Twenty Twenties

Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.

This ringing declaration of intent and resolve—reminiscent of Nehru's famous 'tryst with destiny' speech on India's independence in 1947—was proclaimed by Manmohan Singh, then India's finance minister, in 1991. It marked the announcement of major structural reforms, aimed at transforming the economy, and moving radically away from a closed and quasi-socialist one to an open and near-capitalist one.

Amongst the slew of noteworthy reforms were a slashing of import duties, encouragement to foreign direct investment (FDI), devaluation of the rupee and loosening of restrictions on foreign exchange. Industrial licensing was abolished for almost all products, limiting the industries reserved for the public sector to defence equipment, atomic energy generation and railways. This opened up airline, telecom, TV broadcast and insurance sectors for private players.

The most important change, though, was in the mindset. The siege mentality embedded deeply in the country's psyche—possibly due to historical experience with the East India Company—looked askance at foreign capital. This, as also foreign goods, was to be kept out as far as possible, and (as in a siege) high walls offered the best protection—in this case, high-tariff barriers. The new mindset required openness: minimal barriers and a welcome to foreign companies and investors. Permissions, licenses and an obstacle-track maze of bureaucratic clearances: all were almost done away with, and replaced by automatic approval for investments in a host of sectors. This included foreign investments, up to a defined percentage (including 100 per cent in certain sectors). The private sector was looked upon as a partner in the country's development, rather than a greedy, avaricious and untrustworthy entity. All this required a near 180-degree change in the approach of the bureaucracy and the thinking of government.

This change in 1991 has widely been seen as revolutionary; some have even called it the 'second independence'—ushering in economic freedom, like 1947's political freedom. The change from socialism, though, really began earlier. After three decades of an economy that adopted (or sought to adopt) the socialist pattern of development, the early 1980s saw Indira Gandhi (back as prime minister, after the drubbing she received in the 1977 elections) move tentatively—even surreptitiously—towards a more open/capitalistic economy. After her death, Rajiv Gandhi, who became the prime minister, took more steps down the same path. Thus, for about a decade, through the 1980s, the country certainly moved 'rightward' in economic terms. However, the steps were incremental and the change, slow.

Rajiv Gandhi had fuelled growth on the back of borrowed foreign capital, without the reforms necessary to make India competitive in a fast-globalizing world. Soon, the chickens came home to roost and an unprecedented foreign exchange crisis faced the country even as it was going through a period of political instability after the 1989 election. Gold from India's reserves had to be sent abroad to make sure that the country did not default on its debt-repayment obligations. This trauma prepared the ground for the general acceptance that major changes in economic policy were essential.

In 1991, a coalition headed by the Congress was back in power, with Narasimha Rao as prime minister. He appointed Manmohan Singh—an economist with a long record in government officialdom—as finance minister. The Narasimha Rao–Manmohan Singh team (the former deserves more credit than is generally given) bit the bullet, making full use of the crisis to usher in big-bang reforms ('why waste a crisis' may well have been the thought!). These began to pay off, and the two decades that followed saw India emerge as a shining star on the global economic firmament—a close second to China, and often seen as an even better prospect in the long run.

Another brief period of political instability in the late 1990s followed the 1996 election. However, there was no drastic reversal or change in economic policies, as some had feared. The new coalition (the National Democratic Alliance [NDA]), anchored by the BJP and led by the charismatic Atal Bihari Vajpayee, came to power in 1999. The next five years saw further reforms, including bold steps in privatizing some public sector enterprises. India became a favourite of foreign economic commentators and forecasters. Multinational companies (MNCs) rushed to set up operations in India. To the world at large, it was certainly 'India shining'. However, this campaign line of the NDA did not carry credence with the voters and, against all odds, the NDA was defeated in 2004 by the Congress-led UPA. In a surprise move, the Congress chose to make Manmohan Singh the prime minister. The next five years saw unprecedented growth and—despite the dependence of the UPA on the outside support of four Left parties—a continued opening up of the economy. Even the global economic crisis of 2007–08 was weathered by sound policies, establishing the resilience of the Indian economy and the strength of its key institutions.

