Download 1. Socialistic Pattern of Government

Indian Globalization History
Indian economic policy after independence was influenced by the colonial
experience and based on two main assumptions
1. Socialistic Pattern of Government
Policy tended towards protectionism, with a strong emphasis on import
substitution, industrialization under state monitoring, state intervention at the micro
level in all businesses especially in labour and financial markets, a large public
sector, business regulation, and central planning
2. Planned Economic Growth
Five-Year Plans of India resembled central planning in the Soviet Union. Steel,
mining, machine tools, water, telecommunications, insurance, and electrical plants,
among other industries, were effectively nationalized in the mid-1950s
Elaborate licences, regulations and the accompanying red tape, commonly referred
to as Licence Raj, were required to set up business in India between 1947 and
1990.[18]
Before the process of reform 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 licencing prevented foreign goods
reaching the market. India also operated a system of central planning for the
economy, in which firms required licences to invest and develop.
The complex bureaucracy often led to absurd restrictions—up to 80 agencies had
to be satisfied before a firm could be granted a licence 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.
In the 80s, the government led by Rajiv Gandhi started light reforms. The
government slightly reduced Licence Raj and also promoted the growth of the
telecommunications and software industries.
The Vishwanath Pratap Singh (1989–1990) and Chandra Shekhar Singh
government (1990–1991) did not add any significant reforms.
Impact
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%.[20] At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by
9%, South Korea by 10% and Taiwan by 12%.
Only four or five licences would be given for steel, electrical power and
communications. Licence owners built up huge powerful empires.
A huge private sector emerged. State-owned enterprises made large losses.
Income Tax Department and Customs Department became efficient in checking
tax evasion.
Infrastructure investment was poor because of the public sector monopoly.[19]
Licence Raj established the "irresponsible, self-perpetuating bureaucracy that
still exists throughout much of the country"[22] and corruption flourished under
this system.[8]
The economic liberalisation in India refers to ongoing economic reforms in India that started on
24 July 1991. After Independence in 1947, India adhered to socialist policies. Attempts were
made to liberalise the economy in 1966 and 1985. The first attempt was reversed in 1967.
Thereafter, a stronger version of socialism was adopted. The second major attempt was in 1985
by prime minister Rajiv Gandhi. The process came to a halt in 1987, though 1967 style reversal
did not take place.[1] In 1991, after India faced a balance of payments crisis, it had to pledge 20
tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a
bailout deal with the International Monetary Fund (IMF). In addition, the IMF required India to
undertake a series of structural economic reforms.[2] As a result of this requirement, the
government of P. V. Narasimha Rao and his finance minister Manmohan Singh (former Prime
Minister of India) started breakthrough reforms, although they did not implement many of the
reforms the IMF wanted.[3][4] The new neo-liberal policies included opening for international
trade and investment, deregulation, initiation of privatisation, tax reforms, and inflationcontrolling measures. The overall direction of liberalisation has since remained the same,
irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such
as the trade unions and farmers, or contentious issues such as reforming labour laws and
reducing agricultural subsidies.[5] Thus, unlike the reforms of 1966 and 1985 that were carried
out by the majority Congress governments, the reforms of 1991 carried out by a minority
government proved sustainable. There exists a lively debate in India as to what made the
economic reforms sustainable.[6]
The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP
growth rate of 9%.[7] With this, India became the second fastest growing major economy in the
world, next only to China.[8] The growth rate has slowed significantly in the first half of
2012.[9] An Organisation for Economic Co-operation and Development (OECD) report states
that the average growth rate 7.5% will double the average income in a decade, and more reforms
would speed up the pace.[10]
Indian government coalitions have been advised to continue liberalisation. India grows at slower
pace than China, which has been liberalising its economy since 1978.[11] The McKinsey
Quarterly states that removing main obstacles "would free India's economy to grow as fast as
China's, at 10% a year".[12]
There has been significant debate, however, around liberalisation as an inclusive economic
growth strategy. Since 1992, income inequality has deepened in India with consumption among
the poorest staying stable while the wealthiest generate consumption growth.[13] As India's
gross domestic product (GDP) growth rate became lowest in 2012-13 over a decade, growing
merely at 5%,[14] more criticism of India's economic reforms surfaced, as it apparently failed to
address employment growth, nutritional values in terms of food intake in calories, and also
exports growth - and thereby leading to a worsening level of current account deficit compared to
the prior to the reform period.[15]
For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World
Rankings, which is an improvement from the preceding year.
