Hard Truth with Anant Mishra: Rolling the Dice: India’s hampered Economic Policies and Reforms

March 17, 2015 OPINION/NEWS

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By

Anant Mishra

History

Since its independence from the British Raj in 1947, India has followed (and is still following) extremely polarized economic policies and reforms.

India’s economic history can be divided into four different phases: 1947-1965, 1966-1980, 1981-1991, and post 1991. Each phase represents an economic policy vastly different from others.

 

The era begins with the leadership of Jawaharlal Nehru. Nehru was a strong believer of a stable socialist government that would control all major industries, borrowing many examples from the Soviet Union, most famously, the idea of 5 year plan, exclusively aimed to increase the production in industries followed by growth in agriculture sectors. Under the leadership of Nehru, India’s economy flourished phenomenally, mostly due to the presence of the Congress party in the center and Nehru’s ideas and ability to lead people. However Nehru firmly believed in economic policies, which cannot be argued, but various levels of society didn’t believe in his economic approach at that time; this was lost when Nehru died.

 

The following two eras saw a massive decline and instability both at the economic and political level. After Nehru, no leader was able to inspire the confidence in people followed by the importance of a democratic socialist government. It didn’t take long for the people of India to understand what was lost, newspapers started publishing the headlines: “The light has gone out of our lives, and there is darkness everywhere.” However, congress party was able to implement few economic policies at the center, failure to implement the same in every state leading to enormous state wise economic disruption.

The two important factors of democracy, unity and nationalism that Nehru brought, were nowhere to be found, even as government brought new faces to the center, in a desperate attempt to save the fallen economy. The dynamic and charismatic leader Indira Gandhi, tried to unite the country forcefully by abolishing foreign investment in 1973 and expanding the powers of the central government. Although, many questioned Indira’s policy as she, on numerous occasions, used unethical measures in order to achieve her goals, which further resulting in massive corruption scandals and accusations.

The policy of corruption and unethical governance has been in our country since then, and remains to be the forefront of every party agenda or political discussion on our news channels. Often viewed as the most corrupt Prime Minister, Indira’s regime was the undoubtedly the most centralised government in the history of Indian politics.

 

The era, from 1965 to 1991, was stable for the Indian economy, with few instances of growth. Although the lack of consensus towards the economic policy reforms and focus on social unity heavily affected the nation’s economic stability. In 1990, this economic stability was at its tipping point. In those days, India heavily relied on low cost oil from the Soviets, the collapse of the Soviet Union followed by the first Gulf War in the West left India with fewer options. Thus, these trouble situations forced India to buy oil from the free markets. As a result, the foreign exchange reserve of India fell to $240 million, which left the nation with money for a meagre two weeks’ oil supply. In order to avoid depression within the nation, India was forced to change its close door economic policies.

This was the beginning for India’s current era of free market economies. After requesting funds from the International Monetary Fund in 1991, Finance Minister (and future Prime Minister) Manmohan Singh started preparing the nation for the international markets. He lowered tariffs and removed restrictions on India’s foreign direct investment (FDI) policy, which at the time were very controversial moves for an INC member, then a socialist party. With new policies in hand, India rapidly experienced economic growth. Foreign investors were lining up to invest in this new growing economy, and the IT sector growth rate was phenomenally high.

As a matter of fact, this economic growth was a result of very limited liberalization, with state still in charge of the raw materials industries and few IT sectors. Economic growth was relatively steady until the financial crisis of 2008. Even then the growth was slow and foreign investment steady. India’s Gross Domestic Product (GDP) slowed to 4.4%, while China’s GDP was closer to7.7%.

 

 

Current Situation

As the data states, India has grown phenomenally since 1991. In 2007, India was among the 15 economies that reached a total GDP output of 1 trillion dollars. India is also a member nation in the BRICS group (Brazil, Russia, India, China, and South Africa) that are considered widely as the “emerging economic nations”. A nation with one of the largest service industries followed by a giant in the sector of information technology investment, India has shocked the world with this storm.

The details provide a very promising agenda. India has experienced numerous economic problems throughout its history, which makes the issue a pressing concern and a necessary topic in Lok Sabha. 2013 was a year of economic slowdown, experts believed that economy was slipping below 4.4%. This was mostly due to undisciplined spending and extremely poor leadership. India’s budget deficit was a meagre 5.2% of the GDP. On the contrary, the then finance minister, Palaniappan Chidambaram continued increasing the budget to 17%.

