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Development perspectives in the indian economy

India's development effort, beginning with the first Plan, has emphasized raising the domestic savings and investment rate in order to achieve higher growth and faster industrialization. The second Plan provided the requisite elements of industrialization for this strategy, stressing the increased domestic manufacture of capital goods through the development of "basic" industries.

Given India's ample natural resources, it was recognized that the key to industrialization lay, first, in establishing a manufacturing capacity in heavy machinery, heavy electrical equipment and machine tools. As this machinery became available it would be possible, gradually, to manufacture everything else. The next four stages of the logic of development were: steel to make machinery and electricity to drive the machinery; engineers, technologists, technicians and skilled workers to convert raw material resources into machinery and power; the expansion of applied S&T research to solve practical development problems and also to expand the S&T knowledge stock through fundamental or basic research; and a sufficient number of persons with S&T capabilities to undertake the above tasks. Increasing the supply of S&T manpower came to be considered "the only secret" of fast development for a big country like India.¹

The above logic of development is reflected in the structural changes envisaged in the second and subsequent Five-Year Plans in favour of relatively more growth in the basic and capital goods industry, emphasis on import substitution in steel, fertilizers and oil, the high priority given to higher and technical education, and an increasing allocation of resources to R&D in government institutions.

The strategy aimed at faster growth and self-reliance was characterized by an investment pattern in favour of the development of basic industries and physical infrastructure. The public sector played a significant role in their development, increasing the allocation to higher and technical education and the development of central institutions; this was accompanied by a host of policies and measures for the promotion of indigenous industry and technology, the growth of domestic savings and investment, the diversification of industry and trade in favour of manufactures and high value-adding products, and self-sufficiency in essential items like food. The basic thrust of the strategy was the acceleration of the process of domestic capital and technological accumulation. It was also oriented to strategic and security considerations.

The economic progress of India over the last four decades is in many ways impressive. The long-term growth rate is now well over 4 per cent annually, compared to only 1 per cent in the decade before independence. Since independence, India's real Gross National Product (at factor cost and at 1970/71 prices) increased from Rs. 178,410 million in 1951/52 to Rs. 612,010 million in 1984/85, in a period covered by six Five-Year Plans and three annual plans. This was also accompanied by many important structural changes in resource mobilization, and in the patterns of value added and foreign trade.

The process of structural change was a result of the accelerated pace of capital accumulation, which had more than doubled over the last 30 years. The rate of aggregate gross investment (domestic capital formation), which was only 11.9 per cent in 1951/52, had increased to 23.4 per cent in 1984/85, the public and private sector contributing almost equal shares. It is important to note that the bulk of this increased investment was made through domestic (gross) savings, which increased from 10.0 per cent in 1951/52 to 22.1 per cent in 1984/85, as table 1 shows. Net foreign aid contributed as little as 4 per cent of aggregate investment under the recent Five-Year Plans.² Thus, significant progress in financial self-reliance has been achieved since the beginning of the planning period. The projected contribution of foreign inflow in the comprehensive seventh Plan (1985-1990) is little more than 5 per cent, although recently import policy has been liberalized in a significant way. Many other indicators, such as the marginal role of foreign private investment, suggest that India's performance in respect to "self-reliant development" compares very favourably with that of other developing countries.³

The manufacturing sector was the most dynamic sector, recording a growth rate of 6 to 7 per cent during the review period and increasing its share of the GNP to over 15 per cent in 1984185.4 The manufacturing sector was not only growing faster but also growing in complexity, in that the share of basic and capital goods industries in the gross value added of the manufacturing industries increased substantially to over 68 per cent, at 1960 prices, in the period 1960-1980 (table 2). The share of technology-linked - i.e. capital goods -industries increased from 20.3 to 27.4 per cent over this period, and that of the electrical and non-electrical machinery industries from 9.0 to 16.8 per cent (table 3). This emerging industrial structure is highly conducive to S&T development.

Furthermore, there was substantial growth in, and structural transformation of, India's foreign trade sector over this period. Exports grew from Rs.7,329 million to Rs.115,548 million between 1951/52 and 1984/85. This increase was due to diversification in product composition as well as in destination. The share of the manufacturing sector in total exports increased by over 50 per cent. The growth of manufactured exports contributed substantially to the growth of the manufacturing sector and to the increasing "economic openness" of the economy.⁵ Similarly, there was change in the import basket in favour of material and capital inputs. Another development in imports has been the significantly reduced dependence on strategic products such as food, fibres, fuel, fertilizers, steel, and, indeed, machinery (table 4).

