How shifting policies propelled our economy

Sushma Ramachandran

Senior Financial Journalist

INDIA has carved a space for itself in the pantheon of economic giants of the world over the past 75 years. It may not be the richest country or the most equitable in terms of wealth distribution, but it is now the sixth largest in terms of the nominal GDP. It is equally an emerging economy that has immense potential right now for bringing the fruits of its growth to empower its people. The country has reached this point of take-off after decades of shifting policies and stagnant growth rates.

To understand the long path taken for the country to reach this moment, it would be good to look at the status of the economy at the time of Independence. India’s share of world income had shrunk from 22.6 per cent in 1700 to about 3 per cent by 1947. The industry’s share of national output was 7.5 per cent, but it employed only about 2.5 million of the 350 million people. At the time, over half of the country’s GDP came from agriculture. It ranked among the poorest countries in the world with a per capita income of Rs 249.

It was in this backdrop that the newly elected government headed by Prime Minister Jawaharlal Nehru began to evolve policies aimed at pulling the country out of poverty. Little heed was given to Gandhi's visionary plans for developing an India living in the towns and villages. Instead, the Fabian socialistic ideals of Nehru became the bedrock of an economic plan geared to developing giant state-owned enterprises. The Industrial Policy Resolution of 1948 envisaged a ‘mixed economy’ but the ‘commanding heights’ were meant for the public sector.

The second Industrial Policy Resolution of 1956, however, made a precise demarcation of the areas to be controlled by state-run enterprises and those to be left for the private sector. Most capital-intensive industries were confined to the public sector while consumer goods were meant for private industry. It is this policy statement prepared under the aegis of economist and statistician PC Mahalanobis that became the guiding principle of economic policies for many years to come.

The focus on heavy industry led to the neglect of the agriculture sector and, in turn, leading to food shortages in the late 1950s. India was forced to rely on imports from the US under the Public Law 480 that provided surplus foodgrains free of cost. The Green Revolution was the next big milestone as high-yielding grain varieties were introduced, creating a cornucopia of harvests and plentiful food availability.

It was during Indira Gandhi's reign, however, that the license raj regime tightened, corruption levels grew and private industry was stifled. She carried out sweeping nationalisation programmes of the banking industry, foreign oil companies and a wide range of sick companies to prevent job losses. It must be recalled that bank nationalisation came as a sequel to the collapse of several private sector banks and the huge losses suffered by the common man.

It was the first step towards financial inclusion as even a poor person could now open a bank account with just a small amount of money. Even the nationalisation of oil companies set the stage for ensuring the country's strategic security in terms of hydrocarbons.

But the takeover of sick private companies was a colossal error as it saddled the country with huge financial liabilities for many decades. These firms should have been allowed to close in the normal course and enable new ventures to come up in their place.

Right up to 1980, however, these socialist policies kept India's growth rate crawling at 3 to 4 per cent, a level ironically referred to as the Hindu rate of growth. It was left to Prime Minister Narasimha Rao and his Finance Minister Manmohan Singh to launch the economic reforms and liberalisation process in 1991. These policies unshackled industry from the restrictions of the license raj regime and opened up the economy to easier imports and foreign competition.

The net result was a spurt in growth suddenly to 7 to 8 per cent in the mid-1990s. This continued during the Vajpayee regime which deepened the reform process and went ahead to boldly privatise many private sector companies.

The Modi government, in charge since 2014, has seen a growth slowdown yet again due to a variety of reasons. These include the ill-fated demonetisation policy, the launch of the Goods and Services Tax, the two Covid pandemic years and now the impact of the Ukraine war on oil prices and global supply chains. The challenges now are vastly different from those faced at the time of the 1991 path-breaking reforms.

The country has moved ahead a great deal, with the IT industry having become a formidable force in the global arena. India has also become the third largest creator of unicorns, the billion-dollar ventures. At the same time, grinding poverty continues to exist in rural areas where joblessness has grown, especially after the pandemic.

The government needs to create more jobs at the grassroots levels by promoting the growth of village and cottage industries, much as had been advocated by Gandhi. Farmers’ interests must be given more priority as the sector continues to account for 50 per cent of the employment despite its lower share in the GDP. It also needs to bridge the digital divide that can create two widely varying Indias in the coming years. Despite a world-class IT industry, children here were deprived of education for lack of mobile phones during the pandemic.

As for the future outlook, after 75 years, it has to be said that there is now more light than darkness. Former RBI Governor Raghuram Rajan has pointed out that India is much more comfortable than its neighbours with its sizable foreign exchange reserves and low foreign debt. Inflation is set to also come under control by the central bank’s hike in policy rates.

Despite the turmoil in global markets owing to the Ukraine conflict, India remains an outlier, with inflation cooling and the impact of supply chain disruption easing on manufacturing. It is projected to be the fastest growing economy in 2022-23. Even so, an immense amount of work is needed to improve the living conditions of the poorest of the poor. There are miles to go, as Robert Frost said, though not to sleep but to forge ahead.

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