A few months back, the former RBI Governor, Raghuram Rajan sounded a note of caution “India is dangerously close to the “Hindu rate of Growth”. India’s GDP growth in the third quarter of 2022-23 had plummeted to 4.4%.
Economist Raj Krishna formally coined the term ‘Hindu rate of growth’ in 1978 hinting at the low average annual GDP growth rate of India, which largely comprise the Hindu population, in the first three decades of economic planning (1951-1980), of just about 4%. It was in stark contrast to the high annual growth rates of 7% plus clocked by the Asian peers then.
Cut to 2023, India is among the fastest-growing economies in the world. After hitting a low 4.4% growth rate in the September quarter of 2022-23, the Indian GDP growth rate bounced back to 6.1% for the March quarter. When global economies in US and Europe are struggling with recession, the Indian economy seems resilient and among the fastest growing.
From a Hindu rate of growth to becoming the fastest-growing economy, the journey of the Indian economy has been remarkable.
Let us take a trip down memory lane.
India’s independence was a turning point for the Indian economy. Taking inspiration from the USSR’s five-year plans, Prime Minister Jawaharlal Nehru set up the planning commission in 1950 to develop, execute and monitor the five-year plans, which were essentially centralized and integrated national economic programs.
The 1950s – A Shuddery Start
Food shortages and mounting inflation were major challenges then. So, the foremost five-year plan (1951-1956) emphasized the development of agriculture as well as price stability.
The Planning Commission set a target growth rate of 2.1% for the period; the Indian economy outperformed its target by growing at a faster rate of 3.6%. The good performance of the agriculture sector, which comprised 62% of overall GDP in 1950-51, was crucial. The monsoon was good and irrigation projects including the Bhakranangal and Hirakud dam initiated spurred agriculture GDP.
The Second Plan (1956-61) accorded low priority to agriculture and focused on rapid industrialization based on the Mahalanobis strategy of development. It emphasized the growth of basic heavy industries to accelerate the rate of capital formation and thereby economic growth. Five steel plants were set up in the cities of Bhilai, Durgapur, and Rourkela along with hydroelectric power projects.
However, an ambitious import-substitution industrialization strategy increased imports sharply causing current account deficit/BoP (Balance of payment) crisis for the first time since independence. The actual CAGR (4.27%) during the second plan was slightly lower than the targeted rate of 4.5%.
In all, during the 1950s the GDP grew at CAGR of 4.0% while agriculture grew by 3.0%.
The 1960s – Murphy’s law unravels
After the experience of the Second Plan, it became clear that agriculture cannot be ignored. A special emphasis of the Third Plan (1961-66) was on raising agricultural output. However, the war with China (1962) and Pakistan (1965) shifted the monetary focus towards defense and triggered inflation.
Food shortages from the twin droughts of 1965 and 1966 accentuated price rises while foodgrain imports depleted India’s foreign exchange reserves. From an economic growth perspective, the third plan was a miserable flop – the actual growth rate was only 2.4% as against the target growth rate of 5.6%.
Long-term planning was suspended given the crisis and annual plans were drawn instead for three years (1966-99) with a focus on food security and higher agricultural production. The Green Revolution in the late 60s triggered by the adoption of a high-yielding variety of seeds, irrigation facilities, and extensive usage of fertilizers improved food grain production and helped become self-sufficient in food in a decade.
During the 1960s Indian GDP continued to grow at a CAGR of 4.0% akin to the 1950s with agricultural growth falling to 2.3%.
The 1970s –Inflation punch
Two factors were causing instabilities in the Indian economy – fluctuations in agricultural production and uncertainties about foreign assistance. India was dependent on foreign countries for importing foodgrains (especially US), capital goods, and foreign aid to step up the investment rate in the country. The emphasis of the fourth plan (1969-1974) was therefore on ‘growth with stability’ and towards self-reliance. Various programs focused on raising agricultural output and maintaining buffer stocks of food grains.
Indo-Pak War of 1971 and the Asian oil crisis of 1973 stoked inflation while poor monsoons in the last three years of planning upset agricultural output. The target growth rate for the Fourth Plan was 5.7% but the actual growth rate was 3.3%.
Against the backdrop of the economic crisis fuelled by run-away inflation and the existence of poor in large numbers, the Fifth Plan (1974-78) proposed ‘removal of poverty’ (Garibi Hatao) and ‘attainment of self-reliance’. The plan however stressed the rising rate of GDP growth to lift people out of poverty.
Soon after the Emergency period was over in 1977, the Janata Government won elections and terminated the five-year plan prematurely, and put forward a plan for 1978-83 with an emphasis on employment. The Government lasted for only two years and Congress Government came back to power. The target growth rate (1974-79) was 4.4% and the actual growth rate was 4.8%.
In the 1970s, the GDP growth rate grew at a CAGR of 3.0% – lower than in the 1950s and 1960s. Agricultural GDP growth was the lowest in any decade since independence at 1.5% p.a.
The 1980s – Breaking Free from the Past
The Sixth Plan (1980-85) marked the beginning of economic liberalization and the end of the Nehruvian socialistic era. Special emphasis was given to raising exports and improving the long-term balance of payments position of the economy. Specific action programs like IRDP, TRYSEM, and NREP were introduced to remove poverty and create employment. Broadly, the sixth Plan could be deemed a success. As against the target growth rate of 5.2%, it achieved a growth rate of 5.7%.
