributed to fiscal slippage.
○​ Although reforms improved the fiscal situation, long-term consolidation remains
elusive.
●​ Growth Versus Inclusion:
○​ Growth and poverty reduction have improved, but the gains in inclusive
development have been less impressive.
○​ A key future challenge is whether India can sustain per capita growth of 6–8%
per annum (aggregate growth of 7–9%) for the next three decades.
●​ Looking Ahead:
○​ The foundations necessary for a rapid, sustained ascent to prosperity are still
being laid, as discussed in subsequent chapters.

Below is the final, easy-to-understand, context-rich, and visually engaging set of notes on the
provided content. You can copy these notes into your document editor and convert them into a
PDF later.

MOVING INDIA TO A NEW GROWTH

TRAJECTORY
(Comprehensive Notes with Context and Key Insights)

1. Infrastructure Investment – A Critical Imperative

Context & Key Message:​
A 2014 report by the National Transport Development Policy Committee (NTDPC) highlighted
that Indian Railways’ share of total infrastructure investment needed a major boost—from about
0.4% of GDP to at least 1% by 2017–22, and then maintained for the next 15 years. This
increase is essential not only for better connectivity between inland areas and ports (boosting
trade) but also for overall manufacturing productivity and sustainable environmental outcomes.

●​ Railways Investment:
○​ Target: Increase from 0.4% to 1%+ of GDP.
○​ Current status: Improvement to about 0.5% of GDP, still below the target.
●​ Total Transport Investment:
○​ Need to raise overall transport investment (public and private) by an additional
~1% of GDP.
 ●​ Impact:
○​ Enhances manufacturing productivity.
○​ Improves trade by linking inland nodes with ports.
○​ Contributes to a sustainable environment.

2. The Growth Challenge – Sustaining High Growth Rates

Context & Key Message:​
Achieving a sustainable growth rate of 8.5–9% per annum over the next 15 years requires a
continuous, substantial increase in domestic savings and investment. This “big push” means
moving away from business-as-usual policies toward coordinated, decisive policy actions.

●​ Sustained Growth Requirements:

○​ Continuous enhancement of domestic savings and investment.
○​ Coordinated policy reforms to drive a new growth trajectory.

3. Historical Trends in GDP Growth (Table 1 Overview)

Context & Key Message:​
Table 1 provides a snapshot of real GDP growth across different sectors and periods. The
overall picture shows fluctuations across decades, with notable shifts in:

●​ Agriculture:
○​ Consistently lower and more volatile growth.
●​ Industry & Manufacturing:
○​ Strong post-independence performance that slowed in the mid-1960s, revived in
the 1980s, and then experienced fluctuations.
●​ Services:
○​ Consistent acceleration over time, driving overall GDP growth.
●​ Consumption & Investment:
○​ Private and government consumption, along with gross fixed capital formation,
are key drivers.
●​ Other Macroeconomic Variables:
○​ Inflation (WPI and CPI), merchandise account balance, and current account
deficits also play significant roles.

The data underscore that while there has been overall progress, sectoral shifts and
macroeconomic vulnerabilities have persisted.
4. Domestic Savings and Investment Trends (Table 2
Overview)
Context & Key Message:​
India’s growth has largely been financed by domestic savings rather than heavy reliance on
external borrowing. Over time:

●​ Savings:
○​ Increased from about 11% of GDP (1950–65) to over 33% (2003–08).
○​ Both household (financial and physical) and corporate savings have grown.
●​ Investment:
○​ Domestic investment rose from 12% to about 34–38% of GDP in the same
periods.
●​ Key Insight:
○​ The upward trend in savings and investment has fueled long-term domestic
growth.
○​ However, there have been occasional phases of stagnation, often linked to
deteriorating government finances.

5. Sectoral Drivers of Growth Since Independence

Context & Key Message:​
Different sectors have played distinct roles in India’s growth story:

●​ Industry:
○​ Initially robust after independence but slowed in the mid-1960s due to restrictive
policies and external shocks.
○​ Recovered in the 1980s with renewed focus on competitiveness.
●​ Services:
○​ Showed continuous acceleration over the decades and now drives much of the
overall GDP growth.
●​ Agriculture:
○​ Exhibited modest and volatile growth due to weather-related issues.
○​ Periods of overall GDP slowdown (e.g., 1965–81 and 2014–19) were
accompanied by reduced agricultural growth.
●​ The 1965–81 Slowdown:
○​ Caused by adverse factors such as drought, wars, oil shocks, and policy
missteps (e.g., during the Emergency).
○​ Highlighted the critical need for growth-friendly policies.
Overall, the evolution of sectoral growth emphasizes that while industry and services have
spurred growth, agriculture’s performance remains crucial for the broader economy.

