ECONOMIC CHANGE IN INDIA
BASED ON POLICY ACTION
THROUGH THE AGES
Based on a presentation by Saurabh Mukherjee
The critical debate regarding Economic Policymaking was first raised in the 19th century by four towering thinkers.
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Dadabhai Naoroji (1825 to 1917)
Can India 'gain' from global trade, or will the world
'drain' India much like the East India Company and
the Crown?
Dadabhai Naoroji developed the "Drain Theory",
which essentially said that if a country has no power
to stand up to its buyers in the global market, it will
be a net loser in global trade. Although the railways,
formal banking system and telegraph were
developed in the 200 years of British rule, they were
mainly used as military
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Dadabhai Naoroji (1825 to 1917)
assets rather than for developing infrastructure for India. The British
worked in India but remitted their earnings and
resources back to England.
After Independence, the terms of trade with the
outside world could have been improved, and the
country could have benefited from foreign trade.
However, Policymakers grappled with the question
of whether India should be a "Closed" economy or
open up to the world at large.
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Mahadev Govind Ranade (1842 to 1901)
Can the free market deliver economic development,
or does the Government have to do the job?
Justice Ranade believed it was essential that the
country shift from being an agrarian
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Mahadev Govind Ranade (1842 to 1901)
economy to a manufacturing powerhouse driven by domestic
industries if it were to grow at a healthy pace, where
the State's role was to encourage private investment
but not run the business themselves.
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Gopal Krishna Gokhale (1866 to 1915)
Should India focus on educating & skilling its people,
or should the Government just focus on "hard"
public goods like infrastructure and defence?
Gokhale emphasised the need for compulsory
elementary education in India. He believed that the
overall growth of the economy could only happen
when the population was literate.
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Gopal Krishna Gokhale (1866 to 1915)
The principles of finance that he believed in were
that the Government should cut costs wherever
possible and keep corporate taxes low so that private
investment does not get hindered and the nation
gets a chance to benefit from the fruits of private
ventures.
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Mahatma Gandhi (1869 to 1948)
Should India focus on developing sectors where it
has a comparative advantage in the global economy
(e.g. IT services), or should India try to be
self-sufficient (Atmanirbhar) and build out sectors
where it does not have a comparative advantage,
e.g. Semiconductors?
Gandhi wanted India to have a self-sufficient
economy and bring its rural economy to the
forefront of the drive for development. His
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Mahatma Gandhi (1869 to 1948)
primary concern was machines displacing India’s labour,
leading to unemployment. Therefore, in his world
view of becoming self-reliant where everyone
benefits from the fruits of their labour, the modern
model of machine-based production that effectively
was the hallmark of the Industrial Revolution in
Europe did not seem like one that could usefully be
adopted for independent India.
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POST-INDEPENDENCE POLICY ERA
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Era 1: Full throttle Socialism and the "Licence Raj" (1947 - 1979)
When India initially gained Independence, it had
been bloodied by partition and had meagre
resources after 200 years of extractive colonial rule.
As a result, echoing Dadabhai Naroji, India's
policymaking elite was utterly convinced that closer
integration would act as a "drain" on the economy
during this era. Thus, the decision was taken to
"close" the economy to foreigners and let the
Government control critical sectors like mineral
resources, metals, banking, and insurance, which
would be controlled by the State through Public
Sector Undertakings. Licences Raj spread as
licences were required to manufacture almost
everything.
The result was paltry external trade, a fixed
exchange rate which overvalued the rupee, GDP
growth of 3.5% and a per capita income growth of
just 1%. The famines of 1966-7, civil
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Era 1: Full throttle Socialism and the "Licence Raj" (1947 - 1979)
strife with the Naxal uprising, and finally, the imposition of
Emergency (1975-77) destroyed the hopes and
dreams of a generation of Indians.
Access to capital and to the political elite who
controlled the Licence Raj assured success for only 2
constituencies:
- Giant PSUs that successive socialist governments
developed (influenced by the perceived success
of communism), E.g., SBI, SAIL, LIC, Coal India,
BHEL, etc.
- Family-run conglomerates which have already
attained scale and wealth and have political
connections such as Tata, Birla, Mahindra and
Godrej.
For everyone else, the first three decades after
Independence was a really difficult time
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Era 2: Socialism begins to Retreat, and first signs of Economic Liberalization (1979 to 1990)
After the emergency, Indira Gandhi lost the elections
to the Janata Government, which collapsed in 1979
and allowed Indira Gandhi to return to power. There
was an attitudinal shift on the part of the Government away from Socialism and pro-poor policies in
favour of private business. This was mainly due to the
Oil Shocks due to the wars in the Middle East, and a
severe drought. In 1980. GDP fell by almost 6%, and
the per capita income fell by 8%. First, Indira Gandhi,
and then after her assassination in 1984, her son
Rajiv Gandhi began relaxing restrictions, including:
- RELAXATION IN EXTERNAL TRADE
The number of goods placed on the Open
General Licence (OGL) list steadily increased,
which effectively meant more items could now
legally be imported into the country
- BEGINNING OF INDUSTRIAL DEREGULATION
AND TAX REFORMS
The Maruti 800 was introduced in 1982. This was
emblematic of the slow yet definite reforms in
the shape of the delicensing
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Era 2: Socialism begins to Retreat, and first signs of Economic Liberalization (1979 to 1990)
- of industries, permission to switch production lines, permission
to expand more than 2X, and raising minimum
asset value under the MRTP act.
- EMERGENCE OF REALISTIC EXCHANGE RATE
The exchange rate was pegged to the dollar, and
hence, the Indian currency was overvalued,
which rendered India uncompetitive in the
global context. From 1980, the rupee was allowed
to depreciate and reach more realistic values.
