As post-Independence India turns 80, we may as well adopt the Olympic motto — Citius, Altius, Fortius, Communiter or faster, higher, stronger and together — to pull the economy by its bootstraps. The Asian tiger aspires to be the world’s third largest economy, but the growth miracle is missing. It’s not that we need supernatural powers to turn water into wine or lead into gold, but we must get the right sectoral mix to create jobs and increase incomes. The task is neither simple nor easy given the prevailing geopolitical tensions, volatile energy prices, supply-chain disruptions, tariff wars and above all with China and the US up to their necks for global dominance.
In short, trouble is everywhere and like a dreaded mother-in-law it could often show up unannounced. While the discomfort caused by an unwelcome guest is tolerable, the damage due to the polycrisis where multiple, independent shocks collide simultaneously or in succession would be devastating. So India needs to flex its biceps to ensure that not only growth picks up speed but also sustains the momentum.
Growth trajectory
Traditionally, the economy was heavily dependent on agriculture and the structural shift to industry, particularly, manufacturing took decades. As a result, economic output during 1950s and 1980s remained sluggish with elevated poverty levels. Eventually, industrialisation began in the mid-90s and sustained expansion followed, though it lasted just three decades. For instance, if the average annual growth rate accelerated from about 2.9% during 1960-70s to 5.8% during 1980-90s, rising further 6.9% between 2001 and 2011, only to slow down to 5.4% in the following decade. Also, much of this growth was from services sector, which grew from 4% to nearly 7%.
In contrast, agricultural sector’s growth was fixed to the floorboard at about 3% throughout. If it accounted for 57% of national output in 1955, its share plunged at the dizziest rate to 17-18% now.
Thankfully, the manufacturing sector’s share rose from 9.9% to 17%. But instead of reaching the desirable 25%, it’s squatting at the same spot, neither gaining nor losing an inch. On the other hand, services sector share jumped from 19% in 1955 to 56%.
While the pace of growth is appealing, economists believe that the sector accounts for a far higher share of economic activity than should have been the case, given India’s level of per capita income.
In sum, growth isn’t broadbased despite decades of efforts.
Trade & industry
Prior to 1914, India’s trade grew at unprecedented levels but volumes collapsed thereafter following the First World War and Great Depression. Unfortunately, trade failed to turnaround even after Independence, with India adopting a highly restrictive trade regime. Capital goods imports were subjected to rigorous licensing norms, other imports were channelled via state-run trading organisations, while consumers goods were totally banned.
The export-import policy in late 1970s somewhat relaxed import controls, making room for domestic industries to modernise and the pace of trade reforms continued in the 1980s, with emphasis on export promotion. But the downside was that the average effective tariff rate for capital goods almost doubled to 63% by 1988.
However, import quotas on machinery, equipment and manufactured intermediate goods were dispatched to the morgue in 1990s, while tariff rates that peaked to 300% reduced drastically to 80%.
Consumer goods remained on the banned list for another decade or so. Besides the restrictive trade policy, the industrial-unfriendly policies of 1951 and 1956 limited private sector participation. These policies were further reinforced in 1970s, along with the introduction of the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA).
These laws made it challenging for companies to seek approvals even for capacity expansion, technology adoption, and so on. The mid-1980s saw some half-hearted liberalisation measures. Substantial deregulation occurred only in 1991, when industrial licensing system abolished altogether, ans sections of the MRTP Act that restricted growth or merger of large businesses were finally omitted. The sector was opened up for private players with the list of industries reserved for the public sector reducing from 17 to 6.
Yet, certain aspects of the old regulatory framework remained like bankruptcy procedures, restricting companies from liquidating assets until recently. Likewise, a full-scale labour reforms too are pending, which means small and medium enterprises that account for large-scale job creation have limited flexibility with regards to manpower management.
Fiscal policy
As if the ruinous trade and industrial policies hampering growth were not enough, also pursued unchecked welfare spending, ignoring fiscal conservatism and contributing to high fiscal deficits and a balance of payments crisis in 1991. Inflation rose from 3% in 1970s to 6% in 1980s, and peaked to over 10% during the 1991 crisis. Monetary tightening, price freezes on food and fuel, and expenditure rationalisation helped lower inflation to 5% by 1995. But it’s a fact that inflation continues to be an annoying pockmark.
Just a decade ago, delivering his third Independence Day speech in 2016, Prime Minister Narendra Modi took the applause for meeting the annual inflation target of 4% and promised to ensure price rise will remain rangebound. But inflation has been blowing hot and cold since then. In fact, just last week the RBI forewarned that prices may remain high throughout the current fiscal.
Lastly, whether India can generate productive jobs amid the AI-scare remains a challenge. The trouble with jobs is that, if high unemployment rate is one concern, data reliability is another. Ever since the government disowned its own jobs data ahead of the 2019 general elections, the credibility of official statistics is under constant attack. Regardless of whether one takes the official data at face value, one thing is indisputable: the pace of job creation must accelerate to keep pace with India’s growing workforce.