The Seventh Plan (1985-90) spelled out a new long-term development strategy of 15 years to create employment opportunities while improving the productivity level of industries by upgrading and developing technology.
The plan was very successful as the economy recorded a 6% growth rate as against the targeted 5% with the decade of 80’s breaking-free from the stigma of the’ Hindu growth rate’.
A high rate of investment was a major factor in improving economic growth. While initially the private savings financed most of India’s investment, by the late 1980s India relied increasingly on foreign borrowing. This trend led to a balance of payments crisis in 1990. The eighth plan was postponed by two years because of political uncertainty at the Centre.
The rate of growth improved in the 1980s – clocking a CAGR of 5.6% – led by Services. Services grew at a solid 6.6% on a CAGR basis. It had overtaken agriculture in terms of sectoral composition of GDP commanding a share of 46% as against 35% for agriculture.
The 1990s – Changing Gears
By June 1991, the balance of payment situation worsened; the rupee was devalued by around 18% in July 1991. In addition, widening fiscal deficit, industry recession and inflation baffled the economy. To combat the bad economic scenario, the Eighth Plan (1992-97) took drastic fiscal and economic reforms under the leadership of then Prime Minister P V Narasimha Rao.
The gradual opening of the economy was undertaken to correct the expanding deficit and foreign debt. Inspired by the export-led growth strategy of Hong Kong, South Korea, and Singapore to transform their underdeveloped economies into developed ones, trade became an engine for future growth.
During the plan period, it managed to clock a growth of 6.8% (the highest so far) as against the target growth of 5.6%. External finance situations also improved.
The Ninth Plan (1997-2002) prepared under the United Front Government depended on the private sector – India as well as foreign (FDI) – to raise production and income levels operating under the discipline of competition and free markets. The Government in turn played the role of facilitator – by involving itself in the social sector as well as infrastructure.
As against the target growth of 6.5%, the actual growth was 5.4%. The service industry was by now the new mover and shaker of the Indian economy with more than 50% share in the country’s GDP.
The 2000s – Full throttle and a global surprise
Till now, plans usually set national-level GDP growth targets. In the Tenth plan (2002-2007), besides the 8% national growth target, state-specific development targets were set for seeking balanced development of all states. As against the plan target of 8%, actual growth was slightly lesser at 7.6%.
By now, India had come into global prominence with its GDP growth being among the fastest-growing economies in the world. Foreign investors were investing in India, and the industrial sector was responding well to competition. Savings and investment rates increased making it possible to grow at faster rates.
While the GDP growth rates were high, it was perceived that the growth was not sufficiently inclusive for many groups, especially SCs, STs, and minorities.
The Eleventh Plan (2007-2012) therefore emphasized ‘faster and more inclusive growth’ after UPA came back into power. It set a target annual growth rate of 9% for the period. It started on a good note in the first year. However, thanks to the Global Financial Crisis, the growth decelerated to 3.1% in 2008-09.
The inflation rate crossed double digits in 2009 and 2010 after crude oil prices hit an all-time high of $ 147 per barrel in July of 2008. To put the economy back on track, the Government announced several fiscal stimulus packages in 2008 and 2009 which increased the fiscal deficit once again – thereby putting further pressure on prices. The drought of 2009 stoked food prices further.
While the economy bounced back to post a growth rate of 7.9 per cent and 8.5 per cent in 2009-10 and 2010-11 respectively, it decelerated to 5.2% in 2011-12 due to sovereign debt crisis in Europe as well as domestic factors such as tight monetary policy and supply-side bottlenecks.
As a result, the average annual GDP growth rate during the Eleventh Plan was 8 percent, which was lower than the target, but highest ever.
The 2010s – Demonetization-led Slowdown
The Twelfth plan (2012-2017) commenced at a time when the global economy was going through a second bout of financial crisis. The priority was to bring the economy back to rapid growth path while ensuring that the growth is both inclusive and sustainable.
It proposed a two-pronged strategy of bringing the macroeconomic imbalances under control and pushing for structural reforms. It set a target of 8 per cent growth for the plan period and almost achieved the target – growing at 7.5% on a CAGR basis.
Also, by 2015, Planning Commission was replaced by NITI Aayog thereby bringing an end to the concept of five-year plans. India’s GDP growth rate accelerated and improved consistently during the years 2013-14 to 2016-17 from 6.4% to 8.3% respectively.
Demonetization came in Nov ‘2016. Ever since, India’s GDP started losing growth momentum – GDP growth dipped to an 11-year low of 3.9% in 2019-20. While the Indian economy shrunk by 5.8% during 2020-21 impacted by the COVID pandemic, it bounced back to a 9.1% growth rate in 2021-22.
The 2020s – India’s time?
While in 2022-23, Indian GDP grew 7.2%, S&P Global Ratings has forecast a GDP growth rate of six per cent for the fiscal year 2023-24, which is the highest among the Asia Pacific economies.
If this growth momentum continues, it is only a matter of time before the Indian economy becomes a $ 5 trillion economy as well as the third largest in the world.