1. I am indeed very privileged for being given this opportunity to speak on the “Development Policy of India” at this august gathering of the United Nations Association of Hungary. I am particularly grateful to Professor Dr. Mihaly Simai, President of the Association and to Dr. Ervin Gömbös, Secretary General for inviting me here today.
2. Lot has been written on the subject of development as well on the issue of the policy mix that would lead to it. Most of the problems confronting mankind today stem from lack of development and the resultant paucity of economic opportunities. Some of today’s conflicts flow out of a perceived sense of deprivation, inaccessibility to education, health, shelter, food and gainful employment. In this background, it is interesting to see how a country of more than a billion strong emerging into a free world after a history of colonialism and consequent underdevelopment seeks to raise the living standards of its people and give them the benefits of a reasonable standard of living. The story of India’s development policy has unfolded over the last 57 years. It has its ups and downs. It is the story of how a people speaking a large number of different languages, professing a wide variety of religions are progressing in a democratic polity under the rule of law and a free press.
3. As Independence drew near, the Indian National Congress Party which spearheaded the independence movement in India along with the leading Indian entrepreneurs came up with several different plans of how the country’s development was to be brought about. These planners felt that the State must emerge as a mobiliser of savings as well as an important investor and owner of capital. The State was viewed as the main instrument that would bring about the economic change through the policy of regulation and control of economic activity. In this thinking the Indian planners were greatly influenced by the Soviet experience and they believed that the saving rate in the economy as well as the growth rate could be increased by investing heavily in the capital goods and heavy industries at the expense of the consumer goods sector. As the private sector neither had the technical skills, nor the capital for such heavy industries and also since the gestation period for such industries is long, it was felt necessary that the investment would have to be undertaken by the State.
4. India also followed the policy of import substitution and gave a low priority to foreign trade. This thinking mainly stemmed from the belief that the terms of trade were loaded against the developing countries and primary producers and that their export prospects were severely limited. It was felt that the prices of exports depended upon world factors and were therefore given to large variations. The pessimism associated with the export led growth was shared by the development economists of that time. These economists felt that there was a tendency for exports of primary producing countries to lag behind the rate of increase in international trade in general.
5. The early development policy was also deficient by not laying enough emphasis on public investment in agriculture. This was the result of the prevailing view then that a growing labour force in developing countries could only be absorbed in industries and that in the early stages of industrialization it was necessary for agriculture to contribute to the building up of a modern industry by providing cheap labour. The main objective seemed to be a faster development of the industrial sector. Therefore, India’s development policy in the early years according to Professor Bimal Jalan suffered from a neglect of exports and trade opportunities, excessive protectionism and import substitution, undue reliance on fiscal controls and the inefficiency of the public sector. The fall in India’s share of world trade was dramatic. It fell from 2.4 per cent in 1947 to only 0.4 per cent in 1980s. The rate of growth achieved during the period 1951 – 1984 was about 3.8 per cent per annum and 4 per cent between 1989 and 1990.
6. Most development economists in the 1940s and the 50s believed that it was not possible to overcome under-development without State intervention. Paul Kuznets showed that the process of economic development was always accompanied by shift in the labour force from low productivity agriculture to high productivity manufacturing. Such a shift required higher degree of capital accumulation. Similarly, NURKSE expressed that poor societies remain poor because they could not save enough in view of their low per capita incomes. Therefore, it was necessary to have large investments in social overhead capital areas such as transport, communications, power and urban infrastructure. Such investments could only be made by the State by mobilizing and investing resources. The success of Keynesian activism during the great depression in the Western countries and the success of the Marshall plan in the quick reconstruction of the war damaged economies of Western Europe also suggested State activism. In India, the state thus emerged as a planner, saver, investor and Manager in order to quicken the pace of development.
7. The development strategy followed by India from Independence to 1990 can be debated. While on the one hand India was able to build reasonable infrastructure of road, ports, power generation and irrigation as well as outstanding educational institutions, its growth started falling below that of some of the countries of East Asia. It became self-sufficient in agriculture, which was a far cry from the middle 1960s when it had to import substantial amount of food grains to feed its people. It emerged as an exporter of rice, wheat and sugar. But the denial of foreign investment and a share in the expansion of the world trade as well as access to cutting edge technology, Indian industry and agriculture did not come up to the full potential of development.
