Another reason, which has contributed towards the restricted growth, is India being a ‘closed economy’. This is when there is limited trade, either due to the economic activity, taking place on a ‘subsistence basis’ or due to restricted development in the manufacturing sector of the economy. Also there is limited international trade. Subsistence is when a country produces only to support itself rather than use the surplus for trade. The low international trade is due to high trade barriers in the form of quotas, tariffs and other excise duties. Another problem with a closed economy is the fact that foreign investment is limited. An economy, which is closed cannot benefit from specialisation and comparative advantage. Once India reduced its barriers, its exports increased by 5% in 1995. India also encouraged more investment in the long run.
‘Bureaucracy’ has been a major attribute to restricting India’s growth of the economy. The imposition of many strict restrictions but the Indian government in terms of foreign exchange control and planning, have both prevented India operating within a free market system. This can only lead to inefficiency and misallocation of resources in the economy. The ‘red tape’ makes legal procedures very monotonous and time consuming. The strict restrictions slowed down investment projects and limited the inflow of foreign income. Although this was the case the restrictions were also an advantage to the economy, as they saw the economy grow during a period where other eastern economies were suffering. This was mainly due to a restricted number of multinationals in the country, thus reducing the outflow of money from the economy. In 1991, the Indian government simplified procedures, to introduce a soviet inspired system of industrial micro planning together with a large measure of private ownership. Many tariffs were cut, the import licensing system was liberalised, the rupee was devalued and made convertible for trade, and inward foreign investment was encouraged.
India’s growth has also been restricted due to the quality of the factors of production, also known as ‘factor endowment’. This measures the quantity of resources and the quality of them. In India’s case, the quantities of resources are plentiful but the quality is not good. The main factors of production are; Land, Labour, Capital and enterprise. Firstly, India has many power cuts, which put a break in the production, thus reducing the total output of the country. Also the quality of some of its raw materials such as water is not satisfactory thus increasing the producers cost unnecessarily. The quality of Labour is also not adequate as skilled labour is limited due to poor education. India also has a poor infrastructure, thus restricting it further, in terms of transport and communication. These factors thus restrict from the economy being productive and instead act as barriers, which a firm has to overcome in order to survive.
India’s restricted growth has been due to the factors examined above. India over last five years has yet again opened its economy even more, reduced the strict planning and has improved the infra structure. This has brought it more investment from abroad. It can now be said that India is in stage four of Rostow’s stages of growth model. It is said to be in the ‘drive to maturity’ as its growth is now becoming self-sustaining and its industry becoming more diverse with its infra structure improving by the day.
