The Indian Growth Story

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Status: In Progress  |  Genre: Editorial and Opinion  |  House: Booksie Classic

Excerpt :
"Today we stand at the verge of an era of transformation, one which will not be limited to mere economical aspects but will extend over to society and culture as well. In the next 30 years, India is projected to reach new heights and become one of the few socio-economic powerhouses of the world."

After independence in 1947, our policymakers of the time were worried that foreign imperial rule might return in the form of economic domination through trade and investments. Thus, out of this fear and a fascination for socialism, we embarked on the journey of seeking "Economic Freedom". In contrast to the sensational term, the government imposed heavy control on the economy and the market. After four decades of socialism, our share in global trade had fallen from 2.2 per cent in 1947 to 0.45 per cent in 1985, the number of poor people in the nation had approximately doubled, and due to an unsustainable government spending spree to drive the production, we had emptied our foreign exchange and had sunk deep in debts till 1991 when Shri P.V. Narsimha Rao became the Prime Minister and finally, the government decided to liberalize the economy. He insisted that we were not headed for a radical transformation but were taking a middle path but the opposition slammed the government and even labelled them as being sold to the International Monetary Fund. The economy took 2 years to stabilize but then started achieving record highs in growth. It has been 30 years since then and we have come a long way, from being one of the poorest countries in the world to entering the top 5 world economies' list. Our ambitions are higher than ever now. We aim to become the manufacturing hub of the world, while steadily evolving into a knowledge-based 21st-century economy. Today we stand at the verge of an era of transformation, one which will not be limited to mere economical aspects but will extend over to society and culture as well. In the next 30 years, India is projected to reach new heights and become one of the few socio-economic powerhouses of the world. From hard economic and military power to soft power of cultural influence, as our power expands, so should our responsibility. Building stronger institutions, having a clear and consolidated understanding of our positioning and role in the world, much more active foreign policies and a lot more need to be done. The era of non-alignment has gone, we have changed a lot and so has our global role and image.

 

Starting from 1991, I have tried to look back at our journey through the past 24 years to understand what we have achieved, what remains and how are we gearing up for what lies ahead.

 

The Past: 24 years of transformation 

 

Liberalisation and its importance (1991): The great Indian growth story started here. This was the inflexion point not only economically but socially as well. Pre 1991, the economy was closed, businesses and enterprises heavily controlled, and growth dismal. The top income tax rates rose to 97.5 per cent with a wealth tax to 3.5 per cent. Business houses achieving a good growth rate if were able to achieve an income higher than a specified limit used to be either nationalised or taxed heavily. In other words, they used to be punished for performing well. Socialist policies like these soon started taking a toll on the national economy. We started emptying our foreign exchange and sinking in debt. India even earned a name, the begging bowl of the world, a bottomless pit for loans and financial favours. Pre 1991, following up to the gulf war, the situation was such dire that our foreign exchange could only finance three weeks of imports. In 1991, the market was opened for foreign companies and the domestic ones were unchained. It was an attempt towards establishing a more business-friendly ecosystem. The results were terrific. After 2 years of instability, we achieved a record growth of 7.5 per cent in the three years 1994-97 and 5.7 per cent in 1997-2003 despite the Asian financial crisis, and two droughts in 2000 and 2002. India stood far more resilient than its other competitors in Asia.

We started creating jobs, installing industries, boosting infrastructure and lifting people out of poverty and hunger. The number of poor people which had almost doubled since 1947, now for the first time started to decrease. Big global brands started investing and the domestic ones grew stronger. The stock market shot green and various financial agencies started adopting technology and as a result, the National Stock Exchange went fully electronic before London and New York. The Securities and Exchange Board of India was established and brought order and trustworthy practices that were earlier absent. The Economic liberalisation eased access to state of the art technology, big money in the form of foreign investments and huge world markets.

 

Rise of the free market (1991 - 1999): The GDP growth in these 9 years averaged at around 5.8 per cent. To correctly understand this period, it should be divided into three, the uncertain period of 1991 - 1993, the growth years of 1994 - 1997 and the slow years of 1997 - 1999.

