Effects of Liberalization on Indian Economy and Society
Table of Content
- Growth rate
- Education Sector & Health Sector
We have seen landmark shift in Indian Economy since the adoption of new economic policy in 1991. This had far reaching impacts on all spheres of life in India. There can be no concrete conclusions about their impact on Indian people. This turns out to be more of an ideological debate like capitalism vs Socialism. But there is no doubt in the fact that those reforms were unavoidable and very compelling. There was in fact, similar wave all across the globe after disintegration of USSR and end of the Cold War. Many Post-colonial democratic regimes, which were earlier sheltered by USSR, lost their umbrella. They had no option, but to fall in line to new unipolar world order dictated by USA. Even China in late 1980’s adopted ‘Open Door Policy’ through which it liberalized its economy by shedding communist mentality completely. South East Asian economies also reformed their economy and started engaging more with global economy. These along with China, pursued export led growth whereas Indian economy still relies almost wholly on domestic consumption.
Note changing Sectoral composition of India economy since independence
Composition – Services – Steady significant Increase (was more marked after reforms), Industry – Less marked increase (stagnated after reforms) , Agriculture Significant Decline
Patterns in the above graph explain inequity of Indian growth story. As per principle of economics, when a particular sector performs disproportionately higher than average growth rate, economic wealth starts concentrating into that sector. In this case that sector is Service sector. Within this sector, highest growth is marked by sectors such as financial services, Real estate services etc. , which are least employment elastic. Consequently, Growth of past decade was limited to upscale areas of the countries as almost whole service industry, operates from these areas. Majority of India got spillover or trickle down growth from here. This accelerated migration to urban areas. This in turned created array of social problems associated with urbanization. It fundamentally changed pattern of Indian Society.
Now we have ultra-modern and ultra-primitive society coexisting and conflicting with each other. On one side Social institutions like Personal Law boards, Khaps & kangaroo courts etc. tries to uphold their control over their respective community members, on other hand there is western wave pulling out these very members.
Undoubtedly strongest revolution of new century has been one of Information Technology, which started in last years of past century. This revolution was different because it made globalization even more obvious and stark. It made possible transfer of real time human labor across nations, without transfer humans themselves. Further, it erased all boundaries which hinder free flow of information. This has benefited sharing, nurturing and development of knowledge in societies which earlier had access only to substandard or non-updated information. As always package is coupled with some grim realities too.
Governments all across the world has lost their capacity to regulate and ward of against malicious, false, sensitive information and content. Rise of Islamic State demonstrates that, IT revolution has helped development of global Terrorist links more than anything. Moreover, explicit content is freely available on web, to which unmatured children have unrestricted access
GDP growth rate – India’s annual average growth rate from 1990 – 2010 has been 6.6 % which is
almost double than pre reforms era. GDP growth rate surpassed 5% mark in early 1980’s. This made impact of 1990’s reforms on growth unclear. Some believe that 1980’s reforms were precursor to LPG reforms. Other things apart, it is clear that 1980 reforms led to crash of economy in 1991, which was remedied by LPG reforms which were quite more comprehensive. It was IMF loan which gave government to adjust its economy. It was largest ever loan given by IMF. Initially there were global doubts on India’s credibility for loan, but India has been so far a disciplined borrower.
Industrial Growth Rate – Barring few years industrial growth rate has been not much impressive. Share of Industry still remains stagnantly low at 25%. Worst is that India has transitioned to be a service led economy, directly from an agrarian one. One expiation of this is end of policy of imports substitution which derived industrial growth upto 1990. Foreign companies got free access to Indian markets and made domestic products uncompetitive. They obviously had better access to technology and larger economies of scale.
India’s position also lagged on account of Research and innovation. Import substitution required certain degree of investment and efforts in domestic production. It was carried out even when imports were cheaper. This resulted in good and better capacity building upto that time. This was coupled with constant technology denial by west, which further pushed government to spend on R&D. Technology Denial ended with liberalization and globalization. Till that time Indian Industry was better and modern than that of China. But in two decades China has surpassed India by huge margin in case of both Industry and innovation.
Impact on Small Scale in India
This impact shall be studied right from the beginning of colonization in 18th century. Colonization can be considered as 1st wave of globalization. In pre colonization era, India’s textiles and handicraft was renowned worldwide and was backbone of Indian economy. With coming of industrial revolution along with foreign rule in India, Indian economy suffered a major setback and much of its indigenous small scale cottage Industry was destroyed.
