Urban and Infrastructure Development Unit-I

1. Urban and Infrastructure
Development
Unit-I
BTCI06007

2. Unit-I
Introduction to Economic Reforms and Infrastructure
Development:
• Performance of the States: a review, growth
performance,
implications
for
inter-state
inequality, implications for poverty.
• The determinants of growth in the states: effect of economic
reforms on regional inequality, investment ratios at the state
level, plan expenditure, human resource and quality of
infrastructure.
• Strategy for slow growing states: Development of economic
and social infrastructure, the problem of state finances, the
policy environment and governance, the role of the Central
Government,

3. Economic Reforms

4. Economic Reforms
• Economic Policy of government influences
growth of industry and agriculture, through it
monetary and fiscal measures; it redefines the
roles of public and private sectors.
• Since 1985 the basic thrust of the economic
policy has been to assign a greater role to
private sector, and a number of changes in policy
were introduced with regard to industrial
licensing, export-import policy, fiscal policy
and foreign investment in India.

5. Economic Reforms

6. Economic Reforms
• In the words of the then Prime Minister Mr.
Rajiv Gandhi in 1985,
• “ Public Sector has spread in too many areas
where it should not be… We will be
developing our public sector to undertake jobs
that the private sector cannot do. So that it can
expand and economy can grow more freely.”

7. Economic Reforms

8. Economic Reforms
• The Industrial Policy Statement 1991 was a
major deviation from the dominant role as
signed to the public sector hitherto. Statement
1991 was an attempt towards liberalization of
the economy, was designed to unshackle the
economy from the cobwebs of unnecessary
bureaucratic controls. It has objectives
including:

9. Economic Reforms
• “ Government will Endeavour to abolish the
monopoly of any sector or any individual
enterprise in any fields of manufacture, except on
strategic or military considerations and open all
manufacturing activities to competition”.
• “ The government will ensure that the public
sector plays its rightful role in the evolving
socio-economic scenario of the country.
Government will ensure that the public sector is
run on business lines….”

10. Economic Reforms

11. Economic Reforms
• In the light of the industrial Policy
Statement, industrial licensing was abolished for
all projects except for a short list of industries
related to security and strategic importance, social
reasons, hazardous chemicals, and overriding
environmental reasons
• Other measures of liberalization include
amendment of MRTP Act, permission for foreign
technology agreements in high priority
industries, liberal provisions for hiring foreign
technician and enhancing the limit of foreign
direct investment.

12. Economic Reforms

13. Economic Reforms
• In the light of the Industrial Policy
Statement, Industrial licensing was abolished
for all projects except for a short list of
industries related to security and strategic
importance,
social
reasons,
hazardous
chemicals and overriding environmental
reasons.
• Similarly, all manufacturing activities except
those
of
strategic
and
military
considerations, have been open to competition.

14. Economic Reforms

15. Economic Reforms
• The Memorandum of Understanding
(MOU) System is to be given greater thrust to
greater autonomy to hold them accountable.
Equity holding of the government in the public
sector units have been offered to
banks, financial institutions and public sectors
mutual funds to raise resources and to
introduce competitiveness in the working of
public sector units.

16. Economic Reforms

17. Economic Reforms
• Measures
regarding
liberalization
of
government
policy
towards,
highway,
bridges,
telecom
services, telecommunication manufacturing
equipments, have been announced by the
Central as well as many state government with
the objective of unleashing market forces to
introduce competition, to invite private sector
participation and to reduce burden on
government finances.

18. Economic Reforms

19. Economic Reforms
• Similarly as a measure towards liberalization
in the financial sector a number of private
banks have been given licenses, serious fiscal
and monitory policy announcements have been
made.

20. Economic Reforms
• Financial sector including capital market has witnessed a
number of reforms like,
• freeing of interest rates on debentures
• abolishing of the office of the controller of Capital Issue
(CCI) and
• freeing pricing of capital issues, permissions for setting
up of the private mutual funds and also
• permit foreign mutual funds to operate in India.
• Empowering Securities and Exchange board of India
(SEBI) with more power for ensuring the orderly
development of the capital market; opening up of the
insurance sector to private players despite heavy resistance
from employees. opening up of telecom sector and power
sector & allowing 100 % foreign direct Investment.

