I wrote about the Indian Economy’s midlife crisis, in the FPJ on the 26th of July 2021
On July 24th, 1991, Dr Manmohan Singh presented the Union Government’s budget to parliament. India was at a political and economic crossroads. In the months preceding the budget, the previous government led by Prime Minister Chandrashekar had collapsed under the weight of its own contradictions. The election campaign that followed saw the assassination of the Congress head, and a former Prime Minister, Rajiv Gandhi, by a suicide bomber. Northern Parts of India were still reeling from the aftermath of the Mandal agitation. The Rath Yatra led by LK Advani had begun the previous year, cutting a swathe across the western and northern parts of India – polarising communities.
And India was broke. The oil shock resulting from the First Gulf War, hit us badly. Not only did internal foreign exchange remittances turn into a trickle, but we were also faced with rising oil prices. We were perilously close to running out of foreign exchange and defaulting on debt repayments. An act that would have put us in the same league as some African and South American republics. The story of India pledging its gold to meet its international commitments, to avoid this fate – is now part of the modern lore of India. And then, the change began. Narasimha Rao, the ultimate political juggler, became the Prime Minister – who had no choice but to reform the economy. And, who had the political relationships to guide reform through India’s chaotic political landscape. While PM Rao handled the politics of the day, Dr Singh handled the economics.
Dr Singh’s budget, also called the epochal budget was aimed at solving the economic crisis. Deep structural reform was on the anvil – industrial policy reform, trade reform, financial sector reform, public enterprise reform, tax reform, and a relook at safety nets. There was tremendous resistance – from the unions, from the left, and even the BJP of that time. The Government of the day, managed to push through these step by step, and began freeing up Indians from the shackles of the license raj. The economy went from being one straight jacketed by the Government, to being one, where bold entrepreneurs could play their part in building the prosperity and growth in India. In the 30 years since liberalisation, our GDP has jumped from $193 billion to a shade over $3 trillion. And there has been visible changes in front of our eyes as India moved from a sleepy poor nation to a roaring economy. And, then the pandemic struck.
Thirty years later – India is in a much more secure place, than she was in 1991. We are no longer part of the 3rd world, but a nation that commands its place in the economic order. It is a part of the G20. We are the 6th largest economy in the world. The world bank and IMF can no longer bully us the way they did in the 1980’s. And, much of this respect and admiration India has earned in the last 30 years can be attributed to the Epochal budget, and the animal spirits that it unleashed in the economy. Indian entrepreneurship just needed that breathing space to compete and become the best in the world.
Source: IMF
Today, India’s challenges are different. In the post COVID world, reeling under the lockdowns – the economy has hit a wall. We are faced with high fuel costs, high inflation, high interest rates, NPA’s, and burgeoning unemployment. While the stock market seems to be soaring, the economy seems to be heading for the doldrums. And, despite a thumping majority in Parliament, Mr Modi is unable to transform the Indian economy with the vigour he displayed as the CM of Gujarat.
His party seems to be economically split between the followers of Hayek and the followers of Marx. The economic policies that emanate display this confusion. It seems unclear whether this is a government of ‘minimum government and maximum governance’ or the lodestar of bureaucracy and red tape. Take for example the GST. A simple tax that should have reduced headache and increased revenues. Ask any entrepreneur about how they feel about GST filing – it is a paperwork nightmare, that seems to be designed by CA’s to maximise their revenue. And this is a repeated pattern as far as government stranglehold on the economy is concerned.
A simplification of the rules, that has been promised but never delivered, is the most crucial part of jump starting the Indian economy. Dealing with the government bureaucracy should not feel like getting your teeth removed without an anesthetic. If we want to unleash the next generation of entrepreneurs – people who will truly transform the next 1 billion – we need to redesign government systems, with those from b-towns and rural India in mind. Right now, government systems are designed with those who can afford CA’s, Tax consultants, and lawyers. As we look at becoming a $5 trillion dollar economy those at the bottom of the pyramid have to be a priority. For that the government does not just have to have the right policies, but simplified systems and processes.
Unlike in 1991, India has the political heft in the global stage, to pull off a deficit, to rebuild India. We can get away right now, with increasing the deficit to fund infrastructure that builds India. These just can’t be statues and vanity projects – but has to focus on roads, schools, hospitals, and higher education that focuses on skills of tomorrow. It just needs the courage and the conviction to do this – if it sets the goal, investors and organisations will flock. But, for that the government has become pragmatic about the economy and not be wedded to dogma.