Assignment 1

Indian on Move- Case study analysis

Name: Sumeet Kant Kaul

Roll No: G20088

Introduction:
India was on the move in 1991, finally after dragging itself for
decades under socialist policies inspired by Soviet Union Model. It
was the after-effect of the British raj that made the Indian government
vulnerable to this kind of protectionist thinking. In the initial years
after independence, around 72 % people were working in agriculture
sector, thus, the government allocated 45% of countries resources to
agriculture and approximately 5% of resources for industrial
development. The industrial growth consequently was slow and the
second five-year plan as well as IPR 1948 and IPR 1956 were enacted
that were extremely stringent on imports, foreign currency, trade and
expansion of production by companies. The government laws were
against capitalism and gave more control to the state to regulate
businesses. Imagine ,The government was into baking bread with its
company Modern foods, which was later sold to Hindustan Unilever
in 2000.There were some relaxations on imports for exporters but that
could be considered a negligible drop in the ocean.
The government held high tariffs to the tune of 300% and quotas were
allocated regulating how much companies could produce and who
could produce what. It was the era of License Raj, where licences
were given to do normal business. The bureaucratic red tapism that
grinded the Indian private sector also brought corruption and immense
trouble for those who were entrepreneurial. For example, Government
was subsidising loss-making public-sector companies around 90000
in number but clipping the wings of private sector with its laws. Thus
external trade was very low, exports were only 5%of GDP in 1975 as
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compared to 22% of GDP in 2000.India also fought many wars with
China and Pakistan for disputed territories resulting in very high
defence expenditure and further support from Russia .This made trade
with Russia more prominent along with further reliance on soviet
model for running economy. India was stuck in perennial Kashmir
conflict wasting resources over many decades. From border disputes
to parliament attacks, the government always had a lot to chew.
Furthermore, separatism in Punjab led to operation Bluestar that
caused massive riots and eventually assassination of Indira Gandhi,
the then Prime minister. Her son Rajiv Gandhi had similar fate when
he intervened in resolving civil riots in Sri Lanka. He too was
assassinated in an election rally. The country has always fought the
hardships but it seems with one hand tied behind. There has been
struggles of caste system where lower caste people have been taken
advantage of and their contribution in economy has been therefore
reduced. Opportunities were curtailed for many as they were not
included in the system. Businessmen were caught in maze of license
and permits. Only few businessowners had the muscle to invest and
sail through the tsunami of government created hurdles. Eventually
the country could only escape this situation if some drastic steps could
have been taken. But politics didn’t completely hep either. Many
times, half of parliaments sessions were adjourned due to ruckus
created in the house. This was due to fragmented nature of the
government created because of fragmented and biased voters loyal to
regional parties and issues. Thus, it became difficult for government
to expedite visionary policies. One of the policies that was in
limelight was the reservation policy which mentioned OBC category
to get reservation in government college. This brought turmoil in the
country and many students protested and one even burned himself as
a protest. The issues had always been charged and country had to
fight the menacing divide in many parts of the society.

2
 GDP%
30

25

20

15

10

0
1975 1980 1985 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

The 1991 transformation

The soviet model collapsed in 1990s and so did India’s delusion and
confidence on the soviet model. There was a Balance of payment
crisis in the background of Gulf war. India’s dependence on oil
imports were pinching them now. Only around 1 billion dollars were
remaining in the reserves that could run country for few weeks. There
was a need of urgent steps to be taken so that the economy doesn’t
collapse. The prime minister at that time was P.V Narsimha Rao who
after the death of Rajiv Gandhi took the mantle of this responsibility
and steered the country from a brink of economic disaster. He along
with Finance minister Dr. manmohan Singh seeked help from IMF,
which in turn was ready to help if India liberalised its economy,
opened up itself for foreign trade and investments, maintain fiscal
prudence and engaged in tax reforms and many other pointers
stipulated under Washington Consensus. The 1991 reforms gave a
shot in the arm to Indian economy. Growth rates jumped from 3.5%
to 6% which was a considerable improvement although there was an
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aspiration of 8% growth. The rupee was devalued by 22% against
dollar to make our exports competitive. Banking was privatised and
many foreign banks thus invested in the country. One of the result of
opening up was that India invested heavily in higher education
specifically engineering colleges churning out around 7 million
students in 2000.The massive intellect capital boosted the IT sector
because American and European countries could hire cheaper skilled
labour and get the same work done at lesser cost and with a 24 hour
service bonus. By 2002 IT sector contributes 2% of GDP with a
massive growth potential. Also, since IT didn’t involve ports, custom
laws, production capacity laws it was easier to be set up and running.
New technology was imported as trade was opened up and
entrepreneurial drive was on the rise. Many new companies in
different sectors opened generating more wealth for the country.
Direct Investment flow rose from 76 million in 1991 to 5.626 Billion
in 2002. Ministry of disinvestment was created under leadership of
Arun Shourie that privatised a portion of public sector companies for
e.g. 25% of VSNL was given to TATA Group. There were still lot of
roadblocks that were a drag on the country like poor infrastructure,
poor roads and highway capacity and utilisation. If transport of goods
would take 8 hours from Delhi to Mumbai then it would add delay
and further costing to the price of products thus making our products
uncompetitive in the international markets. The standards of
corruption, infrastructure made foreign investors wary of investing in
India. For example, FDI in china being a communist country was
50Billion dollars in 2002 as compared to India being a democratic
country totalling 8 Billion dollars. Corruption was on another level,20
% of member of parliaments had criminal cases against them and
India was ranking 72nd on corruption index done by Transparency
International. India although free from shackles of soviet model was
still in hangover of its past baggage of bureaucracy. All through this
the Indian IT sector was shining and carrying forward the aspirations
of a growing country, providing employment to many, all because we
opened up our economy and allowed investments in many sectors
giving hope to Indian people for a brighter future. The dilemma was
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how to bring further change as there were cases of tax avoidance in
spite of increasing tax base. The country could not continue running
this way with subsidies being given in fertiliser, seeds and many other
sectors. India’s subsidy bill was 44618 crores in 2002 and 49907
crores in 2003.Policies were enacted to control inflation but further
discipline needed to be shown.