6. Policy Reforms and the Growth Trajectory

A. Reversal of the 1965–81 Slowdown

●​ Factors:
○​ The restrictive policies of the 1960s–80s closed the economy at a time when
neighboring Asian countries were liberalizing.
●​ Impact:
○​ Emphasizes the importance of sustained, growth-friendly economic policies for
low-income countries.

B. Reforms in the 1980s and 1990s

●​ 1980s:
○​ Initiation of reforms aimed at increasing domestic competitiveness.
●​ Early 1990s:
○​ Comprehensive reforms after the 1991 crisis:
■​ Industrial deregulation.
■​ Opening the economy to foreign direct investment and trade.
■​ Real devaluation of the rupee.
■​ Reduction in tax rates and rationalization of the tax system.
■​ Deregulation of interest rates and reduction in statutory pre-emptions.
■​ Improved coordination between fiscal and monetary policies.
●​ Outcome:
○​ These measures were enthusiastically received by the private sector.
○​ They led to increased investment, robust export growth, and higher overall
growth rates in subsequent decades.

C. Challenges in the Late 1990s and Post-NAFC Period

●​ Late 1990s:
○​ Temporary loss of growth momentum due to the East Asian financial crisis, fiscal
setbacks, and a slowdown in agriculture.
●​ Post-NAFC (North Atlantic Financial Crisis):
○​ Similar challenges emerged again, underscoring the need for coordinated and
holistic policy responses.
○​ Emphasis on avoiding policy silos and excessive centralization.
7. The Golden Era of Growth (2003–08)
Context & Key Message:​
A distinct phase of high growth followed 2003–04, marked by several favorable developments:

●​ Key Drivers:
○​ Restructuring by domestic industries.
○​ Reduced nominal and real interest rates.
○​ Fiscal consolidation (declining fiscal deficits).
○​ Strong global demand and ample global liquidity.
●​ Outcomes:
○​ Broad-based growth across agriculture, industry, and services.
○​ Private corporate and public sector savings surged, boosting overall domestic
investment.
○​ Monetary policy innovations (like market stabilization schemes) helped keep
inflation in check despite volatile capital flows.
●​ Infrastructure Investment:
○​ Increased by about 1% of GDP, with a nearly equal split between public and
private sectors.
○​ While road investments increased, railways remained stagnant—a key point
needing further policy attention.

8. The Current Deceleration (2012–18)

Context & Key Message:​
After nearly a decade of high growth, India experienced a slowdown from 2012 to 2014,
influenced by several interrelated factors:

●​ Overshooting Stimulus:
○​ An overly aggressive monetary and fiscal stimulus during the NAFC led to
inflation and current account pressures.
●​ Monetary Tightening:
○​ Subsequent tightening dampened growth, especially as food inflation remained
high.
○​ Minimum Support Prices (MSP) for agriculture increased faster than the
wholesale price index, contrasting with the 2003–08 period.
●​ Fiscal Challenges:
○​ The fiscal stimulus, marked by tax cuts and increased subsidies but stagnant
capital spending, further fueled demand pressures and inflation.
○​ Slow withdrawal of the stimulus led to crowding out of private investment.
●​ Interest Rate and Investment Issues:
 ○​ High nominal interest rates, combined with subdued growth, squeezed corporate
profitability and investment.
○​ The share of interest payments rose relative to corporate profits.
●​ Widening Current Account Deficit (CAD):
○​ The CAD expanded due to global headwinds (lower global export growth), high
domestic inflation, increased gold imports, and incomplete pass-through of
international oil prices.
○​ An appreciated real effective exchange rate and continued opening of the capital
account (including destabilizing debt flows) worsened the situation.
●​ Industrial Growth Slowdown:
○​ Since 2011, industrial growth has decelerated.
○​ Discrepancies in data (e.g., differences between the Index of Industrial
Production and Annual Survey of Industries) complicate the picture.
○​ A revival of the manufacturing sector toward double-digit growth is seen as
essential for future high overall growth.

9. Key Tables and Data Overviews

●​ Table 1: Real GDP Growth – An Overview
○​ Provides sectoral growth rates and macroeconomic indicators over several time
periods.
●​ Table 2: Savings and Investment Rates – An Overview
○​ Breaks down domestic savings (household, private, and public) and investment
rates as a percentage of GDP across different periods.
●​ Table 3: Minimum Support Prices (MSP) and Wholesale Price Index (WPI)
○​ Compares MSP with WPI over several years to highlight trends in agricultural
price support and its inflationary impact.
●​ Table 4: Infrastructure Spending – Recent Developments
○​ Shows infrastructure investment trends, including the division between public and
private spending and their respective shares of GDP.
●​ Table 5: Balance of Payments
○​ Presents detailed data on merchandise exports/imports, trade balance, current
account balance, and capital flows.
●​ Table 6: Indicators of Industrial Activity
○​ Compares industrial output growth based on the IIP, ASI, and gross value added
in manufacturing.

