Wednesday, January 26, 2011

On India's Republic Day: Tracing the Economic Path of The Republic

On 26 Jan 1950, India became a Republic by adopting the Constitution that declares India to be a Secular,Socialist,Sovereign demorcratic republic assuring its citizens of justice,equality and liberty. The Republic and its economy have seen quite a number of turbulences over the last 61years.Starting with a capital scarce economy, the leaders didnt seem to believe that private enterprise would allocate capital towards unprofitable public goods initiatives which were necessary for the country's development.It was felt necessary that Government actively has to allocate resources to maximize the greater public good. Adam Smith's invisible hand was rendered to be not too efficient for the Indian context and State's hand took its place.Economy was to be Planned -- A practice that contiues till date. It was also felt that starting with a minimal base of industrialization and domestic industries,it was not feasible to run an open economy because the foreign competition was way ahead of Indian businesses and would kill the domestic business ventures in a free system. To protect the baby of industrialization, India went on to follow a closed economy. At the time, India was deemed as a great experiment in economic science - A large democracy trying to follow the so called mixed economy model. With assistance from the overseas allies, India managed to built a decent capital goods base in the public sector and in those days todays behemoths like BHEL, SAIL, ONGC etc were born. Infra spending rose from 1% of GDP in 1952 to almost 5% by 1960. It was also realized that for Industrialization, India would need skilled manpower and to train them, institutes like IITs were started by the Government of India. Infra was a key focus and marquee projects like Bhakra Nagal Dam (Asia's second highest Dam)were completed. Agri was a focus but Industrialization was pursued with a vengeance.The focus on Industrialization flowed directly from the view of founding fathers like Nehru who identified that West's strength lied in Industrial revolution and India had to catch up. One by one, problems were being tackled, albeit if at a slow pace. External shocks were abound - forex crisis in 1957 which led to cutbacks in public spending, international restrictions due to wars with Pakistan and China and droughts kept challenging India. But it marched on, even if at Hindu rate, preserving its democracy and liberty. The romanticism however faded away by early 70s. Nehru was dead, two wars with Pakistan and one with China had drained the resources to quite a large extent and Government was attaning much bigger controlling role. The Monopolies and Restrictive Trade Practices Act was passed in 1969 to safeguard consumers from potential abuse of monopoly power in the industrial sector. But, in practice it was used to control businesses by the Govt. Govt became all pervasive. Controls which were devised to manage the business environment became the power levers that turned out to be very counter productive. Private businesses also learned to adapt -- crony capitalism, system adaptation and rent seeking behaviour was taking roots. The period came to be known as "License Raj". Obviously, in such an era, economic growth was stifled and remained fragile sans rhetorics. One good thing that happened was the Green Revolution.The Government focused on the recurring famine problem. High yielding seeds and other resources were introduced, awareness was created through the all pervasive All India Radio and soon India achieved self sufficiency in Food Production. In what can be called the next era, Rajiv Gandhi came in Power in the early 80s and was lauded as a pragmatic leader. He was proably the first reformer. In those days, PSU performance was dropping badly which was creating anxiety in Government circles.This era saw beginning of dismantling of the state controls and licensing maze. He also inducted technocrats in his Government. One notable man was Sam Pitroda who is now credited as the father of Indian Telecom Revolution. Indeed remarkable that India, developing in most other sense, has a Telecom Infra that rivals the very best in the world. However, the country was sliding towards a crisis that was to blow up in 1991. In second half of 80s, the current account deficits widened. Fiscal deficits were ballooning -- 10% in 1986 and as high as 12.7% in 1991. Gulf War further added fuel to fire by exploding the Oil import bill. This was on top of 40% increase in volume of Pet imports between 1987 to 1990. Deficits were financed by commercial borrowings and external debt doubled in 5 years leading to 1990. Political uncertainty played additional spoil sport - coalition governments coming, going and Rajiv was assassinated in May 1991. All of this triggered loss of confidence, and outflows became the new reality. India's forex reserves were just sufficient to pay for 3 weeks of essential imports in June 1991 and the country was potentially weeks away from default. This was the moment when India had to pledge 67 tons of Gold to IMF to secure short term funding. The Govt with Chandrashekhar as PM was the one to take this move and it soon fell which then led to entering of Dr Manmohan Singh as the FM and PV Narasimha Rao as the PM. 1991 was to become the landmark year in Indian economic and political history. What followed has been liberalization of the economy, dismantling of the state controls, license restraints, encouraging private investments and trying to forge a faster economic growth. Trendline growth has decisively moved up, industrial base has expanded and general prosperity, at least in urban areas has improved. Though a criticism is slow reduction in poverty and rising income disparities. The journey of The Republic continues with challenges abound -- External and Internal. External challenges would come from the risks higher global integration brings in financial and political spheres - Specifically commodity price pressures, capital flows (In and Out) and political collateral damages of developments around the world.These challenges though look transient and the biggest and structural ones are internal - The biggest one as PM himself puts is Naxal menace where a socio economic problem has converted into a law and order problem and is threatening one third of India's districts, most of which are natural resource rich. Another big internal challenge is the governance and introducing innovative policies focusing on education and healthcare - if the Republic cant empower its people, little progress can be achieved. We will see how the response to these challenges would evolve.The Republic in the meanwhile will keep marching on changing its pace adjusting to the surroundings...

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