30 years after liberalisation, businessmen are afraid to talk, let alone try

Illusions & Delusions

Thirty years ago, this month, the then Prime Minister Narasimha Rao, who had retained the industry portfolio with himself, dismantled the Licence-Permit Raj, an entangled web of bureaucratic control created by the craze for centralised decision-making, which for long prevented India from realising its true economic potential.

This very swift and efficient scissoring of the tangled web is often called liberalisation. Much was achieved with what was done. In 1991, India needed to borrow a $400 million loan by pledging gold, but now we have over $600 billion in reserves. India’s GDP has vaulted 10 times, from $270 billion to over $2.7 trillion, and per capita income is up seven times from $303 to above $2,000. GDP growth averaged 7% in the 25 years from 1992 to 2017, versus an average of 5% in the 10 years before 1992 (and 4% in the preceding 20).

As a result, poverty declined. Between 2004-5 and 2011-12, the last year for which official data is available, about 140 million people were pulled above the poverty line. Manufacturing employment grew fastest in the world after China, increasing by 7 million or 14% between 2005/2019. Till 1991, all of India existed in perpetual want -- be it a phone, an LPG connection, a car or even a scooter. But now, these and much more are often taken for granted.

But Narasimha Rao had then headed a minority government and the allies had had to be kept pleased. So, he had retained the scaffolding, the paraphernalia of the Licence Raj. This had not caused much concern as income growth indicators were doing well. However, the growth rates have dipped post-2016. Just before Covid, the ‘real’ rate of growth had slumped to 4% and, as inflation was then around 3%, the ‘nominal’ growth was about 7%. During Covid, the ‘real’ growth and the ‘nominal’ growth both slumped into the negative zone, while inflation has increased to over 6%. Growth revival is not happening despite policy intent. This growth collapse has not been witnessed elsewhere. Even Bangladesh has overtaken us on the per capita GDP parameter. A new reform drive is thus the need of the hour. But reform what, why and how?

The best way to resolve such existentialist issues is to focus on all, and not on some selected, facts. We are experiencing a more complex reality today than that witnessed in 1990-91. Though growth rates are negative, our tax collection has increased, and stock markets are booming. Assets managed by mutual funds have crossed Rs 33 lakh crore. Corporate profitability, though still below the 4%-plus range witnessed prior to 2011/12, has improved to 2.69%, well above the pre-Covid levels of 2018 and 2019. Exports and balance of payments are doing well. The ‘new’ internet-focused economy is booming, and India is in the happy state of having 100-plus Unicorns (start-ups valued above $1 billion) with new Unicorns emerging every odd month. So, what exactly is going wrong?

GDP is usually defined as ‘the sum of Consumption and Investment and Government expenditure plus Exports minus Imports (X-M).’ Currently, the government is firing on all cylinders and is investing massively in expanding roads, railways, renewable energy, etc. So, the G is hugely positive. Similarly, X-M is doing well, turning positive after quite a while. The problems faced are due to fall in the other two variables -- consumption and investment.

Consumption has collapsed because of Covid-induced lockdowns. It is stopping people from going out. This is what is creating havoc in a services-oriented economy. It will revive when Covid goes away but till then, it will remain a challenge. The only reform possible here is to accelerate vaccination and to provide cash aid to those who are locked out of jobs.

The reason for the collapse of private sector investment is more complex. It has happened despite an increase in profitability, a share market boom, a variety of tax inducements offered by the State, the production linked incentive (PLI) scheme and the lowest interest rate regimes ever seen post-Independence. Outstanding industrial credit, however, has fallen sharply these last few years, instead of rising. While no businessman is talking, people also ‘vote by feet’.

Truth is, an aggressive deleveraging of debt is happening in businesses too scared of taking any risks whatsoever, lest they fail, be slandered or prosecuted by multiple authorities. Some 7,000-odd high net-worth individuals (HNIs) now migrate overseas every year.

The engine of a capitalistic growth model elsewhere in the world is often called Schumpeter’s “gale of creative destruction” or the “process of industrial mutation that continuously revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Risk-taking there is thus celebrated. A private individual, Richard Branson, could dare to fly to the edge of space. Here, a business failure is often criminalised. The growth engine has thus stalled. So, we are left with a Shakespearean dilemma of what needs to be reformed.

Perhaps the starting point could be to dismantle/merge the multiple enforcement agencies created post-Independence to safeguard a shortages-oriented foreign exchange-starved economy. Have they not crossed the ‘use by’ date? We need to re-instil business confidence and boost demand to re-kindle the sense of euphoria.