Just after the reforms, there was huge uncertainty around how things would turn out to be. On one side, where the opposition slammed the government and lashed out with heavy criticism, paranoia was widespread amongst the people as well. This resulted in over-protectionism which explains the slow growth of these years averaged at around 3.8 per cent. It took 2 years for things to settle down and stabilize, people to figure out the new systems and the results which followed were overwhelming.

The growth started picking up. People started realising the new power which they had in their hands, new global brands started entering the Indian market. Enthusiasm in the market started rising and so did the economic activity. The market was now more competitive than ever. There was always the fear of killing the domestic enterprise by giving access to global brands. But what happened was quite opposite, domestic enterprises quickly adapted to the change and became more competitive and efficient. There were more jobs available, money was flowing in, production was rising and as a result, the growth in these 4 years averaged at around 7.5 per cent. Such stability, resilience and growth were unknown in the Indian context. The criticism which earlier used to dominate the political landscape now started vanishing.

1997 started with the Asian financial crisis, the major tiger economies of the south-east were affected, with mild effects reaching Japan, China and even India. As a result, the growth started with a low rate of 4.05 per cent but resumed its spirit soon enough and achieved an average of 6.36 per cent. These immediate 9 years after liberalisation saw a marginal rise in industrial output, exports and overall economic production. Although small and slow, we started taking steps towards private capital and the free market. Despite this, socialism and economic protectionism just refuse to go away easily, which is evident from the fact that the economic policies of almost all political parties in India sound more or less similar, and more socialist at that.

 

The slow years (1999 - 2004): After achieving decent growth in the past 9 years, we faced an array of situations which slowed down the economic growth. Starting from the economic sanctions following the nuclear tests, we faced 2 droughts in 2000 and 2003, the Kargil war, the dot com collapse and global recession of 2001 and the global uncertainty created in the run-up to the Iraq invasion in 2003. But despite these slowing factors, the economy managed to survive through with an average growth rate of 5.65 per cent.

Shri Atal Bihari Vajpayee became the prime minister in 1998. In 1999, we conducted our first successful nuclear test, Pokhran 2. Following up to that, China and the US heavily condemned the tests with the US imposed heavy economic sanctions. The UN as well adopted resolution 1172 and condemned the test. The sanctions imposed by the US consisted of cutting off all assistance to India except humanitarian aid, banning the export of many defence materials, ending American credit and credit guarantees to India and opposing the lending by international finance institutions to India. What followed was a notable decline in foreign investment and exports which fell by 4.6 per cent in 1997 - 1998. Although the exports increased by 11.2 per cent in 1998 - 1999, it picked up a good pace in 1999 - 2000 with an increase of 14.7 per cent. The dot com bubble burst and coupled with some other factors resulted in the global recession of 2001 which lasted for some months. Having recently faced a drought disaster in 2000 and a war in 1999, another drought followed in 2003 and the economy took multiple beatings. The growth reached its local minimum at around 3.8 per cent in 2003 but quickly made a record recovery to 7.86 per cent in 2004.

 

The boom years (2004 - 2010): Growth friendly global conditions and stable domestic conditions fuelled the growth in this period and the growth rate reached its highest with the average for the 7 years reaching up to 7.28 per cent under the leadership of then Prime Minister Dr Manmohan Singh. A slump happened in 2008 with the growth touching 3.087 per cent following the financial crisis but it quickly recovered to 7.862 per cent in 2009. With only China and India being the major economies reaching such high rates of growth, soon the world started comparing the two and looking at India as China's only potential competitor. Perception of India had started changing and we were more confident than ever in telling the world about our arrival. We lifted more than 200 million people out of poverty, hunger ratio declined from 17.3% in 1983 to 2.5% in 2005. Exports and Industrial output grew marginally, huge leaps were made in improving the Human Development Index, life expectancy, average household incomes and India started moving from a low income towards a middle-income economy. In 1991, our major exports included textiles, polished gems etc., now it included software, business services, pharmaceuticals, automobile, auto components, engineering materials etc. Corporate tax was cut from 58% to 30%, yet the collections increased from 1% of GDP to 6% of GDP. Income Tax rates were also decreased from 50% to 30% but collection increased from 1% to 2% of the GDP. Better revenues ensured better delivery of public services, better education, health, security and transportation infrastructure. India has transformed its roads, railways, airports and ports in the last few years to an almost unrecognizable extent.

