Economic Lens - Swapnil Nair
The Economic take on the Liberalization of Indian Economy Post 1990
The Indian economy today
Although today india's economy is one of the fastest growing within Asia. India was not always a major economic superpower. The fact is, the Indian economy that is internationally recognised as a massive industry only emerged in the 1990s. Prior to the 1980-90s the economy of Indian was in a poor place due to substandard economic policies. This page will discuss how that poor economy was reformed in the 1980-90s to mould India's economy into the superpower it is today. |
(Ross) A chart comparing the annual GDP/ Gross Domestic Produce change from year to year. This shows some important facts, such as how underperforming the Indian economy was compared to the Chinese economy and how liberalization boosted the Indian economy.
Important Key Terms GDP- Gross Domestic Produce, This is the monetary sum of all goods and services produced within a nations border. Debt to GDP ratio- This a method used to give us debt as a function of the country's GDP. A high debt to GDP usually indicated that the economy is overburdened with debt. SOEs- State owned enterprises are corporations that are completely or by majority held by the government of a country. This means that all the profits of the company go towards state spending and furthermore the company is funded by tax money. FDI- Foreign direct investment is the term used to detail the investment of capital in a company by persons of organisations not based within the nation. Macroeconomy- A large scale economic system, such as the economy of a nation. The reformation of the Indian economy and its genesis
The genesis event to which the liberalization of the Indian economy can be traced back to is the balance of payment crisis that occurred in 1991. To bail India out of the crisis they requested an IMF & World Bank reform package. Although the crisis was quickly, dispersed and dealt with, which caused the IMF and World Bank to end operations within India, the reforms keep subtly occurring. Slowly piece by piece legislations were passed to liberalize sectors of the economy that were most essential to the public. The idea prior to these reforms was one of the license raj within India, most major industries were state owned and one that were not were subjected to heavy taxes and restrictions to ensure that they do not grow and more importantly outgrow SOE’s. This license raj was brought to an end in the 1990s. The manner in which this took place was firstly the liberalization of the Imports and Exports. Initially importing goods into India was a peril. All goods were classified into four major categories: Banned, Restricted, Limited Permissible and OGL (Open General License). All these categories were restrictive but even the most accessible category the OGL was levied heavy taxes. The highest tariff was 400% and the average tariff was 130% and only 4% of all goods were subjected to a tax below 60%. This caused the inflation of the price of goods, also most foreign goods and technologies were unavailable within the nation. This paired with the already low wages as mentioned before created great discomfort for the average citizen. Furthermore, this made the SOE’s very inefficient and caused for macroeconomic unstable, In the sense that output did not meet demand thus creating shortage further adding upon that the low wages paid to employees by these SOE’s and the general unprofitable nature [compared to private corporations]. But in the 1990s, these taxes were revised and rationalized to the point where today the highest tariff is only 45% and the average tariff is down to under 25%. Through this manner of reducing the tariff rates, the government lifted the reliance on SOE’s and invited private corporations to feed upon the import demand of the developing nation thus subtly decentralizing the economy. (Panagariya) Furthermore, prior to the 1990s all FDI’s of foreign direct investments into India were subject to heavy restrictions and scrutiny by the RBI [Reserve Bank of India]. The law stated that companies could only have 40% equity held by a foreign stakeholder. This added up to the fact that all FDI’s in India during the 1980s amounted to a paltry $100-200 million. This was extremely detrimental towards the overall economy as it caused a shortage of capital for businesses, but newer laws gave more leeway to such investor giving them more incentives such as removing restrictions and also providing foreign tax exemptions for such investors by signing tax exemption deal with nations such as Cyprus. All these efforts amounted to the fact that in 2015 this amount was up to $39,000 million, providing the Indian economy with an abundance of capital. ( Department of Industrial Policy and Promotion) In addition to this the government slowly also decentralized some key Industries that effect the average citizen such as: Telecommunications, Insurance, Petrochemicals etc. In every instance the manner with which the government promoted privatization within these industries was via reducing the barriers to entry within the sector. That means that they reduced the various friction encountered by organizations as they entered that sector, frictions such as: forms, permits, licenses, approvals [bureaucracy] and taxes. Overall pertaining to the question the picture this paints is that the government realized that their idea of a centralized economy had failed and was causing peril to the average citizen. Making that their agenda the manner in which the liberalize the economy was initially targeting the sectors that most affected the citizens directly such as: Telecommunications, Petrochemical [Oil & Gas] and Imports. Which meant that even though the liberalization was quite subtle and over large periods of time the effect to the public was instant, the economy was improving in the sectors that affected them daily. This allowed the government to improve the standard and sentiment of their citizens while still allowing them time to evaluate their policies and how to substitute the income from SOEs’. (Panagariya) But were the reforms actually this effective?
