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Economic liberalisation in India

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The economic liberalisation in India refers to the ongoing economic liberalisation, initiated in 1991, of the country's economic policies, with the goal of making the economy more market-oriented and expanding the role of private and foreign investment. Specific changes include a reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment. Liberalisation has been credited by its proponents for the high economic growth recorded by the country in the 1990s and 2000s. Its opponents have blamed it for increased poverty, inequality and economic degradation. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet solved a variety of politically difficult issues, such as liberalising labour laws and reducing agricultural subsidies.[1] There exists a lively debate in India as to what made the economic reforms sustainable.[2]

Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than China, which has been liberalising its economy since 1978.[3] The McKinsey Quarterly states that removing main obstacles "would free India's economy to grow as fast as China's, at 10% a year".[4]

There has been significant debate, however, around liberalisation as an inclusive economic growth strategy. Since 1992, income inequality has deepened in India with consumption among the poorest staying stable while the wealthiest generate consumption growth.[5] As India's gross domestic product (GDP) growth rate became lowest in 2012-13 over a decade, growing merely at 5.1%,[6] more criticism of India's economic reforms surfaced, as it apparently failed to address employment growth, nutritional values in terms of food intake in calories, and also exports growth - and thereby leading to a worsening level of current account deficit compared to the prior to the reform period.[7] But then in FY 2013-14 the growth rebounded to 6.9% and then in 2014-15 it rose to 7.3% as a result of the reforms put by the New Government which led to the economy becoming healthy again and the current account deficit coming in control. Growth reached 7.5% in the Jan-Mar quarter of 2015 before slowing to 7.0% in Apr-Jun quarter.

Pre-liberalisation policies

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Further information: Economic history of India and Licence Raj

Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning.[8] Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalised in the mid-1950s.[9] Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990.[10]

Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system of central planning for the economy, in which firms required licences to invest and develop. The labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a licence to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.

— BBC[11]

Pre-1991 liberalisation attempts

Attempts were made to liberalise the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The second major attempt was in 1985 by prime minister Rajiv Gandhi. The process came to a halt in 1987, though 1967 style reversal did not take place.[12]

In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries.[13]

The Chandra Shekhar Singh government (1990–1991) took several significant steps towards the much needed reforms and laid its foundation.[14]

Impact

  • The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%.[15] At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and Taiwan by 12%.[16]
  • Only four or five licences would be given for steel, electrical power and communications. Licence owners built up huge powerful empires.[11]
  • A huge private sector emerged. State-owned enterprises made large losses.[11]
  • Income Tax Department and Customs Department became efficient in checking tax evasion.[citation needed]
  • Infrastructure investment was poor because of the public sector monopoly.[11]
  • Licence Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country"[17] and corruption flourished under this system.[18]

The fruits of liberalisation reached their peak in 2006, when India recorded its highest GDP growth rate of 9.6%.[19] With this, India became the second fastest growing major economy in the world, next only to China.[18] The growth rate has slowed significantly in the first half of 2012.[20] An Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace.[21] The economy then rebounded to 7.3% growth in 2014-15.

First Round of Reforms (1991–1996)

The former prime minister P V Narasimha Rao, who spearheaded economic liberalisation policies in the early 1990s. Rao was often referred to as Chanakya for his ability to steer tough economic and political legislation through the parliament at a time when he headed a minority government.[22][23]

Crisis

Main article: 1991 India economic crisis

By 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, the state of India was in a serious economic crisis. The government was close to default,[24][25] its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports. It had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). Most of the economic reforms were forced upon India as a part of the IMF bailout.[26]

A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalisation was slowly embraced. The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests.

— India Report, Astaire Research[18]

Economic Liberalisation of 1991

In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors.[27] Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies.[1] By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation.[28] This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than rural residents.[29]

Later reforms

  • The Bharatiya Janata Party (BJP)-Atal Bihari Vajpayee administration surprised many by continuing reforms, when it was at the helm of affairs of India for five years.[30][when?]
  • The BJP-led National Democratic Alliance Coalition began privatising under-performing government owned business including hotels, VSNL, Maruti Suzuki, and airports, and began reduction of taxes, an overall fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.
  • The United Front government attempted a progressive budget that encouraged reforms, but the 1997 Asian financial crisis and political instability created economic stagnation.
  • Towards the end of 2011, the Congress-led UPA-2 Coalition Government initiated the introduction of 51% Foreign Direct Investment in retail sector. But due to pressure from fellow coalition parties and the opposition, the decision was rolled back. However, it was approved in December 2012.[31]
  • In the early months of 2015, the second BJP-led NDA Government under Narendra Modi further opened up the insurance sector by allowing up to 49% FDI. This came seven years after the previous government attempted and failed to push through the same reforms and 16 years after the sector was first opened to foreign investors up to 26% under the first BJP-led NDA Government under Atal Bihari Vajpayee's administration.[32]
  • The second BJP-led NDA Government also opened up the coal industry through the passing of the Coal Mines (Special Provisions) Bill of 2015. It effectively ended the Indian central government's monopoly over the mining of coal, which existed since nationalization in 1973 through socialist controls. It has opened up the path for private, foreign investments in the sector, since Indian arms of foreign companies are entitled to bid for coal blocks and licences, as well as for commercial mining of coal. This could result in billions of dollars investments by domestic and foreign miners. The move is also beneficial to the state-owned Coal India Limited, which may now get the elbow room to bring in some much needed technology and best practices, while opening up prospects of a better future for millions of mine workers.[33]