10. Policy Implications and Future Challenges

Key Takeaways:

●​ Need for Coordinated Policy Action:

○​ Future growth requires breaking away from business-as-usual approaches.
○​ Policies must be interlinked, avoiding silos and over-centralization.
●​ Focus on Infrastructure and Investment:
○​ Increasing railways and overall transport investment is crucial.
○​ Enhanced private sector participation in infrastructure can drive manufacturing
and trade.
●​ Maintaining Macroeconomic Stability:
○​ Prudent fiscal policies and a stable inflation environment remain essential.
○​ Managing the current account deficit within prudent limits is vital.
●​ Revitalizing the Manufacturing Sector:
○​ Restoring robust manufacturing growth is critical for sustainable, high-quality
growth.
●​ Learning from Past Slowdowns:
○​ The slowdown of 2012–14 reinforces lessons from the high-growth phase
(2003–08):
■​ Avoid overshooting stimulative policies.
■​ Ensure timely and effective withdrawal of fiscal stimulus.
■​ Support private corporate investment through better fiscal management
and monetary policy.
●​ Broader Economic Inclusion:
○​ Despite high growth, equitable distribution of benefits remains a challenge.
○​ Continued attention is needed on poverty alleviation, quality improvements in
agriculture, and addressing regional disparities.

Final Thought
The content underscores that while India has made significant strides in terms of growth and
infrastructure development over the decades, sustaining high-quality growth in the future will
depend on a balanced and coordinated approach to fiscal policy, infrastructure investment, and
industrial rejuvenation. Addressing the lingering issues—from investment gaps in critical sectors
like railways to the challenges of maintaining macroeconomic stability—will be key to moving
India to a new growth trajectory.

Below is a final, visually engaging set of notes in an easy-to-understand narrative-plus-bullet

format. These notes summarize the key insights from the provided content on industrial activity,
savings/investment trends, fiscal and external policies, and infrastructure requirements. You can
copy this text into your document editor and later export it as a PDF.
Moving India to a New Growth Trajectory
(Key Indicators, Policy Insights & Future Directions)

1. Indicators of Industrial Activity (TABLE 6)

Context:​
Table 6 provides a snapshot of India’s industrial performance over the period 2000–01 to
2016–17. It combines data from the Index of Industrial Production, the Annual Survey of
Industries (ASI), and Gross Value Added (GVA) measures.

Key Insights:

●​ Growth Fluctuations:
○​ Early 2000s saw moderate growth (around 5–7% in industrial indices).
○​ Mid-2000s experienced a surge (e.g., 13–15% growth in some GVA measures
during 2004–05 and 2006–07).
○​ Post-2008, growth became volatile—with noticeable slowdowns (e.g., industrial
output growth falling to around 2.5–4.4% in later years).
●​ Data Discrepancies:
○​ Different indicators (IIP, ASI, GVA) sometimes present diverging pictures,
complicating policy assessments.
●​ Takeaway:
○​ The high growth of the mid-2000s was not sustained, contributing to the “Great
Slowdown” during 2012–14.
○​ Restoring robust industrial performance is crucial for future high-quality growth.

2. Macroeconomic Developments and the Great

Slowdown (2012–14)
Context:​
The slowdown after nearly a decade of high growth was driven by several overlapping factors.

Key Points:

●​ Overshooting Stimulus:
 ○​ Excessively stimulative monetary and fiscal policies led to inflation and pressures
on the current account.
●​ Tightening & Its Impact:
○​ Subsequent monetary tightening reduced growth momentum.
●​ Fiscal Challenges:
○​ A delayed withdrawal of fiscal stimulus and stagnant public investment further
dampened growth.
●​ Industrial Slowdown:
○​ With industrial output not keeping pace (as seen in the data discrepancies), a
sustained recovery hinges on revitalizing manufacturing.

3. Domestic Savings and Investment Trends

Context:​
India’s growth has historically been driven by high levels of domestic savings rather than heavy
reliance on external borrowing.

Key Points:

●​ Rising Trends:
○​ Gross domestic savings rose from about 11% of GDP (1950–65) to over 33%
(2003–08).
○​ Investment rates similarly increased from 12% to roughly 34–38% of GDP.
●​ Financing Growth:
○​ Most economic growth has been financed by domestic savings.
●​ Policy Implication:
○​ To achieve sustained growth (8.5–9% per annum), further enhancements in
savings and effective channeling into productive investments are essential.

4. Fiscal Policy and Tax Collections

Context:​
Effective fiscal management and improved tax revenue are vital for providing the resources
needed for investment and growth.