Table 1. Net foreign aid utilized by India: share in aggregate (gross) and public sector investment (capital formation) (Rs. million at current prices)

Source: Ministry of Finance, Economic Survey, various issues; Central Statistical Organization (CSO), National Accounts Statistics, various issues; Planning Commission, Sixth Five Year Plan, 1980-85, 1981.

a. Data in column 2 do not include suppliers" credits and commercial borrowings.
b. Adjusted for errors and omissions.
c. Annual average, actual not readily available.
d. Provisional.
e. Includes drawings under IMP Trust Fund.
f. Quick estimate.
g. Parentheses point to the projections, including Rs. 20,000 of private corporate borrowings.

Table 2. Changing significance of capital goods industries: share of different industry groups in total^a value added (gross, at 1960 prices), 1960, 1970, and 1980

Source: CSO, "Principal Characteristics of Selected Industries in Organised Manufacturing Sector, 1960 to 1980," December 1980 (mimeo). a. Total of all selected industries in Annual Survey of Industries.

Table 3. Direction of change in capital goods industries: share of different capital goods industries in total^a value added (gross, at 1960 prices)

Source: CSO, "Principal Characteristics of Selected Industries in Organised Manufacturing Sector, 1960 to 1980," December 1980 (mimeo).

a. Total of all selected industries in Annual Survey of Industries.

From the viewpoint of technological self-reliance, the most significant substitution was that of imports of machinery and equipment by domestic production. Considered in relation to capital formation in the form of machinery and equipment, import dependence fell from about 70 per cent in 1950/51 and over 60 per cent in 1960/61 to about 20 per cent by the end of the 1970s, and again to about 10 per cent in recent years; this works out to only 6.7 per cent in 1982/83, the last year for which data could be obtained on a comparable basis.

It should be noted, however, that in spite of these notable achievements, the performance of the Indian economy has fallen short of its planned targets as well as of its real potential. For instance, in every Plan except the last, performance has not matched the targets, in terms of either overall growth or the individual growth of major sectors. Nevertheless, many similarly placed developing countries recorded much slower growth rates and a higher dependence on the rest of the world than did the Indian economy.

There is growing evidence that the productivity of many sectors in India is low compared not only with the major developed countries but also with many developing ones. Thus, the increase in the incremental capital-output ratio (ICOR) over the Plan periods shows a decline in the capital productivity ratio.⁶ There is also evidence to suggest that factor productivity grew very marginally in the Indian economy.⁷ The growth of labour productivity (value added per employee) in industries is estimated to be around 1.5 per cent during the period 1965-1980. The growth was slower in basic and intermediate industries and negative in consumer goods industries, but higher in capital goods industries. However, this indicator varied considerably over the period and the overall trend may, therefore, not be statistically significant.

The energy-GNP intensity in the economy has also increased. Growing pressures on India's balance of payments, particularly a slower growth of exports in recent years, is also a reflection of the loss of international competitiveness over the period.

Table 4. Import substitution in strategic products in India (percentage share of imports in total supplies/availability)

Source: Planning Commission, Sixth five Year Plan, 1980-85, 1981, p. 15; Seventh five Year Plan, 1985-90, 1985, chap. 3; Ministry of Finance. Economic Survey, various volumes.

a. Means net exports.
b. Imports as a percentage of machinery component of gross investment on calendar year basis. c. Col. 12/col. 2. d. Net imports in throughput (financial year).
e. For 1951/52.

It is not surprising, therefore, that in the seventh Five-Year Plan (1985-1990), the major concern of Indian planners was to focus on measures for raising productivity and on the reformulation of a strategy to improve the international competitiveness of Indian industry.

Since the second Five-Year Plan, policy emphasis in India has been on import substitution and industrialization based on heavy industries. The government's various policy instruments, notably trade policy, fiscal policy, industrial licensing policy, and technology policy, were aimed in this direction, in both the public and private sectors. In the phase of industrialization, the public sector played a dynamic role, taking considerable initiative in setting up new heavy industries and infrastructure.

The development of technology through investment in physical and human capital was a key component of the planning strategy; technological progress was to engineer growth and lead to social transformation.

