30 years of Economic Reform; Indian Economy Then and Now

Where we stand from Nehruvian to Modi Policies, what need to do for GDP growth with a vision of FY26!

 

S. Kumar

A quote from French Novelist Victor Hugo: “No power on earth can stop an idea whose time has come” was recited by then finance Minister Dr. Manmohan Singh at the end of his 1991-92 budget speech. He then went on to conclude with the declaration: “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”!

This speech set the stage for the cleanest declared break from the past that India has seen on the economic front—both in years prior and since. Importantly, the 1991 reforms were on a scale not seen before, although reforms initiated in the 1980s- continuation of the ‘Liberalization by Sleuths’.

It’s really difficult to do justice in prose in describing the protectionist regime, or “license raj ”, that existed in India for four decades until 1991. No doubt that regime was designed partly by a well-founded (at that time) belief in the benefits of a planned economy and partly by the still-fresh colonization experience that reinforced the merits of self-reliance. In 1991, India’s capita income was just $360 a year, having been overtaken by several “miracle economies” of Asia growing at 7% per year or more. Three decades later, before Covid hit. India’s per capita income was up to $2,100. GDP had grown at 7% for two decades, making India a miracle economy too. Although this policy resulted in a number of important institutions and increased domestic capacity and capabilities, its failure was reflected in the much-maligned Hindu rate of growth (annual per capita income growth of 1.5%). Some sectors—such as broadcasting, telecom, retail, and information technology—have leapfrogged in their development cycle, while others such as agriculture, roadways, manufacturing and electricity have yet to change much. Structurally too, despite consensus at the central level—which has transcended governments led by different parties and coalitions—reforms have been deployed in fits and starts and not as a continuous process. And the reform mindset has taken hold in states to different degrees, as evidenced by variable progress on state-level fiscal and social indicators (education and health). If we look forward to the next 25 years, realizing India’s full potential will task all of us with simultaneously making progress on further economic reforms and addressing the critiques. In essence, the reforms initiated in 1991 have transformed much of the country. While any short note on this past quarter-century can only come up with a mixed verdict, the view ahead is best summed up by a few lines of Russian writer Victor Serge’s poem: “The ardent voyage continues, the course is set on hope.”

The economic policies of Nehru are often blamed for the poor economy of India in the subsequent years; however, it cannot be denied that his decisions were necessary by the needs of the time. India indeed to effectively harness its domestic means as well strengthen its governmental control to the base for future privatization. It is often speculated that Nehru would’ve embraced the economic reforms and economic liberation of the late 20th century if he was alive. The Nehruvian plans had a similar logic of using the state as an entrepreneur as well as providing capital to private industry through special development banks in the absence of deep financial markets. This is the famous quest of controlling the commanding heights of the economy. A more technically correct explanation would be that Nehru wanted the state to dominate the production of capital goods and intermediate goods so that the Indian economy has enough strategic depth to withstand any future attacks on its political autonomy. It is a theme that still resonates in some parts of the Indian policy establishment that worries about the growing role of Chinese equipment suppliers in Indian power and telecom sectors. But it was eventually the shortage of food in the late 1960s that forced India to compromise on its foreign policy in return for wheat shipments. However, Nehruvian planning failed to meet its grand hope despite an encouraging start but important parts of the vision are still relevant in India today: the central role given to economic growth in the battle against mass poverty, a relentless focus on capital accumulation, a higher savings rate to fund asset creation, strategic depth to the industrial structure and fiscal conservatism. All this is a far cry from what recent profligate governments that claim to follow Nehru have done.

