Ancient Indian Economic Philosophy

• India had the largest economy in the ancient and medieval world from the 1st to 17th century AD
• India controlled between one-third and one-fourth of the world's wealth
• The economy consisted of self-sufficient villages and cities that were commerce centers

Ancient Economic Philosophy of India

• Arthashastra, by Kautilya (Chanakya) (321–296 BCE), is the earliest known treatise on ancient Indian economic philosophy
• Arthashastra is a handbook for King Chandragupta Maurya containing directives on how to reign
• Artha encompasses all aspects of material well-being, not just wealth
• Arthashastra is the science of material prosperity, or "the means of subsistence of humanity"
• The major focus of Arthashastra is on fruitfully maintaining/using land
• Kautilya emphasizes robust agricultural initiatives for abundant harvests to fill the state's treasury
• Taxes, equal for private/state-owned businesses, should be fair and easily understood
• True kingship is defined as a ruler's subordination of his desires to the good of his people
• Advancing the common good involved 7 vital elements: King, Ministers, Farmlands, Fortresses, Treasury, Military, Allies

British Rule in India

• The advent of Europeans and the British marked a shift in India's economic history
• The period of British rule can be split into the East India Company (1757-1858) and the British government (1858-1947)

Economic Impact of British Rule

• British manufacturing capabilities increased in the 18th century
• This created a need to increase raw material supply, find markets for finished goods
• India's foreign trade reversed from exporting manufactures to exporting raw materials
• Indian exports faced heavy tariffs, imports faced lower tariffs due to discriminatory policies
• Consequently, Indian goods lost competitiveness, domestic demand fell culminating in destruction of Indian handicrafts/manufactures
• The destruction of Indian manufactures led to adverse consequences for the Indian manufacturing sector
• Domestic consumers shifted demand to foreign goods, wanting to affiliate with western culture

Consequences of Damaged Production

• Damage to the production structure had far-reaching economic and social consequences
• It destroyed the internal balance of the traditional village economy characterized by agriculture and handicrafts
• Large scale unemployment and absence of alternate sources of employment
• Increased pressure on land, causing sub division/fragmentation of land holdings, subsistence farming, reduced agricultural productivity/increased poverty
• Imports of cheap machine-made goods made survival of domestic industries difficult
• Land tenure systems, especially the zamindari system, created a class focused on perpetuating British rule
• Excessive pressure on land increased demand for land under tenancy, zamindars extracted excessive rents/payments
• Absentee landlordism, high indebtedness of agriculturists, growth of exploitative money lenders, low attention to productivity led to agricultural collapse

Industrialization During Colonial Era

• Factory-based production did not exist in India before 1850
• Colonial India's industrial enterprises started growing in the mid-19th century
• The cotton milling business grew steadily through the second half of the 19th century, and achieved high international competitiveness
• India's cotton mill industry had 9 million spindles in the 1930s, globally 5th in number of spindles
• Jute mills expanded rapidly around Calcutta due to global demand, Indian jute occupied a large share of the international market by the late 19th century
• Brewing, paper-milling, leather-making, matches, and rice-milling industries developed
• Heavy industries like iron were established by British capital as early as 1814, and India's iron industry was ranked eighth in terms of output in 1930
• Before the Great Depression, India was the 12th largest industrialized country, measured by manufactured product value
• Producer goods industries did not show major expansion, due to pressure from English producers
• India's industrial growth was insufficient for economic transformation

Economic Status at Independence

• India was overwhelmingly rural, inhabited by mostly illiterate and poor people
• Society was stratified, with extreme heterogeneity
• The literacy rate was just above 18 percent, life expectancy was barely 32 years in 1951
• Poverty was in terms of income and human capital
• The policies in 1950's were guided by Nehru's vision to build a socialistic society with heavy industry along with the Gandhian philosophy of small scale/cottage industry/village republics

Post-Independence Indian Economic Policy

• The Nehruvian model supporting social/economic redistribution and state-directed industrialization came to dominate
• Centralized economic planning/direction was at the core of India's development strategy
• The Planning Commission of India was established to plan for economic development along socialistic lines
• Rapid industrialization of the economy was the cornerstone of Nehru's development strategy
• The bureaucrats/technocrats envisioned a significant role for the state in industrialization
• The Industrial Policy Resolution (1948) expanded the role for the public sector and licensing to the private sector
• It granted state monopoly for strategic areas like atomic energy, arms, ammunition, railways
• New investments in basic industries were exclusively given to the state
• The Industrial Policy Resolution of 1956 supported public sector expansion which resulted in dampening private initiative/enterprise
• Private investments were discouraged and this had long-lasting negative consequences for industrial growth
• India followed an open foreign investment/trade policy until the late 1950s

