India was considered by its colonial rulers to be the brightest jewel in the British crown, as it was relatively well endowed in terms of natural and human resources, physical infrastructure and entrepreneurship. India’s social and economic indicators at the time of independence were similar to those of Southeast Asian countries and China in terms of poverty level, illiteracy and health status.
When independence was achieved, continuity with the past was less disrupted as the majority of experienced officials who administered British India chose to serve the newly independent country. Another advantage is that the political party that came to power – the Indian National Congress – had thought about the country’s development choices and had prepared an economic plan even before coming to power.
Two paths of development then offered to newly independent countries were based on liberal market or state control and command economy based on central planning. The path chosen by Congress, inspired and guided by Pandit Nehru – himself a Fabian socialist – was this – central planning dominated by the public sector. Although the Industrial Policy Resolution of 1948 proposed a mixed economy, central resource allocation plans favored the public sector. India established the Planning Commission in 1950 to prepare and implement the first five-year plan. The plan launched in 1951 focused on agriculture and irrigation to boost agricultural production and overcome the food shortage.
The second plan advocated rapid industrialization focused on heavy industries and capital goods – a constant theme of subsequent plans – which prevailed until 1991. In addition, the public sector took control of the economy and the role of the private sector. sector has gradually shrunk. From the 1950s to 1991, several industries such as airlines, banking, and insurance were nationalized.
In 1950, agriculture was the dominant sector of the economy with 55% of GDP and over 80% of employment and livelihoods. The average GDP growth rate between the 1950s and 1970s was around 3.5%, rising to over 5% in the 1980s. A major reallocation of funds to industries away from the agricultural sector compounded the shortages food and inflation soared in the country.
Shastri in 1964, succeeding Nehru as Prime Minister, emphasized agriculture. High-yielding wheat varieties developed by researchers in Mexico and rice developed in the Philippines have been adopted and widely disseminated. The substantial increase in food grain production along with the White Revolution in the form of increased milk production helped India achieve food security.
Until 1990, India was lagging behind other developing countries with an average economic growth rate of 3.5%, stagnating per capita incomes, increasing incidence of poverty and a shift towards internally isolated from the global economy in terms of trade and investment. The private sector was hampered by permits, licenses, import bans and restrictions, foreign exchange quotas and nationalized bank deposits used to finance government deficits or for public sector projects. Under the government of Rajiv Gandhi, there was a partial move towards liberalisation, but these measures were not maintained and were quickly withdrawn. However, it was realized that even these limited efforts had pushed the rate of economic growth beyond the 5% average in the 1980s – an unprecedented feat.
The turning point came in 1991 when the cumulative effect of past economic policies of command and control and public sector domination led to a severe balance of payments crisis in the country. The country had foreign exchange reserves that could only pay for three weeks of imports. Prime Minister Narasimha Rao, with the capable help of his finance minister Manmohan Singh, prepared a comprehensive reform program and approached the IMF for a bailout.
The raj license and permit were scrapped overnight, the main barrier to private sector entry for permission to increase capacity or create new capacity was removed, accelerated measures to promote exports were instituted to enable exporters to enter the world market and exclusivity for public enterprises and the private sector ended. Foreign trade rules were liberalized and the protection of domestic industries in the form of high tariff rates ended as they were now required to compete with foreign products.
Complex import licenses have been removed so that domestic industries can import raw materials, parts and components, machinery and equipment without any restrictions. The exchange rate was pegged to a basket of currencies rather than set arbitrarily by the government. FDI rules have been changed to attract foreign capital, technology transfer and management expertise. Approvals of up to 51 percent of equity investments by foreign companies were made automatic.
Investment in the local stock market was permitted for foreign institutional investors. The practice of automatic financing of the budget deficit by the Reserve Bank of India has been abandoned. Top tax rates on personal income, corporate profits and capital gains have been reduced. For-profit public enterprises have been given greater autonomy and freedom to raise resources in the capital market. Some of these companies have been privatized with transfer of management control to the strategic investor. Power generation and the insurance sector were opened up to the private sector, and Indian companies were allowed to raise funds abroad.
This paradigm shift in the basic philosophy of economic policy-making and governance was not taken seriously by domestic and foreign investors in the first place, because for them the real test was whether these reforms would be supported or implemented by a different political party that came to power. . Although the rate of economic growth during the period 1991-96 exceeded 5%, the real kick-start for the economy came after the BJP government under Vajpayee not only continued these reforms but introduced new new liberalization, deregulation and privatization reforms. The credibility and non-reversal of these reforms was established and the Indian economy was taking over at a speed never seen before.
The change in policy direction pushed the investment rate to 28% in 2004-05, with private sector investment rising from 13% to 20% in 2004-05 and 24% in 2009-10. India’s GDP growth rate reached 8% in the mid-2000s. FDI flows accelerated from $6 billion a year in 2000-01 to $81 billion in 2021-22 . Foreign exchange reserves exceeded $600 billion. Poverty has fallen to less than 20%. Fiscal deficits remained contained within a narrow range of 6-7% of GDP.
The share of goods exports in the global market has tripled since India decided to integrate into the global economy. India has become the back office of the rest of the world, with services exports growing from $16 billion to $240 billion in the last two decades alone. The buffers India put in place saw it weather the storm of the 2008 global financial crisis and the 2020 Covid-19 pandemic. There was a downturn and decline and many ordinary people suffered during the lockdown, but the economy has shown resilience.
At $3.2 trillion, India has become the sixth largest economy in the world, behind the United States, China, Japan, Germany and the United Kingdom. The per capita income of $2,500 is a multiple of 30 of what it was at independence. The production of food grains which was 50 million tons in 1950 has increased sixfold over the past seven decades to 316 million tons, while the population has increased 3.7 times over the same period, which indicates almost twice as much availability in consumption per capita. The literacy rate is nearly 78% compared to 18%, with female literacy rising from 9% to 70%.
To be continued..
The writer is the author of ‘Governing the ungovernable’.