Today, socialists still moan about 30 years of reform saying it neglects inequality. They forget that Indira Gandhi in the 1970s imposed income tax of 97.7%, plus a wealth tax of 3.5%. In theory a socialist paradise had arrived. In fact, black money exploded, corporate honesty collapsed, crooks soared and the honest went bust. In three decades after independence, India’s poverty rate fluctuated with the monsoons but showed no improvement at all. Meanwhile the population doubled. So, the absolute number of poor people doubled, an outrageous consequence of Indira’s attack on crushing inequality. Alas, many leftists want to revive that approach. Although unsuccessful attempts at liberalization were made in 1966 and the early 1980s, a more thorough liberalization was initiated in 1991. The reform was prompted by a balance of payments crisis that had led to a severe recession. Specific changes included reducing import tariffs, deregulating markets, and reducing taxes, which led to an increase in foreign investment and high economic growth in the 1990s and 2000s. From 1992 to 2005, foreign investment increased 316.9%, and India’s gross domestic product (GDP) grew from $266 billion in 1991 to $2.3 trillion in 2018. According to one study, wages rose on the whole, as well as wages as the labor-to-capital relative share. But since 2016-17 growth has decelerated from 8.3% to 7%, 6.1%. 4.2% and minus 7.3% in the Covid year 2020-21. India looked better after 25 years of reform than after 30. Apart from incomplete economic reform, the greatest hurdle is a moribund police-judicial system that gives no real justice, prevents enforcement of contract (the heart of a market system), and permits gross misuse for political vendettas. Second, apart from a few centers of excellence like IITs, the educational system produces semi-illiterate schoolboys and unemployable college graduates, so beneath a thin veneer of world-class skills India is hollow. Third, business entry has been liberalized but not exit, checking the creative destruction needed for success. Without tackling these, India will not regain 7% miracle growth.

At a time when many expected India to shut its doors to conserve its reserves, it bravely did the opposite. India might have been staring at the end of the proverbial barrel then, but the iconic reforms have put the gun in India’s hands now. The 1991 reforms turned out to be the turnaround script that changed the grammar of the country forever. The reform was prompted by a balance of payments crisis that had led to a severe recession. In the late 2000s, India’s growth reached 7.5%, which will double the average income in a decade. IMF says that if India pushed more fundamental market reforms, it could sustain the rate and even reach the government’s 2011 target of 10%. States have large responsibilities over their economies. India is the Fifth largest economy in the world by nominal basis and the third largest by purchasing power parity adjusted exchange rates (PPP). India’s GDP growth during January–March period of 2015 was at 7.5% compared to China’s 7%, making it the fastest growing MAJOR economy. During 2014–15, India’s GDP growth recovered to 7.3% from 6.9% in the previous fiscal. During 2014–15, India’s services sector grew by 10.1%, manufacturing sector by 7.1% & agriculture by 0.2%. Indian Economy grew at 7.6 & 7.1 in FY 2015–16 and FY 2016–17 respectively as major reforms had taken place like Demonetization and implementation of GST in FY 2016–17. India’s real gross domestic product (GDP) at current prices stood at Rs. 135.13 lakh crore (US$ 1.82 trillion) in FY21, as per the provisional estimates of annual national income for 2020-21. India is the fourth-largest unicorn base in the world with over 21 unicorns collectively valued at US$ 73.2 billion, as per the Hurun Global Unicorn List. By 2025, India is expected to have ~100 unicorns by 2025 and will create ~1.1 million direct jobs according to the Nasscom-Zinnov report ‘Indian Tech Start-up’. India needs to increase its rate of employment growth and create 90 million non-farm jobs between 2023 and 2030’s, for productivity and economic growth according to McKinsey Global Institute. Net employment rate needs to grow by 1.5% per year from 2023 to 2030 to achieve 8-8.5% GDP growth between 2023 and 2030. According to data from the RBI, as of the week ended on June 04, 2021, the foreign exchange reserves in India increased by US$ 6.842 billion to reach US$ 605 billion. In the Union Budget 2021-22, capital expenditure for FY22 is likely to increase by 34.5% at Rs. 5.5 lakh crore (US$ 75.81 billion) over FY21 (BE) to boost the economy. In May 2021, the government approved the production linked incentive (PLI) scheme for manufacturing advanced chemistry cell (ACC) batteries at an estimated outlay of Rs. 18,100 crore (US$ 2.44 billion); this move is expected to attract domestic and foreign investments worth Rs. 45,000 crore (US$ 6.07 billion). The Union Cabinet approved the production linked incentive (PLI) scheme for white goods (air conditioners and LED lights) with a budgetary outlay of Rs. 6,238 crore (US$ 848.96 million) and the ‘National Programme on High Efficiency Solar PV (Photovoltaic) Modules’ with an outlay of Rs. 4,500 crore US$ 612.43 million). In June 2021, the RBI (Reserve Bank of India) announced that the investment limit for FPI (foreign portfolio investors) in the State Development Loans (SDLs) and government securities (G-secs) would remain unaffected at 2% and 6%, respectively, in FY22. To boost the overall audit quality, transparency and add value to businesses, in April 2021, the RBI issued a notice on new norms to appoint statutory and central auditors for commercial banks, large urban co-operatives and large non-banks and housing finance firms.