Economic Crisis and Import Controls

• A balance of payments crisis emerged in 1958 causing concerns regarding foreign exchange depletion
• Trade was gradually tightened, investment licensing was reduced for new investments requiring import of capital goods
• Comprehensive import controls were maintained until 1966
• Average annual GDP growth rate (1950–80) was a modest 3.5 percent, known as the 'Hindu growth rate'
• The focus was on capital goods and capital-intensive projects rather than consumer goods

Shifts in Economic Strategy

• The first major shift in Indian economic strategy was in the mid-1960s and agriculture was not given high priority
• Reliance on institutional models such as land reforms/farm cooperatives, not technocratic areas increased agricultural productivity at a slow rate
• Continuous monsoon failures caused severe droughts in 1966 and 1967
• The agricultural sector recorded negative growth and India faced a food problem
• The need for a jump in food grain production was vital
• Increasing agricultural productivity was given the highest priority, kick-starting government agricultural policy change
• A thorough restructuring of agricultural policy known as the 'green revolution' was initiated
• The green revolution was materialised by using innovative farm technologies, high-yielding seed varieties, intensive water/fertilizer/pesticides to significantly increase food grain production, enabling India to tide over the food problem.

Government Policies and Nationalization

• Extra administrative controls were introduced on trade/industrial licensing and a wave of nationalization was launched
• The government nationalized 14 banks in 1969 and another 6 in 1980
• The license-raj, autarchic policies, external shocks, and oil shocks contributed to decelerated growth lasting two decades
• India, practically a closed economy, missed opportunities created by a growing world economy
• Government policies aimed at equitable distribution of income and wealth killed the incentive to create wealth.
• The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, regulated large firms
• Restrictions were placed on licensing, capacity addition, mergers and acquisitions
• Policies restricted big business house expansion, kept their entry away from nearly all but a few capital intensive sectors
• The policy of reserving products for small scale manufacture was initiated in 1967
• It excluded big firms from labor intensive industries, and India was not able to compete in the world market
• Stringent labor laws also discouraged starting labor intensive industries in the organized sector.

Shift Towards Reforms

• Growing realization emerged among policymakers/industrialists that the strict regime was counterproductive
• Most controls/regulations had not delivered due to absent incentives/openness for sustained growth

Early Liberalization of Reforms

• Seeds of early liberalization/reforms were sown during the 1980s, especially after 1985
• Considerable efforts were initiated in different directions during the early 1980s, monetary policy, fiscal moderation and structural reforms
• These initiatives, spanning 1981 to 1989, referred to as 'early liberalization' aimed at changing the thrust on 'inward-oriented' trade and investment practices
• Reforms were 'reforms by stealth' to denote its ad hoc, not widely publicized nature
• These efforts started bearing fruit with higher growth rates during the 1980s compared to the previous three decades as the average annual growth rate of GDP during the sixth plan period (1980–1985) and the seventh plan period (1985–1990) were 5.7 and 5.8 percent respectively
• The early reforms of the 1980s covered industry, trade, and taxation
• The government also embarked on exchange rate management
• Delicensing of 25/more broad categories of industries was done in 1985
• Broad-banding was accorded for industry groups to allow flexibility/changes without fresh licensing
• The asset limit for MRTP firms was raised from 20 crore to 100 crore in 1985-86
• Multipoint excise duties were converted into a modified value-added (MODVAT) tax
• The Securities and Exchange Board of India (SEBI) was established as a non-statutory body on April 12, 1988
• The open general license (OGL) list was steadily expanded
• Export incentives were introduced and expanded
• The exchange rate was set at a realistic level which helped expand exports
• Price and distribution controls on cement and aluminum were abolished
• Based on the real effective exchange rate (REER), the rupee was depreciated by about 30.0 per cent from 1985–86 to 1989–90
• The budget for 1986 introduced policies cutting taxes further, liberalising imports and reducing tariffs
• The economy's growth was thwarted due to structural inadequacies/distortions
• Private sector investments were inhibited by licensing policies, public sector reservations, government controls
• The public sector leading manufacturing/service sectors was plagued by inefficiency/government controls/bureaucratic procedures, had very low returns on investment
• The MRTP act created restrictive conditions creating barriers for entry/diversification/expansion
• Import controls ensured that foreign manufactures/components did not cross the borders domestic industries being protected
• Foreign investments/competition were not allowed

