What were these reforms?
The core purpose of the reforms was to dismantle the ‘licence raj’ system that had plagued the country. The licence raj epitomised a deeply regulated and centra-lised economic system. The regulations were so tight that it was impossible for a businessman to do business in a transparent way. Imports and exports were so regulated that it used to take many years to import certain products. All in all, highly centralised in New Delhi, it triggered systemic corruption in India.
The comprehensive reform process carried out in 1991, can be segmented into three parts. One is on de-regulating the industry; two on liberalising trade controls; and the last are changes in the financial, agricultural and manufacturing sectors.
The ‘Statement of Industrial Policy’ on 24 July, 1991 was a game changer in de-regulating industry. Through a single legislation it did away with licensing and entry restrictions on MRTP firms. It also ensured that public sector monopoly was done away with and FDI was brought up to 51 per cent.
The licensing regime was abolished for all industries except for some mandatory sectors. The public sector monopoly, which existed earlier, was also restricted to 8 areas and the restrictions on the MRTP Act were removed. The policy abolished the threshold of 40 per cent on foreign equity investment. The concept of automatic investment was introduced where the Reserve Bank of India was empowered to approve capital investment up to 51 per cent in 34 industries. The automatic approval of foreign direct investment up to 100 per cent was given to all manufacturing activities in Special Economic Zones (SEZs) except those subject to licensing or public sector monopoly. Subject to licensing, defence was now open to the private sector for 100 per cent investment with FDI (also subject to licensing) up to 26 per cent permitted.
Trade liberalisation was evident in industries such as insurance, banking and telecommunications, which had high government intervention. The telecom sector, which was a state monopoly, was opened up in 1994. Also, the new telecom policy in 1999 further opened up the area making India one of the largest telecom markets in the world. In the insurance sector, the Insurance Regulatory and Development Authority (IRDA) Bill was passed in 1999 and it has brought FDI into the insurance sector in India. Similar such legislations were planned since 1991 in the power sector with the National Electricity Bill in 2003 and other new legislations, which attempted to introduce competition through public-sector entities in the generation, transmission and distribution.
The second phase of reforms
The second phase of reforms took place in the first decade of this millennium. At a stage where the change narrative was waning, India was fortunate enough to witness a resurgent growth in 2003 onwards for five years. This exponential growth was the pivot in which the next wave of reforms was positioned. The opening up of FDI in almost all sectors including defence, single brand retail and a plethora of areas paved the way for direct FDI in nearly all the sectors in India. While multi-brand retail still seems stuck in a roadblock, by and large, most areas have been opened up. One of the highlights of the post-reform period is the successful passage of the GST-bill. The GST can bring about a few fundamental changes: it will increase the resources available for poverty alleviation and development; it would also help facilitate the ‘Make in India’ process and streamline tax governance.
So have the reforms agenda made India a far better place to live?
It is time that India seeks its economic identity and associates the broader world within that identity. The more we try to ape the world, the more helpless contours we would drag ourselves on to. Here are some suggestions for the way ahead:
1) Customise the Indian reform story to an Indian milieu
There is no denying that reforms were required for us to boost growth but the future ahead is tricky. Unless India customises its reform agenda to its strengths, it is going to face the same issues the West is facing. Economic inequality in countries such as the United States is so rampant that the median income, which was there in 1975 remains the same today in the US. The top 1 per cent has grown exponentially and its impact on the rest of the 99 per cent has been significant. The rise of Donald Trump and events such as Brexit are effects of economic marginalisation of the majority and the social consequences associated with it. Is India buffered from this prospect? The answer frankly is no.
We have not taken into account the widening inequa-
lity that is plaguing our urban societies. Urban issues including chaotic development, corruption and crime are on the rise—all of this because of inequality growing in an aspirational society. One of the key ways to address this is to cater reforms to suit the Indian psyche. Examples of this are the gold monetisation scheme and the MUDRA Bank schemes introduced by the Modi government. Even though these plans haven’t ticked off, they represent the inherent strengths of Indian society—a quality which it possesses and which needs to it nurtured. It would be imperative to have customised ideas like this to evolve the reform agenda to the next level of sustenance and sustainability in a local context.