Impact

HSBC GLT, Pune

[34]

The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US$132 million in 1991–92 to $5.3 billion in 1995–96.[35]

Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently, a rate of growth that will double average income in a decade.... In service sectors where government regulation has been eased significantly or is less burdensome—such as communications, insurance, asset management and information technology—output has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal.

— OECD[21]

Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. His prescription to speed up economic progress included solution of all outstanding problems with the West (Cold War related) and then opening gates for FDI investment. In three years, the West was developing a bit of a fascination to India's brainpower, powered by IT and BPO. By 2004, the West would consider investment in India, should the conditions permit. By the end of Vajpayee's term as prime minister, a framework for the foreign investment had been established. The new incoming government of Dr. Manmohan Singh in 2004 further strengthened the required infrastructure to welcome the FDI.

Today, fascination with India is translating into active consideration of India as a destination for FDI. The A T Kearney study put India second most likely destination for FDI in 2005 behind China. It has displaced US to the third position. This is a great leap forward. India was at the 15th position, only a few years back. To quote the A T Kearney Study, "India's strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT, business process outsourcing, research and development, and knowledge management activities".

Challenges to further reforms

For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings, which is an improvement from the preceding year.

OECD summarised the key reforms that are needed:

In labour markets, employment growth has been concentrated in firms that operate in sectors not covered by India's highly restrictive labour laws. In the formal sector, where these labour laws apply, employment has been falling and firms are becoming more capital intensive despite abundant low-cost labour. Labour market reform is essential to achieve a broader-based development and provide sufficient and higher productivity jobs for the growing labour force. In product markets, inefficient government procedures, particularly in some of the states, acts as a barrier to entrepreneurship and need to be improved. Public companies are generally less productive than private firms and the privatisation programme should be revitalised. A number of barriers to competition in financial markets and some of the infrastructure sectors, which are other constraints on growth, also need to be addressed. The indirect tax system needs to be simplified to create a true national market, while for direct taxes, the taxable base should be broadened and rates lowered. Public expenditure should be re-oriented towards infrastructure investment by reducing subsidies. Furthermore, social policies should be improved to better reach the poor and—given the importance of human capital—the education system also needs to be made more efficient.

— OECD[21]

Though recently labour law reforms have been enacted at the state level[46][47][48][49]

Reforms at the state level

See also: Economic disparities in India

According to an OECD survey of the Indian economy [21] states that had more liberal regulatory regimes had better economic performance. The survey also concluded that were complementary measures for better delivery of infrastructure, education and basic services implemented, they would boost employment creation and poverty reduction.