In June 2021, RBI Governor, Shaktikanta Das announced the policy repo rate unchanged at 4%. He also announced various measures including Rs. 15,000 crore (US$ 2.05 billion) liquidity support to contact-intensive sectors such as tourism and hospitality and in June 2021 only, Finance Ministers of G-7 countries, including the US, the UK, Japan, Italy, Germany, France and Canada, attained a historic contract on taxing multinational firms as per which the minimum global tax rate would be at least 15%. The move is expected to benefit India to increase foreign direct investments in the country. In November 2020, the Government of India announced Rs. 2.65 lakh crore (US$ 36 billion) stimulus package to generate job opportunities and provide liquidity support to various sectors such as tourism, aviation, construction and housing. Also, India’s cabinet approved the production-linked incentives (PLI) scheme to provide Rs. 2 trillion (US$ 27 billion) over five years to create jobs and boost production in the country. Numerous foreign companies are setting up their facilities in India on account of various Government initiatives like Make in India and Digital India. Prime Minister Narendra Modi launched the Make in India initiative with an aim to boost the country’s manufacturing sector and increase the purchasing power of an average Indian consumer, which would further drive demand and spur development, thus benefiting investors. The Government of India, under its Make in India initiative, is trying to boost the contribution made by the manufacturing sector with an aim to take it to 25% of the GDP from the current 17%. Besides, the Government has also come up with the Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase digital literacy. So, as per the Reserve Bank of India’s (RBI) estimates, India’s real GDP growth is projected at 9.5% in FY22; this includes 18.5% increase in the first quarter of FY22; 7.9% growth in the second quarter of FY22; 7.2% rise in the third quarter of FY22 and 6.6% growth in the fourth quarter of FY22 and beside as indicated by provisional estimates released by the National Statistical Office (NSO), India posted a V-shaped recovery in the second half of FY21. As per these estimates, India registered an increase of 1.1% in the second half of FY21; this was driven by the gradual and phased unlocking of industrial activities, increased investments and growth in government expenditure.

Modi had pledged to turn India into a $5 trillion economy by 2025, but the pandemic is set to push that back by years. The International Monetary Fund expects India to grow 6.9% in the next fiscal year that starts in April 2022, lower than the more than 8% needed long term to reach Modi’s ambitious target and create jobs for the millions entering the workforce. Jim O’Neill, chairman of Chatham House in London — who coined the term BRICs to describe the emerging markets of Brazil, Russia, India and China while serving as a top Goldman Sachs Group Inc. economist — is these days cautious on India, largely because the government hasn’t made many of the long-term structural changes, he believes are needed for it to reach its full potential. According to Indira Rajaraman, an economist and a former member of the Reserve Bank of India’s board ‘The pandemic has set us back hugely, and we were already on a growth downswing when it happened, going forward it, all depends on how cleverly we design the way we come out of these doldrums. No doubt that unlike the old guard in 1991, Modi has turned the economy more inward, focusing on self-reliance and homegrown companies. Despite championing free trade in global forums, he’s raised tariffs on goods including electronics and medical equipment, partly reflecting global trends.

Finally, India has to find its rightful position in the new world economic order. The Atmanirbhar strategy has been well-conceived and is quite timely. All efforts should be made to attract investment into India so that India can play a major role in the global supply chain. India will have to compete with China, US, and the EU for attracting investment. In this context, India’s CIT (calculated Income Tax-corporate) reforms making the CIT rate competitive will become quite relevant. We may also recognize that recently, the US has announced a major stimulus program which includes a long-term plan intended to last until the end of the decade primarily for infrastructure expansion and clean energy worth US$2 trillion which may be financed partially by an increase in the US corporate tax rate from 21% to 28%. If India continues with its current CIT regime, this may have major implications for incentivizing relocation of US investment towards India. In India’s plan, both the central and state governments including their public sector enterprises and the private sector are to participate. If required, for financing the NIP (National Infrastructure Pipeline), the central government may keep its fiscal deficit well above the current FRBM norm of 3% of GDP up to FY26.

 

Writer is a senior Journalist and political critic!

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