India on Move

Indian on Move

Introduction

India is a developing economy with its nominal GDP as the fifth largest in the world.
Household consumption accounts for nearly 60% of India's GDP. The majority contribution
of India's GDP comes from the service sector (around 50%), followed by the industrial sector
and the agriculture sector. Demographically, agriculture is the broadest sector and is a
primary source of livelihood for 58% of the population.
Young people less than 21 years of age represent more than 48 percent of the Indian
population; hence the long-term growth prospective of the Indian economy remains positive.

Share of GDP: 2009 - 2019

Pre- Liberalization Policies after Independence

Foreign Trade Policy:

After independence, the county's economic policy was carried forward from the pre-
independence colonial system. India's trade policy was driven by perceived foreign exchange
scarcities and the desire to ensure that scarce foreign exchange is used only for significance
purpose of economic development. The main objective of the policy was to ensure the
country's independent development. Hence, industrialization and self-availability in essential
goods were the critical goals of India's trade policy.
Mahatma Gandhi's "Swadeshi" economic vision stressed the growth of the rural economy.
These included khadi, handloom, handicraft, and sericulture by establishing cottage
industries. Jawaharlal Nehru believed that the most effective way to win the battle against
mass poverty was through rapid industrialization. It was in contrast with the medieval
Gandhian economic vision centered on household production. However, Nehru's strategy
advocated abolishing the import of foreign products and encouraging production in the
domestic market i.e., replacing imports with domestic production (import substitution). It was
a reaction to a country that had initially been colonized by a trading company. There was a
sense of deep suspicion of foreign trade.

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The inward-looking trade policy stresses to produce all the goods and services for growth and
development within the country. Under this policy, there was a definite restriction of
movement of goods and services, capital, and no kind of foreign investment could take place
from foreigners. In a good sense, the inward-looking policy may have proved to be the
stimulator for the domestic industries or weak industries, and these kinds of policies provided
a chance to the weak industries of developing nation to get stable and robust, which may,
later on, face the foreign competition consistently.
Licence Raj:
Even though the British had left, the situation of India had not changed much. It was as if the
License Raj had replaced the British Raj. Between 1951 and 1991, License Raj was the term
given to regulation and the accompanying bureaucracy, which was necessary to set up and
run businesses in India. The Government resorted to a licensing system to maintain control
over industries as per the Industries Development and Regulation Act, 1951.
Under these regulations, existing industrial units needed to obtain registration, and the new
industrial units were required to set up under the licensed industries category. If a firm
decided to manufacture an item that was initially reserved to be produced by a small-scale
industry, it had to obtain a license for that. Even for increasing the production capacity
beyond 25%, prior approval was required.
India registered a growth rate of just 1.4% in the period between 1960 and 1980. This was
attributed to the disastrous effect of Licence Raj.

The Economic Reform of 1991

Since independence in 1947, the economic policy was greatly influenced by the colonial
experience and it was considered as exploitative by the then Indian leaders. It was mostly
protectionist as India had been shielding its domestic industries from foreign competition by
taxing imports.
Guided by short term and long-term objectives, a new economic policy was launched in 1991
by the erstwhile Union Finance Minister Mr. Manmohan Singh under the leadership of then
Prime Minister Mr. P.V. Narsimha Rao. It was considered as the dawn of global exposure of
the Indian economy, by introducing the LPG model. The strategy was a mix of
macroeconomic stability and structural adjustment. This new model was designed to
liberalize, privatize, and globalize the Indian economy.
The new policy was also the result of the balance-of-payment crisis. Certain international
events were related to the advent of the reforms.
During the late 80s, there was a wave of liberalization all over the world. Several communist
countries like Poland, China, Hungary, etc. started liberalizing their economies to increase the
growth rate. They were successful in this mission. So, India got inspired and followed them.
The Gulf War led to the stoppage of the flow of foreign currency from Gulf countries. The
collapse of the Soviet Union proved that socialism might not be the solution to India's
problem. Also, the Soviet Union was India's major trading partner.

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The stability of inflation and balance of payment equilibrium was necessary as a short-term
measure. India faced an acute shortage of foreign exchange reserves. They were just $ 1
billion (100 crores) barely enough to finance for imports of two weeks.
India's Government was compelled to approach the IMF (International Monetary Fund) and
World Bank for short-term loans. Both these institutions were ready to grant loans only with
a condition to make structural changes in the country that is to remove restrictions and open
the economy. Thus, under the tremendous pressure of the situation, India had to accept the
condition and declared the New Economic Policy in July 1991.