After independence, government attempted to revive small scale sector by reserving items exclusively for it to manufacture. With liberalization list of reserved items was substantially curtailed and many new sectors were thrown open to big players.
Small scale industry however exists and still remains backbone of Indian Economy. It contributes to major portion of exports and private sector employment. Results are mixed, many erstwhile Small scale industries got bigger and better. But overall value addition, product innovation and technology adoption remains dismal and they exist only on back of government support. Their products are contested by cheaper imports from China. Policies of government toward SSI were covered in previous article access here and here
Impact on Agriculture
As already said, share of agriculture in domestic economy has declined to about 15%. However, people dependent upon agriculture are still around 55%. Cropping patterns has undergone a huge change, but impact of liberalization can’t be properly assessed. We saw under series relating to agriculture that there are still all pervasive government controls and interventions starting from production to distribution (here SPS and here – WTO).
Global agricultural economy is highly distorted. This is mainly because imbalance in economic and political power in hands of farmers of developed and developing countries. In developed countries, commercial and capitalistic agriculture is in place which is owned by influential Agri corporations. They easily influence policies of WTO and extract a better deal for themselves at cost of farmers of developing world.
Farming in developing world is subsistence and supports large number of poor people. With globalization there has been high fluctuation in commodity prices which put them in massive risk. This is particularly true for cash crops like Cotton and Sugarcane. Recent crises in both crops indicate towards this conclusively.
Also there is global Food vs. Fuel confusion going on. Sugar and corn are used to manufacture ethanol which is used as fuel. In USA Corn is produced mainly for this purpose, as sugar cane is in Brazil. Now there are apprehensions that what if converting food into fuel is more remunerative for producers? More than 1 billion people still live in hunger, much more are just hand to mouth. It is futile to expect that free market will take care of these people, who don’t have any purchasing power. Clearly, Agriculture is biggest market failure, but is rarely discussed for being so in WTO.
Another global debate born out of globalization is one of GM crops. Here too powerful MNCs like Monsanto hold the key. USA allows unhindered use of GM crops, but EU bans it. In India field trails are going on. (It was discusses here)
On the positive note, India’s largely self-sufficient and high value distinguished products like Basmati Rice are in high demand all over. Generally speaking, India is better placed to take up challenge of globalization in this case. If done in sustainable and inclusive manner, it will have a huge multiplier impact on whole economy. Worldwide implicit compulsion to develop Food processing Industry is another landmark effect of globalization.
Apart from these, Farm Mechanization i.e. use of electronic/solar pumps, Tractors, combines etc. all are fruits of globalization. Now moving a step further, Information technology is being incorporated into agriculture to facilitate farming.
Impact on Services Sector
In this case globalization has been boon for developing countries and bane for developed ones. Due to historic economic disparity between two groups, human resources have been much cheaper in developing economies. This was further facilitated by IT revolution and this all culminated in exodus of numerous jobs from developed countries to developing countries. Here US have to jealously guard its jobs as we guard our agriculture.
Software, BPO, KPO, LPO industry boom in India has helped India to absorb a big chunk of demographic dividend, which otherwise could have wasted. Best part is that export of services result in export of high value. There is almost no material exported which consume some natural resource. Only thing exported is labor of Professionals, which doesn’t deplete, instead grows with time. Now India is better placed to become a truly Knowledge Economy.
Exports of these services constitute big part of India’s foreign Exchange earnings. In fact, the only three years India had Current Account surplus, I.e. 2000-2002, was on back of this export only.
Further, in banking too India has been a gainer. Since reforms, there have been three rounds of License Grants for private banks. Private Banks such as ICICI, HDFC, Yes Bank and also foreign banks, raised standards of Indian Banking Industry. Now there is cut through competition in the banking industry, and public sector banks are more responsive to customers.
Here too IT is on path of bringing banking revolution. New government schemes like Pradhan Mantri Jan dhan Yojana aims to achieve their targets by using Adhaar Card. Having said this, Public Sector Banks still remain major lender in the country.
Similarly Insurance Industry now offers variety of products such as Unit Linked Insurance plans, Travel Insurance etc. But, in India life Insurance business is still decisively in hands of Life Insurance Corporation of India.