21. Economic Reforms

22. Economic Reforms
Pubic Enterprises : Size and Growth
• Public Sector in India has witnessed a phenomenal growth
during the last four decades since independence; public
enterprises at the centre have increased from 5 units of
investment of Rs 30 crore in 1950 to 237 units with the
investment of Rs 2, 73,700 Crore During 1997-98.
• However, the involvement of public sector in all sectors
have come under criticism in the recent years due to their
low productivity, high cost and dismal return on capital
employed.
• Public enterprises showed a profitability of 14.53 percent.
And net profitability of 4.11 percent. Profitability has to be
analyzed considering that public enterprises are also
expected to fulfill certain social objectives,

23. Pubic Enterprises : Size and Growth

24. Economic Reforms
Profitability of Public Enterprise
• Sector-wise analysis of profitability indicates that gross
profitability has declined for various sectors except those
for power as well as petroleum companies; agro base and
textile enterprises reported loss.
• Further the net profitability reduced over the years for
engineering,
fertilizers,
chemicals
and
pharmaceuticals, textiles and agro based industries and
while power and petroleum sectors maintained their positive
profitability.
• The poor performance of public enterprises can be due to
poor project management, overmaning, inadequate
attention to R & D and Human resources
development, and the policies of the government.

25. Profitability of Public Enterprise

26. Economic Reforms
Privatization and Deregulation: Issues
• The role of public enterprise has undergone close scrutiny
in the developing countries, particularly in the 1980s. Many
government seem to have concluded that public enterprise
were not the ideal hybrids they had been made out to
be, only rarely did they combine the strengths of the public
and private sector, as originally expected and occasionally
they combine the worst of both.
• According to the world bank Report on Reform of public
Sector Management (1991), the state in a developing
country has tried to do too much through the public sector
or has assigned to public agencies tasks for which they were
ill suited, or has retained activities in public sector when
conditions justifying public management have changed.

27. Privatization and Deregulation:
Issues

28. Economic Reforms
Commercialization
• To be cost effective and to improve performance, public enterprise
have to run on businesses like principle and adopt the principles of
„Commercialisation‟ in their operations. This would require laying
down commercial goals and targets, introducing competitiveness
and providing autonomy for operations and making accountable.
• To quote from the world bank report (1991) “ experience
demonstrates that public enterprises‟ performance can be improved
without changing ownership- by assessing the firms clear
commercial goals, imposing a hard budget constraints, giving
manager the means and power to attain these goals, exposing the
enterprise to competition, rewarding the managers who achieve
objectives and sanctioning those who do not allowing persistent
poor performance to go out of business”
• The process of “commercialization‟ subjects public enterprise to
roughly the same conditions and signals as to a profit maximizing
firm operating in a competitive market.

29. Economic Reforms

30. Economic Reforms
Loss Making Enterprise
• Restructuring of Loss making enterprise including sick private units
taken over by the state is of national significance and is relatively a
difficult exercise. Such units are a drain of national resources and
require budgetary support every year.
• There is a urgent need to have plan for the revival of the viable units
either as ESOP(Employee stock ownership plan) or their merger
with a unit having market potential; and for the closure of unviable
ones.
• The Industrial Policy Statement provides for the referral of such
units to an institution like BIFR for the formulation of revival/
Rehabilitation schemes.
• There is a need for decision, through not politically palatable, on
restructuring of loss making units by involving the concerned
employee either by sale or by closure, though the former is
preferred.

31. Economic Reforms

32. Performance of the States
• Performance of the States: a review, growth
performance, implications for inter-state
inequality, implications for poverty.

33. Performance of the States
• Macroeconomic data for the 14 major Indian states
reveal the extent of inter-state differences in the pace of
economic growth in the past decade.
• Rising regional inequality, as measured by an increase
in the Gini-coefficient from 1986-87 to 1997-98, has
important implications for poverty reduction.
• Because of state specific characteristics, the divergent
patterns of economic growth witnessed in the 1990s do
not necessarily imply that the economic reforms at the
national level were biased. But to mitigate such
regional differences in the future requires deepening
reforms and addressing the specific deficiencies that
have decelerated growth in some states.

