Indian economy at 75: The story of a great unshackling

At that midnight hour on 15th August 75 years ago, India started out with arguably the most robust industrial and entrepreneurial base of all countries that would eventually get decolonised over the next decade or so. The original intent of the planned economy model that was adopted post-independence was of big push from the state in support of that entrepreneurial base. But that system quickly ossified into a state dominated, as opposed to state supported, economic and industrial policy apparatus where bureaucrats and their political masters decided what, how much, and where to produce, and sometimes even the price to charge for it. A convenient myth to airbrush this reality is that India chose socialism. But what India’s ruling elite actually chose was a system of crony capitalism that benefitted the few at the expense of the many. The legacy of that choice still looms large in our political economic discourse, even as we struggle to set free the entrepreneurial energies of small businesses and farmers from that stranglehold. In that sense, our independence struggle is ongoing. The results of this narrow pursuit of vested political and business interests are well known to all. India’s long-term GDP growth between 1950 and 1990 was around 4%, far below its potential. This is underlined by the fact that India’s GDP per capita in 1947 was 7.1% of the US, by 1995 it has actually shrunk to 5%. The reforms in the 1990s was beginning of the process to undo this legacy of crony capitalism wrapped in pro-poor socialist colours. Indian economic reforms can be perceived as involving four interconnected but discrete layers. The first layer involved eliminating the distortion caused by quotas, quantitative restrictions, price controls, licensing, etc. This was the focus of the reforms that were pursued by Narsimha Rao and Vajpayee Governments in the 1990s. PM Vajpayee also brought in a renewed focus on addressing India’s hard infrastructure deficit. Thanks to those initial reforms, India and her people are at a much better place today. I would urge my readers to look beyond often-quoted numbers such as the increase in India’s share of global GDP (from about 4% in 1950 to 7% in 2019 in PPP terms), or global trade (0.5% in 1980s to 1.7% in 2018), or the large number of Indians who were pulled out of absolute poverty in the two and half decades since mid-1990s (about 200 million). Instead, let us look at examples around our own lives that I am sure all Indians would recognise. Our domestic help in the early 1990s could not afford a bicycle or a visit to the airconditioned single-screen movie theatre. Our domestic help today visits multiplexes regularly, sends her two children to a private English medium school, and in 2018 had decided to take a flight to her home in North Bengal after finding a cheap ticket online using her smartphone. Yes, there are still plenty of Indians who live in dire poverty-about 250 million Indians subsist on an income of less than USD 2 per day, and the pandemic can potentially push many more into that category. But the transformation of lives due to the ‘independence’ of the Indian economy from the ‘license quota raj’ and the tyranny of bureaucratic control is too ubiquitous to deny. These initial reforms were followed by a long-period of inaction as the Manmohan Singh government was faced with the contradiction of an alliance with the communists and the burden of numerous scams in his second term. It was only in 2015 under PM Modi that the second layer of reforms-focusing on addressing the design and structure of economic governance started to get addressed. Some of the critical reforms included reforming the Insolvency code, labour sector reforms and direct benefit transfers for subsidies. Another example is the new Farm Bill that would free India’s farmers from overarching state control, but is currently facing political headwinds from vested interests. A good start has also been made on the third layer of reforms associated with addressing microlevel administrative inefficiency and poor quality of governance that add high transactions costs to doing business, and has hindered optimal investment in manufacturing and agriculture. India’s ranking in World Bank’s Doing Business surveys have improved very significantly in the last five years. But reforms in this third layer cannot be limited to the Federal level alone. The state governments have an equally important role to play in this facet of reforms, since many of the areas, from electricity distribution to enforcement of regulations on transport, warehousing, and land acquisition, are essentially state subjects. Ignoring the difficult second- and third-layer reforms after the initial spurt in the 1990s, and the significant slowdown in infrastructure development has cost India. Persistently high costs of doing business and relatively poor quality of infrastructure and logistics discouraged investment led growth in manufacturing. Despite improved economic growth since 1990s, share of manufacturing as percent of GDP has continued to languish below 20% and manufacturing sector accounts for less than 15% of all jobs. This is the single biggest contributor to rising inequality in India. With relatively few middle-class jobs being created in manufacturing, India has not been able to replicate the socio-economic transformations seen in China, Malaysia, Thailand and other Asian countries. Faced with the so-called industrial revolution 4.0-defined by increasing automation, and the rise of sophisticated protectionism across the world, India has an uphill task of expanding its manufacturing sector and generating meaningful employment for what is the world’s largest cohort of young workers. It would have to do so with shrinking opportunities for labour intensive manufacturing and without the relatively open global markets that countries like China and South East Asian economies are depended on to pull out a significant section of their population from poverty. Competitiveness would be increasingly defined by skills, ability to adopt technology and productivity. This brings us to the fourth layer of reforms. For too long, education and health policy and associated infrastructure has been seen as independent of the overall matrix of reforms needed for national competitiveness and well-being. It is now time to focus on human resource development in all its dimensions. Otherwise, India stands the risk of being left behind in the new landscape of technology intensive production networks that would define the global economy in the coming years, and condemn its current generation of young workers to persistent levels of poverty and poor quality of life. The unfinished second and third layer of reforms associated with improving economic governance and unshackling entrepreneurship need to be expedited, and the fourth layer of reforms focusing on socio-economic interventions that make Indian economy competitive, taken up proactively. This would require cooperation between the states and the centre, and living up to the idea of the Union our founding leaders envisioned. This would require political maturity and unity of purpose. Our collective ability to find that unity of purpose will define India’s future tryst with destiny.

Pritam Banerjee is an independent trade and economic policy professional. He is currently employed by Asian Development Bank as a Logistics Sector Specialist Consultant. The views expressed in this article are entirely his own and do not reflect any of his employers.

By Dr Pritam Banerjee