 

Marginal slowdown (2010 - 2014): We were able to achieve high growth rates after liberalization but shied away from bringing in further structural reforms to continue our movement towards a more and more free market to create more potential for growth. Fraser Institute's economic freedom index ranked India at 114th of 157 nations as a result of the decline in its score from 6.71 in 2005 to 6.43 in 2013. World Bank's ease of doing business rankings ranked India at 130th of 189 countries. We ranked 183rd in ease of getting construction permits, 178th in enforcing contracts, 157th in paying taxes and 155th in starting a business. In 2011, concerns grew around moderation in our growth rates. Failure of the government in reducing useless public spending and raising revenues increased the fiscal deficits to 5.5 per cent of GDP. The CAG calculated the possible revenue lost by the government by allocating spectrum on a first-come, first-serve basis and estimated it to be around $16.2 billion. Ill targeted subsidies, promulgating political corruption, loss-making PSUs and unneeded loan waivers bloated government spending. Around 10 - 20 per cent of the loans of public sector banks were either restructured or were under some kind of stress. As an example of ill-targeted subsidies, the election manifesto of AIDMK for 2016 Tamil Nadu state elections included the following freebies: cell phones for ration card holders, laptops with internet connections for 10th, 12th graders, maternity assistance of ?18000, 100 free electricity units every two months, waiver of all farm loans (at a cost of $5.9 billion), a 50 per cent subsidy for women to buy scooters, an 8-gram gold coin for women getting married, 20 kilos of rice per family, free mixer grinder, a fan per family, subsidized kitchen, cows and even goats for rural families. Important government subsidy programs like food and rural employment are also plagued by waste. Annual losses of state electricity distribution utilities reached around 1 per cent of GDP. Education, healthcare and delivery of other public services remained abysmal. These factors coupled with the near-stagnation of the global economy lowering the exports, and elevated crude oil prices driving up imports raised our account deficit to around 3 per cent of GDP. To worsen the conditions, foreign institutional investors resisted investing in India, making it difficult to finance such a deficit. The value of rupee dropped by over 20 per cent and the growth dropped to a low of 5.241 per cent in 2011. Though the growth gradually picked up after 2011, it remained below expectations achieving an average of 6.12 per cent.

 

The Present: Under Modi (2014-2020)

 

When Prime Minister Shri Narendra Modi was elected in 2014, the previous years(after 1991) had largely been a story of private-sector success and government failure. The gross production had swelled, industrialization had happened, people had been lifted out of poverty and government revenue had risen, but the delivery of public services remained broken. Education and health infrastructure was barely able to fulfil the needs of the people. Lack of strong institutions, resistance to structural reforms and bad infrastructure still made us lag. Inability to develop human capital resulted in poor performance in the generation of skilled labour and intellectual property. Almost un-sackable government staff having no accountability to the people had resulted in an inefficient bureaucracy. The criminalisation of politics, an almost absence of cultural and social institutions and an over-expanded state administration portfolio made the perseverance and development of social capital difficult. All of this piled up to pose a huge governance challenge and the Modi administration came with the expectation of solving this.

 

What has been achieved?

We have seen an array of new reforms and governance frameworks in the last 6 years, we shall discuss some of the major ones which have worked out well.