34. Gini-Coefficient

35. Performance of the States
• The impact of India’s economic reforms on
economic performance has been the subject of
much academic study and public debate in
India, but the focus has been largely on the
performance of the economy as a whole or of
individual sectors.
• First, balanced regional development has
always been one of the declared objectives of
national policy in India and it is relevant to ask
whether economic reforms have promoted this
objective.

36. Balanced Regional Development

37. Performance of the States
• Second, India’s federal democracy is
increasingly
characterized
by
regionalisation of politics, with politics at the
state level being driven by state rather than
national issues, and this makes the economic
performance of individual states an issue of
potential electoral importance.

38. Performance of the States
• This is particularly so because liberalisation has
eliminated many of the controls earlier
exercised by the central government and
thereby increased the role of state governments
in many areas that are critical for economic
development. Finally, since state level
performance shows considerable variation across
states, with many states recording strong
growth in the post-reforms period, it is
important to identify the reasons for their
success in order to replicate it in other states

39. Economic Liberalisation

40. Performance of the States
• The growth performance of the 14 major states in the
pre and post-reform period can be studied on the
basis of the available data on the Gross State
Domestic Product (GSDP) for each state Time series
data on the GSDP in each state are prepared by the
Statistics Department of state governments, but
these estimates do not add up to the GDP presented in
the national accounts.

41. Performance of the States
• Most Indian states are much larger than
most developing countries, and the national
accounts data of developing countries have
similar problems, but this has not deterred
development economists from comparing
performance across developing countries and
drawing lessons from inter-country variations.

42. Growth Performance

43. Growth Performance
• The growth rate of the combined GSDP of all the 14
states taken together increased from 5.2% in the
pre-reform period to 5.9% in the post-reform period.
• There is variation in growth performance across
states in both periods, with some states growing
faster than others, but the degree of dispersion in
growth rates increased very significantly in the
1990s.
• The range of variation in the first period was from a
low of 3.6% per year for Kerala to a high of 6.6% in
Rajasthan, which gives a ratio of 1.8 between the
highest and the lowest. In the second period, the range
increased from a low of 2.9% per year for Bihar to a
high of 8.2% for Gujarat, increasing the ratio to 2.8.

44. Growth Performance
• The increased variation in growth performance in
the 1990s reflects very different behaviour at
different ends of the spectrum of per capita
GSDP. Growth accelerated sharply for two
states at the upper end of the spectrum, i.e.
Gujarat and Maharashtra, but it actually
decelerated in Bihar, Uttar Pradesh and
Orissa, all three of which were not only at the
lower end of the per capita GSDP spectrum but
also had relatively low rates of growth to begin
with.

45. Growth Performance
• Only four states achieved relatively strong
growth with growth rates of GSDP in the
1990s above 6.0 per cent in the second period.
It is interesting to note that these states are
fairly well distributed regionally i.e. Gujarat
(8.2%) and Maharashtra (8.0%) in the
West, West Bengal (7.0%) in the East and
Tamil Nadu (6.0%) in the South.

46. Growth Performance

47. Growth Performance
• In addition, Madhya Pradesh and Rajasthan in the North and
Karnataka in the South all grew at 5.9%, which is almost at
the 6% level.
• An interesting feature of the performance in the 1990s is
that the popular characterisation of the so called
“BIMARU states” (Bihar, Madhya Pradesh, Rajasthan
and UP) as a homogeneous group of poor performers, a
grouping originally proposed in the context of observed
commonalities in demographic behaviour, does not hold as
far as economic performance in the post-reforms period is
concerned. Bihar and UP performed very poorly,
growing much more slowly than the average, but the
other two members of this group, Rajasthan and Madhya
Pradesh have performed reasonably well.

48. “BIMARU states”

49. Growth Performance
• Simplistic perceptions about the role of
geography in determining performance, such
as for example the view that it is only the coastal
States or the southern States that have done
well in the period of liberalization, are also not
universally valid. Orissa is a coastal State, but
its growth performance is very poor while
Madhya Pradesh and Rajasthan are both
heartland States and have performed
reasonably well. Only two of the Southern
States, Tamil Nadu and Karnataka, made it to
the top six in terms of growth of GSDP in the
1990s.

