Kaleidoscope Biz & Economy

What The End Of License Raj Meant For India?

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Between 1947 and 1990 business was the government’s baby in India. The Nehru government wanted to have a planned economy where everything was controlled by them. Only a few private companies could run a business and that meant lots of regulations, pleasing government agencies, government interference, getting lots of licenses etc. But after 4 decades of this the government was in a serious financial mess. They could no longer afford to keep this baby.

Enter liberalisation in 1991- the End of License Raj. When the baby finally left its nest and went into the hands of private players and foreign investors. It’s been over 25 years since this happened, let’s see what’s changed…

1. Our GDP growth rate almost doubled:

Post liberalisation tariffs and interest rates were reduced, public monopolies ceased to exist, foreigners were allowed to invest in India’s growing sectors (meaning foreign direct investment increased). Basically we were open to outsiders and private players running business in India. And its impact directly reflected on our GDP growth rate. Between 1955 and 1990 our GDP grew at around 4%. Post liberalisation this rate went up to 7%.

2. Foreigners started finding India attractive:

Before 1991 for a foreign company to start a business in India (Foreign Direct Investment-FDI) was pretty rare. But today foreigners are flocking to India. As of 2018 FDI in India averaged to $1308.71 million. Compare this to the meagre $74 billion back in 1991. And more FDI just means more dollars for India, more brands, more jobs, better quality products, basically a buyer’s paradise!

3. They also wanted a piece of our financial action:

While FDI means actually setting up a physical business in India, FII (Foreign Financial Institutional) means foreigners participating in our stock markets. Their investments bring in more cash to our economy but at the same time they also mean once profits are realised the money will move out. In short FDI is long term while FII is short term. But FII inflows just reflect how politically and economically stable a nation is. Example in 2017 FII’s poured in $30 billion in our stock markets.

4. Our financial markets went nuts:

The BSE Sensex which is an indicator of India’s stock markets was lingering around 1000 points in 1991. But today it’s near 32,000 points. That means returns from stock markets have multiplied 32 times for investors.

5. We became a goldmine for HR recruiters:

There is an economic difference between the developed countries and developing countries. This makes labour in developing countries much cheaper. As a result post reforms a lot of Indian’s could provide services to developed countries. Add to this the IT boom that created multiple jobs in the Software, BPO, KPO, LPO sectors. As a result more jobs were created for Indians. All this only brought in more foreign exchange in our country and helped reduce our Balance of Payments (difference in payments made to and received from other countries) situation.

6. Our banking & telecom system got more competitive:

When more players enter a playing field, the fight amongst them gets heated. Similarly when the banking sector was opened up to private players, the public banks started becoming more efficient with their work. This happened in the telecom sector as well. Initially this was a government sector. But once it was privatized it has resulted in increased competition giving consumers the best deals ever. (Example Jio vs Airtel vs Vodafone).

 All this is great. Until it leads to the rich getting richer…

One major drawback of liberalization is the increasing inequalities amongst the rich and the poor. When things like food, health, education are privatised they become luxuries rather than necessities. A little over half of our population is employed in the agricultural sector. Post reforms when the government withdrew its support from this sector by cutting down its investments and reducing subsidies it had adverse effects on our country. For instance, farmers switched from food crops to cash crops such as cotton, coffee, sugarcane etc. This led to a scarcity of food and drove our country to increase in malnutrition. Not to forget farmers became burdened by debt leading to farmer suicides. Post liberalisation, the first decade saw a rise in indebted farm households from 26% to nearly 49% and today the situation still remains grim. Meanwhile, India continues to be the home to some of the richest people in the world. So we can’t help but wonder, did we become too ambitious with our plans for liberalization?

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