The economic reforms of 1991 has brought significant changes to the Indian economy. The Indian government adopted the policy of liberalization, privatization and globalization in 1991, which wasn’t expected from a Prime Minister who was considered to be a socialist.
The agenda of the economic reform was to demolish the provision of license raj. Under the license raj it was mandatory for businessmen to take license from the government to set up industries or import goods and services. The Government used to issue limited licenses and levied very high duties. On the other hand foreign investment in India was limited to few sectors and the amount of foreign investment was low.
Such policies after independence were developed to protect the domestic industries from large foreign industries which have achieved the economies of scale. This is known as the infant industry argument (IIA). Developed countries such as South Korea and Japan also followed similar strategies during their initial period of industrialisation (Stefan Neumann, 2013).
Shift of focus from the Hindu rate of growth
Growth rate of the Indian economy before 1990s’ was known as the “Hindu rate of growth”. The term was used to describe the slow growth rate of the Indian economy after Independence. From the second five year plan the government’s focus was industrialization. At the time of independence the agriculture sector was the biggest contributor to the Gross Domestic Product. Its contribution accounted for almost 50% of the Gross Domestic Product during 1954- 55 (Planning Commission, 2015). However to achieve higher economic growth the share of secondary contributors like manufacturing and tertiary contributors like the service sector should have been more.
To shift the focus from agriculture Jawaharlal Nehru focussed on industrialisation as an important part of the second five year plan. During 1950-55 the growth rate of the manufacturing sector increased from less than 3% to above 7%. However the growth could not be sustained and fell down to below 5% during 1955-56 (Planning Commission, 2015). As a result, the Nehru– Mahalanobis strategy of industrialisation could not achieve its targets. Both political and economy of the country and the flaws in the adopted strategy were the major reasons behind the failure. Furthermore, lack of basic infrastructure and unavailability of skilled manpower were other reasons. As a result, in the 1960’s the focus shifted back to the agriculture sector and Green Revolution was introduced in India.
|Five year Plan||Major Focus||Growth Rate|
|First plan (1951- 1956)||Agriculture, stability of price|
|Second plan (1956- 1961)||Industrialization|
|Third plan (1961- 1966)||Agriculture|
|Fourth plan (1969- 1974)||Improve growth rate of the agriculture sector|
|Fifth plan (1974- 1979)|
Sixth plan (1980- 85)
Seventh plan (1985 – 1990)
It almost took one and a half decade to stabilize the political environment in India after the death of Nehru.
Shift of focus from a socialist economy to capital intensive economy
Due to the gulf war between Iraq and Kuwait the supply of crude oil was disrupted and prices started climbing. Since India was a major importer of oil, increasing oil prices adversely affected the balance of payment. With the crackdown of the Soviet Union, India had lost its major buyer and its exports declined further affecting the Indian economy adversely (Bhat, 2011).
One of the main reasons behind the economic reforms of 1991 was the balance of payment crisis. The Indian government was not in a position to pay more than three weeks of its import bills (Cerra & Saxena, 2000). With no other options available, India accepted the terms and conditions of the International Monetary Fund (IMF) and took the bailout package.
Paving a way for Economic reforms
With the breaking down of the Soviet Union and facing economic problems India moved away from a socialist towards a more capitalist economy. The acceleration in the economic growth began after the economic reforms of 1991. However, the actual acceleration had started in late 1980s’ as the Gross Domestic Product growth reached 5.6%. Industrial regulation was relaxed and the rationalize tax system was adopted to boost the industrialization process. But the economic growth rate in 1990 was not impressive enough. As a result, the actual growth rate during 1990-91 and 1991-92 was 5.6 and 1.3 % respectively (Planning Commission, 2015).
It cannot be denied that the growth rate improved during late 1980s’ when the actual growth reached its highest, 10.5 % in 1988-89. However, the economy could not provide the required momentum to such high growth rate. As a result it started to decline till 1991. Infant industrial policy and the import substitution policy can be attributed to low growth rate during this period.
