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Release peace: the magazine

Release peace: the magazine

Analysis & Background Stories on International Affairs

Economic Reforms in India: A Success Story Showing Cracks?

Article by: Sebastian Isakovic

This article was published as part of a collaboration with the India China and America (ICA) Institute. Based in Atlanta, GA the ICA Institute provides research on the economies and geopolitics of the three countries and much beyond.

A History of an Independent Indian Economy

Following the end of British rule in India in 1947, there was a strong sense of nationalism across all constituents of the country. In the area of economics, this manifested itself as the Swadeshi movement, which propagated the belief that India could produce everything at home and become self-dependent. This movement was led by Jawaharlal Nehru until 1964, who believed that to import from abroad was to be the slaves of foreign powers. As a result of this philosophy, India’s economy was necessarily concentrated in the agricultural sector, far more recently than its Western counterparts. Drawing upon research from the India, China, and America (ICA) Institute, has economic liberalisation in India been a success story or a case against globalisation?

An Age of Modernisation

Over time, India began to modernise and move away from agriculture and towards the industrial and service sectors. Unlike other contemporary emerging economies, the transition did not result in a drastically increased industrial sector, but rather in the service sector. Between 1950-2005, the share of the industrial sector as a percentage of total GDP increased from 15% to 27%, while the service sector’s share almost doubled, from 28% to 52%. This discrepancy was due to restrictions placed on labour-intensive industries not placed on the service sector. This acted as a disincentive for large corporations to enter the industrial sector compared with the more liberalised service sector.

The Process of Liberalisation

Liberalisation began in the 1980’s under the premiership of Rajiv Gandhi. However, due to unfavourable macroeconomic conditions, India was not able to reap the economic rewards of the liberalisation process until it was accelerated in earnest by Prime Minister Narasimha Rao, with the devaluation of the Rupee in 1991. During this same year, the Prime Minister ended industrial licensing in all but 18 sectors, while the finance minister Manmohan Singh ended the import licensing on capital goods. Singh drastically cut the tariff rates from 355% to 110% in 1991, with a further reduction to 65% in 1994-1995. These measures, when coupled with a general shift towards more liberalised economic regulations, resulted in increased foreign investment and trade. This led to a dramatically increased GDP and improved economic performance. While the history of economic liberalisation in India is well understood, in order to understand the extent of its success or failure, we must consider its impacts: not just on economic growth, but on the country’s population. Arguably the most important question that should be considered when discussing such a reform should be: do the positive impacts outweigh the negatives?

The Economic Impacts

A major criticism of economic liberalisation in India is that income inequality has become significantly more pronounced since 1991. Looking at the most recent data available from the world inequality database, the wealth owned by the top 10% of the Indian populace increased from 35% to 57.1% over 15 years. Proponents of liberalisation policies argue that more people have jobs than would otherwise be possible and that absolute living standards increased, albeit at the expense of relative living conditions. Indeed, the absolute level of income of Indians increased dramatically, with GDP per capita having increased from $304 in 1991 to $2,257 in 2021.

Connecting to the World

Continuing to look through the narrow, but important, lens of economic performance, we can see that due to a greater availability of foreign investment, the stock market in India is now acting more efficiently than in the immediate post-independence period. Coupled with greater access to global markets, India has more opportunities for economic prosperity than ever before. The increased level of output has been shown to have directly resulted in faster economic growth. However, a negative impact of the increased access that foreign investors now have to the Indian market is that there has been a loss of diversity in business. This effects is a result of larger multinational companies investing, merging with, and acquiring smaller firms. Going forward, this might leads to reduced competition and therefore higher prices for consumers.

Another Side of the Coin

To understand the effects of the liberalisation policies in their totality, one must also consider the non-economic impacts of these changes. Critics of economic liberalisation point towards the loss and attrition of local culture, due to the rising influence of globalisation in the country. This can be seen in the modest increase in the break-up of traditional joint families in favour of nuclear families due to economically motivated decisions, such as the pursuit of job opportunities in distant parts of this vast subcontinent. Furthermore, through increased levels of urbanisation and industrialisation, the environmental conditions for much of the Indian population have significantly worsened in the past few decades. This is exemplified by Indian cities frequently ranking amongst the places with the worst air pollution in the world, outranking Chinese cities even already a decade ago, prior to China’s gigantic efforts to tackle the issue. Another side effect of the ongoing industrialisation is water pollution, where it is estimated that around 70% of surface water in India is unfit for human consumption. These externalities are no unknown observations to those countries in Europe that underwent industrialisation about 150 years ago and were faced with the same challenges.

The Wealth and Equality Trade-Off

Economic liberalisation and the process of globalisation have drastically altered the Indian economy over the past 30 years. GDP has increased, the number of jobs has gone up, and the average Indian is now multiple times richer than in 1991. However, the level of income inequality has increased markedly and a slow attrition of Indian cultural values has accompanied an opening up of the country to the world. There is for certain one reason the world should take note of India’s development: As of 2023, it is the most populous country in the world.

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