Brief Overview of Indian Political History — Part 4: Economic Liberalization Era (Years 1991–2007)
CITIZEN ZERO PUBLIC CORRESPONDENCE 2023.01.26: E-mail Notes to Dr. Manmohan Singh, Former Prime Minister of India [& copy to @PriyankaGandhi, General-Secretary of INC.]
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Editorial Note: These Citizen Zero e-mail correspondences below were exchanged with Dr. Manmohan Singh, Former Prime Minister of India & Chief Architect of India's 1991 Economic Reforms (and copy to @PriyankaGandhi, General-Secretary of Indian National Congress) in the year 2023. On the ocassion of India's 74th Republic Day on the 26th January, they are being published here on the substack platform for free public-domain access. Mera Bharath Mahan! Jai Hind! Vande Mataram! •
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<20230206> The Era of Economic Liberalization in India that began with with reforms initiated in 1991-92 by the Congress-led Government under PM Narasimha Rao and Finance Minister Dr. Manmohan Singh, that allowed a greater integration of the Indian economy with the world economy, would be seen to pass through a few stages where some of it may be regarded as structurally iterative in the long-run while others as affected by global events of the time— such as with the immediacy of the effects of reforms from the early-to-mid 1990s that managed to keep the Indian Economy out of the looming financial crisis, where with India's Gold Reserves being on lien out to IMF and our foreign-exchange reserves of $4-billion barely enough to cover 2-weeks of imports, towards the fairly quick and painless recovery, whilst keeping inflation under control and unemployment low? (while at the time in comparison to the effects of reforms in the more rigidly state-controlled economy of post-Soviet Russia had resulted in extraordinary hardships for its peoples and conversely given rise to the control of its state-owned infrastructures by a select private Oligarchy), leading into the mid-1990s with those foreign-exchange reserves growing to give the Indian Economy a cover for a period of 7-months of imports by 1999, whilst weathering the late 1990s global recession with the collapse of 'Asian Markets', (of a depreciating Japanese Yen? & foreign-debt-crisis of Indonesia? Malaysia?), on to through those years of 'decoupling' from economic sanctions imposed by USA in response to India's Nuclear Weapons Testing, whilst accomodating the surges in defense expenditure from the ensuing Kargil-war with Pakistan, (and then continuing into the beginning years of the new millennium with further setbacks stemming from the geopolitical strife from 9-11 in America & the USA-Afghanistan & USA-Iraq Wars), and into the mid-2000s and the decade thereafter when the Indian Economy would propel ahead with something of a golden-run of an average GDP growth rate over 7-9%? (that at the time in 2005 helped me to be able to get a fairly easy loan to study in America, while missing out on the proverbial 'gravy-train' kicking-up steam right here), and then witnessing the rapidly changed economic landscape of India with that built-in momentum (so astonishingly transformed, that upon my return from America some 10 years later I would behold utterly unrecognizable to my eyes, in the city that I grew up, and everywhere else in India that I happened to travel after that).
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<20230206> So, a good part of me is going to set myself at the reading-table to figure out the nuts and bolts of that economic paradigm and summarise them to notes from the reference text-books I have at hand, that might serve useful for someone's ponderous essay questions in their 10th standard board exams, say, before embarking on summaries of the various political changes of the era, and of its associated wars, riots, scams, rags & moths & fleas, seeing as Valentines' Day is about a week's time and I might as well get this timeless 'love story' published, before some fanatical goon-squad goes about trashing shops selling heart-shaped candies, flowers and greeting cards.
