Two decades of unshackled growth

An article by Surojit Gupta.

Walk into any shopping mall in any small or large city and you will see top global brands jostling for space. The liberalization, which began in 1991 and will complete two decades next year, has completely transformed the Indian economy, pushing it into the league of the fastest-growing economies of the world and providing consumers a wide choice. The trigger, however, was a balance of payments crisis when, with barely $2.2-billion dollar foreign exchange reserves (enough cover for 15 days’ imports) in its coffers, the government unleashed wide-ranging reforms. Over the years that followed, the so called “Licence Permit Raj” was dismantled. Despite heading a coalition government, the then PM Narasimha Rao and his finance minister Manmohan Singh slowly lifted the iron grip of the state on industry and liberalized trade policy. Successive governments have carried forward reforms, strengthening the private sector, which now contributes almost 80% to the country’s economy. “Unshackling entrepreneurship in India—this is the greatest achievement of the liberalization process,” Planning Commission adviser Pronab Sen said. The once competition-shy Indian corporate sector has come into its own and taken on global players. That’s not all. Indian firms have gone ahead and acquired global companies, such as Tata Steel’s acquisition of Corus and, earlier this year, Bharti Airtel’s $9-billion buyout of the African operations of Kuwait’s Zain. Liberalization of trade policy and abolition of import licensing has led to an increase in trade. The reduction in import tariffs from as high as 400% has gone a long way attracting foreign investment. Foreign exchange reserves now stand at $295 billion, which puts India among the top ten countries holding such high reserves. The most visible impact of liberalization has been the rapid growth in the Information Technology (IT) and ITenabled business and the telecom sector. Virtually non-existent in 1991, the IT and business process outsourcing sectors reflect the impressive gains from the opening up of the economy. The sector’s revenues as a proportion of GDP are expected to rise to 6.1% in 2010 from 1.2% in 1998. It has created 2 million jobs in a very short span. The success of the outsourcing sector has been possible due to the telecom revolution, which has completely transformed the communication landscape of the country. Owning a telephone two decades was a status symbol, but policy changes and reforms have meant that it has now emerged as a common man’s necessity. Latest data shows that India has nearly 700 million mobile phone connections. The telecom sector was liberalized in 1992 and the private sector was allowed to participate, but it was only in 1995 that mobile telephones arrived in India. “We had to go to our neighbour’s house to receive telephone calls from my cousin in London. We had to wait for almost an hour for her to call and we would all be in a hurry to finish the call,” 50-year-old housewife Sandhya Singh said, pointing to the difficult days of communication before the telecom revolution. Economists say opening up the economy and dismantling of controls and restrictions helped in rapid economic expansion. The Indian economy has come a long way from the so-called Hindu growth rate of 3.5% in the 1950s to 1980. GDP growth was below 6% in the 1990s but shot up to above 7% in early 2000s and hovers around 8-9% now. The new benchmark for growth is 8%-9%. Anything below that is now considered a weak performance,” said DK Joshi, principal economist with ratings agency Crisil. Another striking aspect, according to Joshi, has been the rise in the savings and investment rates. Economists say in the period 1971-2002, the investment rate was between 15% and 25% but between 2002-2010 it ranged between 25% and 37%. The savings rate now stands at around 35%. Rapid economic growth as a consequence of reforms has led to the emergence of the “the Great Indian middle class”, which all multinational companies cite as reason for their focus on the Indian market. While the size of this middle class varies from 50 million to 350 million according to various estimates, it definitely has spurred consumption. Demand for automobiles, healthcare, televisions and other consumer goods has zoomed and almost every major global brand is present in the country now. A far cry from the random smuggled versions, which actually was a neighbour’s envy as was travel abroad. Now Indians are said to be one of the biggest spenders on holidays abroad, a reflection of the growth in prosperity of its people. The reforms in the financial services sector, although slow compared to others sectors, has seen a proliferation in demand for banking and insurance. Banking reforms have led to low non-performing assets. Similarly, opening up of the insurance sector to foreign participation in 2000 has led to more competition and efficiency in the space. On the other hand, reforms in the capital markets and setting up of the stock market regulator has attracted massive global attention. Foreign Institutional investors have poured $28 billion in the Indian stock market so far this year. In 2009, they had invested $17 billion. Rapid economic growth has also led to a significant reduction in poverty, although a large segment of the 1.2 billion population still remains in abject poverty. Robust economic expansion has also meant that there has been a structural shift in the economy. From a largely agriculture-dominated economy, India now relies heavily on the services sector for growth. This crucial sector now accounts for more than 50% of the country’s GDP. The services sector, which includes trade, hotels, transportation, insurance, financing, business services, real estate, among others, accounted for 15% of GDP in 1950 and about 44% in 1991. It’s not as if every sector has grown exponentially. Though much better than 1991, infrastructure is still considered to be a weak link. Economist say the failure of infrastructure to catch up with strong growth has meant that large manufacturing industries have not come up, tilting growth in favour of services such as knowledge-based industries. However, the two-decades of economic reforms have also been bumpy with political opposition holding up progress and skeptics questioning the need for any further opening up of the economy. “India’s reforms have been piecemeal and incremental, giving a casual observer the impression that nothing has been happening. If one takes the totality of reforms over the last decade, however, the change is unmistakable,” noted economist Arvind Panagriya wrote in a 2001 Asian Development Bank policy paper. The visible success of economic reforms over the 20-year period now seems to have won over the skeptics. The recent victory of Nitish Kumar in Bihar, who fought the elections on the development plank, shows that there has been a paradigm shift in the attitude to reforms and it appears that there is more acceptance of the concept among the political class. Sustained strong economic growth, robust domestic demand and a huge market has translated into global economic clout for the $1.3-trillion economy. India now is a leading voice in almost all leading global economic bodies, ranging from the International Monetary Fund to the World Trade Organization. “India has grown in stature on the global stage. Two decades ago nobody looked at India. Now no foreign investor can afford to ignore India because of the growth and market potential,” said Crisil’s Joshi But despite rapid strides that the economy has made, analysts say the next 20 years would need more deep reforms in governance, administration, social sectors and infrastructure to help wipe out poverty and push India into the developed nations’ league. Some of the social sector indicators though still remain grim. Many cite the data that shows there are more mobile phones than toilets in India. The Planning Commission says school dropout rates remain high with 43% of the children dropping out before completing school. The quality of education, too, is a reason for worry. The planning commission quotes a survey that in 2009 as many as 38% of children in Standard V could not read text meant for Standard II and 37% could not do simple division. India ranks 119 among 169 nations in the United Nations Human Development Index, which measures countries on the basis of health, education and income. According to the Planning Commission, urbanization is expected to accelerate and the urban population’s share may reach 50% in the next 25 years adding up to 400 million people to the existing urban population of 350 million. This is bound to add pressure to the already stretched services such as sanitation, water supply, waste disposal and urban transport. “We have moved slowly but we have done well in terms of growth, financial markets, capital markets, savings and investments. But much more needs to be done on infrastructure and investments,” says Bimal Jalan, former Reserve Bank of India governor and eminent economist.

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