Evolution of Reforms in India

The below post gives a perspective on the evolution of economic reforms as it relates to India. It was written by Pushpesh Pandey, a student of Sunstone’s PGPM program.

Before the process of reforms began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods from reaching the market. India operated a system of central planning for the economy, in which firms required licenses to invest and develop their business. The labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a license to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The government also prevented firms from laying off workers or closing factories.

The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors. As a result the low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%. At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and Taiwan by 12%.

In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced License Raj and also promoted the growth of the telecommunications and software industries but because of the assassination of prime minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi in 1991, crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s.

A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalization was slowly embraced.

As a result of reform Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence came to 9% and after 2012 is currently at 4.1%, a rate of growth that is expected to double average income in a decade. In service sectors where government regulation has been eased significantly or is less burdensome—such as communications, insurance, asset management and information technology—output has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal.

The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests. Yet, it is a step in the right direction.

Author : Pushpesh Pandey (Sunstone B-School Student)

Sunstone provides a one year part-time online PGPM program for mid-career Technology professionals, helping them transition to entrepreneurial & business roles.

Link for Sunstone’s PGPM program. http://sunstone.in/management-program/sunstone-business-school/program-details/

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