Upon revisiting the research question one important thing comes to light, the question call for dispute of effectivity of these forms. Although the economic benefits of these benefits on a macroeconomic level are irrefutable the aspect of the question as mentions the general populous is still debatable. Although the facts and statistics both prove that the general populous was positively effected during the reforms, how effects was the reforms in equalising wealth. The chart above which is sourced from the Credit Suiess wealth Datebook shows that even today the top 10% hold over 75% of the wealth. This statistic would lead one to conclude that although the reforms helped increase the middle class and wealth of the poorer class in the short term it also helped major industrial tycoons such as Ratan Tata and Dhirubhai Ambani who created multi-billion dollar corporations due to the the reforms. Which results in the fact that on a much larger scale the reforms might have put the middle and lower class at a disadvantage by exponentially boosting the wealth of the top 10% of society. |
Setting the stage- prior to decentralization.
Upon Independence and up to the 1980s and 1990s India’s economic model was one that tried to emulate both non-capitalist and non-communist. It was driven by a blend of state and market. But this model was an absolute failure owing to complex bureaucratic process. This leads to a stagnation in innovation and low growth rates. More over the Initial plan of the government was to achieve this balance via SOE’s or state owned enterprises. These SOE’s controlled large swaths of the industry within India, the primary issue was that these SOE’s did not compare to the economic returns and outputs of similar private corporations, while SOEs were on the large part, profit producing entities. Private corporations could achieve greater profits with fewer resources. The inefficiency of such a large part of the economy also led to a high unemployment rate at 8%, an extremely high debt to GDP ratio of 75%, a poverty rate of 44.5% and an average GDP growth rate of 3.5%. All these statistics paint a very bleak picture for the overall economy of India. We can furthermore analyze the economy by comparing it to that of China, a neighboring Asian counterpart. It is obvious that Chinas economy was performing at a much superior level, in 1971 when the GDP growth for India per annum was 1.6% the growth rate for China was a staggering 7.0% per annum. Similarly, when the Indian debt to GDP ratio was 75%, in China that figure was closer to 20%. These show us exactly how ineffective the centralized economy of India actually was. Moreover than just being an inefficient economy in terms of model, these inefficiencies boiled into a deplorable situation for the populous. Due to the fact that SOEs were poorly performing and not constantly expanding the unemployment rate was at 8.3% in 1983, which is very high compared to post reform rates of 5.9% in 1993. This meant that there were many households without a sustainable source of income and house that did have steady incomes were faced with crippling inflation. For example, 93% of the population lived with a household of Rs. 90,000 per annum in India pre-liberalization of the economy. What this translates to is the fact that 93% of all families were living upon only $1 a day per person. This is comparable to the minimal $2 a day income of the average Chinese worker. This is in a communist nation where most costs were covered by the government. The fact that the average household wage in a ‘capitalist’ country where things have to be purchased was only half of that in a country where most necessities were provided by the government shows the true nature of how poor the Indian economy was performing. Overall it was quite plain to see that the centralized Indian economy was a tedious and ineffective idea which was causing peril to the average citizen and needed to be quickly liberalized and amended to avoid further catastrophe. Picture of Manmohan Singh
Who was Manmohan Singh?
