The year 1991 was truly a watershed moment in India’s economic history. While the economic liberalisation undertaken that year may have been in response to a balance of payments crisis that threatened the country’s stability, the path of economic reforms traversed in the three decades since has shaped India to become a globally recognised powerhouse.
Those like me who have lived in and remember how India was before 1991, distinctly remember how one would have to wait for months (sometimes even years) to get a landline connection at home or an LPG gas connection. Today, one cannot imagine life without a smartphone, which powered by data and digital technologies serves as a gateway to the world. And piped gas is available on tap for households.
Unleashing growth
The economic reforms that India has implemented, broadly, entailed the government loosening control over industrial processes (doing away with the so-called licence raj) and encouraging private sector participation in manufacturing. Sunrise sectors such as Telecom & IT services were promoted and policies to attract foreign investors, who brought in capital as well as technology, were formulated. The ground was also laid for a well-regulated and vibrant financial services sector and capital markets. This helped innovative business models like microfinance, which didn’t exist three decades back in a structured manner, flourish and further the cause of financial inclusion.
According to World Bank data, India’s GDP stood at $2.62 trillion in 2020 (in current dollar terms), which is tenfold larger than what it was in 1991 at $270 billion. Per capita GDP, which was at $303 in 1991 is now close to $2,000. India’s forex reserves, which were barely enough to cover three weeks of imports in June 1991, stand at around $600 billion at present. There was a time when India had to pledge its gold reserves to secure a $400 million foreign debt. Today, no foreign investor worth his capital can afford to ignore India, which reflects in the record level of FDI received in FY21, at close to $82 billion.
Empowerment through finance
Opening up of the BFSI sector to private sector enterprises – who came in with new business models, technology and the ability to attract and nurture top talent – helped democratize access to financial services. While the foundation was laid with the creation of an extensive network of branches and ATMs, banking services reached the doorstep of customers in hinterlands through digital technologies like UPI-based payment systems and e-KYC. The trinity of Jan Dhan, Aadhar and Mobile (JAM), along with the India Stack, has helped penetration of digital technologies and made access to formal finance easier for the masses, especially at the bottom of the pyramid.
Also Read: Reforms lifted GDP growth but didn’t create enough jobs
Credit became more affordable in this period, allowing Indians to avail finance to buy that house or car that they always wanted, without having to rely solely on their precious savings. From a high of 12.3% in October 1998, India’s 10-Year Bond Yield has come all the way down to around 6% in July 2021; and bank interest rates have fallen in tandem. In 1991, domestic credit to the private sector in India, as a share of GDP, stood at close to 24%. This has now touched an all-time high of 56% in 2020. However, much more ground needs to be covered before we reach close to China’s credit-to-GDP ratio of around 165%, or that of the US at 216%.
While the slew of economic reforms over the decades has helped uplift millions out of poverty and led to the creation of a burgeoning middle class, which became the principal driver of consumption, it has also led to higher inequality among the rich and the poor. India’s economic growth and human development haven’t always gone hand-in-hand.
India is currently the sixth largest economy in the world, just a tad smaller than the UK and ahead of countries like France and Italy. But it ranks 131 among 189 countries, alongside countries like Namibia and Honduras, when it comes to UNDP’s Human Development Index (HDI) in 2020. Adjusted for inequalities of income, education and life expectancy, India’s HDI score is even lower and the overall loss to the economy due to such inequality is estimated at 26.4%.
Focus on human development
The imperative before India, therefore, is to help the economically weak, especially those residing in rural and semi-urban areas, build sustainable livelihood for themselves, which can help release them from the clutches of poverty. Microfinance and inclusive banking have played a pioneering role here and helped bring millions of Indians into the formal financial fold. As on March 31, 2021, there were close to six crore microfinance borrowers in the country, with a total outstanding loan portfolio of close to ₹2.60 lakh crore. Assuming these micro entrepreneurs created even one additional job in their small businesses, we are speaking of six crore additional jobs at least.
Also Read: Shankar Sharma on what he asked an astrologer during the 1991 economic crisis
The economic reforms agenda gained urgency due to the crisis that the country was faced with in 1991. Another grave crisis faces India, and the world, today. The COVID-19 pandemic, which has impacted lives and livelihoods, has forced India to rethink its priorities. This is evident from the war-footing with which the country seeks to augment its healthcare infrastructure.
As India freed its markets and linked them to the global economy, the model of development followed has largely been a ‘trickle-down’ model. Under this model, an enabling environment and incentives for big businesses are expected to bring in capital investments, helping create jobs and ensuring economic prosperity for the masses in the long run.
In the current context, perhaps it is now time to experiment with a ‘trickle-up’ model wherein the masses are directly empowered to drive and support the economy as John Maynard Keynes originally envisaged.
The need of the hour is to augment rural infrastructure, help small businesses capitalise on their entrepreneurial spirit, and foster a culture of disciplined credit behaviour which helps them build sustainable livelihoods over time. One also hopes that in subsequent budgets, the allocation towards healthcare and education will keep increasing, along with a focus on sustainable livelihood creation.
This will help India’s journey towards becoming a $5 trillion economy be a lot more inclusive, leveraging the strong foundation laid by the economic reforms undertaken over the last three decades.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