Though voted back to power in 2009, the new UPA government—still led by Manmohan Singh—seemed to have lost its way. It was soon mired in charges of corruption and allegations of various scams. A report of the Comptroller and Auditor General (CAG) give substance and credibility to allegations of massive scams, and an anti-corruption movement led by Anna Hazare suddenly galvanized huge support. His fast in the midst of Delhi drew nearly 24x7 media coverage. The urban middle class—normally passive, and probably the biggest beneficiaries of economic reforms and growth—rather than crediting the UPA or Manmohan Singh for their well-being, became active participants in the anti-government rallies. The allegations of scams and the anticorruption protests led to 'policy paralysis' within government. This, and a retrospective tax introduced in the budget in 2012, affected not just business 'sentiment', but the economy itself.

Following the drubbing of the Congress and many of its allies, the BJP-led NDA came to power in 2014. The expectation was that under the leadership of a business-friendly leader like Narendra Modi, the government would not only take forward the economic policies of Vajpayee's NDA-I, but would usher in even bolder economic reforms. In fact, many expected another '1991'. However, possibly spooked by Congress leader Rahul Gandhi's jibe of a 'suit boot ki sarkar' (literally, a government of the well-off), the government seemed to develop cold feet. Few major reforms were undertaken, and the buzz was that ministers were told to avoid interacting with business leaders. There was, though, a strong focus on improving the Ease of Doing Business (EoDB). India's ranking in the World Bank index went up from 142 in 2014 to 63 in 2019. The target set by the prime minister—of being in the top 50—seems close to realization. However, this improvement in ranking came primarily from incremental changes, and not from any radical reforms. The two substantive reforms were in the bankruptcy process (through the enactment of the Insolvency and Bankruptcy Code in 2016) and the introduction of an integrated Goods and Services Tax (GST) in 2017. The latter was an initiative of the UPA/Congress government and was stalled for many years mainly by the BJP, with Modi (then chief minister of Gujarat) being the major opponent. Ironically, it was first proposed by the BJP-led Vajpayee government, nearly two decades ago.

On 8 November 2016, the government announced the demonetization of high-value currency notes (of Rs 1,000 and Rs 500), catching the country by surprise. Probably the biggest economic policy decision of the government in its five-year stint (2014–19), this was—literally—a disruptive 'reform', creating unprecedented difficulties for everyone. The demonetization of the high-value notes meant sucking out 86 per cent of money from the economy. For some days, the amount of withdrawals permitted from bank accounts and from ATMs was restricted. Businesses and contractors had difficulties in making the usual cash payments for daily wage labour, and many did not get paid for days. As a result, a lot of daily wage workers, especially in the construction industry, went back to their villages. Getting them back, as things settled down, took a while and this caused delays in all construction projects. The middle class was hit hard by the limitation in how much they could withdraw from their own bank account, and by the long wait in endless queues at ATMs. Further, housewives who had assiduously squirrelled away money for a rainy day by saving small amounts from household expenses over years, and had stored this in high-denomination notes, suddenly found that the money had no value. They would have to take the notes to a bank, explain how they had this amount, and then hope to get it exchanged for other (legal) currency in its place. Even business—which often carried out transactions (legally) in cash—was affected, as the demonetization made payments difficult, effectively slowing down the speed and efficiency of operations. Despite the difficulties faced by almost all segments of society, the government marketed this as a bold step to root out black money and choke terror funding. The proverbial common man, who had to stand for hours in a queue to get his own money through an ATM, was made to feel good by being told that even the high and mighty amongst business people had to stand in a queue just like him/her. Success in selling this, and the noble objectives of the step, were visible in the elections to the UP assembly (held soon after demonetization), which saw the BJP ride to power with a huge majority.

(Excerpted with permission from Decisive Decade, published by Rupa Publications)