8. This became particularly notable as India approached the last decade of the 20th century. It entered the last decade with severe macro economic and balance of payment crisis. The gross fiscal deficit of its central and State Governments in 1990-91 was as high as 9.4 per cent of GDP and current account deficit was 3.1 per cent of GDP. The inflation rate exceeded 10 per cent and by the summer of 1991 foreign exchange reserves were below two weeks worth of imports. The debt led growth of the 1980s could no longer be sustained, the industrial growth was a paltry 0.7 per cent and the growth of the GDP was 1.3 per cent. This forced the then new Government led by Prime Minister Narasimha Rao and his Finance Minister Manmohan Singh to have a fresh look at the development strategy of India. Government then decided to take a series of initiatives in respect of policies relating to the following areas:
   1. Industrial licensing
   2. Foreign Investment
   3. Foreign technology agreements
   4. Public sector policy
   5. Monopolies and Restrictive Trade Practices Act and
   6. Aligning India’s tariff structure with rest of the world.
9. Industrial Licensing PolicyThe Government felt that in order to achieve the objective of industrial development post 1990, it would have to allow entrepreneurs to make investment decisions on the basis of their own commercial judgment. The attainment of technological competence and international competitiveness would make it necessary to allow the private sector an enabling environment where it would be able to swiftly respond to fast changing external conditions which characterize today’s manufacture and trade. The Government moved from exercising control to one that would provide help and guidance to entrepreneurship. The industrial licensing system moved away from the concept of capacity licensing. The areas reserved solely for the public sector were opened for the private sector. The industrial licensing was abolished for all industries except some specific areas such as petroleum, alcoholic drinks, tobacco, coal, paper, hazardous chemicals as well as drugs and pharmaceuticals.
10. Foreign InvestmentAn effort was made to establish a closer relationship between the domestic and foreign industry so that foreign investment could be invited in high priority areas requiring large investments and advance technology. Indian entrepreneurs were also encouraged to acquire technological capability from abroad where required without having to go through laborious permission processes from the Government. Similarly, they could hire foreign technicians as well as get into agreements for foreign testing of indigenously developed technologies without requiring prior clearance. The policy on the public sector saw very substantial changes. It was felt that the public sector had shown insufficient growth and productivity, poor project management, over-manning, lack of continuous technological upgradation and inadequate attention to R&D and human resource development. In addition, it had shown a very low rate of return on the capital invested. Therefore, public sector units were given greater degree of management autonomy. Also Government explored disinvestment for those public sector units which served no public purpose and were incurring heavy losses. It specified that in future public investment in this sector would only be made in infrastructure, mineral resources, on strategy considerations or where private sector investment was adequate.
11. Monopolies and Restrictive Trade Practices ActIndian entrepreneurs had found themselves handicapped in enjoying the economies of scale as per the MRTP Act they were prevented from doing so to prevent concentration of economic power and due to prohibition of monopolistic and unfair trade practices. The government now felt that its interference in the MRTP Act in investment decisions of large companies had become deleterious and had adversely affected the industrial growth. The thrust of future policy would only be on controlling unfair or restrictive business practices.
12. These decisions have resulted in great acceleration in the GDP growth of the country. While India recorded an average growth rate of 3.5 per cent from 1972 to 1982 and 5.2 per cent from 1982 to 1992, during the period 1992-2002, it recorded an average growth rate of 6 per cent which accelerated to 8.9 per cent and beyond in the quarter ended 31st December, 2003. On the basis of the purchasing power parity India has shot up to be the fourth largest economy after US, China and Japan. This has been achieved in spite of the international financial crisis out of which India came out unscathed, adverse security environment, two major earthquakes, cyclones and the worst drought in four decades. India is at present implementing the world’s largest single highway project by building a four-lane highway, a total of 13,000 kms linking its various major commercial centres. Similarly, efforts to further develop the infrastructure are taking place as well as incentives for improvements in information technology, communications and bio-technology.
