Column | C. Rangarajan & N.R. Bhanumurthy on Rethinking India’s Development Strategy for Economic Growth

India’s development strategy in the first four decades after Independence was marked by four important elements: dominance of the state in economic activity particularly in the area of investment; an industrial strategy marked by an import substitution policy without regard to cost considerations; centralised planning where the allocation of resources to various sectors of the economy was determined by the erstwhile Planning Commission; and the use of a multitude of controls, permits and licences to achieve these goals.

This overall strategy pushed the stagnant economy forward but only to a limited extent. The overall growth rate between 1950 and 1990 was 4.18 per cent. The crisis of 1990–91 made the policy makers move away from this strategy and the liberalisation policies introduced since 1991 deviated from the earlier strategy in the following ways:

The first was to dismantle the complex regime of licences, permits and controls that dictated almost every facet of production and distribution. Barriers to entry and growth in private sector were dismantled. The second change in direction was to reverse the strong bias towards state ownership of means of production and the proliferation of public sector enterprises in almost every sphere of economic activity. Areas once reserved exclusively for the state were thrown open to private enterprise. The third change in direction was to abandon the inward-looking trade policy. By embracing international trade, India signalled that it was boldly abandoning its export pessimism and was accepting the challenge and opportunity of integrating into the world economy. These broad principles were applied to various sectors of the economy. Economic growth picked up. From 1991 to 2025-26, the average growth rate in gross domestic product was 6.15 per cent.

While these principles largely hold good, a modification of the strategy has become necessary in the context of protectionist policies by major economies and the new stance that has been taken by the United States (US) in the recent period and especially after US-Iran war in relation to foreign trade.

Trump’s imposition of tariffs unilaterally and the US-Iran war leading to the blocking of the Strait of Hormuz have given a big shock to the world economy and global trade particularly. The two pillars of the international trading system have been knocked down. One is the international consensus on tariff rates and the other is free movement of goods along the seaways. India needs to address these immediate concerns that can worsen if the war continues. Even if a settlement is reached, we cannot rule out the possibility of such episodes recurring. Unfortunately, we are entering an era of ‘might is right’. India’s strategy of development must be changed to incorporate such eventualities.

India must identify sectors that should receive high priority under the recalibrated scheme for domestic production. Atmanirbhar as a strategy must be interpreted correctly. Make in India should not mean blind import substitution as it happened in the first few decades after independence. Indian industry must remain competitive. And Make in India should be for the Rest of the World.  Recent events have also shown that we must produce not only to meet consumption but also create reserves of commodities that are critically important. The same needs to be done with respect to certain critical imports like crude oil. The energy sector needs a careful reassessment. Dependence on imported energy must be substantially reduced through the development of alternative sources of energy. We must also adopt new technologies like artificial intelligence (AI). We cannot afford to lag behind such developments despite their impact on employment. The new strategy must take into full account the changes in the global situation and modify the liberalisation strategy. Some of the changes suggested are contrary to the policy of liberalisation. But modifications are needed because of a fundamental change in the approach to global trade by leading countries.

India is entering into free trade agreements (FTAs) with major partnering countries like the United Kingdom and Australia and is in the final stage of negotiations with the US and a few Gulf countries. This is good news.  But going by the outcomes of the past FTAs, India must be cautious about placing heavy bets on new FTAs. There are restrictions on other factor movements—movement of capital and labour.  The emerging immigration policies in the US and the European Union and the restrictions on foreign investments are entirely contrary to the principles of globalisation that were adopted in the 1990s.  So, what strategy should India adopt to achieve the 2047 target?

In the context of global developments, India must focus on improving its productivity and competitiveness. There could be some lessons here from China and Vietnam. On productivity, a simple estimate of Incremental Capital Output Ratio (ICOR) suggests that it is at around five and this needs to be improved, i.e., lower the ICOR. The KLEMS data suggests that although India’s recent productivity growth is almost at par with China’s growth and in some years,  higher, India has to do a lot of catching up. On competitiveness, the global indices (world competitiveness rankings place India at 41 among 69 economies) do suggest some improvement largely due to a few institutional reforms initiated recently.  However, to achieve the Viksit Bharat target, there is a need for a lot more structural reforms in the factor markets as well as significant investments in physical and social infrastructure.  Another area that India needs to focus on is knowledge and innovation. The recent South Korea and China models with ranks four and 10 in the WIPO Global Innovation Index, respectively, (India at 38th rank), suggest a strong positive correlation between innovation and competitiveness. This is one clear area where India could do a great deal more. Focusing on innovation becomes even more crucial in the present context of de-globalisation. While reverting to fair and free global trade with better global governance is an ideal and optimal solution, the recent episodes do not appear to ensure such conditions in the near future. The second-best solution is to enter into regional trade agreements, supplemented by domestic production of critical goods and services in an environment of enhanced productivity and competitiveness.

(Views expressed are personal)

C. Rangarajan Fmr. Chairman, Economic Advisory Council to the PM (to Manmohan Singh) & Fmr. Governor, RBI

N.R. Bhanumurthy Director, Madras School of Economics, Chennai

(This story appeared in Outlook magazine’s August 31 issue, 'Whose Idea of India?', in which India’s noted public intellectuals, policymakers, cultural practitioners, political leaders, scholars and economists write in detail about the idea of India they believe can best secure the nation’s future as we celebrate 80 years of independence.)