The Indian economy has shown a significant increase in "economic openness" in recent years compared to the beginning of the 1970s, as indicated by the increased share of foreign transactions in GDP, collaborations, and investment.⁸ The seventh Plan (1985-1990) lays special emphasis on the development of human resources through programmes of education, health, social welfare, and S&T. It recognizes the importance of "the technology revolution and the growth of human capital and communication" for the "advance technology which can . . . generate resources for accelerated growth."⁹

S&T in development plans and policies

The initial plans emphasized the creation of an institutional infrastructure in S&T. The aims of government policy for the development of S&T in India were set forth in the Scientific Policy Resolution of March 1958, which reflected the government's emphasis on the pure, applied, and educational aspects of S&T, on creating conditions that would lead to an increase in the supply of quality scientists, and on ensuring that the benefits derived from the acquisition and application of scientific knowledge would be enjoyed by the people.

The third Plan (1961-1966) indicated that, as a result of developments during the first two Plans (1951-1956 and 1956-1961), an extensive network of institutions engaged in scientific research had come into existence at a large number of centres. The third Plan allocated about 1 per cent of total public sector outlays for S&T (table 5).

Table 5. Five-Year Plan outlays (public sector) in India: aggregate and S&T sector
(Rs. million at base year or current prices)

Source: Planning Commission, Five Year Plans.

In line with the development strategy of the second Plan, in the third Plan the priorities of "self-reliance" were stressed primarily in terms of concentrating on the expansion of the capital goods and machine-building industries, together with the corresponding development of mining, power and transport, on a scale that would enable the country to build up sufficient capacity to produce domestically the bulk of the capital goods and machinery it required for high investment.¹⁰ In emphasizing "self-reliance" in the capital goods sector, the planners' aim was to apply this to several dimensions- material, financial, and technical. The third Plan also laid stress on "speedy and extensive utilization of scientific research."

The thrust of the fourth Plan (1969-1974) was on finalizing the time-scale for the achievement of "self-reliance," in terms of reducing net foreign aid to half of the then current level by the end of the Plan and eliminating it soon thereafter. This Plan, like the Third Plan, also allocated about 1 per cent of aggregate public sector outlay to S&T.

The draft fifth Plan (1974-1979) envisaged a comprehensive S&T Plan, covering all sectors of the economy. The National Committee on S&T (NCST) set up by the government was to undertake the task of formulating the programme context of the Plan and to advise on the policy framework, covering both S&T and research, design, and development (RDD).

The draft fifth Plan included several programmes aiming at technological growth in selected fields and envisaged a public sector outlay of Rs.4,190 million (1.1 per cent of total), compared to Rs.1,423 million in the fourth Plan (0.9 per cent of total). The total Plan and non-Plan outlay envisaged was Rs.15,682 million, compared to Rs.3,736 million in the previous Plan, amounting to a quantum jump of over 300 per cent. The final fifth Plan revised the total outlays upward. The outlay allocation for S&T was also raised (to Rs.7,676 million) in revision and was around 2 per cent of the total.

The development plans also emphasized the expansion of the base of higher learning and technical education. The public sector played the major role in this. The substantial public sector expenditure devoted to university education and other educational programmes can be inferred from its percentage of total expenditure on education (table 6), which increased from 18 in the first Plan to 27 and 26 in the second and third plans respectively, and to over one-third in the successive Five-Year Plans. In technical education, the percentage increased from 14 in the first to 18 in the second and 21 in the third plans. A large institutional base and a substantial stock of technical manpower was built up during this period. In the successive Five-Year Plans the share was 11-13 per cent, increasing from Rs.1,060 million in the fourth Plan to Rs.2,780 million in the sixth Plan.

As a result, there was a phenomenal increase in the number of technical and science degree-holding graduates and postgraduates in all sciences, and in agriculture, engineering, and medicine (tables 7 and 8). The stock of S&T (economically active) manpower (table 9) increased in aggregate from 188,000 in 1950 to 450,000 in 1960, 1,174,500 in 1970, 1,780,500 in 1980, and 2,406,700 in 1985, and is estimated to reach 3,022,300 in 1990. As a ratio, this was an increase from a mere 0.53 to 3.21 per thousand of population between 1950 and 1985.

Table 6. Plan expenditure/outlay on education under the Plans (Rs. million, rounded at current/base year prices)

Source: Ministry of Education and Culture, A Handbook of Educational and Allied Statistics; Planning Commission, Sixth five Year Plan, 1980-85.

a. Included under other categories of general education.

Table 7. India: Number of degrees awarded annually in science and technology/engineering since 1950

Source: University Grants Commission, University Development in India, part 2, 1983.

