India: An Economy of Development and Despair |
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India started its journey into economic sovereignty at the time of its independence from the imperial rule of the British in 1947. At the time of its independence, it faced a formidable task of improving the living standards of millions of Indians that had been suffering in abject poverty for decades with little hope for improvement. In the earlier half of the twentieth century, the British had paid little attention to the deteriorating conditions of the Indian economy because of their engagements in both the world wars. Subsequent to world war two, India embarked on a journey to identify itself as a nation after having undergone the partition in which a separate Muslim state was carved out of its territories.
India’s economic history begins with the decision to pursue development to alleviate the suffering of the poor with the help of socialism; the founders of India’s modern economy attempted to create a state owned economy which would drive the country forward at the behest of its people. The Indian founding fathers feared foreign domination and wanted to avoid this at all costs. They wanted the state to be the driver of economic growth and were suspicious of private sectors initiatives. As a result, they created an economic system controlled by central planning and encumbered by a tedious quantity of red tape. This “license raj” program, as it came to be called, strangled the private sector and led to rampant inefficiency and massive corruption.
During the 1940s and 1950s, the prevailing opinion held development as synonymous with industrialization. India’s first Prime Minister, Jawaharlal Nehru, believed that an industrialized economy would be able to relieve the suffering of its masses by lifting them out of poverty. Nehru was impressed with the successful mobilization of resources by the Soviet Union. With the experience of the Great depression only a decade past, it seemed unlikely that the private sector could successfully and reliably generate the investment needed for the growth of the Indian economy. As was the norm of the day, the state controlled the commanding heights of the economy with certain industries reserved specifically to the state. Nehru believed that for a country as poor as India, it was essential for the government to monitor the growth of the economy to ensure an equitable and broad distribution of gains.
The Economic Activity and Planning Commission controlled the direction of the economy without the help of the private sector. This pervasive regulation and government control of economic activity had effects opposite to those intended.
As the Indian economy stagnated, it became clear that the state enterprises, run inefficiently, were becoming a drain on public resources. India’s growth rate was fixed at a severely low rate for three decades as a result of the autocratic policies adopted by its rulers. India continued its commitment to state led growth until the 1980s, when the grandson of Nehru unsuccessfully tried to implement structural reforms by liberalizing the economy. During the 1980s, India wasted 10 years with half hearted reforms and failed attempts to rid the system of state controls in an attempt to attract foreign investment. But those changes could not avail a change in the condition of the economy and the suffering of the people remained unmitigated.
The economic reform program that Rajiv Gandhi's government decided upon included encouraging capital imports and commodity exports, a modest degree of industrial deregulation, and a modest degree of tax system rationalization. In the government's first year it eliminated quantitative controls on imports of industrial machinery and cut tariffs on imports of capital goods by 60%. The result was an economic boom; real GDP growth averaged 5.6 %. However, the net capital import bill also rose and there was growing foreign indebtedness which set the stage for the exchange crisis of 1991. Thus these reforms were short lived and ended with a sense of impending disaster for Indian economy.
An initial response to mounting external payment crisis was to turn to IMF. India’s recourse was to get financing from IMF and institute a series of measures to reduce imports. Despite these measures the foreign reserve deposits continued to fall, putting India in an extremely precarious situation.
The Indian economy was revived by bold neoliberal economic reforms triggered by currency crisis of 1991 and implemented by Narasimha Rao, the then Prime Minister of India. These reforms unleashed a wave of rapid economic growth, one unprecedented in the history of Indian economy. India was at the verge of bankruptcy with reserves that could cover only two weeks of imports. At that time, the Prime Minister, assisted by renowned economist Manmohan Singh, developed a vision to emerge from this crisis as a global player. They decided to use this as an opportunity to restructure and reform the old ways which had stifled the spirit of innovation and restricted the scope of competition.
It is apparent that the pre-1990 Indian growth rate did not match the growth rate of East Asian tigers, but it could be considered “normal” for a typical post World War II pattern of growth. Research suggests that there were limits placed on the damage done to the Indian economic growth by the Nehru dynasty’s attraction to Fabian socialism and central planning.
There are many possibilities regarding the status of the limited damage done to the economy. One possibility could be that the constraints placed on growth by the inefficiencies of the “license raj” were a normal course for post World War II world and only exceptional countries were able to avoid these. The parallels to inefficiencies created by state controlled economies could be found in most of the countries at that point. Another possibility is that the destructive effects were offset by the development of a large portion of literate population with ideals vested in democracy, rule of law, and accountability of their politicians.
However, the pace of growth has accelerated since the 1990s, but it has had little effect on poverty. Economic disparities between the haves and the have-nots have widened; nevertheless, it cannot be said that India economic growth is being fueled by further impoverishment of its masses. It would not be illogical to deduce that as India moves forward it would draw more and more people out of poverty which previously was unable to accomplish.
Under the Narasimha Rao’ government, emphasis was placed on creating an environment conducive for business and attracting foreign investment. The tariffs were reduced from an average of 85% to 25% of import value. The rupee became convertible. By the mid-1990s, total foreign trade amounted to more than 20% of GDP. Foreign direct investment was encouraged, and grew from effectively zero in the 1980s to $5 billion a year by the mid-1990s. The government walked rapidly down the path of reform that Rajiv Gandhi's government had tiptoed cautiously onto.
The reforms instituted by Manmohan Singh encompassed all the aspects of the economy. Fiscal reforms included efforts to reduce the deficit and tax reforms. The government adopted a programme of macroeconomic stabilization to restore viability to fiscal balances and balance of payments and to contain prices. At the same time, it undertook the responsibility to implement structural reforms including bold initiatives in external trade, exchange rates, and industrial policy. It aimed to integrate the Indian economy with the global economy by removing the barriers and diffusing it with private capital. The first half of the 1990s saw a remarkable turnaround for the Indian economy. This was attributable to the depth and range of reforms that had reshaped to economy along market lines.
The improvement in fiscal balances in the first half of the 1990s was significant; it was driven by the deregulation of industry, foreign trade, and strong export performance. The overall result was to impel investment with a surge in capital inflow rates.
This strong growth in the 1990s was nourished by the boom of the software industry; this helped sustain the reforms of the earlier years. The factors that led to this rapid growth include productivity gains from the deregulation of trade, industry, and finance, principally in the services sector. There was successful fiscal consolidation and a buoyant world economy responded by facilitating the growth with the help foreign investment in India.
This eventually led to India’s placement as one of the ten fastest growing economies of the world. The growth of GDP was also attributable to the growth of the services sector which became a primary focus of the economy. India’s investment in technology infrastructure and its development of its human capital have reaped dividends that are staggering to consider. India has become the programming hub of the information technology world; major multinational corporations have invested billions of dollars in infrastructure to retain and develop India’s immense pool of human capital. Offshoring to India has become a political hot-button for many industrialized countries that have seen high-paying programming jobs move to India, where development costs are a fraction of what are charged in the industrialized world. India’s one-time problem in balance of payments is now a part of an historical archive, buried under $150 million dollars in foreign reserves, thanks in part to a trade surplus that sometimes sees 25% growth quarter over quarter.
India’s dramatic turnaround was not nearly as miraculous as it was a combination of forward thinking by its leaders, strong economic stewardship, and a concerted effort at developing its human capital. India’s brain-drain of the 1990s has come full circle; now companies are moving to India, investing heavily and helping to develop this regional power. With peace on the horizon with Pakistan, a stable border with China, and strong democratic values, India will soon rival China as a key regional player in South Asia.
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