Manmohan Singh is a Indian economist who has degrees from both University of Oxford and Cambridge. He has served many important roles in Indian politics such as being the prime minister for two consecutive terms. But more interestingly, he has also served important roles within the economic ladders of India. He was the head of the RBI (Reserve Bank of India) which is the central economic governing institution of India. Additionally has also served as the Minister of Finance. He as also served as the Head to the planning commission which a body dedicated to improving the economy and standards of living within India. He was a influential driving force in the liberalization of the Indian economy. During his time in office as the Minster of Finance for India he abashed the heavy tax regime in imports and also reduced state dominance in most industries. These action were responsible for boosting the Indian economy to unseen heights and tapping a huge potential global market. (Nuffield College) (Prazapati) A image comparing the FDIs and foreign reserves of India pre-decentralzation and post-decentralization. These are important due to the fact that FDIs and foreign reserves are important indicators of the economy [for reasons previously mentioned] and the statistics above show us how vital/ effective the reforms were.
The Effects of Decentralization/liberalization
The fact that a central economy within India was a problematic concept and was causing pain to the average citizen has already been established. Furthermore the manner with which the economy was slowly decentralized is also discussed. Now we analyze what effects decentralization had upon the economy, how did the economy & Industries benefit from decentralization. Firstly, we examine the overall health of the economy changed. The primary manner to do that is to analyze the increase in GDP growth. The post reforms rate of GDP increase between 1987-1988 was 3.5% but immediately after the reforms the graph spikes positively, to the point where between 1996-97 the annual GDP increase was 8%. This GDP increase shows us that the reforms were allowing the economy and the government to perform more efficiently and the untapped potential of the industries in India was coming to light. Another marker that can be used to analyze the effect of decentralization is exports from a nation. The reason exports are used as a marker for the economy is due to the fact that exports often show how productive the economy is, and productivity implies health. With that in mind the Total exports in US$ for the year of 1984 were $14,000 Million which is a trifle compared to post-reform statistics of $24,000 Million in 1993. This shows as the economy decentralized and privatized the efficiency of the economy also grew. Which shows us how the economy built to the superpower it is today. The final manner which we will use to analyze the health of the economy is the foreign exchange reserves maintained by the national government. This is important as often a country's foreign currency reserve is an indication of their ability to pay back debt and pay for essential state imports. With the importance of foreign reserves in mind the fact that India’s reserves pre-reform era was a meager $5000 million but the post reform era shows an amazing tripling of that amount to $25000 million. This ratifies the trend that we have been observing within the data. All these various trends point to the fact that overall the reforms that were presented by the Indian government to liberalize the economy were well received by both the Indian public and the general economy as a whole. |
The Grand Conclusion
So pertaining to the matters of, "To what extent did the governmental reforms and policies post 1990 in India to promote industrialisation and decentralisation of the economy allow for a wealthier economy and more specifically a increase in wealth for the average Indian Citizen?" it is quite clear from all the information presented and detailed above that the economy prior to The economy prior of the 1990s under a centralization plan was one with many fatal flaws. The systems caused a huge economic crisis by restricting productivity within various key sectors of the Indian economy, promoting inflation by restricting and heavily taxing the imports of various goods and coupling that with the inability to produce them locally and finally allotting monopolies to inefficient SOE’s in major sectors leading to fewer job opportunities and employed people within the nation. Additionally, the economic model also promoted and caused mass poverty due to high costs of living and low wages/employment rates. Which meant that the most effective way for the Finance Minister [Manmohan Singh] was to decentralize the economy of India. The most effective way to do that was initially targeting the sectors that most affected the citizens directly such as: Telecommunications, Petrochemical [Oil & Gas] and Imports. Which meant that even though the liberalization was quite subtle and over large periods of time the effect to the public was instant, the economy was improving in the sectors that affected them daily. This allowed the government to improve the standard and sentiment of their citizens while still allowing them time to evaluate their policies and how to substitute the income from SOEs’. It is also evident that from the data and analysis that the reforms that were presented by the Indian government to liberalize the economy were well received by both the Indian public and the general economy as a whole. The statistics show that there was a rise in GDP and GDP growth paired with a lowering class of extreme poverty. Additionally, there was also a rise in the average family income in India. Overall this data is concise yet clear enough to show us the fact that the general population was a massive beneficiary of the economic reforms conducted within India in the 1990s. On the other hand, we have also analysed the flip side which looks at the current wealth gap and traces its genesis back to the 1990s reforms. Overall the 1990s reforms were extremely effective at increasing the overall health of the economy and boosting it and further was also mostly successful at increasing the general wealth of the population by growing the middle class and reducing extreme poverty but these came at the cost that the reforms have ensured that there is going to be massive wealth disparity and fair payment issue within India for decades to ensue.
