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The
economic liberalisation in India refers to ongoing economic reforms in
India that started on 24 July 1991. After Independence in 1947, India adhered
to socialist policies. 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 1966 style reversal
did not take place.
In
1991, after India faced a balance of payments crisis, 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). In addition,
the IMF required India to undertake a series of structural economic reforms. As
a result of this requirement, the government of P. V. Narasimha Rao and his
finance minister Manmohan Singh (currently the Prime Minister of India) started
breakthrough reforms, although they did not implement many of the reforms the
IMF wanted.
The
new neo-liberal policies included opening for international trade and
investment, deregulation, initiation of privatisation, tax reforms, and
inflation-controlling measures. The overall direction of liberalisation has
since remained the same, irrespective of the ruling party, although no party
has yet tried to take on powerful lobbies such as the trade unions and farmers,
or contentious issues such as reforming labour laws and reducing agricultural
subsidies. Thus, unlike the reforms of 1966 and 1985 that were carried out by
the majority Congress governments, the reforms of 1991 carried out by a
minority government proved sustainable. There exists a lively debate in India
as to what made the economic reforms sustainable.
..
The
fruits of liberalisation reached their peak in 2007, when India recorded its
highest GDP growth rate of 9%. With this, India became the second fastest
growing major economy in the world, next only to China. The growth rate has
slowed significantly in the first half of 2012. 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.
Indian
government coalitions have been advised to continue liberalisation. India grows
at slower pace than China, which has been liberalising its economy since 1978. The
McKinsey Quarterly states that removing main obstacles "would free
India's economy to grow as fast as China's, at 10% a year".
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.As India's Gross domestic product (GDP) growth rate became
lowest in 2012-13 over a decade, growing merely at 5%, 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. For 2010, India was ranked
124th among 179 countries in Index of Economic Freedom World Rankings, which is
an improvement from the preceding year.
..
Pre-liberalisation
policies
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. 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.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.
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 licencing 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.
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.The Vishwanath Pratap Singh
(1989–1990) and Chandra Shekhar Singh government (1990–1991) did not add any
significant reforms.
..
Impact
1. 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%. At the
same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by
10% and Taiwan by 12%.
2. Only
four or five licences would be given for steel, electrical power and
communications. Licence owners built up huge powerful empires.
3. A
huge private sector emerged. State-owned enterprises made large losses.
4. Income
Tax Department and Customs Department became efficient in checking tax evasion.
5. Infrastructure
investment was poor because of the public sector monopoly.
6. Licence
Raj established the "irresponsible, self-perpetuating bureaucracy that
still exists throughout much of the country" and corruption flourished
under this system.
Narasimha Rao
government (1991–1996)
The
assassination of prime minister Indira Gandhi in 1984, and later of her son
Rajiv Gandhi in 1991, crushed international investor confidence on the economy
that was eventually pushed to the brink by the early 1990s.
As
of 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,
it was in a serious economic crisis. The government was close to default, 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.
Most of the economic reforms were forced upon India as a part of the IMF
bailout.
..
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
Later reforms
1. 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.
2. 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.
3. The
United Front government attempted a progressive budget that encouraged reforms,
but the 1997 Asian financial crisis and political instability created economic
stagnation.
4. Towards
the end of 2011, the 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.
..
Impact of reforms
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.
Cities
like Chennai, Bangalore, Hyderabad, NOIDA, Gurgaon, Gaziabad, Pune, Jaipur,
Indore and Ahmedabad have risen in prominence and economic importance, become
centres of rising industries and destination for foreign investment and firms.
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.
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 is
further strengthening 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 is putting 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”.
..
Ongoing
economic challenges
1. Problems
in the agricultural sector.
2. Highly
restrictive and complex labour laws.
3. Inadequate
infrastructure, which is often government monopoly.
4. Inefficient
public sector.
5. Inflation
in basic consumable goods.
6. Increasing
Gap Between the Lower and Upper Classes.
7. Corruption
8. High
fiscal deficit
9. Stagnant
export and increasing Imports.
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.
Reforms at the
state level
At
the state level, economic performance is much better in states with a
relatively liberal regulatory environment than in the relatively more
restrictive states".
The analysis of this report suggests
that the differences in economic performance across states are associated with
the extent to which states have introduced market-oriented reforms. Thus,
further reforms on these lines, complemented with measures to improve
infrastructure, education and basic services, would increase the potential for
growth outside of agriculture and thus boost better-paid employment, which is a
key to sharing the fruits of growth and lowering poverty.
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