By KG Narendranath
for all its gains — well-preserved integrity, largely uninterrupted freedom for the people, financial stability, a booming services sector, a rising middle class — India’s post-Independence economic history is one of moderate success relative to potential. It is also marked by many missed opportunities.
After the initial, predominantly state-supported efforts at nation building, the country could have embraced macro-economic, trade and industrial reforms by the 1970s, if not during the late 1960s. It could have also invested more meaningfully in primary health and elementary education and ensured higher efficiency and wholesome outcome of such spending, implemented a paradigm of land policy that at once discouraged exploitative rent-seeking and facilitated consolidation of non-viable holdings for investments in agriculture, infrastructure and industry.
It ought to have raised public investments in R&D manifold, incentivised technology transfer to domestic industry from abroad, embarked on bankruptcy reforms by the turn of the last century to unlock sunk capital, populated the coal sector with global players with technology and equipment to extract the fossil fuel from underground mines and broad-based the capital markets by bolstering the corporate bonds segment.
Further, it could have created world-scale capacities in the labour-intensive textiles-and-garments industry soon after the WTO announced in 1994 a 10-year phase-out period for bilateral quotas that restricted shipments to the developed markets. The hefty import tariffs on inputs for synthetic textiles and plastic industries could have been lowered many decades earlier. At a broader level, with factor markets reforms hanging fire for long, the country blew the chance to become a significant manufacturing power.
The cost of some of the missed opportunities is easily quantifiable. Come to think of it: China and India had roughly the same share in global textiles and clothing market in 1970s. By 2006-2007, China’s share jumped to 37%, against India’s long-stagnant 3%, as massive capacity build-up since early 1990s helped the former to capture the lucrative markets opened up after the 2004 abolition of bilateral quotas. India, however, retained the garment sector exclusively for the MSME sector till 2004-2005. So, while India procrastinated, smaller countries like Bangladesh and Vietnam benefitted from China’s gradual ceding of market share in global textiles market as it inevitably shifted to high-tech manufacturing as its labour costs rose.
The series of India’s missed chances may not have dried up, yet. It increasingly looks that the country’s harnessing of the much-touted “demographic dividend” will be grossly sub-optimal. The perceived advantage will fizzle out in less than two decades. While two thirds of population is now in the 15-59-years working-age group and over a million below 29 years are entering the labour market every year, only a tiny fraction of them is equipped to be gainfully employed. The 2015 National Skill Development Mission came a bit too late and may not yield the outcome similar to what the policy-makers aspire for, given that it was not supported by quality school education.
Looking back, Looking ahead
- The RBI was established on April 1, 1935, as a private shareholders’ bank; till its nationalisation in 1949, it used to have a largely subservient function to the Bank of England.
- The foundations of the money market were built by mid-1980s, since then, RBI has gradually assumed its regulatory roles.
- India chose flexible-but-managed exchange rate subsequent to the 1991 crisis; by 1996, the exchange rate became sufficiently flexible and interest rates market-determined.
- The disconnect between asset and liquidity markets has been glaring on many occasions. In 2007, for instance, the stock market surge was 6 times the rate at which the real economy expanded.
- Indian industry at the time of Independence largely comprised “extractive industries” like cotton textiles (27%), tea (12%), jute (7%) and sugar (6%).
- India had a third currency unit called anna at the time of Independence, it was 1/16th of a rupee and equal to 4 paise.
- The size of the Union Budget in 1950-51 was just Rs 337 crore or 3.3% of nominal GDP; in Budget 2021-22 it was 15.9% of GDP.