State of the Indian Economy

The rise of the Indian economy is one of the most important economic developments of our day. To put it in context, one needs to start by considering how India gained Independence. The year was 1947, and it was the culmination of a long struggle between the British government and the Indian independence movement. That movement was led by Gandhi, but his most important lieutenant was Nehru.

The two had very different views on a number of questions, and in particular on economic issues. Gandhi believed in a very simple life, while Nehru had absorbed the doctrines of British socialism. The British socialist movement at that time aimed to build up a modern economy as rapidly as possible. India was characterized by very low per capita income. In some ways India had a fully developed capitalist economy, and it had some of the oldest capitalist institutions in Asia, such as the Bombay Stock Exchange, founded in 1875.

There was a manufacturing sector, but it didn't cover many industries. There was even a steel industry and a relatively strong textile industry, but these were limited. It was predominantly a subsistence economy. Post independence years till India turned 25 Indian Congress absolutely dominated India. Congress thought its approach to economic development must be modern, focused and in tune with the global trend it should have broad and extensive conformity to kick start an industrial revolution to build a mammoth contemporary economy.

The thinking was right to develop a economy that modern in every sense but the industrial revolution was caught in the muddle in-between bureaucracy, the licence raj and the vote bank politics. The policies implemented by the Government of India during the 70’s and the 80’s were brilliant only in maintaining the power and influence of the bureaucrats “License Raj" developed very quickly. Everything needed permission. If you owned a business that officially was in the private sector, in order to develop you needed a license.

You couldn't get foreign exchange to import until you had the industrial license to expand. The government effectively controlled everything through a series of interlocking controls of that type. The End result growth was slow. Another feature of this period was that the educational system was much distorted. Illiteracy continued, and in particular female illiteracy, which is still quite common in India. But at the same time the elites have a very good educational system, typified by the Indian Institutes of Technology and Management, which were established in this period to cater to the elites.

The education they received has been important in the subsequent development of the country's economy. During 1960’s and the 1970’s the Indian population was growing at 2.5 percent per year and GDP is only going up 3.5 percent a year. Net result was no improvement in the standard of living for the common man and it also resulted in increase in poverty. One of the critical problems facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development.

The five-year plans have attempted to reduce regional disparities by encouraging industrial development in the interior regions, but industries still tend to concentrate around urban areas and port cities. After liberalization, the more advanced states are better placed to benefit from them, with infrastructure like well developed ports, urbanization and an educated and skilled workforce which attract manufacturing and service sectors. The union and state governments of backward regions are trying to reduce the disparities by offering tax holidays, cheap land, etc., and focusing more on sectors like tourism, which although being geographically and historically determined, can become a source of growth and is faster to develop than other sectors A steady and growing market size, abundant availability of natural resources for manufacturing, cost attractiveness, reliable business community, high levels of intellectual manpower, engineering expertise and a reform process that has brought about impressive economic liberalization, has made India a very attractive destination for foreign investment.

Liberalization of the economy led to price war between companies and it consequence was Electronic goods, cars and telecommunications were made affordable to the common man. IT and ITES were booming after the liberalization of the Indian economy. The major reason for IT companies success is that the government did some things right. Its founding of the Indian Institutes and giving licenses to private players to start technology, arts, science and engineering institutes led to a flow of highly qualified manpower, many of whom found vocation in the IT sector.

The problem with the Indian politics is that MP’s vote for the bill when there party is in power and opposes the bill when they are not in power. It happens with both BJP led NDA and Congress led UPA. All the governments of the 1990s were effectively reforming governments, even if not as strongly as some of us would have liked. They tried to push the reform agenda, and if they were slow, at least there were no big reversals as in Latin America and elsewhere. Education is still a problem area for the country. There's excellent education for a small minority in the elite, and poor or no education at all for some people at the base of the pyramid. Finally, India is still a poor country. The average person still earns less than $2 a day. The figure is controversial, but the World Bank reckons that a quarter of the population is poor by its measure of $1/day.

(Narayanan is a graduate Engineer aspiring to be a economist in the near future. A Madurai-resident, he believes in India story and is proud to be an Indian)