inflation%
12

10

0
1980 1985 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Post 1991 era

India post 1991 implemented liberalisation and privatisation in
stages .The cononundrum was that governments were often coalitions
and needing support of many political parties took considerable
time .Further delay in decisions making happened due to consistent
social conflicts be it Babri Masjid demolition or Godhra riots or the
aftermath of resistance against Reservation policy in India in early 90s
.The environment was mostly politically charged where many
regional parties had to be appeased to enact policy decisions. Still
India managed considerable improvement in growth as well as
generating employment. But more had to be done as fiscal deficit was
running 5.6% in 2003 and unemployment rate was 9% in 2002. India

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needed tax reforms, cutting down on unresourceful tax incentives also
reducing subsidies that were eating into India’s consolidated revenue.
However, there were lot of political points in taking such decisions. A
trade-off was present because population was used to free subsidies
but it hampered growth as half of revenue would go in serving the
debt of country. Visionary leader was required who could make
visionary policies balancing the short term with long term yet not
compromising on the future generations. Millions have to be lifted out
of poverty still. India represented 44% of world’s poor. That is why
prudent decisions needed to be taken. Business environment in India
was better in terms of more freedom and control was transferred from
state to private owners. Literacy rates increased from 52% in 1991 to
65% in 2001 adding more educated workforce to the business
environment. If India could manage to weed out corruption and focus
on infrastructure, the entrepreneurial drive would rise and people
would themselves lift up the country’s economy. The rise was such
that many India IT companies were listed in foreign capital markets.
Many foreign companies like GE and Ernst and Young could hire
cheaper labour in India and service their clients abroad creating ton of
opportunities .Indian higher education institutes were churning out
bright human capital ,there was a serious case of brain drain that
created losses for country however there was always more English
speaking human capital available in India for business environment.
In 2002 government could sell 3 billion dollars worth of public sector
companies much less than their expectations. There were companies
like Hindustan zinc which did much better than before after being
sold .Insurance, pharma and mining sectors were opened up and
business environment did make use of such opportunities .But there
were also backlashes against the government that they were loosing
control of priced possessions of India .This group believed that
government shouldn’t loose control of public sector companies.
Majority of this group were the heads of such companies who were
used to living on government funding and thus had made the
businesses uncompetitive. Their fears of losing their jobs made a
heavy dent on the company’s balance sheet. The cutting of subsidies
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and disinvestment of companies although were unpopular moves in
eyes of some people. It did help the government revenue to fuel
growth. This shot in the arm was very much needed in a polarised
environment where social unrest could derail the governments and
then they would end up subsidising and pass popular unresourceful
budgets to appease the voters. The business house needed consistency
and Vijay Kelkar’s committees’ recommendations needed to be
implemented so that not only India becomes a leader in the 21st
century but also shows way to many other countries on how to lead in
spite of so many troubles. Thus, government had to be decisive and
onus was on them.

70
Literacy rate%

60

50

40

30

20

10

0
1951 1961 1971 1981 1991 2001

Conclusion:
There has been a lot of backlog where the entire country has been
struggling since centuries of British rule. The nation has seen soviet
model of economy due to fear of being ruled again by foreign
investors. In setting up the Industries, the government had crippled
the wings of private companies with its draconian laws. Only the stare
at the bottom of economic abyss in 1991 revived the Indian
aspirations for a brighter future. Since then business environment has
been much more positive as foreign investments have risen although
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not as per the expectations that could have been. This is largely due to
unstable coalition governments, socially charged environment and
hangover of corruption due to bureaucratic nature of the government.
This along with corruption led to slow development of infrastructure
causing a drag in the economy. However new governments while
making policies do bring reforms but major reforms Politics needs
urgent attention. As many members of parliaments are having
criminal cases against them. This leads to biased policies and
inefficient government as people who are running the office are
themselves incapable and unqualified in terms of a clean image. India
is on the move but it needs to move even faster.

References: India on the move by

Richard H.K Vietor and Emily J.Thompson