50. Growth Performance
• The remarkable performance of Gujarat and
Maharashtra, both of which grew at over 8 per
cent per annum in the 1990s, a rate normally
associated
with
“miracle
growth”
economies, deserves careful study. These states
clearly benefited the most in the post-reforms
period, but it is important to note that their
superior performance was not the result of any
conscious policy which limited the benefits of
liberalisation to these states,

51. “miracle growth”

52. Growth Performance
• Their superior performance must be attributed
primarily to the ability of these two states to
provide an environment most conducive to
benefiting from the new policies.
• Their experience, together with the experience of
the other strong performers should provide the
basis for identifying the critical ingredients of
success in accelerating growth, which should be
emulated by others.

53. Growth Performance
• The performance of Kerala in the 1990s also
deserves special mention. Kerala has long been
commended for its achievements in human
development,
especially
education
and
health, but it has also been criticised for under
performance in economic growth. However,
• Kerala‟s economic performance, which was
relatively lackluster in the 1980s, appears to have
improved markedly in the post-reforms period.
From a GSDP growth rate of 3.6% in the
1980s, much below the average for the 14
states, it accelerated to 5.6% in the 1990s.

54. Performance of Kerala

55. Growth Performance

56. Implications for Inter-State
Inequality
• The deceleration of growth in the poorer
states witnessed in the 1990s has important
implications for regional balance. Regional
differences in per capita income levels have
long been a matter of concern in India and
for good reason.
• The per capita GSDP of Punjab, the richest
state, is five times that of Bihar at the other
end of the spectrum.

57. Punjab, the richest state, is five
times that of Bihar

58. Implications for Inter-State
Inequality
• Balanced regional development has always
been stated as an objective in India’s plans
and although this objective has never been
quantified in terms of rates of convergence of
per capita GSDP, or a reduction in regional
inequality to some specified target in terms of
one of the inequality measures, the objective
surely implies that regional differences in
per capita incomes should narrow with
development, and in any case not widen.

59. Implications for Inter-State
Inequality

60. Implications for Inter-State
Inequality
• Concern was not with convergence in the sense
of underlying long term trends, but the actual
behaviour of per capita GSDP in the postreform period, compared with pre-reform
behaviour.
• From this perspective, the impact of the growth
process on regional inequality in the 1990s is
best seen by constructing a Gini-coefficient for
the total population of the 14 states assuming that
all individuals within a state have a gross income
equal to the per capita GSDP.

61. Implications for Inter-State
Inequality

62. Implications for Inter-State
Inequality
• This provides a measure of inequality in the
total population of the 14 states which
ignores the inequality arising out of the
unequal distribution within each state, and
focusses only the inequality which arises
because of inter-state differences in per capita
GSDP.
• It is not true that all the richest states got
richer relative to the poorer states.

63. Implications for Inter-State
Inequality
• Punjab and Haryana were the two richest states in
1990-91 but their growth rates of per capita GSDP
were not only lower in the 1990s than in the
1980s, but in both cases actually fell below the
national average. Except for Bihar, Uttar Pradesh
and Orissa, which grew even more slowly, all other
states narrowed the distance between themselves and
Punjab and Haryana. The deceleration in growth in
Punjab and Haryana in the 1990s deserves closer
study to understand the reasons for the loss of
growth momentum in these states that were among
the good performers in the 1980s.

64. Implications for Inter-State
Inequality
• Maharashtra and Gujarat, which are in the
high income group and were ranked just
below Punjab and Haryana at the start of the
1990s, accelerated very significantly and
achieved the fastest rates of growth in per
capita GSDP. These states clearly pulled
ahead of all other states.

65. Implications for Inter-State
Inequality
• Three of the poorest states, Bihar, Uttar
Pradesh and Orissa, which together account
for about a third of the population of the 14
states, fared very poorly in 1990s.

66. Implications for Inter-State
Inequality
• In the case of Bihar and Uttar Pradesh, per
capita GSDP growth was a little less than
1.3 per cent per year, which was less than a
third of the national average. It is possible
that growth rates of income may be higher
because of remittances from migrant
labour. It is also important to note that not all
the poorer states performed badly growth
rates of per capita GSDP, but the growth
rates were very low.