13. The new Government which took over in May, 2004 along with coalition partners has come out with a Common Minimum Programme for economic and social development. The programme has seven clear objectives:
    1. Maintaining a growth rate of 7 to 8 per cent per year for a sustained period;
    2. Providing universal access to quality, basic education and health;
    3. Generating gainful employment in agriculture, manufacturing and services and promoting investment;
    4. Assuring 100 days employment to the bread winner in each family at the minimum wage;
    5. Focusing on agriculture and infrastructure;
    6. Accelerating fiscal consolidation and reform;
    7. Ensuring higher and more efficient fiscal devolution.
14. The Government feels that one of the greatest assets of the country is the human resources. Therefore, empowering the people, specially poor with universal access to education and health and facilitating their full participation in the growth process through gainful employment will enhance people’s welfare. The Planning Commission, accordingly, has given priority to education for the children so that each child obtains at least eight years of education in school. Allocations have also been made for mid-day meal for children, drinking water as well as medicines at fair prices and a Doctor within a reasonable distance. The other thrust areas that have been outlined are:
    1. Doubling agriculture credit in three years, accelerating the completion of irrigation projects and investing in rural infrastructure.
    2. Providing farm insurance and livestock insurance.
    3. Improving agricultural product markets and promoting agri-businesses.
    4. Adequate drinking water
    5. Expanding water harvesting, watershed development and minor irrigation and micro irrigation schemes
    6. Enhancing public and private domestic and foreign investment in industry to create new jobs
    7. Greater space for small scale industries to thrive and grow
    8. Augmentation of electricity generation
    9. Universal access to telecommunication facilities, more housing for the poor
    10. Access to medical care through health insurance and
    11. Encouraging savings and protecting the savings of senior citizens.
15. With regard to education, the Government intends to upgrade 500 technology institutes over the next five years. In the health sector, the universal health insurance would be redesigned so that it can become more affordable. In the agriculture and rural economy, the emphasis would be on flow of credit, irrigation and rural infrastructure, restoration of old water bodies, water harvesting, flood control, diversification into areas such as horticulture, floriculture and oilseeds. As we are already self-sufficient in wheat and rice, emphasis will be laid on agricultural research and development, the setting up of small farmers’ agricultural business consortiums and an Agricultural Insurance Company would help mitigate risk in the agriculture sector. With regard to development of infrastructure, the government will remove the inadequacies through a mix of policy and fiscal measures. The Government would set up inter-institutional groups to see that power projects go in for speedy execution. Similarly, emphasis is also being laid on container transport terminals as well as rural housing.
16. In the industrial sector, in order to make investment climate attractive to investors, a proposal to establish an Investment Commission has been made. The commission would have a broad authority of the Government to engage, discuss and invite domestic and foreign businesses to invest in India. National Manufacturing Competitiveness Council will become a Forum for policy dialogue to energise and sustain the growth of manufacturing industries. The council will be asked to suggest measures for enhancing competitiveness.
17. The Government is committed to the orderly development and functioning of a capital market, a number of steps have been taken to broaden and deepen the capital markets as well as to strengthen their regulatory regime. It is further proposed that the procedures and operations would be made simpler and quicker for FIIs (Foreign Institutional Investors). Investment ceilings for FIIs in debt funds have been raised. Banks with strong risk management systems and greater latitude in their exposure to the capital market will be encouraged. Other steps mooted are alternative trading platform for small and medium entrepreneurs to raise equity and debt from the capital market and initiate steps to integrate the commodities’ markets and the securities market.
18. The Finance Minister intends to establish a Board for reconstruction of public sector enterprises. The Board will advise the Government on the measures to be taken to restructure public sector enterprises including cases where disinvestment, closure or sale is justified. The Government intends to introduce Value Added Tax from 1st April, 2005.