Good Heavens! 'What's So Funny About Peace, Love and Understanding?' ;-)
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<20230206> India's main macroeconomic crisis in 1991 is usually referred to the situation of Balance-of-Payments (BOP) / Current-Account-Fiscal-Deficit (CAD) and Domestic-Revenue-Deficit (DRD), where BOP is the negative difference arising from greater import costs to export earnings and payments, and DRD is the domestic Spendings (consisting of inter alia, interest-payments, subsidies, defence expenditures, salaries, etc.) that exceeds Revenue collected. BOP during the earlier decades up to mid-1960s was largely because of the amounts of foodgrains India had to import, and Total-Fiscal-Deficit (TFD) (DRD + CAD?) arose from not meeting planned targets for rapid public-sector industrialization projects, partially diverted to the sporadic war expenses, and structurally from Capital stagnation and unscalability from Industrial Licensing Quotas and Restrictive Import Controls, measures that were originally aimed at preventing private monopoly in resource concentration and encouraging domestic intermediate capital-goods manufacturing. With the success of the Green Revolution into mid-1970s, that though BOP would go on to be met with the situation created from the Agricultural Surplus, but that the increasing Revenue-Deficit had resulted from agricultural subsidies that went into food procurement, seeds, fertilizers, electricity, irrigation, exports, etc., and in industry from government takeovers of many loss-making enterprises. While some of these measures were accounted for achieving Welfare & Equity within the Planned-Development, there were other measures that were the result of unplanned, reactionary, populist, electioneering posturing by various new States and Central Governments, where such fiscal profligacy was seen specifically worsening between 1977-79, and later between 1989-91. Whereas in the mid-1980s it was seen that the Total-Fiscal-Deficit increased from Over-Spending (e.g. in Defense-sector), and leaving behind a reduced/negative surplus from handling an increasing Debt-Service-Ratio (i.e. the repayment of principal-plus-interest as a proportion of Exports of Goods and Services). And, tacked on to this was the Domestic-Debt and Foreign-Debt from Over-Borrowing, that is, a higher proportion of expensive Short-Term-Debt compared to Concessional-Debt, probably towards Commercial-Spending spurred on by initial reforms in Industrial-Deregulation, and partial lifting of Import-Controls, without the back-up of equivalent reforms in Financial & Labour Markets at that time in 1985.
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[20230207] Some of the main aspects then of the reforms initiated in 1991-92, and its corresponding effects up unto 1994-95 / 1995-96 / 1996-97 is encapsulated in the following observations:
—One, 'realistic linking' of foreign-exchange rate to the Market, and this measure had at the outset devalued the rupee by about 20%, (while in comparison the devaluation of the Rupee by 35% in 1967 by PM Indira Gandhi was considered 'less realistically' effective being pegged to the depreciating Sterling at the time?). And so, Exports in dollar-terms was able to achieve a yearly average growth-rate of 20% after an initial dip of 1.5% in the first year, and the Current-Account-Deficit in BOP being reduced from an unsustainable 3.2% of GDP to about 1.6% of GDP in five years, where 90% of our import-payments were met with export-earnings. Likewise, India's overall External-Debt-GDP-Ratio was reduced from 41% to 28.3% in those five years, and Debt-Service-Ratio (DSR) from about 36% to under 20% by 1997-98 (while in East-Asian Economies the DSR was still lower at 10%). That by 1999, India's Foreign Exchange Reserves had reached over $30 billion dollars;
—Two, liberalization of Trade and Industrial Controls providing a greater access to necessary Imports, (probably of new machinery affordable for large industry and capital-goods manufacturing?) As a result, Capital-goods sector increased to about 25% growth in 4 years;
—Three, dismantling the Industrial-Licensing system and abolition of Monopolies and Restrictive Trade Practices (MRTP) Act, (that probably opened the doors to new industrial entrants, while allowing suitable mergers and acquistions of loss-making businesses?) As a result, growth-rate of Industrial production & manufacturing grew from less than 1% to peaking at 12.8% in five years;
—Four, gradual privatization of some public sector undertakings (such as ?);
—Five, reforms to Capital and Financial Markets, such as the repeal of Capital Issues Control Act of 1947 through which government controlled new stock-issues and prices, and further external liberalization allowing foreign investors to buy Indian corporate shares, so much so that by 1995 the Indian Stock Market became the largest in the world in terms of number of listed companies, and who were able to raise capital from less than ₹1 billion rupees in 1980 to over ₹250 billion rupees in 1993-94, amounting to greater than 60% of GDP at the time. Additionally, Indian companies were at this point allowed to access international markets, and by 1995 they were able to raise above $5 billion with Global Depository Receipts (GDR) and Foreign Currency Convertible Bonds (FCCB) issued through the Indian Stock Market?;
