From the heady days of planning, reforms and liberalisation to the present Atmanirbhar Bharat, the Indian economy in the last seven-and-a half decades has seen many fascinating twists and turns.
Despite the exploitative nature of the colonial rule which led to the impoverishment of the country, in the 1920s, an indigenous class of industrialists emerged as the British colonial government accorded some tariff protection to Indian steel, textiles, and jute industries. By the 1940s, despite vast pockets of poverty and rural deprivation, India became the tenth most industrialised nation in the world.
Setting an industrial base
Jawaharlal Nehru was one of the early converts to economic planning and it was in the 1930s that the National Planning Committee was formed by the Congress Party, headed by Subhash Chandra Bose.
In the 1940s, a group of industrialists and economists including GD Birla, Lala Shri Ram, JRD Tata, Ardeshir Dalal and John Mathai came out with a remarkable document called the ‘Bombay Plan’ which laid a roadmap for the economic development of independent India. This plan had some remarkable similarities with the one charted by the Congress Party — both ‘Plans’ called for a massive role for the government in the development of an industrial base for the nation. That the industrialists and politicians were on the same page on a state-led strategy for economic growth was unique to India.
India’s western-style liberal, parliamentary democratic political structure and a Soviet-inspired economic planning strategy, which historian Nikhil Menon calls a unique arranged marriage, had no parallels globally.
It was the second five year plan that set ‘socialistic pattern’ of society, with the public sector firms upholding the ‘commanding heights’ of the economy. It was also a period where the ‘licence-permit-quota’ raj was established.
The first 10 years of planning (1951-61) did achieve some impressive results — an industrial base for capital goods was established and growth rates of 3.6 per cent and 4.3 per cent were achieved during the first two plans.
The decade of crisis
But crisis was not far away and promptly arrived in the 1960s. It was a decade where two debilitating wars, droughts and monsoon failures led to a serious food and balance of payments crisis. It was a decade where the country was heavily reliant on food imports and the ‘ship-to-mouth’ existence was a painful reality.
Indira Gandhi, the then Prime Minister who was still finding her feet in the maze of Indian politics, had to undertake the politically difficult decision of devaluing the rupee for the first time.
But as the decade wound down, the ‘green revolution’ — the adoption of new hybrid varieties of wheat and rice seeds, coupled with irrigation and subsidised fertilisers — made India self-sufficient in food and food imports reduced drastically.
It was during this period that India’s economy took a ‘left turn’, marked by momentous decisions such as the nationalisation of banks and insurance companies, the coal sector, parts of the steel industry and greater controls on industry. More sectors were reserved for the small-scale sectors and the big industry groups were restricted to only some ‘core’ areas.
There was also an abortive attempt to nationalise the grain trade to control runaway inflation in the 1970s and peak income tax in that period was at 97 per cent!
The massive strikes and political unrest of the early 1970s culminated in the Emergency and ironically growth spiked during this period. Some loosening of the state’s grip on the economy was seen in this period.
It was also in this period that two important committees — the RK Hazari committee and the Dagli committee — were formed to look into the policy of licensing and both of them called for its reform.
The second oil crisis of 1979 worsened external finances and India had to approach the IMF for help which led to further loosening of government controls.
Winds of change
The 1980s saw a shift to a more liberalised economy. Import duties on electronic components were slashed to promote the domestic electronics industry. Rules for technical collaborations with foreign companies were eased.
The automobile sector reaped the benefits as the PSU Maruti Udyog and two-wheelers firms such as Hero, TVS Motor, and Bajaj Auto joined hands with Japanese firms Honda, Suzuki, and Kawasaki to launch a whole new range of cars and two-wheelers.
But these were still baby steps and ironically it took a full-blown balance of payments crisis in 1990-91 for the wholesale dismantling of the licence-Permit-Quota Raj.
1991 and after
The gross fiscal mismanagement of the 1980s, with fiscal deficit close to 8 per cent, led to a serious balance of payments crisis and the country was at serious risk of defaulting on its external debt. The economic and political risks of a default were unimaginable and the short-lived Chandrashekhar government approached the IMF for help again.
The Narasimha Rao government that came to power in 1991 took two crucial decisions — first it devalued the rupee and second it pledged gold to the Bank of England to avoid default.
But crucially, PM Narasimha Rao along with Finance Minister Manmohan Singh took this crisis as an opportunity to undertake large-scale industrial, trade and financial reform. Thus began the dismantling of the Licence-Permit-Quota Raj with the “bonfire of controls”, to use IG Patel’s colourful phrase.
Trade reforms and import duties were slashed across the board. Rules for foreign investments were substantially eased. Financial sector reforms were also undertaken with controls eased and rupee was taken off the currency peg and allowed to “free-float”, which means its rate was now market determined.
Crucially by the mid-1990s there emerged a political consensus on the importance of reforms agenda and the BJP-led NDA government of Vajpayee took the reforms process forward.
The benefits of reforms were seen a decade later when the country consistently posted 8+ per cent growth between 2003 and 2011. The standards of living of people across classes improved. More than 300 million people were pulled out of poverty in this period.
The structure and size of the economy underwent a drastic change. Indian industry came of age and became more competitive. Conglomerates such as Tatas, Reliance, Birlas and Mahindras also started acquiring firms abroad and became truly multinational.
The one sector that truly benefited from reforms and a more open economy was the IT and IT services industry — home grown companies like Infosys, Wipro, HCL and Tech Mahindra became world leaders.
The telecom sector was another success story and the mobile phone and internet penetration leading to a major transformation to the lives of Indians.
The misses of the last seven-and-a-half decade are unfortunately many. India’s still abysmal human development indices is a matter of deep distress. Here too, there are wide regional disparities with the Southern States comparing well with even some western countries. The Northern, Eastern and Central States are lagging behind, though the North-Eastern States have made impressive strides.
That health and education remain to be universalised is a huge failure of the Indian polity.
The jobs scenario is another area of concern. The growth in India has been largely of the “jobless” kind, where industrial growth has not led to a commensurate increase in job opportunities. India’s unusual leap from the agrarian stage to the services stage, bypassing the manufacturing stage, has inevitably had an impact on job creation.
Agriculture is another area crying for reforms and change. Though its share in the GDP has dropped drastically it still supports a large part of the workforce. It is a sector that is hugely dependent on state subsidies — price support, grain procurement, free power, fertiliser price subsidies — and this has had a telling impact on state finances. Reform in this area is complex and politically fraught as seen by the abortive attempt made by the Modi government in enacting and then repealing the three farm laws in 2020-21.
India is also a country riven by huge income, gender and caste disparities that need to addressed. Ranking 135 out of 146 countries in the WEF’s recent gender gap report, it is a reflection of the shockingly poor status of women in India. Their abysmally low labour participation rate shows the huge social and economic barriers that women face to gaining meaningful employment.
As India enters its 76 th year as an independent nation, there is much to celebrate about but there is also much that remains to be accomplished.