An unshackled tiger

Twenty years ago India was in deep trouble. Inept monetary governance and inflationary pressures had instigated a balance of payments debacle. India's foreign reserves weren't sufficient to fulfil the country's immediate trade obligations. Subscribing to a bailout of sorts, the central bank shipped 67 tonnes of gold to the International Monetary Fund as collateral for an emergency loan.

 It was these events that forced the hand of then Finance Minister Manmohan Singh to undertake reforms that would kick-start a ferocious growth spurt. He deregulated trade and rid the system of red tape that confined India's businesses, allowing them to operate largely autonomously. To supplement the inflow of foreign capital that the policy change had impelled, the rupee was devalued. The results are self-evident. The economy is now four times the size it was at the point of liberalisation. Gross domestic product (GDP) is more than $1.5 trillion (about Dh5.5 trillion) as compared to $433 billion in 1990. GDP per capita has also more than doubled to $1,265 — a commendable statistic considering the country's meteoric rise in population. Literacy is up, poverty is down, and the number of Indian billionaires featured on the Forbes list has gone from one to 49. It is fair to say that India has enjoyed a bountiful couple of decades — the question is whether a new set of reforms are needed going forward.

Transitioning an economy from a socialist to a free-market one is a tricky affair. Three out of the four BRIC (Brazil, Russia, India and China) economies have undergone this particular reform — three nations that now constitute the future face of global commerce. It was catastrophic for Russia, and a stroke of genius for China — ‘shock therapy' versus gradualism is the theoretical debate, largely partaken in and applied by economists at the University of Chicago. Russia was put through an abrupt and comprehensive reformation in the early 1990s and was in shambles soon after. China began to moderately incorporate capitalist components as early as 1978 and has gone from being a minnow to an absolute behemoth where commerce is concerned. India, it seems, did a bit of both. Liberalisation gradually reared its head decades before the 1991 crisis. The shove needed for deregulation and privatisation might have been a godsend. But to learn from China means to adhere to the need for constant adaptation in mediated doses — so as not to shock the system into the barrage of transitional bottlenecks that Russia suffered. China, after all, still operates to a great extent under the socialist mechanism, and also happens to be the only economy that can be deemed more prolific and successful than India's. India has the demographic composition (higher population growth) and potential to overhaul the Chinese; the rest is a question of policy.

Though the financial crisis had a comparatively diminutive impact on the Indian economy, there remain niggling issues. Slowing growth, though not the most pressing concern, is a problem considering the high rate of inflation. Rising GDP per capita doesn't do much good if it is outpaced by the cost of living. The prospect of overheating undoubtedly plays on the minds of central bankers and policymakers in the country. Instances of corruption often grip proceedings and cause multiplicative setbacks. One issue is that the presence of unethical business practices repels foreign investment. Conversely, ousting personnel at an administrative level warrants the auditing of entire projects and organisations — causing time delays and various other inefficiencies. Corruption also dents the country's tax base on two levels — directly, then through the disdain of the population towards public officials. Efforts to improve infrastructure are the most affected by such predicaments. Public-sector projects of this nature are also pegged back due to outdated legislation. Laws instilled in 1894 still govern the process of acquiring land. 70 per cent of infrastructure projects in India are delayed for this reason.

Negative aspects

India's labour market also bears restrictive traits. To mitigate this point and the figures that point towards a burgeoning and dynamic workforce, one must veer away from quantitative data and comment on a certain je ne sais quoi regarding the country's people. They do seem to have an inbuilt enterprising trait and work ethic. There might not be a strict basis for such a statement, but a closer look into what has transpired despite a less-than-ideal operating environment only suggests the same. Indian entrepreneurs are famous. Relying on the relatively new private sector, the country hopes to be the world's third-largest economy by 2030 based on current growth rates (from being the tenth largest currently). Ten million people join India's working class, and 25 million are born every year. Entry-level positions are paid the proverbial peanuts by most global benchmarks. A high urbanisation rate also means that a large number of workers are coming from rural backgrounds that denote the lack of a pertinent skill set. In line with this trend is the fact that agriculture now accounts for less than 15 per cent of GDP, whereas that number was nearly double 20 years ago. The services and industrial sectors respectively have not risen as steeply as farming has declined. Inflation on average has outstripped per capita income growth. Earlier this month, a panel of top economists lowered its forecast for economic growth this fiscal year to 8.2 per cent against 8.5 per cent the previous year. Ingenuity has persisted where opportunities may not have. The country's demographics are generally favourable — an increasingly young population is strengthening the ratio of those who are contributing to dependants and pensioners — an aspect of the future that is brighter than China's.

Trade is an area to be praised. Self-sufficiency as well as signs of protectionism are still apparent — for example India is the second- largest producer of sugar in the world, but consumes almost all of it domestically. Exports are, however, surging. India has a trade surplus and its foreign reserves now total more than $300 billion — the fifth largest in the world. This puts the country in stark contrast to its state in 1991. There are problems with regard to energy that tie into issues of policy. The country is subject to power outages. Privatisation beckons.

All of this can be perceived as a cricket game. A couple of good overs that set the pace for the first 20 cannot be counted on indefinitely. The endgame will depend on a revision of strategy and an address towards the current state of affairs. India could by all means saunter along as it is — it would likely persist in its positive direction. Growth is as high as could be hoped considering the foundation on which it is built. A back-to-basics approach is needed. The 1991 reforms did well to give the country spending power and significant global clout. Debt to GDP is a manageable 66 per cent and the budget deficit stands at 8 per cent. Policymakers have wiggle room with regard to spending on infrastructure. Transport systems, education and power are all areas in which India could improve. There are still sectors that could do with privatisation and industries that could benefit from further deregulation. India's government should concentrate on functioning in the more conventional sense — focus on tax earnings and spend on facilities for taxpayers. Laissez-faire can do the rest.