Contents
1 Pre-liberalisation policies
1.1 Impact
2 Narasimha Rao government (1991–1996)
2.1 Crisis
3 Later reforms
4 Impact of reforms
5 Challenges to further reforms
5.1 Reforms at the state level
6 See also
7 References
8 External links
Pre-liberalisation policies
Part of a series on the History of modern India
Emblem of India Pre-independence
Independence movement
Rebellion / Mutiny / First
War of Independence 1857–1858
British Raj
1858–1947
Partition
1947
Post-independence
Political integration
1947–1949
Non-Aligned Movement
1953–present
States Reorganisation Act
1956
Indo-Pakistani War
1965
Green Revolution
1970s
Indo-Pakistani War
1971
Emergency
1975–1977
1990s
Economic liberalisation
See also
History of India
History of South Asia
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Further information: Economic history of India and Licence Raj
Indian economic policy after independence was influenced by the colonial experience (which
was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian
socialism. Policy tended towards protectionism, with a strong emphasis on import substitution,
industrialisation under state monitoring, state intervention at the micro level in all businesses
especially in labour and financial markets, a large public sector, business regulation, and central
planning.[16] Five-Year Plans of India resembled central planning in the Soviet Union. Steel,
mining, machine tools, water, telecommunications, insurance, and electrical plants, among other
industries, were effectively nationalised in the mid-1950s.[17] Elaborate licences, regulations
and the accompanying red tape, commonly referred to as Licence Raj, were required to set up
business in India between 1947 and 1990.[18]
Before the process of reform 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 licencing prevented foreign goods reaching the market. India also operated a system
of central planning for the economy, in which firms required licences to invest and develop. The
labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied
before a firm could be granted a licence 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.
— BBC[19]
In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly
reduced Licence Raj and also promoted the growth of the telecommunications and software
industries.[citation needed]
The Vishwanath Pratap Singh (1989–1990) and Chandra Shekhar Singh government (1990–
1991) did not add any significant reforms.
Impact
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%.[20] At the same time,
Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and Taiwan by
12%.[21]
Only four or five licences would be given for steel, electrical power and communications.
Licence owners built up huge powerful empires.[19]
A huge private sector emerged. State-owned enterprises made large losses.[19]
Income Tax Department and Customs Department became efficient in checking tax evasion.
Infrastructure investment was poor because of the public sector monopoly.[19]
Licence Raj established the "irresponsible, self-perpetuating bureaucracy that still exists
throughout much of the country"[22] and corruption flourished under this system.[8]
Narasimha Rao government (1991–1996)
The former prime minister P V Narasimha Rao, who spearheaded economic liberalisation
policies in the early 1990s. Rao was often referred to as Chanakya for his ability to steer tough
economic and political legislation through the parliament at a time when he headed a minority
government.[23][24]
Crisis
Main article: 1991 India economic crisis
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.
By 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value
of a basket of currencies of major trading partners. India started having balance of payments
problems since 1985, and by the end of 1990, it was in a serious economic crisis. The
government was close to default,[25][26] its central bank had refused new credit and foreign
exchange reserves had reduced to the point that India could barely finance three weeks’ worth of
imports. Most of the economic reforms were forced upon India as a part of the IMF bailout.[2]
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 globalisation was slowly embraced. 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.
— India Report, Astaire Research[8]
Later reforms
This list is incomplete; you can help by expanding it.
The Bharatiya Janata Party (BJP)-Atal Bihari Vajpayee administration surprised many by
continuing reforms, when it was at the helm of affairs of India for five years.[27]
The BJP-led National Democratic Alliance Coalition began privatising under-performing
government owned business including hotels, VSNL, Maruti Suzuki, and airports, and began
reduction of taxes, an overall fiscal policy aimed at reducing deficits and debts and increased
initiatives for public works.
