Lessons from India’s industrial model

Last Wednesday, we provided insights into China’s industrialisation strategy, highlighting lessons Nigeria can learn from key reforms taken by the Asian nation in the early 80s that boosted its growth and economy, pushing it up to the third largest in the world after the United States and the European Union.

But China is not the only nation that has taken the pains to enact bold reforms. India, world’s second most populous country, is also a sure example to learn from.

In this write-up, we would delve into India’s industrialisation policies that helped its nation to attract sufficient investments, reduce unemployment and lift well over 37 million of its populace out of poverty.

Shortly after colonial rule, the Indian government followed a non-industrial model where it believed that the economic activities of what and how to produce should be determined by the state.

The East Asian economy, between 1947 and 1964, under the leadership of Jawaharlal Nehru, the then prime minister, practised a bureaucratic centralised government that made licensing requirements stringent and accompanied by a gamut of procedures that required private investments to go through tight clearance by several disparate and uncoordinated ministries.

With the claim of supporting local production of goods and services, the Indian government at that the time subjected almost all trade and capital imports to quantitative restrictions in the form of import licenses. This unhealthy policy was supplemented by tariffs at rates that were among the highest in the developing world.

Aside from the high tariffs and imposed import restrictions, the government also subsidised produce from the nationalised firms, directed investment funds to them, and also controlled both land use and prices.

This over-restrictive, and often self-defeating nature of the regulatory framework, began to become evident by the late 1960s and early 1970s. Comprehensive planning was increasingly criticised as planned targets were not met and many plans were not even implemented. The lack of success in some dimensions led to a new and more restrictive set of regulations. One example is the attempt to reserve sectors for small industries and to restrict the growth of large firms.

The effect of these policy stances was liquidity squeeze, high unemployment, multinational poverty and weak economic growth. Not too long after, the country had the most number of poor living, with over 321 million of its populace living below the poverty trap in 1974, according to World Bank data.

Beginning in the early 1980s, a mild trend towards deregulation started. Economic reforms were introduced and it started to liberalise trade, industrial and financial policies. Subsidies, tax concessions, and the depreciation of the currency improved four of 13 export incentives. These measures helped GDP growth to accelerate to over five percent per year during the 1980s, compared to 3.5 per cent during the 1970s. This reduced poverty more rapidly.

However, India’s most fundamental structural problems were only partially addressed. Tariffs continued to be among the highest in the world, and quantitative restrictions remained pervasive. Moreover, a significant government influence continued in the allocation of credit to firms and discouragement of foreign investment. Relatively inefficient public enterprises, controlling nearly 20 percent of GDP, remained a drag on economic growth.

The government expanded anti-poverty schemes, especially rural employment schemes, but only a small fraction of the rising subsidies reached the poor. Competition between political parties drove subsidies up at every election. The resulting fiscal deficits (8.4 percent of GDP in 1985) contributed to a rising current account deficit. India’s foreign exchange reserves were virtually exhausted by mid-1991 when a new government headed by Narasimha Rao came to power.

The Late 90s could be described as the straw that hit the camel’s back for the Indian economy. The government flagged off economic policy reforms in the business, manufacturing and financial services industries, targeted at boosting economic growth.

The reform was encroached in a model referred to as Liberalisation, Privatisation and Globalisation (LPG). The major aim of the LPG model was to slacken government regulations hurting the growth of investment in the country, transferring of state-owned assets and position the country for consolidation among various economies of the world.
In July 1991, India launched an economic reform programme. The government committed itself to promoting a competitive economy that would be open to trade and foreign investment.

Measures were introduced to reduce the government’s influence in corporate investment decisions. Much of the industrial-licensing system was dismantled, and areas once closed to the private sector were opened up. These included electricity generation, areas of the oil industry, heavy industry, air transport, roads and some telecommunications. Foreign investment was suddenly welcomed.

Greater global integration was encouraged with a significant reduction in the use of import licenses and tariffs (down to 150 per cent from 400 per cent), elimination of subsidies for exports, and the introduction of a foreign exchange market.

Since April 1992, there has been no need to obtain any license or permit to carry out import-export trade. As of April 1, 1993, trade is completely free, barring only a small list of imports and exports that are either regulated or banned. The World Trade Organisation (WTO) estimated an average import tariff of 71 per cent in 1993 which has been reduced to 40 percent in 1995.

With successive additional monetary reforms, the rupee, since 1995, can nearly be considered a fully convertible currency at market rates. India now has a much more open economy.

With these reforms, the Indian economy grew the overall amount of overseas investment to $5.3 billion from a microscopic $132 million in four years and today, the country is ranked the second-highest destination for investment in the world, according to data from the United Nation Continental Trade and Development (UNCTAD).