Another major development is one of Stock Markets. Stock Markets are platforms on which Corporate Securities can be traded real time. It provides mechanisms for constant price discovery, options for investors to exit from or enter into investment any time. These are back bone of free markets these days and there is robust trade going all over the world on stock exchanges. Their Importance can be estimated from the fact that, behavior of stock markets of a country is strongest indicator of health and future prospects of an economy.
These markets has thrown open wide array of associated services such as Investment Banking, Asset Management, Underwriting services, Hedging advice etc. These collectively employ lakhs of people all over India.
Similarly there are commodities market which provides avenues for investment and sale of various eligible commodities.
Conventionally, Telecom sector was a government owned monopoly and consequently service was quite substandard. After reforms, private telecom sector reached pinnacle of success. And Indian telecom companies went global. However, corruption and rent seeking marred growth and outlook of this sector.
Entry of modern Direct to Home services saw improvements in quality of Television services on one hand and loss of livelihood for numerous local cable operators.
Education and Health Sector
It should be noted that food (Agriculture), Health and education (and to lesser extent banking) are among basic necessities, which every human being deserves and can’t do without. Unfortunately, in developing countries there is market failure in all these sectors and majority of people can’t afford beyond a certain limit (or can’t afford at all). Concept of free markets, globalization, liberalization etc. fails here miserably. Free markets provide goods and services to people who can afford paying for them, not to those who deserve and need these.
Now if we consider these sectors from angle of our inclination towards free markets, certainly there has been lot of progress. There has been world class education available in India and Deregulation has resulted in Mushrooming of private engineering and Medical Colleges. But in reality, this had far reaching devastating effect on society.
These new colleges accommodate only a miniscule proportion of aspirants at very high costs. Recently, an Independent organization ‘Transparency International’ came out with report claiming that India’s medical system is most corrupt in the world. This was no surprise, we all know from where it starts. High fees of education forces many aspirants to take educational loans from banks. After qualifying job market is unable to absorb majority of them. Practice turns out to be option of last resort. Now to make a decent living and to pay back the loans person is lured by corruption. Consequently, when many similar cases are put together, we get a corrupt system, economy and society.
Reality is that after deregulation and liberalization, government along with other sectors, pulled its hand from social sectors too. Now there is Mediocre to high quality options are available in private sector which can be availed as per one’s budget. In public Sector Less than Mediocre to Mediocre options are available. This leaves huge proportion of aspiring students and expecting patients.
On Social front India’s performance is deplored all over the world and it is probably behind all important developing economies. This lacuna has been recognized and government has taken the charge. In case of education almost universal enrollments has been achieved upto primary level and now impetus should be on improving quality, so that student of public schools comes at par with atleast average private ones.
India's Economy: Challenges, Opportunities and Impact on the U.S.
Bollywood is More Popular than Hollywood
India is the world's fourth-largest economy. It produced $8.0 trillion in goods and services in 2015. But it has a long way to go to beat the top three: China ($19.5 trillion), the European Union ($19.2 trillion) and the United States ($17.9 trillion).
India has had rapid growth despite the Great Recession. It grew 7.3 percent in 2015 and 2014 and 6.9 percent in 2013. From 2008 through 2012, it grew by 5 percent to 11 percent.
That phenomenal growth rate has reduced poverty by 10 percent in the last decade. (Source: “India's Economy,” CIA World Factbook.)
On June 26, 2017, President Trump met with Indian prime minister Narendra Modi. They discussed increasing the number of H1B visas for Indian immigrants and the number of U.S. arms. American business leaders want India to reduce protectionist policies that give domestic companies an unfair advantage. This would help U.S. companies compete in pharmaceuticals, entertainment and consumer electronics. The Trump Organization wants to double its real estate holdings in India. (Source: "Trump and Modi Set for First High Stakes Meeting," CNBC, June 26, 2017.)
On May 16, 2014, India elected Modi as prime minister. By doing so, it rejected 60 years of leadership by the party started by Mahatma Gandhi. Mr. Modi, a successful businessman, promised to reduce bureaucracy and regulation, greenlight infrastructure projects and simplify the tax code.
Modi must streamline the government bureaucracy that has so far raised the cost of foreign direct investment. For example, he has talked about ending “tax terrorism.” He promised to rationalize India’s complicated tax regimes and support the introduction of a Goods and Services Tax. This would bring greater predictability to India’s business climate.
