India attained independence in 1947 and since then, the government of India adopted the strategy of protecting the economy from direct and fierce competition from foreign companies. In order to do this, it adopted the ISI model (Import Substitution Industrialization Model). As the focus of the government was on making the economy closed to foreign competition, the decision to adopt the ISI model was in tandem with the focus of the company. The model was based on bringing upon regulations in the private as well as public sector along-with tight regulations in the field of trade and foreign direct investment (From “Hindu Growth” To Productivity Surge: The Mystery of The Indian Growth Transition 2004). In comparison to other economies of the world, Indian economy was much closed. It could not sustain in the end because it led to encouragement of inefficiency in one of the most crucial sectors for growth in any economy i.e. the manufacturing and the industrial sector. For example, the average Gross National Product per capita until initial years of 1990s was as low as $2301 (Goyal & Rao 2013). The performance plan for growth in India is written for every five years. From 1950-1980, the five year plans were not able to surpass the targets they had set. The growth rate was as low as 3.5%. Therefore, India experienced a slow growth rate from the period of independence until 1991. The Hindu rate of growth rate was 1.7 per cent from 1950-1980 in per capita terms. The bureaucratic structure of the government of India including the suffocated private economic activities under controls of the bureaucratic impediments also contributed to slow economic growth rate (From “Hindu Growth” To Productivity Surge: The Mystery of The Indian Growth Transition 2004).
When Narsimha Rao became the prime minister of India, the country was suffering from huge balance of payment crisis owing to very high rates of interest, and inflation that was on high ride due to the fall of the major trading partner of India i.e. Soviet Union at the time revolving around 1991. All these instances forced Rao to make an urgent call for monetary help from IMF (International Monetary Fund). The IMF made gave its authorization for the loan, but it also prescribed ten reforms without which India could not get the loan. It included policies that were focused on stimulating growth and reaching an environment that was stable (From “Hindu Growth” To Productivity Surge: The Mystery of The Indian Growth Transition 2004). Another most important prescribed reform was to make the role of the government and its bureaucracy minimum in taking the economic decisions. It worked well for the economy of India and its growth. These market reforms resulted in reduction of the fiscal deficit of India from 9.4% of GDP in 1990-1991 to 6.5% of GDP in the year 1998. Furthermore, there was a significant drop in the inflation rate from 7.5% in the years of 1980s to 6.3% in 1990s (From “Hindu Growth” To Productivity Surge: The Mystery of The Indian Growth Transition 2004).
A key feature of the economy of India in 1980s was faster growth of public expenditure on comparison to the ability of the system to collect taxes and generate revenues from other sources. By the end of years of 1980s, the revenue was registered to be less than 60%. The Washington Consensus strategy worked well. It led to substantial rise in the total expenditure of the Central Government. It rose from 60% in eighties to 70% in early 1990s and by the year 2000, it rose to 84 percent (From “Hindu Growth” To Productivity Surge: The Mystery of The Indian Growth Transition 2004).
Hindi-Muslim frictions play a significant role in the economic growth and policies of India. Geographic and religious frictions disrupt the process of national politics. There are nuanced connections with the growth of the economy and conflicts. India has long witnesses the conflict and tension between Hindus and Muslims. Pakistan, Afghanistan and Iran are in the neighborhood of India which the contact between these two religious groups constant. There have never been peace terms among these States. Thus, this demographic fragmentation has led to creation of inequality and it also promotes negativity among various related castes in India (Alvin 2009). As a result, the civil society of India is usually subordinated to the political society of India. The civil society is very restricted owing to this demographic segmentation. The political society is not genuine and honest. The political parties in India not only monopolize the channels of political influence but it also exerts the power in terms of what kind of agenda, issues, claims and even the identities enter the political arena of India. Thus, economic decisions are not solely made on the basis of the market situation (Alvin 2009).
Huge fiscal deficits creates problems for the government to execute the policies and plans for attaining the targets of five year plans.
Since the adoption of liberalization by the government of India in 1991, the place has shown promising factors in the field of foreign direct investment. There is progressive liberalization in foreign trade policy and capital account. There are strong macroeconomic fundamentals, large population to cater to, growing size of the economy and rise in the per capital income of Indians since 1991 (Academic Foundation 2004). The decision of the Indian government to open up the economy and embrace the phenomenon of globalization has attracted large business corporations to invest in India. In the era of post liberalization, the Indian government has taken a number of initiatives to attract FDI investors in India. There is allowance of 100% FDI today that creates an automatic route for FDI investment in various sectors in India. Macroeconomic factors such as high disposable incomes, emergence of middle class and availability of competitive workforce at low cost makes India an attractive site for FDI inflows (Academic Foundation 2004).
Academic Foundation. 2004. Reports on Investment Approval and FDI in India. Academic Foundation Publisher.
Alvin. 2009. The Indian Economy Since 1991: Economic Reforms and Performance. Pearson Education India.
From “Hindu Growth” To Productivity Surge: The Mystery of The Indian Growth Transition. 2004. [Online]. Available at: http://www.hks.harvard.edu/fs/drodrik/Research%20papers/IndiapaperdraftMarch2.pdf [Accessed on: 26 January 2014].
Goyal, S.K. & Rao, K. 2013. [Online]. Available at: http://isidev.nic.in/pdf/wc_skg.pdf [Accessed on: 26 January 2014].