The United Front government attempted a progressive budget that encouraged reforms, but the
1997 Asian financial crisis and political instability created economic stagnation.
Towards the end of 2011, the Government initiated the introduction of 51% Foreign Direct
Investment in retail sector. But due to pressure from fellow coalition parties and the opposition,
the decision was rolled back. However, it was approved in December 2012.[28]
Impact of reforms
The HSBC Global Technology Centre in Pune develops software for the entire HSBC group.[29]
The impact of these reforms may be gauged from the fact that total foreign investment (including
foreign direct investment, portfolio investment, and investment raised on international capital
markets) in India grew from a minuscule US$132 million in 1991–92 to $5.3 billion in 1995–
96.[30]
Cities like Chennai, Bangalore, Hyderabad, NOIDA, Gurgaon, Ghaziabad, Pune, Jaipur, Indore
and Ahmedabad have risen in prominence and economic importance, become centres of rising
industries and destination for foreign investment and firms.
Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades
after Independence to 7½ per cent currently, a rate of growth that will 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.
Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome
change. His prescription to speed up economic progress included solution of all outstanding
problems with the West (Cold War related) and then opening gates for FDI investment. In three
years, the West was developing a bit of a fascination to India's brainpower, powered by IT and
BPO. By 2004, the West would consider investment in India, should the conditions permit. By
the end of Vajpayee's term as prime minister, a framework for the foreign investment had been
established. The new incoming government of Dr. Manmohan Singh in 2004 is further
strengthening the required infrastructure to welcome the FDI.
Today, fascination with India is translating into active consideration of India as a destination for
FDI. The A T Kearney study is putting India second most likely destination for FDI in 2005
behind China. It has displaced US to the third position. This is a great leap forward. India was at
the 15th position, only a few years back. To quote the A T Kearney Study “India's strong
performance among manufacturing and telecom & utility firms was driven largely by their desire
to make productivity-enhancing investments in IT, business process outsourcing, research and
development, and knowledge management activities”.
Challenges to further reforms
Slow growth of the agricultural sector, where half of Indians earn most of their income[31]
Highly restrictive and complex labour laws.[4][10][32][33][34][35][36][37][38]
High inflation[31]
High poverty[31]
Corruption and graft[31]
Lack of political consensus and will[31][39]
OECD summarised the key reforms that are needed:
In labour markets, employment growth has been concentrated in firms that operate in sectors
not covered by India's highly restrictive labour laws. In the formal sector, where these labour
laws apply, employment has been falling and firms are becoming more capital intensive despite
abundant low-cost labour. Labour market reform is essential to achieve a broader-based
development and provide sufficient and higher productivity jobs for the growing labour force. In
product markets, inefficient government procedures, particularly in some of the states, acts as a
barrier to entrepreneurship and need to be improved. Public companies are generally less
productive than private firms and the privatisation programme should be revitalised. A number
of barriers to competition in financial markets and some of the infrastructure sectors, which are
other constraints on growth, also need to be addressed. The indirect tax system needs to be
simplified to create a true national market, while for direct taxes, the taxable base should be
broadened and rates lowered. Public expenditure should be re-oriented towards infrastructure
investment by reducing subsidies. Furthermore, social policies should be improved to better
reach the poor and—given the importance of human capital—the education system also needs to
be made more efficient.
— OECD[10]
Reforms at the state level
See also: Economic disparities in India
The Economic Survey of India 2007 by OECD concluded:
At the state level, economic performance is much better in states with a relatively liberal
regulatory environment than in the relatively more restrictive states".[10]
The analysis of this report suggests that the differences in economic performance across states
are associated with the extent to which states have introduced market-oriented reforms. Thus,
further reforms on these lines, complemented with measures to improve infrastructure, education
and basic services, would increase the potential for growth outside of agriculture and thus boost
better-paid employment, which is a key to sharing the fruits of growth and lowering poverty.[10]