In 2014, Modi promised to boost trade with the United States. Modi said he would level the playing field for U.S. companies by reducing policies that favor Indian manufacturing and intellectual property. This could help U.S. pharmaceutical companies, Hollywood and consumer electronics. (Source: “India Election: What Narendra Modi’s Victory Means for the U.S. Economy,” The Wall Street Journal, May 19, 2014.)
What Type of Economy Is India?
India has a mixed economy. Half of India's workers rely on agriculture, the signature of a traditional economy. One-third of its workers are employed by the services industry, which contributes two-thirds of India's output. The productivity of this segment is made possible by India's shift toward a market economy. Since the 1990s, India has deregulated several industries, privatized many state-owned enterprises and opened doors to foreign direct investment.
India is an attractive country for outsourcing and a cheap source of imports. That’s because its economy has these five comparative advantages:
- The cost of living is lower than in the United States. Its GDP per capita is half that of other poor countries like Iraq or Ukraine. This is an advantage because Indian workers don't need as much in wages, since everything costs less.
- India has many well-educated technology workers.
- English is one of India’s official languages. Many Indians speak it. This, combined with the high level of education, attracts U.S. technology and call centers to India. For example, an Indian call center employee only costs $12 per hour. That's almost half the American counterpart of $20 an hour. As a result, more than 250,000 call center jobs were outsourced to India and the Philippines between 2001 and 2003. (Source: Technology Manufacturing Corp.)
- India’s 1.3 billion people come from a wide range of economic and cultural backgrounds. This diversity can be a strength or a challenge. Socioeconomic status is largely determined by geography. India’s three main regions each have distinct class and education divisions. Annually, 11 million people leave the rural areas to live in the cities. Most of them are young and educated. They seek a higher quality of life. (Source: "Special Report: India," The Economist, May 23, 2015.)
- The profitable Indian film industry is called "Bollywood." It's a portmanteau of Bombay (now Mumbai) and Hollywood. Bollywood makes twice the number of movies Hollywood makes. The most wpopular actor in the world is India's Shah Rukh Khan. Bollywood contributed $3 billion to India's GDP in 2011 and is expected to reach $4.5 billion by 2016. Bollywood generates less revenue than Hollywood ($51 billion) only because its ticket prices are much lower. On the plus side, Bollywood films cost less to make: $1.5 million on average versus $47.7 million in Hollywood. (Sources: “How Big Is Bollywood?,” International Business Times, May 3, 2013. “Shah Rukh Khan,” Los Angeles Times, November 4, 2011.)
These comparative advantages mean great opportunities for American business. Foreign direct investment in Indian companies has the potential to be very profitable. The Indian middle class is almost 250 million people. That's bigger than the U.S. middle class. It will continue to drive India's consumer spending and economic growth.
In addition to FDI, India has seen more than 100 initial public offerings in the last 18 months. Private equity funding grew in 2012 and 2013, a trend that is expected to continue. Energy, Health Care, Industrial and Materials have been the top four sectors. While inbound M&A deals have declined in the last year, outbound deals have increased substantially in the emerging markets in the Middle East, Asia, Africa and South America. These deals are driven by depressed valuations due to the recent recession.
In March 2016, Mr. Modi dedicated $1.5 billion in funding and tax breaks to boost high-tech startups. The program will streamline patent applications and investments. That should double India's new startups to 11,500 in the next five years. (Source: "India Bets Big on Startup Companies," Global Finance, March 2016.)
Prime Minister Modi is a Hindu nationalist leader. Many blame him for the violence against Muslims while he was governor of India's western region of Gujarat.
Modi is up against India's bloated government bureaucracy. That makes the execution of any fiscal or monetary policy difficult. In August 2015, he was blocked from passing a bill to acquire land to promote infrastructure. He has also not been able to produce a bill to create a uniform goods and services tax. (Source: "Lights, Camera, Inaction!" The Economist, August 29, 2015.)
U.S. monetary policy has hurt India’s economy. When the Federal Reserve began its quantitative easing program, the lower interest rates strengthened the value of the dollar. This caused the value of India's rupee to fall. The resulting 9.6 percent inflation forced India's central bank to raise its interest rates. This action slowed India's economic growth, resulting in mild stagflation in 2013. In the second quarter, it had 9.6 percent inflation and 0 percent GDP growth. Inflation was caused by a declining rupee. Slow growth came from contractionary monetary policy to stem inflation. By 2014, inflation had slowed to 6 percent. For more see, What You Need to Know About the Emerging Market Crisis.