 

The reason for India’s GDP growth slipping can be clearly attributed to massive inefficiencies in all sectors of the economy, especially agriculture and pollution. The World Bank in 2009 estimated that the environmental degradation in India is costing it close to $80 billion, which is approximately 5.7% of the GDP. This is because polluted air and water are forcing the government to increase subsidiaries in the agriculture sector.

 

Talking separately about agriculture subsidiaries, India spends about 10.7% of the GDP. Farmers are paid through government subsidies to keep the food price down. More than 90% of farmers receive government subsidiaries. These are a nominal payment for their crops that have gone bad due to atmospheric imbalance. Almost 10% of the crops are rotten, even before they are sold into the market. The recent report of the World Bank clearly states that these subsidiaries are rising, though on the other hand investments in the private sector are declining.

Large sums of money are paid to farmers as subsidiaries in an effort to stabilise the economy. Hence the Lok Sabha must find a way to decrease the amount of crops that are burnt in order to boost efficiency and lower subsidiaries.

In addition to high subsidiaries, the agriculture sector also represents a huge inefficiency in terms of labour. Approximately 3/5th of the population is working in the agriculture sector, yet the agriculture accounts for 17.4% of the total GDP. 60% of the entire working population in the agriculture are considered unnecessary. These workers have no other field to associate as manufacturing is not directly in contact with this sector.

The needs of these low skilled labours are still unfulfilled and it’s just not the case of fiscal year, it’s the same scenario, over and over again. If we compare this sector with other service industries, it comprises more than 50% of the GDP with skilled labour as a requisite other than the former. Every year 1 million skilled workers enter the Indian economy, hence the over nature of the unskilled labour in this sector is creating a huge inefficiency. The government must therefore find right employment opportunities for these labourers which will in turn boost economic efficiency.

 

Perhaps the most well known problem that India faces today is the widespread corruption. India ranked 94 out of 176 countries in the corruption transparency index of 2013. Additionally, the Transparency International stated that some, if not all, government bodies suffered heavily from widespread corruption. The March 2014 polls cleared our thoughts as 94% of the Indians believed that the government was corrupt.

Corruption not only hampers people’s perspective towards the government, it also adversely affects the economy. A study conducted by Ernst and Young supports the same fact. Roughly $5.92 Billion was lost due to corruption in the fiscal years of 2011 and 2012. Talking about a national approach, very little success has been achieved. The government should find creative solutions to deal with this issue both regionally and nationally to safeguard the citizens and strong economy.

 

India’s poor economic and political corruptions were one of the main reasons behind the fall of congress in the Lok Sabha elections and were also key in the rise of Prime Minister Modi. Modi worked wonders in governance when he was Chief Minister of Gujarat. Reviving the liberalization in the private sector, Modi was very successful in attracting all private investors to Gujarat, dropping the rate of employment to 1% in 2013. He brought electricity and running water to million homes in Gujarat. With his massive win in the elections, Indians are hoping that he can recreate the same scenario nationally.

 

Raised with a stable economy, Modi’s economic policies are different than the state controlled economies. Despite reviving liberalization in 1991, the government keeps an eye out on many important sectors like retail. Since arriving in office, Modi has given strict instructions to decentralise the government, reducing its involvement in the economy. Recently, our Finance Minister Arun Jaitley explained the aam budget with a raised FDI investment in defence and rail infrastructure. While addressing the people of India, he increased the FDI in defence expenditure to 49%. The next morning stock prices were high sky as investors grew anxious with the new FDI investment policy. By inviting more foreign players, Modi plans to release these sectors in the free market.

 

The increase in foreign investment is completely opposite to Nehru’s belief of “Socialist Democracy”. Although it is helping the nation’s economy to flourish, it is not the first time that Modi’s economic policies are being challenged. Since 1991 India has walked carefully between the lines of central government and economic liberalization, so a radical approach towards a complete liberal state would devastate the “barely” stable economy. If liberalisation is the only option, then it should proceed gradually. Although not many in the Congress Party oppose liberalization. The government must maintain a balance between their actions and liberalised economic policies.

 

 

The next five years of the government are of the utmost importance as these will be the deciding factors for the future economic scenario of the government. India is now standing at the crossroads of becoming an international super power and being stable centrally.

The government must also deal with issues like corruption and decide which economic policies suit the needs of the people and support the country by bringing back the growth that this nation, once called ‘Sone Ki Chidiya’, had before.

 

 

 

 

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Anant Mishra

Anant Mishra is a former Youth Representative to United Nations. He is an Associate Member of Institute of Defence Studies and Analysis, New Delhi specializing in counter terrorist operations and foreign policies in Africa and Middle East.

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