How India became a ROARING Asian tiger!


Faced with a foreign exchange crisis in 1991, India embarked on gradual, erratic, but persistent economic reforms that in two decades transformed its living standards and place in the world.
In 1991 India was viewed globally as a bottomless pit for foreign aid, periodically hit by food and foreign exchange crises and hamstrung by an immense web of controls imposed in the holy name of socialism and then used by politicians to line their pockets and build patronage networks.
Early that year, The Economist magazine carried a survey on India titled 'The Caged Tiger,' which concluded sorrowfully that India would remain trapped in its cage, unable to join other Asian tigers that had become 'miracle economies.'
Many analysts saw India as a lumbering elephant, in stark contrast to the Chinese tiger.
Twenty years later, the Indian elephant has indeed morphed into a tiger. It averaged 8.5 per cent growth in the last decade and survived the Great Recession of 2007-09 with only minor bumps before returning to 8.5 per cent growth in 2010-11.
Table 1: India's GDP growth
Years
GDP growth %
1950-80
3.5
1980-92
5.5
1992-2003
6.0
2003-10
8.5
Source: Calculated from tables in Government of India, Economic Survey 2010-11 
Its per capita income has shot up from $300 in 1991 to almost $1,700 today, and its gross domestic product this year will exceed $2 trillion in nominal terms and maybe $4.5 trillion in PPP (purchasing power parity) terms, which would make it the third-largest economy in the world after the United States and China.
It is hailed today as a potential superpower and has been proposed by the United States for a permanent seat on the United Nations Security Council. Political analysts see it as perhaps the only credible Asian check on Chinese hegemony in the 21st century.
Many analysts (including Goldman Sachs, who coined the term BRICs to mean Brazil, Russia, India, and China) predict that India will soon overtake China as the fastest-growing economy in the world.
Nevertheless the unfinished reform agenda remains huge. The Doing Business report of the World Bank ranks India at just 134th of 183 countries in ease of doing business. India ranks only 121st in the United Nations' Human Development Index, and its nutritional indicators are among the worst in the world.
A quarter of the country's districts suffer from some sort of Maoist insurrection. India needs major economic and governance reforms in the years to come.
The history
After Independence in 1947, India followed a socialist pattern of development, emphasizing self-sufficiency and public sector dominance. It was inward looking and sceptical of markets and international trade.
In the 1970s, marginal income tax rates went as high as 97.75 per cent, on top of which a wealth tax of up to 3.5 per cent was levied to promote the garibi hatao (abolish poverty) policies of Indira Gandhi.
Yet poverty did not fall at all in the three decades after Independence, and GDP growth averaged just 3.5 per cent per year (the so-called 'Hindu Rate' of growth), just half of what had been achieved by Asian tigers with outward-looking, market-friendly policies.
Some economic liberalization plus runaway public spending helped accelerate GDP growth to 5.5 per cent in the 1980s. But this was based on unsustainable borrowing, and it ended in tears when India ran out of foreign exchange in 1991.
Rajiv Gandhi was widely expected to win the general election in June 1991 but was assassinated by a Sri Lankan terrorist. No party won an absolute majority in that election, and the Congress Party formed a fragile minority government headed by a political lightweight, Narasimha Rao.
So, both economic and political conditions were highly unfavorable. The Soviet Union was collapsing, making it clear that more socialism was not the answer. Meanwhile, Deng Xiaoping had revolutionized China, showing that the market was the way to go.
And so, more in sorrow than ideological triumph, India turned away from socialism to half-baked liberalism. There was no Ronald Reagan or Margaret Thatcher in India: reform was a very pragmatic process.
Opposition parties accused India of having sold out to the International Monetary Fund and swore to reverse the reforms when they came to power. But within two years the reforms restored India's finances, and in the three years from 1994 to 1997 India averaged 7.5 per cent GDP growth, a new record.
This was too successful to reverse, and so India continued down the reform path even when other political combinations came to power. The reform process was halting, inconsistent, and sometimes partially reversed, yet the overall direction remained unaltered.
No party dared liberalize very restrictive labour laws, and so India failed to make its mark in labour-intensive industries. But, to everybody's surprise, it emerged as a major power in brain-intensive industries ranging from computer software and medical tourism to auto exports and research and development.
The Asian financial crisis of 1997-99 was the first test of the resilience of Indian reforms. Growth took a hit, yet -- in part because it was a relatively closed economy -- the country survived without serious damage, without imposing new controls on capital inflows, and without having to go hat in hand to the International Monetary Fund like so many other Asian neighbours.
Indeed, this was the period when India's computer software industry rose to prominence, playing a leading role in developing software to thwart the so-called Y2K problem.
The recession of 2001 led to greater outsourcing of software and business services, and India built on that opportunity. In the next decade it marched up the value chain, moving steadily into higher and higher levels of technology, proving that India had not just cheap labour but world-class skills.
In 2000 India was seen as globally competitive in services but not industry, where the Chinese juggernaut crushed all opposition. India's restrictive labour laws made it virtually impossible to shed workers in any company with over 100 workers. Labour inflexibility meant India could not follow the path set by the other Asian tigers, of export-led growth based on labour-intensive industries.

Indian entrepreneurs were wary of setting up large labour-intensive factories for exporting items like garments, and so suffered the ignominy of being overtaken by Bangladesh in this sector.
But, after taking time to adjust to liberalization and globalization (which was opposed by an influential quasi-protectionist section of industry called the Bombay Club), Indian industries greatly improved their productivity and in many areas became globally competitive.
One measure of how far India has come is that in 1991 the then Finance Minister Manmohan Singh's first budget brought the maximum import duty down -- to a still whopping 150 per cent. Earlier it was as high as 300 per cent.
Today the standard import duty is down to 10 per cent, and the effective rate for many items is around 7 per cent, close to the average for Southeast Asian countries.
Back in 1991 more than 800 items were reserved for production by small-scale industries, and several more for the public sector. These reservations were whittled away gradually over more than a decade.
Controls on industrial production, imports, technology, and foreign exchange have been abolished or hugely relaxed.
The financial sector used to be a virtual government monopoly, but has now been liberalized with the entry of several private and foreign players, though the sector remains heavily regulated, and 70 per cent of banking is still in government hands.

Foreign investment has been liberalized in most areas, though much remains to be done in service industries like retail, banking, and insurance. Privatization has been very limited, but private investment in infrastructure and other areas previously reserved for the government has transformed the country, especially in telecommunication.
When India started down this reform path 20 years ago, sceptics abounded. Leftist critics predicted that India was going down the World Bank-IMF path that had supposedly resulted in a 'lost decade' of economic growth in Africa and Latin America in the 1980s and warned that India would suffer a similar fate.
They predicted that opening up and cuts in import duties would cause massive unemployment and de-industrialize India. They warned that multinational giants would rapidly take over the Indian economy and that Indian companies would go bust or become subservient underlings of foreigners.
They also warned that the fiscal stringency imposed by the IMF would strangle social spending and safety nets, hitting the poor.
Every one of these dire predictions turned out to be wrong. Far from suffering a 'lost decade,' India became a miracle economy averaging 8.5 per cent growth in the 2000s. Far from getting de-industrialized, Indian industry rose to new heights with the abolition of controls, and many new Indian giants emerged.
A few Indian companies were indeed taken over by multinational corporations, but most Indian companies comfortably held their own, and dozens became multinationals in their own right, acquiring companies across the globe. Indeed, India began to rival China in making acquisitions abroad.
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