Economic Reforms of 1991

• India embarked on bold economic reforms in 1991 under the Narsimha Rao government
• The fiscal initiatives for enhanced economic growth saw government revenue expenditure exceeding revenue receipts
• The fiscal deficit was financed by domestic and external debt leaving unsustainable balance of payments
• Persistent huge deficits led to swelling public debt and a large proportion of government revenues had to be earmarked for interest payments.
• The surge in oil prices triggered by the gulf war in 1990 put a severe strain on the balance of payments
• Foreign exchange reserves touched $1.2 billion, barely sufficient for 2 weeks of imports
• Tightening of import restrictions to muster forex resulted in reduction in industrial output
• India had to depend on external borrowing from the International Monetary Fund
• IMF put forth corrective policy measures before additional drawings could be made
• The fragile political/economic situation ballooned into a 'crisis of confidence'

Paradigm Shift in Indian Policy Reforms

• The year 1991 marked a paradigm shift in the Indian policy reforms
• In 1991, collapse of the Soviet Union/success of China were lessons, with outward oriented policies
• The reforms aimed to move the economy toward greater market orientation and external openness
• The reforms, known as liberalization, privatization and globalization, spelt a shift in economic philosophy and change in approach
• The objectives were reorientation of the economy to a 'market friendly' or market oriented economy
• Macroeconomic stabilization through fiscal deficit reduction was another objective

Reform Measures

• Reform momentum originated in economic, fiscal, and balance of payments crises as the reform package was structured as a mutually supportive reforms package
• The policy paradigm focused on shifting from central direction to market orientation
• Policies can be classified as stabilization measures (short term to address inflation and adverse balance of payment)
• Structural reform measures were of a continuing nature aimed at bringing in productivity and competitiveness by removing difficulties in the economy sectors

The Fiscal Reforms

• Escalating deficit levels rendered the stabilisation efforts complicated
• Fiscal discipline by reducing the fiscal deficit was pursued due to excess domestic demand, surge in imports and the widening of the current account deficit (CAD)
• Finance was attempted by radical measures to augment revenues to reduce government expenditure
• A stable and transparent tax structure was put in place and better tax compliance ensured

Thrust on Expenditure

• The government thrust was on curbing government expenditure
• Subsidies were reduced and unnecessary ones abolished
• Part of government's equity holdings in select public sector undertakings was put up for disinvestment
• Private sector participation was encouraged

Financial Discipline

• The government entered into an agreement with the Reserve Bank in September 1994 to reduce the fiscal deficit to nil by 1997–98

Monetary and Financial Sector Reforms

• Financial sector reforms were introduced for making the sector more efficient and transparent
• The focus was mostly on reducing the burden of nonperforming assets on government banks
• Sustaining competition, and deregulating interest rates were sought
• The measures involved interest rate liberalization, the reduction in controls on banks by the Reserve Bank of India in respect of interest rates chargeable on loans and payable on deposits.
• There was to be the opening of new private sector banks/ facilitating competition among the sector, simultaneously removing administrative constraints that reduced efficiency
• The reduction was in reserve requirements (statutory liquidity ratio (SLR) and cash reserve ratio (CRR))
• Liberalisation of bank branch licensing policy/granting freedom to banks in opening, relocating, or closing branches followed
• Prudential norms of accounting were implemented to ensure that the books of commercial banks reflect an accurate and truthful financial position

Reforms in Capital Markets

• The Securities and Exchange Board of India (SEBI) was set up in 1988 and given statutory recognition in 1992
• SEBI has been mandated as an independent regulator of the capital market

The Industrial Policy

• The 'New Industrial Policy' was announced on 24 July 1991 with substantial deregulation of the industry
• There was to be an end to the 'License Raj' removing licensing restrictions for all industries except for 18
• Public sector was limited to eight sectors based on security and strategic grounds – railway transport, atomic energy

Other Policies

• The Monopolies and Restrictive Trade Practices (MRTP) Act was restructured and the provisions were repealed.
• There was to be liberal participation by the private sector and to narrow areas reserved for public sector
• Foreign investment was liberalised as automatic approval was introduced for foreign direct investments up to 51 percent
• External trade saw further liberalization by substituting listing license-free items with the negative list approach
• The consumer goods which remained under licensing were made free 10 years later
• There was to be a devaluation of the Rupee by 18% against the dollar
• Government holdings of equity share capital of public sector enterprises was disinvested

Trade Policies

• The reforms aimed at dismantling quantitative restrictions on imports and exports
• They focused on a more outward oriented regime with phased reduction and simplification of tariffs, and removal of licensing procedures for imports

Indian Economy After Reforms

• India has grown with the integration if its economy with the global economy
• The economy has moved towards a market oriented nature, with a reduction in government's market intervention
• There is growth in the private sector investment and initiatives
• A number of sectors have achieved high standards
• Stable investment inflows have taken place

NITI Aayog

• On 1/1/2015, the Planning Commission was replaced by the National Institution for Transforming India (NITI) Aayog
• It will 'spur innovative thinking by objective experts' and promote co-operative federalism' by enhancing the voice/influence