Surpassing the traditional Hindu rate of growth
With introduction of the economic reforms there has been significant changes in India, both economically and politically. In terms of political reforms, adopting the LPG policy (liberalization, privatization and globalization) which was the shift from the Soviet influenced socialist approach to US-influenced capitalist approach. More importantly the economic reforms opened the doors for the foreign investors to invest in India which was restricted in the pre–reform period.
Since 1991, India has been one of the top destinations for foreign investments. Foreign capital flow was in various forms such as foreign direct investment, foreign portfolio investment and external debt. However only the foreign direct investments had long term impact on the economy. With the demolition of the license raj and moving towards more market oriented economy, foreign investment was opened for many new sectors. Because of which there was significant increase in the flow of foreign investments into India and the growth rate also crossed the traditional “Hindu rate of growth”.
Even though the foreign direct investment in India had, the flow of investment has been highly unequal among the sectors. The service sector has been the leading sector to attract foreign investments followed by the manufacturing sector and agriculture sector respectively. The agriculture sector which was and is the largest employer in India lags behind in terms of investment and growth (Basu & Das, 2015; Planning Commission, 2015).
The manufacturing sector which is considered to be a job creating sector is also not able to perform as expected. The contribution of manufacturing sector in the Indian gross domestic product has been declining (Planning Commission, 2015). Consequently, the total exports from the manufacturing sector has been continuously declining (Francis, 2015). The launch of the “Make in India” program by the Indian government is expected to give a much needed boost to the manufacturing sector.
Challenge of maintaining balance between growth and sustainable development
There is no doubt that India is able to achieve high growth rate with foreign investments as the major contributor. However, India has not been able to perform in terms of the overall development of the country. According to the latest Human Development Index (HDI) India is ranked 130 out of 188 countries. Furthermore, India ranked 143rd out of 188 countries in the Health Index (UNDP, 2015). This shows that the growth in the country is not able to improve the overall welfare of the people.
Consequently, there has been an increase in economic inequality over the years. The richest 10% of Indians hold 74% of the total wealth of the country. On the other hand the elasticity of employment with respect to growth has also slowed down. The employment elasticity which was 0.29 during 1994-2004 has declined to 0.02 for the period 2005-2010 (NSSO, 2013). With higher economic growth and low employment elasticity, it can be said that India is experiencing a problem of jobless growth.
India ratified the Paris Climate Change Agreement on 2nd October, 2016. India has set the target of producing 40% of electricity using non- fossil fuel by the end of 2030 (TIME, 2016). However this would create a challenge for the Indian government to maintain its high growth rate without compromising its environment. Thus, it will be interesting to see how the foreign investment will impact the Indian economy and how India will balance between growth and sustainability.
- Cerra, V., & Saxena, S. C. (2000). What Caused the 1991 Currency Crisis in India ? Washington D.C. Retrieved from lnweb90.worldbank.org/CAW/cawDoclib.nsf/vewAsiaPacific/9921ECB13A1A8D8585256C6700761000/$file/wp00157.pdf.
- NSSO. (2013). Household Assets and Liabilities. New Delhi. Retrieved from http://mospi.nic.in/Mospi_New/upload/nss_Report_570.pdf.
- Planning Commission. (2015). GDP at Factor Cost at 2004-05 Prices, Share to Total GDP and % Rate of Growth in GDP. Retrieved October 4, 2016, from http://planningcommission.nic.in/data/datatable/data_2312/DatabookDec2014 2.pdf.
- Stefan Neumann. (2013). Import Substitution Industrialization and its conditionalites for Economic Developoment- A Comparative Analysis of Brazil and South Korea. Central European University.
- TIME. (2016, October 2). India Has Ratified the Paris Climate Change Agreement. Time Inc. New York.
- UNDP. (2015). Human Development Index and its components. New York. Retrieved from http://hdr.undp.org/en/composite/HDI.