The history of the Indian economy dates back to thousands of years. India is believed to have been among the largest and strongest economies in the world before the 16th century, controlling nearly a fourth to third of the global wealth.

Fast forward to 1990; the country’s economic fortunes had turned on its head. By then, the country was deep in debt and on the verge of reneging on its financial commitments. The country was running out of dollars to pay for its imports and loan obligations. To avert this disaster, some deft moves and bold steps were needed.

Immediate fire fighting

India had to undertake some urgent steps if it had to retain investor and lender confidence. This led to pledging of our gold overseas to raise some much needed dollars. Though it was unpopular and against the Indian ethos, there really was no option left. India went in for devaluation of the Rupee to make exports competitive and imports a trifle unattractive. This was done in a calibrated manner and the exchange rate was made market dependent partially which ultimately ended up in the INR becoming convertible, though to a limited extent. An amnesty scheme that allowed inward foreign exchange remittance without any questions being asked was another drastic step taken to shore up the forex reserves.

Reforms became imperative

The country was dependent on external support for survival. The lack of political wriggle room and the socialist mindset prevented unshackling of the Indian economy which was tied up in bureaucracy and political patronage. The Gulf war made things worse with oil prices shooting up and inward remittances from expatriates dwindling. India was staring at a foreign exchange crunch. The fiscal situation too had worsened. Multilateral funding agencies like the IMF, which were the traditional sources of external funding for India, were turning the heat on the government, pressing it for economic reforms as a condition for further funding. External debt had ballooned to US$ 66 billion in 1991 from the US$ 22 billion level of 1984. The economic growth rate averaging at about 4%, often referred to as the Hindu rate of growth, over the past three decades was not sufficient to pull millions of Indians out of poverty.

India needed some big-bang reforms to emerge competitive in the globalized competitive landscape. The government formed after the 1991 elections had no choice but to undertake these reforms to get India out of the rut.

Major reforms

The Indian economy needed to unshackle itself from the historical mindset and approach for businesses to flourish. Abolishment of the license raj was the most important step in this direction which enabled Indian businesses to start and expand operations without obtaining licenses or quotas from the government. Opening up of the economy to external investment was another step in attracting FDI, which would not only bring capital but also technology for the benefit of Indian businesses. While some sectors like automobiles, capital goods, etc. were put on the automatic route (here no government approvals for foreign investments were needed), some sectors like banking, insurance, etc. required prior approval of the Foreign Investment Promotion Board (FIPB).

Reform of the foreign exchange laws, by replacing the draconian Foreign Exchange Regulation Act (FERA) with the Foreign Exchange Management Act (FEMA) in the face of improving forex position, was another step towards unshackling the economy. This facilitated smoother and more liberalized foreign exchange transactions by individuals and business entities. Indians could now spend more abroad and also take up limited capital account transactions for investment purposes. Indian companies were allowed to invest abroad which ultimately led to the creation of some Indian MNCs and India’s integration into the globalized world. Gradual decontrol of fuel prices, first in petrol and then more recently in diesel, has provided the much needed subsidy relief to the Indian fiscal position and made these fuel prices reflect international market prices.

Minor reforms

These big-bang reforms were not the only ones that could liberalize the Indian economy adequately. There were many small obstacles that held back Indian enterprises from blossoming to their potential. Offering them flexibility in labour laws by allowing retrenchment of workers by smaller companies without government approval, even while ensuring employee welfare, was an important step in this direction. Decontrol of interest rates, whereby banks were given the freedom to fix their own deposit and lending rates, made funding market determined thereby helping both depositors and borrowers. Rationalization of income tax rates from the prohibitive historical levels to the more acceptable levels of 30% improved compliance, generated more revenue and left money in the hands of the earners to spend thereby boosting economic activity. Introduction of technology in governance has been another step that has brought transparency apart from improving the ease of operating.


 



The hiccup

Economic reforms found broad acceptance among the major political parties in India and led to successive governments traveling further down the path of reforms. However, the few years leading to 2014 was marked by policy drift and a slowdown in reforms. Coincidentally, economic factors like high inflation, high CAD and high fiscal deficit colluded to sharply bring down the GDP growth rate to the 6-7% levels from the earlier 8-9% levels witnessed for a decade till then. The new government, which assumed office in 2014, had to take steps to reverse the decline and put India back on the high growth path. Reforms in Indian Railways, transparent auction of scarce resources, like telecom spectrum and coal, were steps that revived investor interest and confidence. Recent legislative action on the much awaited indirect tax reform with introduction of the Goods and Services Tax (GST) is expected to further accelerate the reform momentum in India.

The challenges

Despite the broad political convergence of views on the need for economic reforms and the implicit inevitability of it, there are challenges that need to be overcome in the path of reforms. Political pressure and populism is one major challenge that can throw the reform process out of gear. Lack of majority for the ruling party in the upper house of Parliament could retard the legislative agenda and would require deft handling by the government. The uniqueness of India with respect to demography, diversity and culture could make tough reforms difficult. Resistance from the labour force would be another challenge in the much required reform of labour laws.

The road ahead

Though much has happened on the reforms front over the last 25 years, much more needs to be done in the near to medium term. GST implementation is a mammoth task that requires further legislation and operational synergy between the States and the Centre. Its implementation is expected to ease business processes, improve efficiency and add to the GDP growth rate. Land reforms, labour reforms, further pruning / targeting subsidies too seem imperative.

Broad consensus among major political parties and market compulsion should ensure continued reforms in India. Political bickering and societal resistance should gradually give way to pragmatism.

To conclude, India is already considered to be the fastest growing major economy in the world currently and reforms will only further bolster the country’s strength. In a nutshell, exciting times lay ahead for India and her citizens.




 







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