The government of India spends around 7.4 lakh crore rupees annually on subsidies which are around 3% of the GDP. But, the distribution of these subsidies and making sure they reach to the beneficiary has always been a tough challenge, but with Direct Benefit Transfer the conditions have significantly improved. Starting in 2014, the government was able to open more than 40 crores Jan Dhan Accounts in the past 6 years, which coupled with Aadhar, has allowed for 1.7 lakh crore rupees directly reaching the beneficiaries. The remaining portion of the subsidies are also being slowly moved to this new ecosystem which has the potential to eliminate the losses due to middlemen and corruption. This new framework was named the JAM trinity, which stands for Jan Dhan, Aadhar and Mobile. Further, due to the use of biometrics in Aadhar, many other problems have been solved. The recognition of 80,000 salary receiving fake teachers and 30,000 fake railway employees is a great example. The long due GST was finally implemented in 2017, which standardized nation-wide sales taxation. Despite the many controversies surrounding the rationality of its rates, it has constantly improved. An ideal GST would arguably have most of its items under a single slab, with a few exceptions of some minimal number of luxury items taxed a little higher and some essential goods taxed lower or completely exempted. The current one seems to be far away from that but although very slowly, seems to be moving in that direction. It could have been argued that from a system of socialism without entry, India had moved to a system of capitalism without exit. Introduced in 2016, the Insolvency and Bankruptcy Code was aimed at solving this by better regulation of the banking systems and ending crony capitalism. In a follow up to that, we saw a huge NPA crackdown under which the top 50 bad loans of various banks across the nation were scanned and various companies and individuals were charged and some even penalised.

The PPP model was staggering in 2014, it was revisited and brought back to life. The Modi administration has given the government a major role in financing fresh equity in infrastructure, with private sector mainly executing government contracts. Clearances and land acquisition have picked up. Bank loans to state electricity boards have largely been replaced by state bonds, reliving bank stress. Of the stuck projects worth ? 3.8 trillion, this government had already unlocked ? 3.5 trillion in 2015. Consequently, road construction has risen from 8.5 km per day during 2012 - 2013 to 11.9 km per day in 2014-15, to 16.5 km per day in 2015-16 and 30 km per day in 2018-19. Railways is another sector witnessing quick reforms and transformation. Railway stations are being rebuilt, some private trains have been allowed and technology and services are being improved. With the introduction of National Infrastructure Pipeline recently, the government aims to ? 102 lakh crore on various sectors of infrastructure including energy, urban infrastructure, railways, roads and ports. Bharatmala, Sagarmala and Delhi-Mumbai Industrial Corridor are some of the upcoming megaprojects with the potential of completely transforming India. Electricity generation has increased from 199,877 MW in March 2012 to 370,106 MW in March 2020, coal shortages have been successfully dealt with and electricity has reached everywhere. Coal production rose by 97.86 million tons in 2020-21 and had risen by 32 million tons in 2014–15 against an increase of 31 million tons in the previous four years together. Most parts of India have surplus electricity for the first time in decades. However, state electricity boards have not been reformed as a condition of their rescue, and they have the potential to once again go deep into the red because of politically ordained subsidies. In sum, infrastructure problems are slowly lessening, but major challenges remain.

Following up to the pandemic, the long-overdue labour laws have been reformed and the agriculture sector has been liberalised, although reforming the land acquisition laws still remains. Corporates tax rates have been cut to the lowest ever. Overall, these steps have greatly improved the ease of doing business in India. In 2014, India stood at 142nd among 190 countries, in 2017, we jumped 42 positions to the 100th rank and in 2019 we have jumped 37 spots and have acquired the 63rd position. FDI inflows are higher than ever, starting at $ 34.5 billion in 2014, it has grown significantly every year and reached $ 50.61 billion in 2019. In a follow up to the government's Make in India programme, India has now become the second-largest mobile manufacturer in the world, with a capacity increase of around 450% since 2014, and now with schemes like production linked incentive, that capacity is projected to increase much further and faster.

To conclude, from GST and labour reforms to the scrapping of Article 370, a lot has happened in the last 6 years of the Modi Administration, but no regime can be devoid of shortcomings and this one is no exception.

 

What remains?

The government spent ?235 crores on the training of bureaucratic personnel in 2019-20, but it seems little is obtained from such expenditures. The bureaucracy in India is still inefficient and incompetent. Any attempt to reform the bureaucracy is met with heavy backlash, which is why previous regimes had resisted in going forward with them, the current Modi administration has not proved to be any different. There are 198 police personnel per 100,000 people in India against a UN recommended level of 220 and far below the US (352) and Germany (296). In Uttar Pradesh, the shortage reaches its peak of 43 per cent, with the shortage of head constables being 82 per cent and inspectors being 73 per cent as of 2015. Just taking a look at the responsibilities of the police, it ranges from taking care of thievery and pickpocketing to the complex issues like dealing with illegal immigration. On top of that, around 47,000 personnel are tasked only with the security of VIPs. In short, policing and overall public staffing needs immediate structural reforms but little has been done for that.

