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With each passing day, it is getting easier to believe that the acceleration in India’s economic growth from around 6% to 8% is here to stay. The hard part is trying to explain why this has happened. How this is explained is important since it has a bearing on our future policy.
As per conventional wisdom, India’s growth accelerated to around 6% in the nineties from the historical rate of 3.5% because ‘reforms’ had unleashed the pent-up energies of India entrepreneurs long shackled by the socialist raj. It slowed subsequently because ‘reforms’ had lost momentum. The last three years’ spurt in growth is the fortuitous result of a global economic boom. Once the world economy slows down, we will he back to 6% growth–unless we proceed with ‘second generation’ reforms.
However, each of these propositions bristles with problems. It is not true that economic growth rate accelerated to 6% in the nineties. In fact, research has shown that the ‘structural break’ in India’s economic growth occurred not in the early nineties but in the eighties, when economic growth accelerated to close to 6%. The growth in the first decade after reforms was not significantly different from the growth rate in the eighties. The ‘reforms’ in the sense of market-oriented or even pro-business policies did not commence overnight in 1991, but had commenced earlier. Economic policies in the nineties merely helped consolidate an underlying trend.
Subsequently, the world economy slowed down in 2001–03, which put the brakes on Indian economy. Then came the crucial change, an acceleration to 8% in 2010–06. This cannot be ascribed to any fresh bout of ‘reforms’ or even to the global boom. There have been important structural changes in the economy. One is the rise in the savings rate from 23.5% in 2000–01 to 29.1% in 2004–05. Most of this increase has come from the turnaround in public savings. Thanks to the rise in the savings rate, the economy has moved on to an altogether higher investment rate. The second structural change is enhanced export competitiveness, reflected in the rising share of exports. The Total exports (trade plus invisible receipts) / GDP ratio has risen sharply from 16.9% in 2000–01 to 24.6% in 2005–06. A third, less noticed change in recent years is financial deepening. The bank assets / GDP ratio rose from 48% in 2000–01 to 80% in 2005–06 on the back of a surge in bank credit.
One factor is common to these three structural changes: lower interest rates. The decline in interest rates has helped fiscal consolidation, it has boosted firms’ competitiveness and it has led to a huge increase in retail credit. Lower interest rates have been made possible by the rise in inflows on both current and capital accounts. The rise in inflows, in turn. reflects growing overseas confidence in India’s economic potential — confidence created by two decades of economic growth of 6%. The sharp depreciation in the rupee in the nineties undoubtedly helped but it is worth recalling that a trend towards rupee depreciation was underway in the eighties itself.[1] Which of the following statements is INCOREET according to the passage?
(A) Growth rate after reforms was similar to that in the eighties
(B) Reforms in economic policies had started prior to the nineties
(C) Structural changes in the Indian economy have helped lower interest rates
(D) Increase in public savings rate has contributed to higher investment rates[2] The passage DOES NOT discuss
(A) factors contributing to lower interest rates
(B) the importance of world economy on India’s reform rates
(C) dimensions of structural changes in India’s economic reforms
(D) the role of the public sector in India’s reformsasked in JMET
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