—Six, removing of large number of restrictions on participation by Multinational Corporations (MNC) and Foreign Direct Investments (FDI). Notably, as a result, FDI from 1991-92 to 1995-96 increased nearly 100% every year from about $130 million to over $2 billion (though comparatively FDI in China averaged about $30 billion every year, where similar economic reforms had begun in 1978), while Portfolio-Investments increased to nearly $5 billion (but that the government took caution enough to control Short-Term Capital Inflows which had otherwise resulted in volatile foreign withdrawal as with Mexico and South-East Asian economies in the late 1990s.);
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The overall GDP rose from 0.8% to a yearly average increase of 6.8% in those five years from 1991-92 to 1995-96, (while the ongoing Eighth Five-Year Plan (1992-97) compared to the previous plan measured a growth rate of 6.94% in GDP). While Gross Domestic Savings & Investment Capital Growth increased by well over 2.5% of GDP, (with banks investing nearly 15% in Corporate-Securities);
Under these Liberalization Reforms, the Total Fiscal-Deficit in those five years was reduced from 8.3% of GDP to a yearly average of 6% (in which the Primary-Deficit (CAD?) representing Over-Spending in the current year was reduced to 0.6% and the rest being interest-payments from past deficit in government expenditure.)
With regards to impacting Poverty-Ratio (i.e. proportion of population below the poverty-line), measured from 1973-74 to 1993-94, while India had experienced a fairly rapid decrease from around 55% to 36%, it was still slower compared China who was able to reduce their Poverty-Ratio from nearly 60% to 22%.
The total employment had increased to an average of 6.3 million jobs per year, and inflation brought down from 17% then to about 5% in 1996. And somewhat surprisingly there were overall reductions in Direct-Tax (Income-Tax plus Corporate-Tax) and Indirect-Tax (Customs, Excise and Service Tax), and would remain so till 2001-02.
Specifically with regards India's Agricultural Productivity with the 1991-92 reforms, apart from the fall that first year, would increase returning to its traditional Growth-Rate of over 3%. Additionally, there was seen an increase in rural agricultural wages by about 5% per year; And, to safeguard the rural economy against any potential negative impact from these structural reforms (other than countering the effect of drought), the government had increased its Social Services and Rural Development Expenditures by 2.5% above the Pre-Reform period.
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[20230207] The Indian Economy then began to witness a slowdown from 1997-98, following the 1996-97 recession in East Asian economies of Japan, South Korea, Indonesia, Thailand, and likewise in Russia and Brazil, and with the overall decrease of global trade in 1998, had experienced a decline in FDI & negative Portfolio-Investment in 1998-99 as well. The yearly average GDP growth-rate between 1996-2001 was still above 5.5% (though the target under the comparative Ninth-Five Year Plan had been set higher at 6.5%) But structural to the Indian economy, the sluggishness has been attributed to some of the following reasons:
—Subsidies from States and Central government increased continuing from 1991-92 itself towards foodgrains, fertilizers, electricity, water, diesel, kerosene, cooking-gas, etc., which inhibited new investments in Agriculture Methodology (for instance, continued crop-burning at the end of the harvest-cycle before the new sowing season not only contributed to air-pollution in the region but also failed to be utilized into innovative Bio-Fuels Technology?). While also there were incidental selective expenditures in government salaries based on the Fifth Pay Commission implementations then, and this had caused the Primary-Deficit (CAD?) to rise to 2.4% of GDP between 1997-98, so much so that Economic Survey of Government of India in 1998-99 argued for imposing a Constitutional-Limit on Fiscal-Deficit as a measure to check populist government subsidy spendings;
—Incomplete Public-Sector Reforms in Energy & Oil-Sector? with Electricity-Boards under various State Governments subsidizing, undercharging, continuing to run up huge losses;
—Export slowdown & negative-growth in 1998-99 resulting from supply bottlenecks in Transport-Infrastructure & Energy-Sector affected quantitative and qualitative manufacturing capacities, losing out on Labour-Intensive-Production to China due to our Labour Market inefficiencies (possibly including skewed shortage of Skilled/Semi-Skilled Labour Force?);
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[20230209] A brief survey of the Indian economy from 2002-2007, is described in the following paragraphs. One of the main economic trends in the post-Reform period measured in 2006-07 was seen in the large shifts in proportions of the three sectors in contribution to India's GDP, of Agriculture (18.5%), Industry (26.4%), and Services (55.1%) compared to the previous eras (59.2%, 13.3%, 27.5%) in 1950-51 & (32.1%, 21.6%, 46.3%) in 1970-71 respectively. And, while this is a predictable benefit of industrialization brought about to labour-intensive economies, it would be relevant nevertheless to achieve sustainable levels of productivity in all our essential sectors.