Key Points:

●​ Public Sector Savings:

○​ Government savings turned negative post-2008–09 fiscal stimulus, while public
enterprises’ savings have also declined from their 1990s/2000s levels.
 ●​ Subsidy Reductions:
○​ Recent measures have reduced central subsidies (e.g., energy subsidies), but
political pressures remain a risk.
●​ Tax Revenue Trends:
○​ The gross tax/GDP ratio dropped from a peak of 12% to about 10% but may
improve with the continued roll-out of the GST and further tax system
simplification.
●​ Overall Goal:
○​ Reducing the overall fiscal deficit and government borrowing (targeting around
4–5% of GDP) will help free up domestic savings for productive use.

5. External Savings and Export Growth

Context:​
While domestic savings drive growth, prudent management of external flows is crucial for
external sustainability.

Key Points:

●​ Export Performance:
○​ Until around 2012, Indian exports grew rapidly, boosting their share in GDP;
however, since then, export growth has slowed.
●​ Current Account Deficit (CAD):
○​ A widening CAD has been a concern, driven by high domestic inflation, increased
gold imports, and incomplete pass-through of international oil prices.
●​ Projections & Targets:
○​ To sustain high growth, exports should aim to reach 30–35% of GDP by
2030–35.
○​ A sustainable CAD of around 2–2.5% of GDP requires steady net capital inflows
(approximately 4.0–4.5% of GDP in projections).
●​ Long-Term Implication:
○​ The need for external capital is projected to rise significantly, underscoring the
importance of a balanced mix of equity and debt flows.

6. Manufacturing and Industrial Policy

Context:​
Manufacturing is viewed globally as the engine for rapid and sustained growth, but India faces
challenges in this sector.
Key Points:

●​ Crucial Role of Manufacturing:

○​ High-growth countries like Japan, Korea, and China have leveraged
manufacturing for sustained economic miracles.
●​ Challenges in India:
○​ Despite a large labor force, Indian manufacturing struggles with regulatory
impediments in land and labor usage.
○​ Competitiveness issues persist in labor-intensive sectors.
●​ Required Reforms:
○​ Accelerating manufacturing growth to near double-digit levels is vital.
○​ Reforms must focus on reducing regulatory constraints, improving infrastructure,
and maintaining a competitive real exchange rate.
●​ Policy Focus:
○​ Integrate urban land and labor reforms, enhance the efficiency of power,
transport, and logistics, and nurture a skilled workforce to support modern
manufacturing.

7. Infrastructure Investment: The Backbone of Growth

Context:​
Robust infrastructure is critical for supporting manufacturing, trade, and overall economic
expansion.

Key Points:

●​ NTDPC (2014) Findings:

○​ Indian Railways’ share of total infrastructure investment should rise from ~0.4%
to at least 1% of GDP by 2017–22.
○​ Overall, transport investment (including railways) must increase by around an
additional 1% of GDP.
●​ Broader Infrastructure Needs:
○​ Projections call for infrastructure spending to climb from 5–5.5% of GDP to
approximately 8% in the 2020s.
○​ Critical sectors include electricity, roads, bridges, ports, airports, and logistics.
●​ Public vs. Private Roles:
○​ While the private sector can drive investments in communications, ports, and
airports, the public sector must remain the primary investor in railways, roads,
and power.
●​ Impact:
 ○​ Enhanced infrastructure will improve manufacturing productivity, link inland
regions to ports for increased trade, and contribute to environmental
sustainability.

8. Policy Implications and Future Growth Objectives

Combined Message:​
For India to sustain high-quality growth over the next 15–20 years, a coordinated and
multi-pronged policy approach is essential.

Key Strategies:

●​ Enhance Domestic Savings & Investment:

○​ Increase household and corporate savings while efficiently channeling these into
productive investments.
●​ Prudent Fiscal Management:
○​ Reduce fiscal deficits and government borrowing to free up resources for growth.
●​ Infrastructure Boost:
○​ Prioritize infrastructure investments—especially in railways and transport—to
support industrial expansion and trade.
●​ Support Manufacturing Competitiveness:
○​ Implement regulatory reforms, improve labor and land policies, and ensure a
competitive real exchange rate.
●​ Balanced External Management:
○​ Sustain export growth and manage the current account deficit with steady net
capital inflows.
●​ Synchronized Policy Coordination:
○​ Avoid siloed decision-making; ensure fiscal, monetary, and supply-side policies
work in harmony to foster sustainable growth.

Final Thought
These comprehensive notes illustrate that while India has made substantial progress over the
decades, reaching a new growth trajectory will require bold reforms and coordinated policy
efforts. Addressing infrastructure gaps, revitalizing manufacturing, and ensuring fiscal and
external sustainability are the key pillars that will determine the future success of India’s
economic transformation.