India has made monumental advancements in its economy in recent years. It is now the fourth economic power in the world after the US, China and Japan. It is interesting to review India’s progress since Independence.
At midnight on August 14, 1947, Pt Jawaharlal Nehru made his historic speech, and one of his finest, ‘A Tryst with Destiny’, in the Constituent Assembly, He said that his “first thoughts go to the architect of this freedom, father of the nation — Mahatma Gandhi”. Then he offered his greetings to all nations and peoples and pledged on the nation’s behalf that India would work for furthering peace, freedom and democracy in the world. In the end, he offered his deference to the motherland, saying “... and to India, our much loved motherland, the ancient, the eternal and the ever new, we pay our reverent homage”.
When Nehru became our first Prime Minister and settled down to chalk out a policy for the country’s economic uplift, the nation had a choice of two paths to follow. One was to take the path adopted by the US, Britain and other democratic world powers. The second path was the one followed by Russia with modifications as needed.
Nehru, a true democrat, had utter dislike for Western countries’ economic policies, where all importance was given to the private sector. He was a socialist to the core. He thought India should try to adopt some of the good points of the Russian economy and the economic policy of Russia should be the model for India, with modifications as required in an Indian context. The first decision, thus, was to make plans every five years for the growth of the country, as Russia did.
Earlier in 1944, while World War II was still on, J.R.D. Tata, my father G. D. Birla and a few other businessmen had conceived of an economic blueprint called the ‘Bombay Plan’. This was welcomed by the people. When India decided to make a Five Year Plan for its economic growth, the business community wholeheartedly approved.
The first Five Year Plan approved by both Houses of Parliament was for 1951 to 1956. Nehru was under great pressure to clearly announce that India was a socialist country. In 1954, Parliament moved an amendment to the Constitution to proclaim that India was to evolve into a socialistic pattern of society. The amendment was approved. And so the ‘socialistic pattern’ became the nation’s political philosophy.
Under this law, all power was vested with the government. Industrial licensing was introduced so that no one could start an industrial unit without obtaining a licence from the Government of India. The licence defined the location, exact site and size of the plant, import of equipment and machinery along with their value etc. It led to the creation of the licence raj. Controls were introduced in all spheres of business. Nothing could move without State approval, which meant a battery of bureaucrats. It became a ‘raj of the babus of various ministries’. The ‘control policy’ led to widespread corruption.
Before World War II, the standard of honesty among public servants was fairly good. After controls were imposed, corruption became rampant. In the late 1960s, the government embarked on a policy of nationalisation. As India followed the socialistic pattern, this was inevitable. Airlines were nationalised in the late 1960s, 14 top banks in 1969, insurance in 1972, coal in 1972-73, and sick textile units at about the same time.
As a result, India developed into a protected market. Prices were all artificial with no relationship to world prices. There were stringent import restrictions. Hence people had to purchase what was available without access to quality goods from other nations. So, it was not surprising that in the first 25 years after the first Five Year Plan, from 1951 to 1976, the average GDP growth was only 3 per cent per year. A miserable picture. As a result of this artificial economy, inflation soared and interest rates rose to 15 or 16 per cent.
Indira Gandhi, who became Prime Minister for the second time in 1980, realised that the extent of nationalisation and the chain of controls had led to corruption and inadequate growth. She confided to me some time in 1980 and said, “Krishna Kumarji, I realise now it was a mistake to have nationalised so many industries and introduced so many controls.”
When Indira Gandhi was assassinated on October 31, 1984, Rajiv Gandhi became Prime Minister. The economy of the country went on deteriorating. Owing to the big deficit in the revenue budget, the fiscal deficit was as high as 12 per cent in 1991, which is, by any yardstick, an exorbitant figure. The year 1991 was one of crisis. India reached the threshold of bankruptcy. In 1990-91, the balance of payment was (-) $ 9.68 billion. Foreign debt, which in 1980-81 was only $ 23 billion or 12 per cent of GDP, rose to $ 83 billion in 1991, or 30.4 per cent of GDP. Foreign exchange reserves in July 1991 dropped to $ 1.1 billion, equivalent to 2.4 weeks of imports. The gold reserve was 333 tonnes, which was pledged to the Bank of England owing to the huge foreign exchange loan. A big portion of this gold reserve was shipped to the UK.
In June 1991, fresh elections were held. Unfortunately, Rajiv Gandhi was assassinated on May 21, 1991, during the election campaign. This was a national tragedy. After the 1991 general elections, Narasimha Rao became Prime Minister. The overwhelming Congress view was that Sonia Gandhi should take over the reins of governance as Prime Minister, but she declined. It was felt by us, the Congress MPs, that the choice of Narasimha Rao as Prime Minister was Sonia Gandhi’s.
It was wise of Narasimha Rao to make Manmohan Singh Finance Minister. Manmohan Singh was not even an MP at the time. He was advisor on economic affairs to earlier PM Chandra Shekhar. Manmohan Singh as Finance Minister was a choice made by Sonia Gandhi.
In mid-July 1991 — soon after cabinet was formed — Narasimha Rao called a meeting of some Congress MPs for discussions. I was one of the invitees. Rao said that India was almost a bankrupt country — a fact known to all economists and businessmen in India. He had decided, after consulting Manmohan Singh, to liberalise the economy and encourage the private sector. This was not a new idea; the Congress had emphasised this as a main objective in its 1991 election manifesto. Rao asked us to express our views. All the MPs supported Rao. I said that the economy’s liberalisation was the only solution to pull the country out of the morass of bankruptcy it was sinking into.
On July 24, 1991, the government announced the liberalisation policy. It was a historic day. It took us 44 years to realise that the only path to prosperity was to follow a policy of privatisation and liberalisation. Industrial licences were abolished except for seven items. Foreign direct investment was liberalised, as were majority foreign holdings in many industries. MRTP remained a law only in name. Import control was abolished barring a few items.
Since foreign exchange reserves were almost exhausted, Manmohan Singh ordered the Reserve Bank to freeze the release of foreign exchange even against import licences already issued. He said if this action put many industrialists in a tight position, so be it. The industrialists, he said, knew how to keep themselves afloat. Side by side, Manmohan Singh devalued the rupee by 20 per cent. Thus, imports became very costly and exports received a big boost. Manmohan Singh saved the country.
Since then, India has never looked back. In the last four years, GDP growth has been 8 per cent, industrial production has risen at 10 per cent per year and services at 9 per cent. The share market has been buoyant adding to the country’s wealth and that of shareholders. Market capitalisation, Rs 6 lakh crore in 2002, grew to Rs 34.26 lakh crore by December 2006. The fiscal deficit in 2005-06 was 4.1 per cent of GDP, and is expected to reduce to 3.8 per cent for 2006-07.
In 15 years, July 1991 to 2006, the economy has made fabulous progress. The acquisition by the Tatas of Corus (a deal of more than $12 billion) and by the Aditya Birla Group of Novelis have further brightened the country’s image. Industrialists such as the Tatas, the Aditya Birla Group, the two Ambani brothers, the Ruias and the Mittals are swiftly expanding their businesses. The middle-class is playing an important role in the economy’s enrichment. By 2020, it is expected that India will overtake Japan to become the third economic power in the world. By 2050 it will become the second richest economy after China. The prestige of India has spiralled in the world and Indians who go abroad are treated with great respect.
So much about the present economic position of the country. Going ahead in the same tempo India has undoubtedly a bright future.
This article is based on a speech made by KK Birla at Sangeet Kala Mandir, Kolkata, in January 2007