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Mainly, and the good news first, seen sustained over these five years, India experienced for the first-time, an overall average GDP growth of 7.6% (and here again the ongoing Planning Commission's Tenth-Five-Year-Plan of 2002-07 had set a higher target of 8%, where barring the first year the growth-rate observed was indeed above 8.6%, with last two years growing above 9%).
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Likewise, Gross Domestic Savings & Investment rose closer towards East-Asian levels to around 33% & 35% as a proportion of GDP, primarily from higher interest-rates through the Private Corporate Sector, while even the Public-Sector Savings-Investment Gap experienced a marginal surplus compared to the negative gap in the pre-Reform decades. While furthermore, these savings-investment proportions by the year 2026 were estimated to increase to over 39% encouraged by India's 'Demographic-Dividend' trending towards a 69% working-age population of 15–64, and a declining Dependency-Ratio (Non-Working-to-Working) of less than 0.48;
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The implementation of the Fiscal Reforms and Budget Management Act (FRBMA) in 2003 was crucial in reducing the combined States and Central Government's Total-Fiscal-Deficit by specifying mandated targets for Revenue-Deficit requiring reduction by 0.5% or more of GDP each year, and likewise reduction of Fiscal-Deficit (CAD?) by 0.3% or more. This measure as a result had enabled both a reduction CAD & RD, wherein the proportion of Revenue-Deficit to Total-Fiscal Deficit was reduced from 79.7% in 2003-04 to 57% in 2006-07 , and so the Total-Fiscal Deficit was reduced to 6.3% of GDP as in the 1995-96 Balance-Sheet, and India's 12th Financial Commission had deemed Total-Fiscal Deficit of 6% of GDP or less as the guideline for Sustainable-Development (when equally shared between the Center and the States).
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The downside of Government Expenditures measured in 2005-06 was that nearly 86% of Revenue Receipts was spent for about 13% in subsidies and 38% in interest & debt payments, with the rest of it (presumably 35%) towards salaries, pensions, and defence, while further marginalizing Capital-Expenditures on infrastructure (roads, ports, electricity), new agricultural development, education and health. It is somewhat astonishing in those years from 2001-07, that given such low capital-spending by the government, it is probably the qualitative improvements from the spread of industrial-deregulation and import-relaxation reforms, that India's Industrial Sector grew at an average of 8.8%, specifically in Manufacturing, where the Capital-Goods Sector averaged a 13.5% growth-rate, overtaking the Consumer-Goods-Sector.
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The Tax-GDP-Ratio too had in the beginning of 1991-92 reforms fallen from 10.2% to 8.2% because of the tax-cuts offered up to 2001-02, but would now inch back up to 10.3% in 2005-06. This is accounted for by a near doubling of Personal-Tax collection and a tripling of Corporate-Tax collection, so that the combined Direct-Tax would increase from 19.1% to an estimate of 47.6% as proportion of the Total Tax Revenue in these 15 years.
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(It would be worthwhile to note how the Tax-GDP-Ratio would achieve greater prominence through Indirect Taxes as well after the implementation of 2016 Goods-and-Services-Act GST?)
