- Date : 15/08/2019
- Read: 8 mins
It has been 72 years that India gained Independence. But how has it fared in terms of its economy? Let's take a look.
India’s growth story since Independence is essentially a shut-and-open case. After following a closed economy for decades, the liberalisation era that was ushered in by PV Narasimha Rao's government opened the floodgates for both private and foreign investments. This set the country on a long upward trajectory.
Former journalist, researcher and author Gautam Chikermane summed it up best when, in his book 70 Policies that Shaped India: 1947 to 2017, he wrote, “If the Industrial Policy Resolution of 1956 was the single most important policy that shut India down, the 1991 statement on industrial policy is the overarching architecture that opened all doors.”
Today, India – with a growth rate expected to touch 7% in 2020 – is considered to be an emerging market. Along with China, Russia and Brazil, India is one amongst four of the largest developing economies in the world.
(Emerging markets are developing economies that have shown signs of being able to evolve into a developed nation. Some of these economic indicators include a healthy GDP growth rate, existence of regulatory body, liquidity and a country’s financial market.)
As India enters its 72nd year of being an independent power, it is important to remember that the economic picture was not always rosy. The country's economy was considered to be the elephant that trundled, with its muted growth being termed as the “Hindu rate of growth”.
Stifling economic policies that came to be informally known as the Licence Raj, held India back for the first four decades post Independence. This changed in 1991 under the Narasimha Rao government, when India actively began to embrace globalisation.
Interestingly, it was the twin pillar of the Nehruvian conservatism legacy and India’s post-1991 global outlook which ensured that the country was not massively injured by the 2008 global meltdown.
Over the subsequent decades, the conservative approach became so inbuilt in the Indian psyche that all banks and financial institutions stayed away from risky ventures that had proved toxic for financial institutions elsewhere. This lead to the 2008-2015 recession. It helped cushion the impact of financial upheavals in the developed economies.
Plus, at the time the financial meltdown, India was much less dependent than most on global trade and capital. For instance, its external trade accounted for about 20% of its GDP as against China’s 75%.
The large domestic market, which accounted for the rest of the GDP, kept the economy ticking as Indian manufacturers produced goods and services to meet local demand. Domestic investors also invested most of their funds locally, thanks to the 1991 policy shift that lifted curbs on private investment.
NRI-friendly policies helped to ensure that remittances from Indian expatriates and the diaspora kept growing. It reached $46.4 billion in 2008-2009. In fact, these policies ensured that for several years, India would be the recipient of the highest remittance. This value touched $75 billion in 2018.
As a result, domestic consumption rose, keeping domestic producers engaged in 2008-2009. India’s GDP growth rate hit 6.7% in 2008-2009 at a time when the global crisis was battering most of the world's economies.
But first, let us go back to the beginning to gain a better understanding of how we reached where we are today.
Around the time India rolled out its first Five-Year Plan (1951-56) that concentrated primarily on increasing the national food production, the Jawaharlal Nehru government also enacted the Industrial (Department and Regulation) Act, 1951. Colloquially known as the IDR Act 1951, it empowered the government to regulate the pattern of industrial development through licensing.
While the 1951 Act gave birth to the “Licence Raj” – an elaborate system of licences, regulations and accompanying red tape that were needed to set up and run an industrial unit – what followed was the nationalisation of banks and other financial institutions.
Thus, Imperial Bank of India was nationalised in 1955 to the State Bank of India, while 1956 saw 200 insurance companies and provident societies being merged to form the Life Insurance Corp (LIC).
In 1956, the government also announced the Industrial Policy Resolution, which sought to enhance the role of the public sector, while expecting the private investments to contribute wherever possible. As part of this programme, the 1956 Resolution classified industry into three categories: Schedule A, B and C Industries. These were split thus:
- Schedule A Industries: This comprised of 17 industries entirely under the Central government's supervision and included sectors such as defence, railways, air transport, mining, iron and steel and power generation;
- Schedule B Industries: This list had 12 industries allocated to state governments which they could run in alliance with private companies, provided the latter acquired the relevant licenses;
- Schedule Industries: These were the industries which were not covered by the first two schedules and were subject to the IDR Act.
