“Many of the advances in the sciences that we consider today to have been made in Europe were in fact made in India centuries ago.” – James Grant Duff, British Historian, 1826
India’s rise may seem unprecedented, but it’s actually reclaiming a position it held for centuries. Throughout much of the last 2,000 years, India has been either the largest, or the second largest economy in the world. The Mughal period (1526-1858 AD), in particular, was one of great prosperity for India. An estimate of the annual revenue of Emperor Akbar’s treasury in 1600 is £17.5 million ($25.3 million). This exceeds Great Britain’s treasury two hundred years later in 1800, which totalled £16 million ($23 million). From 1500 to 1700, India’s share of global gross domestic product (GDP) remained relatively constant at slightly under a quarter. Under British colonial rule, India’s prominence declined with its share of world income falling continuously until the late 1970s.
Shortly after independence in 1947, the government adopted a series of Soviet-style five-year plans to modernize its largely agrarian economy into an industrial one. Among the developments was the formation of the Planning Commission – a key agency for economic planning for successive governments through until 2014. But in the following decades, India’s economy expanded at glacial pace, what was disparagingly termed the “Hindu rate of growth”. By the 1980s, investment in infrastructure, industry and scientific and technological research had started to manifest itself in improved growth. But this was not enough to avert a series of severe balance of payments crises, which culminated in near-default. The socialist and protectionist model of development had failed.
India’s inflection point came in 1991 when the government embraced wide scale economic liberalization, beginning the transformation of the economy into a market-oriented system. Embodied in this was a conscious shift away from the Licence Raj – the post-war era of corporate bureaucratization and red tape that had stifled entrepreneurship and growth for decades.
The Indian government deregulated its financial sector, encouraged private and foreign investment and devalued the rupee to boost exports.
Economic liberalization has been widely credited as the driver behind India’s rapid progress ever since. And rightly so. The economy grew seven-fold in the twenty years following 1992, and current far-from- Hindu growth rates of 6-8% per annum speak volumes of the success of reforms. Today, India has a strong, diversified economy and is a world leader in various industries, notably information technology. Yet, many obstacles remain, as those familiar with the ramshackle nature of the country’s infrastructure will be aware. In the past, the political establishment overlooked, consciously sidestepped or, due to the fragmented nature of Indian politics, were simply unable to address such complex and thorny issues.
Now the country has a bold and ambitious leader in Prime Minister Narendra Modi, who has torn up the rule-book and started afresh.
Market Realist – India (EPI) was often referred to as the “Sone ki Chidiya” (the golden sparrow) in times of yore due its rich natural resources and economic strength. The economic health of India (INDA) declined during the British rule. However, India (IFN) is definitely coming full circle as it rapidly becomes one of the fastest-growing emerging economies (EEM) (VWO) in the world.
This resurgence in economic strength can be largely attributed to then finance minister Manmohan Singh’s new economic policy of liberalization, privatization, and globalization, which was introduced by the Narsimha Rao government in 1991. A basic outline of the changes made under the three tenets is given below:
Liberalization refers to the slackening of government controls on industry licenses, quotas, and restrictions.
- abolition of license requirements except in six industries
- abolition of the Monopolies and Restrictive Trade Practices Act (or MRTP)
- freedom given to producers to fix prices of goods and services
- measures undertaken to attract foreign capital and investment in India
Most of the manufacturing industries required for economic growth were under state control prior to 1991. Unfortunately, bureaucracy and red tape were the hallmarks of the Indian public sector then, which led to sick industrial units and lack of profits. Privatization was brought in to help the private sector take up a bigger role in shaping the economy. The following measures were undertaken:
- disinvestment in the public sector
- the creation of the Board of Industrial and Financial Reconstruction (or BIFR) to help revive loss-making units in public sector enterprises
- dilution of government stakes by selling shares to the private sector
Until 1991, Indian policies were aimed at keeping the Indian economy isolated from the rest of the world through tariffs, restrictions, and duties on import and export. This changed after the New Economic Policy came into effect. The following were the highlights:
- import liberalization
- replacing the Foreign Exchange Regulation Act (or FERA) with the Foreign Exchange Management Act (or FEMA)
- rationalization of tariff structure
- abolishment of export duty
- reduction of import duty
The New Economic Policy is one of the major reasons India has been able to set itself on a growth trajectory. However, many new reforms are still required to perpetuate this growth. Many of those reforms are being taken on by the Modi government. Next we will look at what could derail those growth attempts.