Liberalization: Previously, all aspects of the economy were controlled by the state, and
licenses were given to a select few. With the abolition of this Licence Raj system, the private
sector has been freed from licensing and other economic restrictions. Industrial licensing was
abolished for almost all product categories, except for alcohol, tobacco, hazardous chemicals,
industrial explosives, electronics, aerospace, and pharmaceuticals. Previously, RBI used to
control the interest payable on deposits of different maturities and the rates which could be
charged for bank loans. These bank loan rates also varied according to the sector of use and
the size of the loan. Liberalization of interest rates led to the decontrol of RBI in a sequence
of steps beginning with longer-term deposits and then to deposits of shorter maturity. New
accounting norms of classification of assets and provisions of bad debt were introduced.
Before this liberal economic policy, prior approval was required of companies for capacity
expansion and diversification under the Monopolies & Restrictive Trade Practices (MRTP)
Act. This act was repealed and later replaced by the Competition Act, 2002, to eliminate the
need for prior approvals.
Privatization: It refers to the transfer of ownership of property or business from a government
to a privately owned entity. Privatization meant that the industrial sectors, which were once
permitted only to the public sector, were now allowed to be operated by the private sector.
Also, the policy allowed the involvement of the private sector in the ownership of Public
Sector Units. The PSU's were running in losses due to political interference, and the
managers were not able to work independently. The production capacity remained under-
utilized. Hence, this change in policy was inevitable.
Globalization: Globalization meant the integration of a nation's economy with the global
economy. The new policy heralded a process by which regional economies, societies, and
cultures became integrated by a network of trade, communication, and transportation. The
trade policy reforms focussed on greater openness. Hence, the policy package was essentially
an outward-oriented one. New initiatives were taken in trade policy to create an environment
to provide a stimulus to export. It also aimed at reducing the degree of regulation and
licensing control on foreign trade. The Indian currency was devalued to solve the balance of
payment. Through Foreign Direct Investment, a wide range of sectors could invest. Under
NRI Scheme, the facilities which were available to foreign investors were also given to NRIs.

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India on Move

Outcome of the Reform

Positive Outcomes:

A year prior to the economic reform, the GDP growth rate was a mere 1.1%. Due to the
impact of the 1991 reforms, the growth rate increased year by year and in 2015-16 it was
estimated to be 7.5% by IMF. Much of the increase in economic growth is attributable to the
strong performance of the manufacturing sector, in contrast to the 1970s.

GDP of India: 1960-2019

Foreign Direct Investment (FDI) is a critical driver of the economic growth of India. It has
been a major non-debt financial resource for the economic development of India. Relatively
lower wages, tax exemptions, etc have been the important reasons for the foreign companies
to invest in India. FDI has generated employment for the youth of the country especially for
the technical people. Since 1991, India has established itself as a lucrative foreign investment
destination. Foreign Direct Investment equity inflow in India stood at US$ 49.97 billion in
2019-20. Due to liberalisation many new entrepreneurs have started their own companies.

Exports have increased and stood at USD 26.38 billion as of October 2019.

India Exports: 1957-1960

Securities and
Exchange Board
of India was set
up in 1988 and
was made
statutory body in 1992. SEBI is authorized to regulate the working of mutual funds and stock
exchanges in India.

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India on Move

Insurance sector was the monopoly of central government till recently. In 1999 Insurance
Regulatory and Development Authority (IRDA) Act was passed to introduce reforms in this
sector. The IRDA has given license to many private sector companies to do insurance
business. This has ended the monopoly of government in this sector.

Import licensing controls have been abolished except for imports to consumer goods. Almost
all capital goods, raw materials, intermediaries and components were made freely importable.
The tariff structure had been rationalized and customs duty has been reduced.

Negative Outcomes:

The economic reform favoured the formal sector of the economy, especially the
manufacturing sector, but there was only a marginal increase in the contribution of the
economy. On the other hand, the agriculture sector's share of GDP went down. The
agriculture sector in the Indian economy contributes much higher than the world's average of
6.4%. Moreover, the Indian agriculture sector accounts for 18 percent of India's gross
domestic product and provides employment to 50% of the countries workforce. This has led
to a lower per capita income of the farmers, increasing the rural indebtedness. Nearly three-
fourths of India's families depend on rural incomes, and about 70% of India's poor are found
in rural areas. Agricultural reforms in technological advancement and mechanized farming
could have contributed to the GDP of this sector. To meet the demand of the growing
population with rising income, the food security of India depends on producing cereal crops,
increasing its production of fruits, vegetables, and milk. Thus, it needs to emerge as a more
productive, competitive, diversified, and sustainable sector.

The local businesses got affected when the multi-national companies started doing business
in India. These MNCs were technologically advanced, financially strong, and production
efficient as compared to their Indian counterpart.

Globalization has also contributed to the destruction of the environment through pollution.
Vast areas of vegetations were cleared to set up manufacturing units. Liberalization has led to
environmental impact affecting the health of the people.

The economic reform has also contributed to the widening income gaps within the country.
There was a stagnation of employment generation in both rural and urban areas across the
states. Unemployment increased in most parts of the country. The rural employment growth
rate hit an all-time low.

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India on Move

References

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(GDP) across economic sectors 2019. Retrieved July 31, 2020, from
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gdp-across-economic-sectors-in-india/

2. India GDP Annual Growth Rate1951-2020 Data: 2021-2022 Forecast: Calendar.

(n.d.). Retrieved July 30, 2020, from https://tradingeconomics.com/india/gdp-growth-
annual
3. Half lion how P.V. Narasimha Rao transformed India. (2016). Gurgaon, Haryana:
Penguin Books India.
4. Brand India. (n.d.). Retrieved July 31, 2020, from
https://www.ibef.org/economy/foreign-direct-investment.aspx
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from https://www.encyclopedia.com/international/encyclopedias-almanacs-
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2020, from https://cleartax.in/s/impact-of-gst-on-indian-economy

7. 25 years on, the good, bad and ugly of reforms. (2016, July 17). Retrieved July 31,
2020, from https://timesofindia.indiatimes.com/blogs/Swaminomics/25-years-on-the-
good-bad-and-ugly-of-reforms/

8. https://www.un.org/esa/desa/papers/2007/wp45_2007.pdf