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India's External-Trade (Imports plus Exports) in 2002 had doubled from pre-Reform Period to about 31% as a proportion of GDP ahead of America and Japan, and behind China and South Korea. When measured in 2006, India's Imports for machinery and other Capital-Goods constituting about 12% while Petroleum-Oil constituted the largest proportion of over 33% of total import cost, and had thus continued to grow at a still faster rate than exports (though export-surpluses was also reported in the previous 3 years). So India's resulting Current-Account-Deficit in BOP was at 0.75% of GDP in 2005-06. The yearly average Export growth-rate from 2002-06 was at 24% and climbing higher, doubling up to the $100 billion mark in those 5 years (which was still only about 1% in global export share, being ranked 29th). India's main exports at the time included among Raw Goods Petroleum products, ores and minerals; among Manufactured Goods included engineering machinery, instruments, drugs and pharmaceuticals, automobiles and parts (with India exporting nearly 18% of cars and three-wheelers produced in 2005-06); while Commercial Services Exports went upwards of $60 billion in those 15 years of Reforms (giving India a share of 2.3% and a rank of 11th globally in World Commercial Services in 2005-06) comprising Software services (at 3.4% global share) and Business & Communications services (IT & BPO services at 65% & 46% of global share i.e. more than $15 billion yearly).
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<20230211> One of the key features of foreign Capital Inflow in the Indian Economy are Remittances from Migrant-Workers abroad benefitted by higher interest offerings in Indian banks. Beginning in 1970s-90s the main source of Remittance arrived from 'low-skilled' Indian workers in the Gulf & Middle-East Countries, accounting for about $2.5 billion in 1990. And, then again as a qualitative result of the 1991-reforms there was an increase in the availability of better-equipped technically-skilled workers, and correspondingly an increase in the category of higher-earning Indian migrant workers in America, Canada, UK, Europe, etc. into the new millennium, and Foreign-Remittance accounted for about $7.5 billion between 1991-2000 (i.e. rising upwards of 0.7% of GDP), and then the average yearly inflow increasing above $17.5 billion over the next two decades (i.e. rising upwards of 3.2% of GDP)?, so much so that, of the Global Foreign-Remittance in 2004 of over $225 billion, India would account for the highest share of above 10% compared other countries as China, Mexico, France, and Philippines!
Almost as important is India's Foreign-Direct-Investment, though its growth and levels achieved in China were far ahead, almost by a factor of 10-15 when measured in 2002, with net FDI in India about $4 billion and China raking in nearly $50 billion in the same period. While there's also an Outward FDI (e.g. $3.2 billion in 2005-06) flows channeled by Indian Companies in pursuing investments, mergers and acquisitions of Foreign Companies, and it also opened up possibilities of revenue collection through specific Corporate-Capital-Taxes, given that India's Top-20 companies by market-capitalization derived more than 50% of their profits from sales abroad.
Further, as a result of the steady maturity achieved in the market-capitalization of the Indian Stock Market from about 13% in pre-Reform 1990s and 60% in post-Reform mid-1990s to about 91.5% in 2007, there was seen a greater foreign capital inflow through Foreign-Financial-Institutions (FII) whose Portfolio Investments (PFI) with Indian Primary and Secondary Securities were permitted since 1992, albeit with restrictions, which from averaging about $2.5 billion yearly from 1993-2002, to a record-high of $12.5 billion in 2005-06. Wherein further American Depository Receipts (ADR) and Global Depository Receipts (GDR) of collaborative resources of foreign companies accounting for about $2.6 billion of the PFI in 2005-06 were mobilized by Indian Companies through the Indian Stock-Market. While it did come with the risk of foreign capital-flight from global financial fluctuations, the role and importance of PFI as deemed appropriate by successive Indian Governments in the post-Reform period can be comparatively determined from equivalents in Japanese Stock Market (96% market-capitalization) and South Korean Stock Market (94.1% market-capitalization).
From all these sources of Foreign Capital Inflows, India could not only finance its Current-Acount-Fiscal-Deficit (CAD) but had also needed to evolve a more broader Monetary Policies? for its Foreign-Exchange Reserves which was recorded to have accumulated to $185 billion in 2007 from about $2.5 billion in the pre-Reform period of 1990-91.