But instead of propelling India, this socialist classification and licensing of the industry had three fallouts that choked India’s economy:
- State-owned companies gathered flab at the cost of efficiency
- Entrepreneurship got curbed as those with connections got licenses
- The fiscal future of the country was left at the mercy of bureaucrats
Faced with a crippling forex reserve crisis in 1991, the then government led by PV Narasimha Rao announced a new economic policy that saw Licence Raj being abolished, state-controlled industries opened to foreign technology investment, and steps were taken to regulate unfair trade practices.
The new policy showed that India had, for the first time, become serious about GDP growth and boosting industrial efficiency. The areas that it looked at were:
- Industrial licensing: The number of industries that required licenses was cut to 18 in 1991, and further to six by 1999 – pharma, hazardous chemicals, explosives like gun powder, tobacco products, alcoholic products, and electronics, aerospace and defence equipment. This in effect was the scrapping of the Licence Raj.
- Foreign Investment: For the first time, foreign entities were allowed to hold a controlling 51% stake in an Indian venture; this applied to 47 industries, while export houses were allowed to have a stake of up to 74%.
- Foreign Technology: Automatic permissions were given for tech transfer agreements on a lump sum Rs 1 crore, along with various royalty conditions.
- MRTP Act Amendment: Threshold limits of MRTP companies were eliminated and the replaced in 2009 by the Competition Act 2002.
- SSI Reservations Diluted: This tiny sector was re-defined to units with less than Rs 5 lakh investment, enabling previously reserved sectors to attract higher investments.
These were revolutionary steps that cleared away systemic drawbacks built over four decades and allowed the industry to flourish in post-1991 India, making it a landmark policy.
Reforms were also brought about in the financial sector, as noted by the Asian Development Bank in a report released in 2011. “India is contributing significantly to …world economic growth,” it said. “Hence, it is important to look at the manner in which financial development has occurred in India.”
The study took note of the post-1991 changes made in the financial sector – securities, debt, foreign exchange etc. – and found marked movement towards global standards in each. In the securities market, for instance, it compared the 2009 situation to what existed pre-1992 across various areas such as a regulator, a form of securities, their pricing, intermediaries, disclosure norms and access to international market etc.
Listed below are some of the progress reports the study found:
- [Pre-1992]: No specific regulator, but had central government oversight
- : A specialised regulator for the securities market (SEBI) was created in 1992, which was empowered to protect investors’ interest and to develop and regulate the securities market
Form of securities
- Dematerialised through enabling legislation (1996–97)
- Only some intermediaries (stockbrokers, authorised clerks), who were regulated by SROs (self-regulatory organisations);
- Specialised intermediaries – registered and regulated by SEBI and sometimes by SROs, identified by a unique identification number – were required to follow a code of conduct;
- Granted by the central government;
- Access granted after compliance with issue requirements under the SEBI Act, 1992;
International market access
- No access
- Corporations allowed to issue ADRs, GDRs and raise ECBs, while foreign institutional investors allowed to trade in Indian markets.
Related: 5 Economic concepts you need to know
India has followed a market-driven economy from 1991 despite the changes in ruling parties at the Centre. In line with this, the current government under Narendra Modi’s prime ministership has sought to promote a culture of entrepreneurship in the country over the last few years.
As part of this effort, it has launched several programmes. One of these, the “Make in India” initiative is aimed at transforming India into a global manufacturing hub, while the “Standup India” campaign seeks to boost entrepreneurship and jobs creation.
In his first term, Modi launched a drive against slush funds and sought to simplify India’s complicated tax system. He has been voted back for a second term with a bigger mandate. More bold measures may be expected to keep the economy on a stronger growth orbit. Check out these 7 Government schemes to aid economic development and financial stability that you can benefit from.