67. Implications for Inter-State
Inequality
• Performance of four middle income states
(West Bengal, Tamil Nadu, Kerala and
Karnataka) was above the average, with
West Bengal showing very strong growth.
These states not only improved their
position relative to the average, they also
grew faster in terms of per capita GSDP
than they did in the 1980s

68. Implications for Poverty
• The difference in growth performance across
states, with relatively low rates of growth for Uttar
Pradesh, Bihar and Orissa have important
implications for poverty reduction in India. India‟s
past experience at the national level shows that as long
as GDP growth was modest, i.e. between 3.5 to 4% up
to the late 1970s, there was no significant reduction in
poverty; the percentage of the population below the
poverty line fluctuated, falling in good agricultural
years and rising in bad, but with no trend decline. It
was only after GDP growth accelerated in the 1980s
that a trend reduction in poverty began to be noticed.

69. Implications for Poverty
• Drawing on this experience, India’s poverty
reduction strategy consisted of a twopronged approach relying upon an
acceleration in growth to bring about a
general
improvement
in
living
standards, supplemented by poverty
alleviation programmes directed at identified
poverty groups that may not benefit
sufficiently from the growth process.

70. Implications for Poverty
• The trends in poverty in individual states in the
pre and post-reforms period can be seen from
the official estimates of poverty at the state
level and the all-India level presented in Table
4.

71. Implications for Poverty
• These estimates are made by the Planning
Commission based on the so-called “large
sample” surveys covering about 120,000
households, conducted periodically by the
National Sample Survey Organisation (NSSO).
Table 4 shows that the percentage of the
population below the poverty line show that
the percentage in the 14 major states has
declined steadily from 43.8% in 1983 to 26.4%
in 1999-2000.

72. Implications for Poverty

73. Implications for Poverty
• The ten-year period 1983 to 1993-94 saw a relatively
modest reduction of about 7.5 percentage points in
the percentage of the population below the poverty
line followed by a much larger decline of almost 10
percentage points in the subsequent six-year period
1993-94 to 1999-2000.
• It is tempting to conclude that the faster growth in
the post-reforms period led to a faster pace of
reduction in poverty but this conclusion needs to be
qualified noting that the 1999-2000 survey may not
fully comparable with the earlier survey because of
certain modifications in the method of collecting
information on consumption

74. Implications for Poverty
• Table 4 shows a significant decline in poverty in the
post-reforms period in all states except Orissa.
Poverty in Punjab and Haryana, which was low to
begin with, has become marginal at 6% and 9%
respectively.
• In Kerala too, it is down to 12%. Significant gains have
also been made in Tamil Nadu, Karnataka, Andhra
Pradesh and Rajasthan. Table 4 also shows a significant
decline in poverty in Uttar Pradesh and Bihar despite
relatively poor growth of GSDP in both states. This
could reflect the impact of migrants‟ remittances

75. Implications for Poverty
• It is also possible that the extent of the decline
between 1993-94 and 1999- 2000 is exaggerated
because of the non-comparability problem.
• However, it is important to note that even after
allowing for the decline the level of poverty in these
states is still high and indeed India’s poverty problem
is becoming increasingly concentrated in this area.
• In 1980, the three states of Bihar, Uttar Pradesh and
Orissa accounted for 37.5% of the total population
below the poverty line in India, but by 1999-2000 this
had increased to 46%.

76. Implications for Poverty
• Continuation of the growth pattern observed in
the 1990s, with a region accounting for one third
of the population and the largest concentration
of poverty deriving very little benefit, while the
rest
of
the
country
enjoys
robust
growth, present obvious problems.
• It will exacerbate regional inequality with
further concentration of poverty in a
particular region, which is surely a recipe for
political instability.

77. Implications for Poverty

78. Implications for Poverty

79. Implications for Poverty
• The development strategy for the future
must therefore ensure that the slow growing
states accelerate to a respectable growth of
GSDP of say 6 per cent per year.
• This would ensure per capita GSDP growth
of around 4%, which is certainly needed if
there is to be a significant reduction in
poverty in these states over the next ten
years.

80. Implications for Poverty

81. References
• CENTER
FOR
RESEARCH
ON
ECONOMIC
EVELOPMENT AND POLICY REFORM
• State Level Performance Under Economic Reforms In
India
• By Montek S. Ahluwalia
• Urbanization Urban Development & Metropolitan Cities
in India
• Dr V. Nath Concept Publications

82. Empowering India!