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Straight from the Specialists

India after 20 years of reforms

August 1, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

On July 24, 1991 India became a different place for business. The economy was opened though not as much from conviction as necessity. But once started, reforms had to be followed through whichever the party in power.

The policy structure that was shaped after independence was the style of the day, generally called the socialistic pattern of society. It blended private sector which was largely confined to consumer goods with the public sector which monopolised infrastructure. Even the private sector was regulated.

The government had to give its approval to what industry is to be set up, where it should be located, what the production capacity should be, what technology to be used, and in many cases what the price of the product should be. Industry became high cost and had to be protected with heavy import duties and tight restrictions on foreign investment.

Reforms changed all that. Before reforms, entrepreneurship lay in getting licences from government; after reforms entrepreneurship meant surviving in competition. Result?

Indian businesses which had been thwarted by controls blossomed when they had the freedom of enterprise. Some old business houses lost their way but many new business houses cropped up. Initially, size was a handicap and a spate of mergers and amalgamations took place. Management became professional.

Some industries developed at a torrid pace. IT led the new industrial dynamism.

Telecommunications picked up even faster with mobile phones and the subscriber base is expected to cross one billion in March 2012. Automobiles production shot up at more than 30 percent per year with the emergence of 300 million middle-class. Banking, mutual funds and insurance came to the fore to fund housing and equity.

Investment jumped from 24 to 36 percent of GDP. That enabled the economy to grow faster. From less than 6 percent, growth jumped to average over 9 percent. The Indian economy expanded into a trillion dollar economy two years back creating huge opportunities for domestic and foreign investment. The driver was domestic consumer demand.

FII investment poured in. So also FDI. Cumulative foreign investment crossed $100 billion last year. Indian industry has come of age and foreign investment has become a two-way process. Many Indian companies have gone in for acquisitions abroad involving large investment. With the developed world crippled by recession, India and China are expected to act as a lever to lift it up.

India could have performed even better had the second phase of reforms been ushered in. UPA I did very little and UPA II nothing at all. Coal should have been opened to the private sector; prices of petroleum products continue to be administered by government; labour laws discourage employment; fiscal prudence is talked about but not practised; rupee is yet to be fully convertible; privatisation is frowned upon; there is huge governance deficit resulting in delays, excessive transaction costs and corruption; foreign investment policy continues to be restrictive. Infrastructure remains the biggest handicap. Resume reforms and industry will grow at 12 percent.

A faster development of industry, along with agriculture and service, will enable GDP to grow at more than 10 percent on a sustained basis. That would make India a $3 trillion economy by 2020.

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