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One of the most important benchmarks of the effect of 1991-Reforms in the Indian Economy into the 21st century, was its ability to achieve a greater sustainability with high-growth rate, and this is underscored by the management of our External-Debt situation. In the 15-year period between 1991-2004, India's External-Debt stood at $122.7 billion, (with India having the second-lowest External-Debt-GDP-Ratio of 17.9% reduced from 28.7%, second-lowest Debt-Service-Ratio of 6.1% reduced from 35.3%, first-lowest in Short-Term-Debt-Total-Debt-Ratio of 6.1%, while being able to raise the highest proportion of Concessional-Debt-Total-Debt-Ratio to 35%, and that's statistically an improvement from being 3rd-most-indebted to 8th-most-indebted among nations of the world in 2004!)
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<20230212> Such a sustained growth rate had encouraged economic policy-making in India in the new millennium towards raising its Per-Capita-Income (as Japan was able to do in 1960s, South Korea in 1970s, and China in 1980s). Besides the need for these measures becomes apparent when considering some of the reasons for a widening Inequality-gap in this period. One, from the 55th & 61st National Sample Survey (NSS) of Poverty-Ratio, conducted between 1993-2005, poverty was reported to have declined in the population from 36% to 27.8% below the Poverty-Line (with Rural-Poverty declining from 1.3% to 1.8% per year and Urban-Poverty from 0.9% to 0.73% per year). Yet among these nearly 300 million Poor people in India in the year 2005, 80 million were among the Poorer people, and about 150 million were among the Poorest people. It was observed that because of the increase in the Inequality-Index (GINI), the poverty reduction was slower by about 3.5% on an average for the years 1993-2005. While there was a considerable effort towards a check on Inflation in the economy?, this Inequality has been attributed to systemic reasons. Primarily Illiteracy, where over 33% of children aged 6-14 had little or no schooling, and growing up to be adults were not enrolled in college, and thus missed out on this period of economic prosperity in India that was linked to upward social-mobility from education. Paradoxically, a rising easy consumerism among the middle-class had also led to a fall in enrollment at universities specializations? and with fewer quality higher education institutions and low research funding had resulted in India filing a lower number of Patents than China and America, and was falling behind thus on Inventions of new Technologies; Two, the other factor for the Inequality gap was the low availability of Health and Immunization services which had had a significant effect on the lifespan and productivity of the workforce, (and as determined by National Family Health Surveys (NFHS 2 & 3) in 1998 & 2006, no improvement was seen in immunization-coverage and childhood malnutrition as extrapolated affected more than half the population of India?). As a result India's Human-Development-Index (HDI) was depreciating from an abysmal position of 126 out of 194 among United Nations. Three, another worrisome factor in the widening Inequality was seen with decreasing contribution of Agriculture to India's GDP (18.5% in 2006-07). This is noticeable with decrease in agricultural growth-rate to only 2.3% in 2005-06? with previously being accustomed to around 3-4% since post-Independence decades. This decrease in Agricultural productivity had also resulted in a shift in employment patterns, but since 55% of the workforce at this time was still essentially rural agrarian, it becomes a dire need to address the provisions for rural vocational non-agricultural employment, education, etc. and likewise a cause for concern because of a corresponding increase in urban-poverty from observed forced migratory patterns.
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Here is a brief look at a data-set for the Indian Economy from UN Data, sampled from the years 2010, 2015, 2022.
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<20220208> At this point, seeing as it is I do not have other adequate text-book references at home and needing to gather these more recent informations from online sources, and perhaps also because the Indian Economy in the new millennium was largely self-propelled from these 1991-92 reforms, per se, and sustained as such into the next two decades at a growth rate of 7-10%?, with a structural robustness proven capable of weathering global recession, a decoupling spread against punitive 'big-stick' international economic sanctions, and any populist factors under different Indian Governments. But also because such a paradigm-study might benefit understanding of other developing economies, among African Nations, in helping stabilize their industrial liberalization reforms from extreme government controls, while achieving the goals of agricultural self-sufficiency and meeting the basic welfare objectives of poverty reduction and higher Human-Development-Index (HDI) for the largest majority of its people, and in bringing together to merge among kindred peace-loving nations with the 'Right Side of History' as against nations espousing the philosophy of 'War & Militarization as the State of Health of Economy' within 'common market-driven economics and competing geo-political national-security interests'.
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Online References: To be added…
