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By Alakh Niranjan Singh, CFA & Rajendra Dichpally
India has been a growing economy since its independence. The earliest systematic data available on India’s growth begins from 1950-51. We tried to analyze India’s economic progress on the lines of total and sectoral compositions under different regimes. We took the figures of GDP at factor cost which excludes indirect taxes and subsidies. This gives the real picture of economic activity. The source of data has been the Economic Survey 2021 published by the Government of India. We found four distinct regimes.
The first regime has been the era of the mixed economy starting from the fiscal year 1950-51 and ending in the fiscal year 1990-91 when Prime Minister Narsimha Rao, with the help of Finance minister Dr. Manmohan Singh started the process of liberalizing the economy. This era was characterized by planning the economy, licensing of productive activities, protecting domestic industries from foreign competition, and public sector undertakings playing the dominant economic role. Clearly, this was not the era of pure competition in which there is free entry and exit of firms in the market, and the public sector plays a minimal role. Entry was controlled by the Government through licensing of industries, and foreign competition was barred through high tariffs. This strategy achieved compounded annual GDP growth rate of 4.07% for the entire 40 years. As can be seen in the table below, agricultural growth had been the slowest at 2.75% while the manufacturing sector grew fastest at the rate of 5.37%.
The second era was the era of liberalization when licensing of industries was relaxed, and some foreign competition was promoted through reduced tariffs. India became the signing member of GATT, now called the World Trade Organization. The membership required India to reduce tariffs. This kind of gradual liberalization brought good results and India’s GDP grew at the compounded rate of 5.74%. This was significantly higher than 4.07% achieved during the previously controlled economic management era. This phase was led by growth in the trade, transport & communication sector, which grew at the rate of 8.23%, followed by the finance and banking sector which grew at the rate of 7.68%. Agriculture did not benefit as its growth rate of 2.88% remained almost the same as that of the previous era.
The third regime of economic history began when Dr. Man Mohan Singh became the Prime minister in May 2004. This had been the phase of fastest economic progress as India achieved a solid compounded annual GDP growth rate of 7.74% for the decade. The finance and banking sector led the growth of the economy by growing at the rate of 11.49% per annum for the whole decade, followed by the manufacturing sector’s growth rate at 9.34%. Farmers also saw prosperity as the agriculture sector grew at the rate of 6.51%. Farmer’s real income almost doubled during the decade. The sector that relatively lagged was the trade, transport & communication sector which grew at the rate of 4.84%. This is absolutely not a slow annual growth rate for the decade.
The fourth regime began with the victory of the BJP when Prime Minister Narendra Damodardas Modi come to power in May 2014. This phase is marked by the significantly reduced growth rate of the economy. It has been now seven years of economic management by PM Modi marked by disastrous economic policies like demonetization, stifling GST, Corona lockdowns, and the new Farm Act instigating farmers’ protest. All these bad economic measures showed highly negative results and India’s compounded annual GDP growth rate fell significantly from 7.74% achieved just before to 4.51% for the last seven years. Though the slowest growth rate of 2.96% has been in the trade, transport, and communication sector, the biggest downfall fall has been in the manufacturing sector as its growth rate fell from 9.34% to just 3.77%. Looks like a high and faulty GST policy has been the main reason for this disaster in the manufacturing sector. GST rate on most goods has been 24% which implies that the manufacturer will first pay 24% of its sales revenue as taxes which would be collected after sales have been completed. During this cash collection cycle, the manufacturer will have to pay interest also on that money which was paid as GST. Thus, the real burden of GST on the manufacturer is far more than what the government collects as tax revenue. Clearly, no manufacturer can grow under such a burdensome regime. Disaster in the manufacturing sector was followed by disaster in the finance and banking sector whose growth rate fell from 11.49% to 6.45%. Farmers also saw their growth rate falling by more than 50% from 6.51% to 3.15%. This slower growth had been bringing discontent in them for years and the new Farm Act triggered their burst. That’s why they have been protesting against the new Farm Act for about a year, but the government has not been listening to them.
To conclude, we can say that the economy did the best under the regime of Dr. Manmohan Singh. There was prosperity all around. The high GDP growth was shared more fairly amongst different sectors of the economy. The present NDA government is undoing the things that were achieved by the previous UPA government. The future looks gloomy.
source https://nrinews24x7.com/a-compendium-of-indias-economic-progress-since-independence/
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