See also

References

  1. ^ a b "That old Gandhi magic". The Economist. 27 November 1997. Cite error: The named reference "Gandhi-1" was defined multiple times with different content (see the help page).
  2. ^ For a critique of the existing explanations and a comprehensive alternative explanation see: Sharma, Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability." India Review (Routledge, UK)126-84
  3. ^ "India's economy: What's holding India back?". The Economist. 6 March 2008.
  4. ^ "The McKinsey Quarterly: India—From emerging to surging" (PDF). The McKinsey Quarterly. 2001.
  5. ^ "India's income inequality has doubled in 20 years - The Times of India". Timesofindia.indiatimes.com. Retrieved 10 July 2013.
  6. ^ GDP growth slumps to 5%, a decade’s low, Hindu Business Line 31 May 2013
  7. ^ India’s Ponzi-styled economic reforms run out of steam, East Asia Forum 4 June 2013
  8. ^ Kelegama, Saman and Parikh, Kirit (2000). "Political Economy of Growth and Reforms in South Asia". Second Draft. {{cite journal}}: Cite journal requires |journal= (help)CS1 maint: multiple names: authors list (link)
  9. ^ Sam Staley (2006). "The Rise and Fall of Indian Socialism: Why India embraced economic reform".
  10. ^ Street Hawking Promise Jobs in Future, The Times of India, 25 November 2001
  11. ^ a b c d "India: the economy". BBC. 12 February 1998.
  12. ^ For a complete history & analysis of liberalisation episodes in India, see: Sharma, Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability." India Review (Routledge, UK)126-84
  13. ^ History of Computing in India: 1955-2010, Rajaraman, V.
  14. ^ New Indian Express http://epaper.newindianexpress.com/c/8158805. Retrieved 18 January 2016. {{cite web}}: Missing or empty |title= (help)
  15. ^ "Redefining The Hindu Rate of Growth". The Financial Express.
  16. ^ "Industry passing through phase of transition". The Tribune India.
  17. ^ Eugene M. Makar (2007). An American's Guide to Doing Business in India.
  18. ^ a b c "The India Report" (PDF). Astaire Research.
  19. ^ "The World Factbook". Cia.gov. Retrieved 10 July 2013.
  20. ^ "BBC News - India growth rate slows to 5.3% in first quarter". Bbc.co.uk. 31 May 2012. Retrieved 10 July 2013.
  21. ^ a b c d e "Economic survey of India 2007: Policy Brief" (PDF). OECD.
  22. ^ V. Venkatesan (1–14 January 2005). "Obituary: A scholar and a politician". Frontline. 22 (1). Archived from the original on 30 January 2010. Retrieved 30 March 2010.
  23. ^ PV Narasimha Rao Passes Away. Retrieved 7 October 2007. Archived 2007-11-01 at the Wayback Machine
  24. ^ India's Pathway through Financial Crisis. Arunabha Ghosh. Global Economic Governance Programme. Retrieved on 2 March 2007.
  25. ^ What Caused the 1991 Currency Crisis in India?, IMF Staff Papers, Valerie Cerra and Sweta Chaman Saxena.
  26. ^ Economic Crisis Forcing Once Self-Reliant India to Seek Aid, New York Times, 29 June 1991
  27. ^ Task Force Report 2006, pp. 7–8.
  28. ^ Kumar 2005, p. 1037
  29. ^ Task Force Report 2006, pp. 17–20.
  30. ^ J. Bradford DeLong (2001). "India Since Independence: An Analytic Growth Narrative" (PDF).
  31. ^ "End of policy paralysis: Govt approves 51% FDI in multi-brand retail". Zeenews.india.com. Retrieved 10 July 2013.
  32. ^ "Parliament passes insurance bill in a major boost to Modi's reforms agenda". livemint.com. Retrieved 13 March 2015.
  33. ^ "Parliament boost to Modi's plans: Coal, mining bills passed by Rajya Sabha". indiatoday.intotoday.in. Retrieved 29 March 2015.
  34. ^ "HSBC GLT frontpage". Retrieved 22 August 2008.
  35. ^ Local industrialists against multinationals. Ajay Singh and Arjuna Ranawana. Asiaweek. Retrieved on 2 March 2007.
  36. ^ a b c d e Biswas, Soutik (27 July 2011). "Challenges ahead for India reforms". BBC News. BBC. Archived from the original on 8 September 2011. Retrieved 23 December 2013. {{cite news}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  37. ^ "IMF calls for urgent reform in Indian labour laws".
  38. ^ Kaushik Basu, Gary S. Fields, and Shub Debgupta. "Retrenchment, Labor Laws and Government Policy: An Analysis with Special Reference to India" (PDF). The World Bank.{{cite web}}: CS1 maint: multiple names: authors list (link)
  39. ^ R. C. Datta/Milly Sil (2007). "Contemporary Issues on Labour Law Reform in India" (PDF).
  40. ^ Aditya Gupta (2006). "How wrong has the Indian Left been about economic reforms?" (PDF).
  41. ^ Basu, Kaushik (27 June 2005). "Why India needs labour law reform". BBC.
  42. ^ "A special report on India: An elephant, not a tiger". The Economist. 11 December 2008.
  43. ^ "India Country Overview 2008". The World Bank. 2008.
  44. ^ Gurcharan Das (July–August 2006). "The India Model". The Foreign Affairs.
  45. ^ Schuman, Michael (5 November 2012). "India vs China: Which Has a Bigger Reform Challenge?". Time. Time. Archived from the original on 9 March 2013. Retrieved 23 December 2013. {{cite news}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help)
  46. ^ http://indianexpress.com/article/india/india-others/rajasthan-shows-way-in-labour-reforms/
  47. ^ http://www.business-standard.com/article/economy-policy/president-okays-rajasthan-labour-reforms-firms-with-300-workers-need-no-govt-nod-to-sack-114110801356_1.html
  48. ^ http://www.business-standard.com/article/current-affairs/madhya-pradesh-assembly-passes-labour-law-amendments-115072200606_1.html
  49. ^ http://www.business-standard.com/article/economy-policy/president-clears-madhya-pradesh-labour-reforms-115112401109_1.html
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