From State to Market: Where Is the Indian Economy Heading To?

From State to Market: Where is the Indian Economy heading to?

The New Economic Policy (NEP) of Liberalisation, Privatisation and Globalisation (LPG) in the year 1991 brought about a complete turnaround in the Economic system and change in direction of economic policy making of the country. The post- independent India till the 1980s was characterized by centrally planned social democracy influenced by the policy making of the erstwhile Soviet Union. Heavy import substitution protected the domestic industries encouraging the production of substitutable domestic goods. There was strong emphasis on import substitution industrialization, economic interventionism, a large public sector business regulation and central planning. The basic and key industries like that of Steel, mining, machine tools, telecommunications, insurance and power plants were nationalized in mid 1950s. The result as perceived by critics was inefficient domestic monopoly and oligopolistic companies. The unfavorable abysmal growth rate in the first three decades after independence was caught up with the popular phrase, ‘the hindu growth rate’. Two major international events blew a threat to the economy of the country. The collapse of the Soviet Union who was the major trade partner of India closed the major gate for exports from India, the Gulf war in 1991 led to sharp hike in Oil price which together resulted in the balance of payments crisis for India. India had to depend on the loans of IMF which in turn was conditional of structural adjustment programs involving liberalization.

Though the period of 1991 was marked as a milestone in the economic history of the country for its breakthrough in liberalization policies, the policies since 1975 were marked by a gradual retreat from the closed economy License Raj model. The rigors of the industrial licensing system were moderated by policies in 1975, 1976, 1980 and 1984. Similarly, import controls on capital goods and for export units were relaxed through schemes like Export Promotion Capital Goods Scheme (EPCG). However, these reforms were piecemeal and limited compared to what came later in the year 1991. The signs of such reforms started showing results with a shift in the growth trajectory in the later part of 1980s.

As to a response to the crisis of 1990 and an obligation to IMF, the Congress government with Dr Manmohan Singh as Finance Minister opened up the economy with the package of reforms in 1991. The reforms removed the License Raj, cut down the tariff rates and reduced the interest rates, disinvested many public sector units, allowed for FDIs, went for fiscal consolidation, devalued the currency, to name a few prominent policy measures. Since then the overall thrust of liberalization has been the same although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming of labour laws and reducing