Judiciary is another such area. Justice is supposed to be blind. In our case, it is also lame. India holds the world record for legal case backlogs (31.5 million), which will take 320 years to clear, according to Andhra Pradesh high court judge V. V. Rao. The Law Commission has recommended the appointment of 50 judges per million population. The current sanctioned judicial strength is just 17 per million, and unfilled vacancies are as high as 23 per cent in the lower courts, 44 per cent in high courts, and 19 per cent in the Supreme Court. No wonder the staggering backlog of cases does not diminish, and most people are reluctant to litigate to redress their grievances. This affects business also, as dispute resolution seems to take forever and little has been done to resolve this.

Many other small and big reforms seem to be pending. One such case is the state electricity boards which are still vulnerable despite various measures taken by the government. Primarily, because they need structural reforms which requires a common ground b/w the state and central governments. GST rates are still too complex and second highest in the world. When iPhone 12 was launched in India, some people rightly pointed out that it would be cheaper to board a flight to Dubai, buy the phone and return than to buy it here itself. Privatisation of PSUs is still lagging. Almost every PSU is a heavy loss-making liability but the government just refuses to let it go, furthermore they have monopolised certain sections of the market. A good example is one of the Indian Army's which has to buy 80 per cent of its arms and arsenal from the OFB even if they are overpriced and incompetent. Tough land acquisition laws are still holding infrastructure development and industrialisation back.

For realising our huge demographic dividend, we need to quickly ramp up our human capital development. Our education system is a mess. Being one of the largest producers of doctors and engineers in the world, we still lag behind many when it comes to the production of intellectual property. Some countries with much smaller scale as compared to ours are performing far better than us. Research and development need to be emphasized much more. As an example, the huge and diverse amounts of data we produce makes us very potent for advanced research in the fields of Data Science and Artificial Intelligence, but the lack of proper cloud infrastructure prevents that from happening. 

Dealing with language barriers, upgrading the old and outdated curriculum, better technical skill development and much more emphasis on cultural & value education seem to be our biggest challenges. The newly proposed National Education Policy (NEP) seems to have a lot of potential for solving this but how it is implemented and how it turns out to be, remains to be seen.

India has a peculiar political landscape, where political parties across the spectrum have little or more fascination for socialism and this has no exception. Socialism seems to be our Achilles' heel, and it just refuses to go away. When BJP came to power with Shri Narendra Modi leading its charge, many expected a contraction of government but all has proved to be wrong. The government still controls temples, subsidises selective religious education, mediates marriages, maintains religious personal law, does charity and as already mentioned, even attempts to run businesses.

Criminals still take part in politics and often become cabinet ministers. That gives them huge clout and ensures that charges against them are not pursued. An analysis by the Association for Democratic Reforms looked at 541 of the 543 members of Parliament elected in 2014 and found 186 had criminal cases pending. Only institutional change can break the criminalization of politics. Exposure of criminal cases is not enough. We need a new law mandating that all cases against elected members of Parliament and members of the Legislative Assemblies will receive top priority and will be heard on a day-by-day basis until completed. That law will make electoral victory a curse for criminals, it will expedite their trials instead of giving them the political immunity they seek. If such a law is enacted, we may well see criminal legislators and ministers resigning to get off the priority trials list. Such reform can truly transform the existing perverse incentives.

 

To conclude, we have come a long way in the past 30 years. We have solved problems of such scale and such complexity that were never seen before and thus have set many records. Having raised the largest number of people out of poverty in the history of any democratic nation, having raised our standards of living of while maintaining our democratic setup and having projected our strength in possibly the politest way possible we have set an example for many but still a lot needs to be done. We must become a much better-governed nation that opens markets much further, improves competitiveness, empowers citizens, vastly improves the quality of government services, strengthens institutions, jails political and business criminals quickly, and provides speedy redress for citizen grievances. We have the ample capacity, confidence and decisiveness needed to solve the most complex of the complex problems. With this realisation, we must continue our glorious march forward.


Submitted: October 24, 2020

© Copyright 2020 Aditya Mishra. All rights reserved.

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