19. As part of the development policy, the Government has always felt the necessity of encouraging science and technology. Over the last 2000 years, India’s contribution to astronomy, mathematics and to medicine is well known. India’s first Prime Minister Pandit Nehru had a deep faith in science and technology as a powerful tool of socio-economic transformation. Sustained investments made in higher education and science and technology have helped build premier institutions of learning which have contributed engineers, architects, doctors, software engineers for the country. Parts of India are now becoming providers of human capital for global research. Some of the areas where there have been substantial achievements are pharmaceuticals, agriculture, remote sensing satellites, and contribution to the “connectivity revolution”. Most of the Indian technology is focused on how to get more from less. This would be relevant to other developing countries also. The State Governments are committed to providing conducive policy environment to promote entrepreneurship, a culture of innovation and access to technology. India would also like to achieve ideal regime of intellectual property rights which strikes a balance between private incentives for innovators and the public interest of maximizing access to the fruits of innovation. With the progressing shifting of the research and development centres from the developed to the scientifically advanced developing nations such as India, we are likely to see more fruits of techno-globalization percolate in the urban and rural areas which will have strong implications for social, cultural, political and economic development.
20. The rise in India’s share in the world exports of non-factor services along with the increasing importance of these exports in India’s current account suggests the possibility that India would become a leading exporter of non-factor services. Software exports have been a very promising area. Commencing from a very low pace of US $ 126 million in 1990, software exports have experienced an annual growth rate of more than 50% to reach US $ 6.32 billion in 2001. Software is a case of rapid growth in an export oriented industry largely driven by market forces.
21. Other services where India could enjoy competitive advantage are travel and tourism. India, at present attracts a mere 2.2 million tourists. But realizing the potential that exists in this sector would necessitate a larger investment both in infrastructure and transportation. A large number of Indian institutes of higher education are of world standards. These pertain to information technology, business management, engineering and medicine. Increasing number of students from India’s neighbouring countries are seeking admissions in these institutions. To fully gain from the demand for studying in these institutions from foreign students, India will have to market these better as well as come up with a fee structure that reflects the costs of running these institutes which are presently highly subsidized by the Government. Third area is healthcare. Over the last decade, a large number of private hospitals with the latest technology and wherewithal for healthcare have opened in India. A large number of patients not only from the Gulf and South East Asia but from Europe and America come for seeking their healthcare here at a fraction of the cost at what such services would be available in their own countries. This is an area where India is earning substantial foreign exchange as well as rapidly upgrading its services and opening up avenues of employment. To this is linked the alternative systems of medicines such as Ayurveda which are becoming increasingly popular.
    • Since July 2003, India has become a net creditor to IMF, after having been a borrower in the past.
    • The Government has written off debts of US $ 30 million due from seven heavily indebted countries as part of the “India Development Initiative” announced in February 2003. The external debt to GDP ratio has improved significantly from 38.7% in 1992 to 20% in 2003. This is one of the lowest among developing economies. External debt in September 2003 was US $ 112.5 billion. Of this long-term NRI deposits is $ 27 billion, commercial borrowings $ 24 billion, multilateral debt $ 31 billion, and bilateral debt $ 18 billion.
    • One of the world’s largest food producers (600 million tons).
    • World’s largest producer of milk, sugarcane and tea.
    • Second largest exporter of rice, wheat, fruits and vegetables. India produces 30 million tons of fruits and 59 million tons vegetables.
    • Food grain production expected to reach 220 million tons in 2003-04. The buffer stock of food grains had reached a record volume of 59 million tons in December, 2001 and stood at 25 million tons in December 2003.
22. To sustain the present growth rate and to further develop the country, there are certain key areas which are receiving attention of Indian economists and the Government. These are a) further lowering the import tariffs; b) reform of the labour laws; c) privatization of enterprises that have no compelling social rationale to be in the public sector; and d) finally reform of laws of bankruptcy.

India’s development in the first 40 years of its independence has been slow but steady. India has built up technical expertise as well as reasonable infrastructure to accelerate its development. From 1990 to 2004 the growth rate has been round 6 per cent. With the kind of liberal and forward looking economic policies that are now being pursued by the Government aimed at integrating India in the globalised trading system, there is no doubt that the Indian economy will develop at a faster pace is well set to realize its potential.