Indian Globalization HistoryExperience

Micro economic reforms and Industrial growth

Dr Suman Pathak

Assumptions • Indian economic policy after independence was influenced by

the colonial experience and based on two main assumptions

1. Socialistic Pattern of Government

Policy tended towards protectionism, with a strong emphasis on import substitution, industrialization 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

• 2. Planned Economic Growth

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 licenses, regulations and the accompanying red tape, commonly referred to as License Raj, were required to set up business in India between 1947 and 1990.

Need for Change in Economic Policy

• 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 licenses to invest and develop.

• The complex bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a license

• 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 was 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.

• The state planning rather than markets, would determine how much investment was needed in which sectors.

Towards Economic reforms

• 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 of Economic Policy

• 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%.

• Only four or five licenses would be given for steel, electrical power and communications. License owners built up huge powerful empires.

• A huge private sector emerged. State-owned enterprises made large losses.• Income Tax Department and Customs Department became efficient in

checking tax evasion.• Infrastructure investment was poor because of the public sector monopoly.• Licence Raj established the "irresponsible, self-perpetuating bureaucracy

that still exists throughout much of the country and corruption flourished under this system.

Economic Liberalization

• The economic liberalization 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 liberalize 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.

• In 1991, after India faced a balance of payments crisis, it had to pledge 20 tones of gold to Union Bank of Switzerland and 47 tones 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 (former Prime Minister of India) started breakthrough reforms,

• Although they did not implement many of the reforms the IMF wanted.

New Neo-Liberal Policies• The new neo-liberal policies included • Opening for international trade and investment,• Deregulation, • Initiation of privatization, • Tax reforms, • Inflation-controlling measures. • The overall direction of liberalization 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.

• Pre-liberalisation policies• Part of a series on the History of modern India• Emblem of India Pre-independence• Independence movement • Rebellion / Mutiny / First• War of Independence 1857–1858• British Raj 1858–1947• Partition 1947• Post-independence• Political integration 1947–1949• Non-Aligned Movement 1953–present• States Reorganisation Act 1956

• Indo-Pakistani War 1965• Green Revolution 1970s• Indo-Pakistani War 1971• Emergency 1975–1977•  • 1990s• Economic liberalization

Impact of Reforms

• 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.

• The HSBC Global Technology Centre in Pune develops software for the entire HSBC group.

• 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 US$132 million in 1991–92 to $5.3 billion in 1995–96.

•  • Cities like Chennai, Bangalore, Hyderabad, NOIDA,

Gurgaon, Ghaziabad, 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.

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• 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

• 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”.

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