How India's economy took off

While many people have credited prime minister PV Narasim-ha Rao’s vision for India’s economic reforms, others have claimed that the government was merely following the diktats of the IMF. To understand the reform process, it is important to note that it consisted of two prongs — liberalisation and globalisation. The ministry of industries handled liberalisation, and the finance ministry took care of globalisation. The policies related to globalisation were based on IMF conditions and were in the interests of IMF’s partner firms.

Manmohan Singh’s first speech as the finance minister focused so heavily on pleasing foreign firms that he mentioned the words ‘foreign’ or ‘international’ over 30 times while there were no references to benefits for India. His sole reference to the removal of licences in India was related to removing import licences to help foreign firms enter the country. As a surprise inclusion in the cabinet, Singh was clearly unaware of Rao’s plans to move away from socialism and expected to merely implement the IMF policies. In his budget speech, Singh declared, ‘Markets can only serve those who are part of the market system. We need direct credible programmes of direct government intervention focusing on the needs of these people.’

Among other enablers of the globalisation process were Raja Chelliah and Jagdish Bhagwati. Chelliah helped restructure the tax system and was working with the IMF when the Rao government came to power. He advised the government to expand the tax base when people were already overburdened by various taxes including the notorious inflation tax. The aim was to service foreign debt, a euphemism for paying IMF.

Bhagawati of the Columbia University openly represented the interests of international organisations and equated free trade with trade managed by these organisations. At one time, his writings on property rights, inheritance laws and appointments in the private sector had read like inflammatory communist pamphlets, but he changed his tune after he started working for mercantilist organisations like the IMF, General Agreement on Tariffs and Trade and WTO. He claimed that holding one’s savings in gold was a ‘social waste’ and opposed people buying homes. Instead he said India needed to import consumer goods from the West. Even his suggestion to privatise PSUs was dubious as his aim was to raise money to pay foreign organisations.

The cynical policies of the globalisation process resulted in several controversies. One policy guaranteed 16% profits to several foreign power companies that invested in India. Another policy attempted to impose unfair patent laws upon the country by forbidding farmers from sowing seeds from the previous year’s harvest of certain crops and mandating them to purchase seeds on an annual basis from MNCs that were World Bank partners.

The firms in the West would also own the rights to turmeric, neem and other Indian food and medicinal items. Sanity returned only after farmers destroyed a unit of Cargill Seeds.

Meanwhile, the liberalisation agenda was starting to take off under Rao, a shrewd politician who had taken control of the Congress. He retained the industry portfolio and the new industrial policy removed the requirement for many types of licenses.

The first effects of the liberalisation program soon became visible across the economy. With new competition, the Indian automobile industry quickly improved the quality of its vehicles. The software industry became an oft-quoted example for positive effects of the lack of controls. It benefited by both liberalisation within India and real free trade at the global level that was not under the management of international organisations. Soon, other sectors followed suit.

While Rao took the first steps in reforming the economy, the process intensified under Atal Behari Vajpayee, leading to the widespread improvement in the lives of Indians. These changes showed that removing controls at the national and international levels were beneficial to the economy. More than 50 years after the British left the country, the economy had finally taken off and India had arrived on the world stage.

— Arvind Kumar is an energy trader and can be reached at arvind@classical-liberal.net. Arun Narendhranath is a political researcher and can be reached at narenarun@gmail.com.