India's combined current account and budget deficit is 12 percent of GDP. That puts more strain on its economy and government,
Investors backed off from India and other emerging markets when the U.S. Federal Reserve began tapering its quantitative easing program. When the dollar rose 15 percent in 2014, it forced the value of the rupee and other emerging market currencies down.
Raghuram Rajan was the Governor of the Reserve Bank of India, the nation's central bank. He raised interest rates to keep the currency strong and head off inflation. (Sources: “India's Rajan May Have to Increase Rates to Head Off Modi,” Wall Street Journal, June 4, 2014. “India calls on Raghuram Rajan to run its central bank,” The Guardian, August 6, 2013.)
Modi's 10 Step Plan
India's President, Pranab Mukherjee, outlined 10 steps the Modi government plans to take:
- Food inflation: Increase the supply of food to lower costs. Prepare to help farmers during a possible subnormal monsoon season.
- Economy: Usher the economy into a high growth path. Rein in inflation. Reignite the investment cycle. Restore the confidence of the domestic as well as international community.
- Jobs: Strategically promote labor-intensive manufacturing. Promote tourism and farming.
- Taxes: Retrospective tax laws, introduced in 2012-13, have been described as the single biggest impediment to foreign investment in India. The Modi government will embark on rationalization and simplification of the tax regime to make it nonadversarial and conducive to investment, enterprise and growth. The government will make every effort to introduce a Goods and Services Tax while addressing the concerns of states.
- Reforms: Reform regulations to encourage investments, especially in sectors that create jobs.
- Agriculture: Increase investment in agriinfrastructure. Address issues pertaining to pricing and procurement of agricultural produce, crop insurance and post-harvest management. Incentivize the setting up of food processing industries.
- Reviving manufacturing: Set up world-class investment and industrial regions, particularly along the Dedicated Freight Corridors and Industrial Corridors. Create a single-window system of clearances at both the center and the states through a hub-spoke model.
- Infrastructure: A new 10-year plan will modernize railways, including the Diamond Quadrilateral high-speed train project. Execute the National Highways program. Build more low-cost airports in smaller towns. Develop inland and coastal waterways as major transport routes.
- Energy security: Augment electricity generation capacity through both conventional and nonconventional sources. Reform the coal sector to attract private investment.
- Urbanization: Build 100 cities focused on specialized domains and equipped with world-class amenities. By the time the nation reaches the 75th anniversary of its independence, every family will have a good house (known as a pucca house) with running water, plumbing, 24/7 electricity supply. (Source: Interview with Ramesh Kumar Nanjundaiya, CEO of Triniti Solutions.)
India’s Foreign Relations
The United States is one of India’s biggest military allies, and China is one of its biggest economic partners. In 2006, the United States agreed defy the Nuclear Non-Proliferation Treaty by allowing full civil nuclear cooperation with India. This is despite India’s violation of the treaty by exploding nuclear devices and not putting its program under the IAEA’s safeguards.
India wants to be treated like the official five nuclear powers: U.S., Russia, Britain, France and China. The United States wants India to cap its production of fissile material (highly-enriched uranium and plutonium), but India has refused. India plans to increase its warheads from 50 to 300 by 2010.
This bending the rules for India looks bad to U.S. allies that agreed to refrain from building nuclear capacity: South Korea, Taiwan, Brazil, Argentina, South Africa, Ukraine, Kazakhstan and Japan. The agreement was part of an overall increase in the business relationship between American companies and India. The United States and India should place greater importance on military cooperation, including joint defense exercises and counterterrorism efforts.
China and India are two of the world’s largest and fastest growing economies. Because of their tight economic partnership, the countries are often called Chindia. China and India have complementary economies. India has raw materials; China has manufacturing. India has high-tech; China has the businesses and consumers to use them.
They also have long-standing trade disputes stemming from their common borders and China’s friendliness with India’s enemy, Pakistan. There are few airline routes and many visa delays. These disputes will not be solved by one friendly trade agreement. Fortunately, both realize the potential advantages of a partnership. A trade agreement is a good first step toward a “Chindia” of some sort.
With one-third of the world’s people, Chindia could be a tremendous economic powerhouse in the global economy. It could also be a threat to the balance of power in that region. That means it is in the United States’ best interest to maintain its alliance with India. That will offset the growing power of China in the region.