What happened and why? Are we really becoming a big economic power? What does the future hold for this nation of 1.1 billion (and growing) in the decade ahead? Let's explore the contours of this exciting story.
Not so long ago (1990), in a country far, far away, foreign commerce was severely repressed. Exports were discouraged by an over-valued exchange rate (Rs 18 per US dollar), hideously complex access to imported inputs and low profitability compared to the hugely protected domestic market. Imports were controlled through detailed licensing of almost all products and unbelievably high customs duties ("peak" rates were higher than 200 per cent!). An equally Kafkaesque system of industrial licensing told entrepreneurs and manufactures what to produce, where and how much! Banks (overwhelmingly government-owned) were told how to give credit, at what rates, how much and to whom. All interest rates were set by government and the Reserve Bank. Needless to say, there was a flourishing illegal market of bribes and payoffs for most licences and permits, which was intimately entwined with politics and election finance. Forex control (and scarcity) was the reigning deity to which all public policy paid homage, while the "hawala" trade flourished. Predictably, there were hardly any private inflows of foreign investment.
What else can we remember about 1990? Well, there were only three makes of cars, the Ambassador, the Premier Padmini and the "new" Maruti-Suzuki. Indica was a good name for an encyclopaedia. Television pretty much meant Doordarshan. Nobody had heard of Infosys and Wipro, let alone Narayana Murthy and Premji. The World-Wide Web suggested a horror movie on spiders. Jet referred to a type of aircraft, not an airline (which didn't exist). "Nifty" meant swift, not a stock exchange index, since the NSE was only created in 1994. The term fii didn't mean anything; the policy which birthed foreign institutional investors came in late 1992. Foreign trips were only taken by the very rich and government officials, who were usually burdened with shopping lists by spouses, relatives and friends for consumer "goodies" (including quality razor blades, cosmetics and ballpoint pens) not available in the country. Telephone connections came with your job...or you waited a few years! Cellphones didn't exist.
On to this over-regulated, inward-looking, under-performing economy was grafted the fiscal profligacy of the late 1980s and the temporary oil shock of the first Iraq (Kuwaiti) war. The result was the full-fledged external payments crisis of 1991, with industrial growth falling, inflation soaring and the overall economy stagnating. The new Congress government might have responded with harsher controls on foreign trade and payments. Instead, prime minister Narasimha Rao appointed a technocratic finance minister and gave him strong political backing. The rest is history. Manmohan Singh and his small band of reforming colleagues (including Montek Ahluwalia, P.Chidambaram and C. Rangarajan) launched an array of reforms, which changed the course of India's economic history. The exchange rate was devalued and made market-responsive. Industrial licensing was swept away, as was much of import licensing. Customs duties were sharply reduced and other taxes reformed. Foreign direct and portfolio foreign investment were welcomed. The fiscal deficit was cut. Interest rates were freed. Banking was reformed (partially) and the stockmarket was modernised, including by establishing the electronic-trade-based NSE and giving sebi legal backing.
The fruits of the ongoing reform programme were reaped very swiftly. Economic growth surged to exceed 7 per cent in three successive years in the mid-nineties. Industrial growth leapt to double digits. Agriculture recorded the fastest five-year growth (1992-97) in India's history at 4.7 per cent. Exports grew at 20 per cent for three consecutive years. Remittances from nris quadrupled in four years and foreign investment went from negligible to $5 billion in the same period, taking foreign currency reserves from $2 to 20 billion in short order. Stock prices recovered from the 1992 scam and new issues flourished. New private banks were launched.
Although the momentum of reforms slowed after 1995, the broad direction of change in favour of greater market orientation and more private sector participation remained intact. Despite successive changes of government, disinvestment of public enterprises continued, the telecom sector was opened up and so were domestic airlines and insurance. There was more hesitant progress in electric power, ports and roads. Private television channels mushroomed. Capital markets were strengthened. Remaining import licensing was phased out by 2001 and peak customs duties steadily reduced (down to 15 per cent in the recent budget). Given the three changes in government at the Centre since 1995, the continuity in policies is remarkable.
The cumulative impact of the initial reforms and the more sporadic initiatives since has been enormous. Economic growth has averaged 6.2 per cent since 1991, making India one of the ten fastest growing countries in the world. Today, average living standards are 70 per cent higher than in 1991, having clocked average growth at 4.3 per cent a year for 13 years. Literacy increased from 52 to 66 per cent of the population. According to the NCAER, almost 100 million people now live in households with incomes between Rs 2 to 10 lakh a year, compared to around 15 million in 1991. This is India's rising middle class. The proportion of people below the poverty line has dropped from nearly 40 per cent to around 20 per cent. Exports of goods and services (including remittances) now account for 20 per cent of GDP as compared to 10 per cent in 1991. Annual software exports have risen from near zero to $17 billion, while foreign investment has climbed from barely $100 million to over $16 billion, thanks mainly to the spurt in fii investments in our stockmarket. With forex reserves at $135 billion the problem today is managing its abundance! Annual sales of two-wheelers have tripled from 1.8 million in 1991 to 5.6 million in 2004, while those of cars (plus SUVs) have soared from two lakh to a million. Fixed telephone connections rose from 5 to 45 million in thirteen years, while mobiles jumped from 2 to 50 million in the past four years.