Works Cited
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Department of Industrial Policy and Promotion, and Reserve Bank Of India. FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI) From APRIL, 2000 to DECEMBER, 2015. India: Ministry of Commerce and Industry, Dec. 2015. PDF.
Kotwal, Ashok. "Economic Liberalization and Indian Economic Growth: What's the Evidence?" India Statistical Institute (2010): 1-54. May 2010. Web. 14 May 2016. <http://ibread.org/bread/system/files/bread_wpapers/294.pdf>.
Lal, Vinay. "Manas: History and Politics, Constitution of India." Manas: History and Politics, Constitution of India. UCLA, 2014. Web. 14 May 2016. <https://www.sscnet.ucla.edu/southasia/History/Independent/indep.html>.
Mishra, Ram Kumar. "SOEs in India's Economic Development." State-Owned Enterprises in the Development Process (2015): 1-59. OECD. OECD Secretariat, 04 Apr. 2014. Web. 14 May 2016. <https://www.oecd.org/daf/ca/Workshop_SOEsDevelopmentProcess_India.pdf>.
Nuffield College. "Dr Manmohan Singh." Nuffield College, University of Oxford. University of Oxford, n.d. Web. 21 May 2016. <https://www.nuffield.ox.ac.uk/People/sites/manmohan.singh/SitePages/Biography.aspx>.
Panagariya, Arvind. India in the 1980s and 1990s: A Triumph of Reforms. IMF. International Monetary Fund, Mar. 2004. Web. 14 May 2016. <https://www.imf.org/external/pubs/ft/wp/2004/wp0443.pdf>.
Panagariya, Mc3 Arvind. India’s Economic Reforms What Has Been Accomplished? What Remains to Be Done? Greenwich: ERDC University of Greenwich, Nov. 2001. PDF.
Prazapati, Ujjwal. Foreign Reserve Comparison. Digital image. Quora. Quora Inc., Apr. 16. Web. 21 May 2016. <https://qph.is.quoracdn.net/main-qimg-1d4ef96225e4980360a0c6f4dff54e5f?convert_to_webp=true>.
Ross, John. "Investment, Savings and Growth - International Experience Relevant to Some Current Economic Issues Facing China." Key Trends in Globalisation. N.p., 2006. Web. 20 May 2016. <http://ablog.typepad.com/keytrendsinglobalisation/2009/05/investment-savings-and-growth-international-experience-in-relation-to-some-current-economic-issues-f.html>.
Team Firstbiz. "From 1947 to 2014: How the Indian Economy Has Changed since Independence - Firstpost." Firstpost From 1947 to 2014 How the Indian Economy Has Changed since Independence Comments. FirstPost, 15 Aug. 2014. Web. 16 May 2016. <http://www.firstpost.com/business/data-business/from-1947-to-2014-how-the-indian-economy-has-changed-since-independence-1983853.html>.
"Telecom Sector in India." India Brand Equity Foundation. Ministry of Commerce & Industry, Government of India, Mar. 2016. Web. 16 May 2016. <http://www.ibef.org/industry/telecommunications.aspx>.
Trading Economics. "India Government Debt to GDP | 1991-2016 | Data | Chart | Calendar." India Government Debt to GDP | 1991-2016 | Data | Chart | Calendar. N.p., May 2016. Web. 14 May 2016. <http://www.tradingeconomics.com/india/government-debt-to-gdp>.
World Bank Group. "Population Growth (annual %)." Data. United Nations Population Division, 1 June 2015. Web. 14 May 2016. <http://data.worldbank.org/indicator/SP.POP.GROW>.