Table 8. India: Annual Ph.D. awards since 1950/1951

Source: University Grants Commission, University Development in India, Part 2, 1983.

By the end of the fifth Plan, S&T education, training and R&D infrastructure and manpower stock, and a range of industries had been set up in the country. The sixth Plan (1980-1985) recognized that "political independence has been matched by increasing technological independence in many areas." The Plan, however, also pointed to several deficiencies and mismatches, a lack of competitive capability, insufficiency of S&T, and areas with no exploitative base. It called for "a detailed strategy for a major technological breakthrough appropriate to our resources and changing national environment."

Table 9. India's stock (economically active) of scientific and technical manpower, 1950-1990

Source: Cols. 2-6: CSIR Division of Scientific and Technical Personnel; Cols. 7-9: Planning Commission, Sixth Five Year Plan, 1980-85, p. 220, and Seventh five Year Plan, 1985-90, p. 123; A. Rahman, Science and Technology in India, New Delhi: NISTADS, 1984. Population estimates from CSO, Statistical Abstract, 1982; 1985 estimate based on growth rate 1971-1981.

a. Estimated.
b. Figures in parentheses refer to total stock, economically active plus unemployed.

Table 10. Outlay for first to sixth plans (Rs. million)

The Plan also observed that the major investment areas in the plans required a much more deliberate and sustained application of S&T than hitherto. It called for "well-planned measures" in this regard so that technology "should strengthen the nation and reduce vulnerability."¹¹ The Plan emphasized the need to establish effective linkages in organizational forms and policy frameworks and the effective utilization of S&T to meet economic and social objectives.

The sixth Plan included several programmes, especially for "indicative thrust areas," and allocated Rs.19,194.1 million out of a total outlay of Rs.1,800 billion for the period 1980-1985. This was in addition to Rs.14,477.8 million non-Plan outlays, which brought the total to Rs.33,671.9 million. Though in percentage terms the public sector Plan outlay allocation (Rs.8,652 million) worked out at 0.9 per cent, the total amount allocated, given in normal terms, compared very favourably to allocation in the previous plans (table 10).¹²

Thus, the sixth Plan, whose outlay was about double that of the fifth Plan, aimed at technological breakthroughs.

During the sixth Plan period, the government issued the comprehensive Technology Policy Statement (1983), stating its objectives with regard to the development of indigenous technology and the efficient absorption and adaptation of imported technology appropriate to national priorities and resources. Its aims, inter alia, are making maximum use of indigenous resources, providing a maximum of gainful and satisfying employment, minimizing capital outlay, and promoting modernization, fuller capacity utilization, and energy efficiency. The Policy Statement noted the need for a system of efficient monitoring, review, and guidance, and a scheme of incentives and disincentives.

The seventh Plan (1985-1990) was formulated at a time when there was widespread concern about raising productivity in the country to meet the need for faster growth and a "resource crunch." The Plan emphasized the consolidation and modernization of the S&T infrastructure and the promotion of certain "thrust areas," and also the undertaking of work in frontline areas of new technology that had emerged. The Plan pointed to the need for S&T missions and linkages of S&T with the rest of the economy. Against the anticipated public sector outlay of about Rs.11,579 million in the sixth Plan (1980-1985), the seventh Plan envisaged an outlay of Rs.24,660 million, which works out at 1.4 per cent of aggregate public sector outlay for the Plan period 1985-1990.¹³

Table 11 shows S&T allocation in India's recent plans - the fifth (1974-1979), the sixth (1980-1985), and the seventh (1985-1990) and reveals the national priorities in this sector, indicating the focus of the public sector on strategic and security areas. The direct share of the socio-economic sectors -industry, steel, energy, and agriculture has been marginal. Atomic energy and space, which together accounted for 37.5 per cent of the allocations in the fifth Plan, had a smaller share in the sixth Plan (25.8 per cent), but more than recovered in the seventh Plan (41.2 per cent). The Council for Scientific and Industrial Research (CSIR) and the Department of S&T were allocated 18.4 per cent of the outlay in the fifth Plan, which fell to 15.9 per cent in the sixth Plan but rose to as much as 35.6 per cent in the seventh Plan. The seventh Plan envisaged increased linkages between S&T and industry and services.

Table 12, however, clearly shows that, compared to the projected growth in GDP in the Plan and the share of the socio-economic sectors in GDP, their direct allocations have remained disproportionately low, especially those for agriculture, manufacturing, and services.

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