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Economic liberalization in India
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The economic liberalization in India fix to ongoing reforms in India.
After Independence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "License Raj", while the slow growth rate was dubbed as the "Hindu rate of growth".
In the 1980s, the Prime Minister Rajiv Gandhi initiated some reforms. His government was blocked by politics. In 1991, after IMF had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures.
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The economic liberalization in India fix to ongoing reforms in India.
After Independence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "License Raj", while the slow growth rate was dubbed as the "Hindu rate of growth".
In the 1980s, the Prime Minister Rajiv Gandhi initiated some reforms. His government was blocked by politics. In 1991, after IMF had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalisation has 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.
The fruits of liberalization reached their peak in 2007, with India recording its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China. An OECD report suggests that the recent high growth rates can double the average income in a decade. The Economist states that "in many ways India counts as one of liberalisation's greatest success stories".
India is still held back by many problems. McKinsey states that removing main obstacles "would free India’s economy to grow as fast as China’s, at 10 percent a year". The World Bank suggests that the most important priorities are public sector reform, infrastructure, agricultural and rural development, easing of labor regulations, reforms in lagging states, and HIV/AIDS. The remaining challenges are demonstrated by the Ease of Doing Business Index, which placed India on the 120th place in 2008, worse than any neighboring country.
Pre-liberalization 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, industrialization, state intervention in labor 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 nationalized 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.
Impact
- Hindu rate of growth refers to the low annual growth rate of the economy of India before 1991, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%. At the same time, Pakistan grew by 8%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%.
- Only four or five licences would be given for steel, power and communications. License owners built up huge powerful empires.
- A huge public sector emerged. State-owned enterprises made large losses.
- Infrastructure investment was poor because of the public sector monopoly.
- License Raj established the "irresponsible, self-perpetruating bureaucracy that still exists throughout much of the country" and corruption flourished under this system.
Rajiv Gandhi government (1984-1989)
In the 80s, the government led by Rajiv Gandhi started light reforms. The government, slightly reduced License Raj, and also promoted the growth of the telecommunications and software industries.
Vishwanath Pratap Singh government (1989-1990) and Chandra Shekhar government (1990-1991) did not do significant reforms.
Narasimha Rao government (1991-1996)
Crisis
Back-to-back assassinations of the prime ministers Indira Gandhi and her son Rajiv Gandhi 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.
Reforms
The Government of India headed by Narasimha Rao decided to usher in several reforms that are collectively termed as liberalisation in the Indian media with Manmohan Singh whom he appointed as a special economical advisor.
The reforms progressed furthest in the areas of opening up to foreign investment, reforming capital markets, deregulating domestic business, and reforming the trade regime. Liberalization has done away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Rao's government's goals were reducing the fiscal deficit, Privatization of the public sector, and increasing investment in infrastructure. Trade reforms and changes in the regulation of foreign direct investment were introduced to open India to foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an acclaimed economist, played a central role in implementing these reforms. New research suggests that the scope and pattern of these reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms.
Deregulation
- In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized.
- Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue.
- Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries.
- Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India's other stock exchanges. The NSE emerged as India's largest exchange by 1996.
Globalization
- Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls. (The rupee was made convertible on trade account.)
- Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors.
- Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation.
- Opening up in 1992 of India's equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs).
Privatization and tax reforms
- Marginal tax rates were reduced.
- Privatization of large, inefficient and loss-inducing government corporations was initiated.
Other
Later reforms
- Atal Bihari Vajpayee's short-lived administration surprised many by continuing reforms.
- The Vajpayee administration continued with privatization, reduction of taxes, a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.
- The UF government attempted a progressive budget that encouraged reforms, but the 1997 Asian financial crisis and political instability created economic stagnation.
- Strategies like forming Special Economic Zones - tax amenities, good communications infrastructure, low regulation - to encourage industries has paid off in many parts of the country.
- The Golden Quadrilateral project aimed to link India's corners with a network of modern highways.
- Right to Information Act (2005)
- Indo-US civilian nuclear agreement (2008)
Impact
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 Bangalore, Hyderabad, Pune and Ahmedabad have risen in prominence and economic importance, became centres of rising industries and destination for foreign investment and firms.
Remaining problems
- Highly restrictive and complex labour laws.
- Inadequate infrastructure, monopolized the public sector.
- Inefficient public sector.
External links
- For a short educational video of the .
See also
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