View: Thirty years of liberalisation-Preparing India for the next 3 decades

The journey of the Indian economy in the past three decades has been a remarkable one. The economic reforms ushered in 1991 and progressive economic liberalisation thereafter has helped sharpen the focus on several policy initiatives that have helped address supply-side issues facing the country—thereby helping improve supply chain efficiencies, bringing in the latest technology and reducing costs for the end-consumer.

A wide range of controls and the so-called license raj was dismantled by the government as it sought to allow the private sector to play a much wider role in industrial operations, even as the role of the State changed from provider and controller of various key goods and services to an enabler of efficient functioning of private entrepreneurs.

This is evident from the rapid strides that India has made in manufacturing sectors like petrochemicals, engineering, automobiles, and the emergence and dominance of sunrise sectors like software and telecom services. From time to time, successive Indian governments have brought in policies to attract investments, domestic and global, as well as strategic and financial. These investments have brought in growth capital as well as technological expertise. The Indian economy started integrating itself strongly with the global supply chain, growing rapidly from its earlier approach and aspiration of import substitution. This also led to a shift in the country’s employment pattern, with the youth migrating to sectors like manufacturing and services, away from traditional agriculture and allied activities.

Global integration has also posed challenges along the way, such as periods of uncertainty during the global financial crisis in 2008 or during the taper tantrum in 2013. However, prudent and timely actions by the government and the Reserve Bank of India (RBI) helped avert the worst and ensured that the stability of India’s intricate financial system was maintained.

A well-regulated and vibrant financial services sector and capital markets have also seen a number of banks and financial institutions cater to the needs of a wide cross-section of customers—from salaried individuals to MSMEs and large corporations. A number of private banks were allowed that grew strongly in the coming years. Subsequent deregulation in areas like insurance and mutual funds followed suit and deepened the penetration of financial products among Indians of all economic classes.

India’s advantage has been that rapid economic growth also came with strong discipline in policymaking and heavy investments in building an appropriate regulatory and institutional framework. Accordingly, the near double-digit inflation prints in the early-1990s largely settled, barring periods of transitory volatility, to around mid-single digits. Similarly, key deficit indicators—fiscal deficit and current account deficit—also followed a path of structural improvement.

From a high of 12.3 percent in October 1998, India’s 10-Year Bond Yield has come all the way down to around 6 percent in July 2021; and bank interest rates have fallen in tandem. As bank credit turned way more affordable and attractive for a large number of individuals and firms, it triggered a virtuous cycle of sustained high growth. The increased penetration of credit is evident from the fact that domestic credit to the private sector in India, as a share of GDP, that stood at close to 24 percent in 1991, reached around 56 percent in 2020. However, larger economies like the US and China have a much higher credit-to-GDP ratio, and that is something that India needs to aspire to as its seeks to become a $5 trillion economy.

Overall, the size of the Indian economy has grown tenfold from less than $300 billion in 1991 to about $3 trillion today, becoming the sixth-largest economy in the world. Per capita GDP has also grown over six-fold from $300 in 1991 to close to $2,000 today, along with a considerable reduction in the percentage of the population below the poverty line.

Still, it is unmistakable that the inequality in the economy has increased further in the last three decades as the sharp rise in national income and emergence of a burgeoning middle class did not lead to a commensurate improvement in the standard of living of an average Indian citizen. Thus, despite being the sixth-largest economy in the world, India ranks 131 among 189 countries, alongside countries like Namibia and Honduras, when it comes to the United Nation’s Human Development Index (HDI) in 2020.

The question that India is faced with today is what can it do to leverage the strong foundation enabled by the reforms of 1991, in order to foster more equitable and sustainable growth?

Achieving this aspiration would need us to invest more heavily than ever before in areas that can have a strong direct or indirect multiplier effect on the economy. Increased outlays for investment in healthcare, education, skill development and rural infrastructure will go a long way. The country’s governance mechanism—at the state and central levels—can work with private sector financial institutions to deepen access to formal financial services in semi-urban and rural areas.

The ongoing COVID-19 pandemic and resultant restrictions on movement have thrown light on the need to create scores of commercial hubs across the country, especially in semi-urban and rural areas, as people may seek employment or an entrepreneurial opportunity closer to home in the new world order.

Channeling the country’s collective efforts towards this objective will help capitalise on India’s young demographic dividend by creating a healthy, future-ready workforce which can leverage technology to create value for themselves, as well as the country.