The result of this modest opening up was a doubling
of the GDP rate, which was around 5.5% in the 1980s.
The economic growth ignited the animal spirits of
investors, and there was a massive equity market
boom at an astounding 22%. However, the 1980s
boom had one fatal flaw - India's fiscal deficit went
from 5.7% in 1980 to 7.8% in 1991. Saddam Hussain’s
invasion of Kuwait in 1990 sent oil prices soaring,
which triggered the Balance of Payments crisis in
1991 as the country ran out of foreign exchange. This
triggered a new era.
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Era 3: The End of the "License Raj", the beginning of the Indian Renaissance (1991 - 2013)
The Balance of Payment crisis in 1991 forced India to
go to the World Bank and the IMF, where India had
to leave the four decades of Socialism and open up
the Indian economy, both to the private sector and
to foreigners. At the time, the RBI had to airlift 47
tons of gold to the Bank of England and 20 golds of
gold to the Union Bank of Switzerland to raise US$
600 million.
After four decades of trying to prop up the PSUs to
build the Indian economy, the government has now
allowed the private sector to invest capital across all
parts of the economy. The impact was immediate
and electric.
Two types of Entrepreneurs emerged in this period:
- Larger-than-life Entrepreneurs like Dhirubhai
Ambani. the Ruias, the Dhoots, the Jindals, and the Hindujas who built
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Era 3: The End of the "License Raj", the beginning of the Indian Renaissance (1991 - 2013)
- pan-India scale and muscle - both financially and politically. They
were financed mainly from the PSU banks, which
domestic capital markets largely ignored. Private
sector banks did not have adequate financing at
this time.
- Technocratic entrepreneurs educated in India’s
elite institutions (IIT, IIM, BITS, etc.) or abroad
emerged and scaled up large businesses, e.g.
Deepak Parikh, Narayana Murthy, Ratan Tata,
Yusuf Hamied, Anji Reddy, etc.
However, poverty, relative to the West, was still
staggering and triggered an inferiority complex in
the Indian mind. For that to change, a new era was
needed.
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Era 4: Capitalism, Increasingly Unfettered (2014 to date)
Governments increasingly withdrew from being a
provider of goods and services, and they focused on
improving the country's physical and tech infrastructure. The combination of building physical
infrastructure and providing the enabling legislation
and institutions for a massive digital revolution has
resulted in India becoming a "networked" economy
over the last decade
• PHYSICAL INFRASTRUCTURE
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National Highway networks nearly doubled
from 79k km in 2012 to 140k km in 2022.
Domestic air travel passengers more than
tripling from 54 mn in 2009 to 170 tn in 2019
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Households with broadband connections
grew 7 times from 20 mn in 2013 to 137 mn in
2023.
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The number of bank accounts grew 3 times
from 100 cr in 2015 to 300 cr in 2023.
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Era 4: Capitalism, ncreasingly Unfettered (2014 to date)
• DIGITAL INFRASTRUCTURE - INDIA STACK
(SEE NOTE OF MAY 2023)
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Aadhar gave a digital identity, started in 2009
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Jan Dhan bank accounts from 2014, which gave every Indian family a bank account.
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Jios ultra-cheap mobile broadband service in 2017
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UPI - where more than 9 billion UPI payments are made every month.
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ONDC - Open Network for Digital Commerce
The cost of capital dropped sharply, not only in the
10-year GSec but also in the large pools of venture
capitalist and private equity money that flow in the
country. Along with foreign capital, there is the rapid
financialisation of savings - all of which have caused
a structural downturn in the cost of debt and equity
capital.
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INDIA DURING THE NEXT DECADE
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According to Ray Dalio, an American
billionaire investor and founder of hedge
fund Bridgewater associates, India has the
highest growth potential in the coming
decade. "If we look at the history, neutral
countries reaped benefits and did their best
than those countries in war. In the context
of myriad ongoing conflicts, neutral
countries like India are going to be
beneficiaries."
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According to Jim Rogers, co-founder of the
Quantum Endowment funds with George
Soros, India is getting noticed. "India is at an
all-time high. Somebody has done a
brilliant job in India. I do not know who but
India has been a very successful market in
the last few months. So, I am not buying it
because it is doing so well. But if and when
things get cheap again in India, I hope I am
smart enough to buy."
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India is one of the few countries where the
working population will be increasing up to
2050; most of the rest of the world will have
a declining working population. Further,
our middle class is still growing rapidly,
which will result in a huge market for
internal consumption.
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Corporate balance sheets and banking
balance sheets are still quite clean. There is
a small cause of concern for Individual
balance sheets as personal unsecured loans
have started increasing rapidly, although
RBI has tried to address that problem.
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The year has ended on a positive note. The Federal
Reserve has confirmed the interest rates will pause,
and eventually, there will be cuts. Foreign
Institutional Investors are back in India - and it is one
of the reasons that large-cap companies are likely to
outperform. Global markets, too, are buoyant. It is yet
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to be seen in the 2nd half of 2024, whether the US
has a soft landing, no landing or a hard landing. In
the meantime, at any dips in the market prior to the
Indian Elections, take the opportunity to buy equity
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DEBT MARKET
Interest rates are likely to have peaked
for now as long as inflation does not
rise again. Hence, continue to hold the
debt funds, which are already held,
because at some time, interest rates
are likely to fall.
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GOLD MARKETS
Gold has proved to be very resilient in 2023. With
the 10-year US GSec interest rates at over 5% and
the dollar index rising up to 107 in 2023 -Gold
prices should have collapsed, but instead did
touch all-time highs. Now, with the US Dollar
index falling and interest rates falling - both are
positive for gold. Further, if the US does have a
hard landing - Gold will protect your portfolio.
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