Not everything is hunky-dory. Over two hundred million Indians still live barely—in abject poverty below a minimal poverty line. More than three-fourths of them are in rural India, where the annual growth of agriculture has slumped to hardly 2 per cent since 1997. Shockingly, almost half of India's children below 5 years were under-nourished in 2001 (compared to 12 per cent in China). And 46 per cent of India's female population was illiterate (only 5 per cent in China).Over 40 million job-seekers were registered with employment exchanges in 2004, while employment in the organised sector (including government) of the economy stagnated below 30 million throughout the last 13 years. Not surprisingly, India is ranked at a lowly 127th out of 177 countries by the latest UNDP index of human development. Improvement is unlikely to be swift given the pressures on state finances and the continuing decline in governance and administrative capacities. The geographic pattern of India's development has remained skewed, with the populous central and eastern states of Uttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and Orissa lagging behind the rest of the country. In 2002, average income in Bihar was less than one quarter of levels in rich states like Haryana, Punjab and Maharashtra! The poor quality of our physical infrastructure (especially power, roads, ports and water supply) is well-known. Large fiscal deficits (10 per cent of GDP for centre and states) soak up private savings and bloat government debt. Above all, the old mindset of government interventionism, subsidies and patronage is still influential, especially in predominantly government-owned sectors of energy, banking, transport, power and water.
While our engagement with the world economy has increased substantially since 1991, we are still far from being a serious economic power in global trade and finance. Our share of world goods exports may have doubled since 1991 from 0.4 to 0.8 per cent in 2004. But it pales in comparison to China's surge from 2 per cent share to over 6 per cent in the same period. In each of the last three years, the increase in China's foreign trade has exceeded India's total foreign trade! In the last quarter of a century foreign direct investment into China has cumulated to a staggering $560 billion. Over the same period India has received hardly $35 billion, less than the $60 billion that poured into China in 2004 alone. If only our Left parties would emulate China's attitude towards globalisation! A tragic result of our timid approach to global economic opportunities (coupled with rigid labour laws, small-scale industry reservation policy and terrible infrastructure) has been the slow growth of our industrial output and employment. In 2003, there were hardly 5 million workers in organised manufacturing out of a labour force of over 350 million! In contrast, Chinese factories employed over a 100 million workers.
The bottomline is, we have come a long way from 1990 but we have a long, long way to go. What does the future hold for us? Our potential is definitely enormous. We are the only big country where the proportion of working age people in total population will continue to increase for the next 30 years. So there should be no shortage of workers or their savings. Our industry has demonstrated its capacity to compete effectively in an increasingly open economy, despite the handicaps of infrastructure and bad policies. The new strengths in a widening variety of services promises much. India's capital markets have matured and shown the ability to attract large volumes of global funds, helped greatly by the high quality of many companies, some of which have listed on New York and London exchanges. Our democracy may be messy and contentious, but it is deep-rooted and assures stability and peaceful changes in government.
Even cautious conservatives like me expect India's economic growth to average 6 per cent a year over the next decade, barring a major crisis in banking, public finances or the world economy.Bolder optimists foresee 8 per cent growth. The difference may appear small, but in per capita terms it's the difference between 4.5 and 6.5 per cent. Under the former, average living standards will improve 55 per cent by 2015. With the latter, they will almost double.
Economic growth at 8 per cent is possible.But it requires major reforms in at least five important areas. First, if we are to really utilise our abundant resource of labour to accelerate economic expansion, then we must reform our labour laws, which hugely discourage new employment and investment in organised industry. Otherwise, the demographic dividend of an expanding workforce could turn into an unemployment nightmare. Second, our sluggish agriculture (which provides livelihood to 60 per cent of our work force) must be revitalised through more rural infrastructure (and less subsidies), greater diversification, removal of internal trade barriers and viable water policies. Third, the pervasive infrastructure bottlenecks must be broken (especially in power) through serious policy changes and restructured government spending. Fourth, the massive government revenue deficits or dissaving (to the tune of 6 per cent of GDP) must be reduced to accommodate higher investment in the economy. Finally, we must privatise many government enterprises in energy, banking, transport and communications. It's the best way to spur greater productivity and competition.
If our governments do all this, then the Indian economy may well grow at 8 per cent over the next decade. This will take India's share of World GDP (measured at internationally comparable prices, or purchasing power parity) from the current 6 per cent to nearly 10 per cent. That would make India a serious economic power (China's share today is 12 per cent). Otherwise, as Lord Meghnad Desai has said, India may have to rest content with being a "Great Democracy", while China becomes a truly "Great Power".
(Shankar Acharya, Honorary Professor at ICRIER, was Chief Economic Advisor from 1993-2000. These are his personal views.)