A tale of economic progression

While the 1980s saw the gradual introduction of reforms, the need to make them wide ranging began to be felt. The voices calling for looser controls and a greater orientation towards global trade and investment were now drowning out the voices who still advocated inward-looking policies. For decades, India had been held back by the belief that looking inwards would be the solution to its development puzzle. However, data and global experiences were increasingly refuting this school of thought. The collapse of the Soviet Union and the rise of China based on outward-oriented policies shifted the dialogue towards economic liberalization and the benefits of globalization. China had made substantial inroads into manufacturing by the beginning of the 1990s. South Korea, Taiwan and the other East Asian Tigers had reached high-income status by now.

1991: Independence for the Economy

In India, on the other hand, reserves had dropped to precariously low levels. By April 1991, it only had reserves to pay for a few weeks of imports, when the norm is years. India had to pledge physical gold for loans. With another forex crisis looming on the horizon, India had no recourse but to seek external assistance from the International Monetary Fund and the World Bank. While these came with certain conditionalities, the ambitious reform agenda had more to do with domestic will and conviction than influence from multilaterals.

The first step in arresting the decline was a devaluation of the rupee. Cumulatively, a depreciation of 19 per cent was seen in two stages on 1 and 3 July. While a devaluation of the rupee stemmed immediate outflows, wide-ranging measures were taken in trade, industry and financial policies, among others. These reforms would form the bedrock of the high-growth years in the future. Perhaps more importantly than unleashing growth in the future, these reforms changed the narrative around entrepreneurship, private enterprise and wealth creation.

In trade policy, import licencing was done away with. Exim scrips were introduced in July 1991, which would eliminate licencing for imports. Earlier, exporters were issued replenishment licences for their import requirements, Ahluwalia recounts in Backstage. The new exim scrips would be earned at a uniform rate of 30 per cent of exports, and perhaps crucially, freely traded on the market. They also acted as a form of automatic stabilizers, as Ahluwalia explains. If the demand for imports exceeded the supply of scrips, then their prices in the market would increase, bringing down supply. This was an important step in moving away from control- to market-based determinants. What is interesting to note is the speed at which these trade reforms were carried out. In less than a day, India’s trade policy stood transformed.

The other part was reducing import duties. Panagariya notes that the highest tariff rate in 1990–91 stood at 355 per cent and the average tariff rate was 113 per cent. By 1993–94, the top rate had fallen to 85 per cent. This shows the extent to which trade was liberalized in India. Export controls were also gradually done away with, opening up more sectors for exports. The exchange rate was also moved from being fixed to flexible.

Perhaps more significantly, a liberalization of trade in services also occurred, which would prove to be a game changer for the Indian enterprise. Sectors such as telecommunications, civil aviation, banking and insurance were slowly opened up to private enterprise after the reforms of 1991. Liberalizing the FDI regime was another crucial reform on the external front. Apart from foreign capital and stable forex inflows, this reform would also bring with it the much-needed access to technology. Majority ownership of foreign entities was now allowed—a marked change from the regime that limited foreign ownership to 40 per cent in the 1970s. Multinationals started making a comeback in India. Procedures were simplified and an ‘automatic’ route created. For applications beyond this automatic route, the Foreign Investment Promotion Board (FIPB) was created to evaluate applications. Foreign institutional or portfolio investments were allowed to invest in Indian capital markets beginning 1992, in a series of capital market reforms.

The dismantling of the Licence Raj was the highlight of the reform agenda. The Industrial Policy Statement was laid in Parliament just a few hours before the then finance minister Dr Manmohan Singh presented his historic budget on 24 July 1991. All industrial controls were dismantled. The MRTP Act was diluted, enabling companies to grow. Essentially, the reforms of 1991 were industrial delicencing reforms.

The Budget presented by Dr Singh in 1991–92 laid out the rationale and the need for reforms. The Tax Reforms Committee under the chairmanship of Raja J. Chelliah and the Narasimham Committee were constituted. Both would propose wide-ranging reforms. Some of the big-ticket reform recommendations of the Chelliah committee included reducing personal and corporate income tax rates, reducing import duties and moving towards a VAT, among others. A crucial recommendation that was implemented was the abolition of wealth tax. Furthermore, the number of tax slabs of personal income was brought down from four to three in 1992–93. Personal income tax rates were brought down from a high of 56 per cent to 40 per cent by 1994–95. Taxation reforms continued and culminated in the Budget of 1997–98, which further reduced income tax rates to 10-20-30 per cent. Corporate taxes were reduced to 35 per cent.

These reforms would not have been possible without the tireless efforts of those who worked behind the scenes. A.N. Verma, principal secretary to the PM, played a crucial role. I had the privilege of working with Verma as a young officer and learnt much from him on how to drive change. His clarity of mind and conviction have always stood out to me. As Rakesh Mohan recounts, Verma, in his earlier capacity as industry secretary, had already laid much of the groundwork for the industrial policy reforms of 1991. Ahluwalia, too, played a key role as commerce secretary. I had the pleasure of working with him, and he always stood out as a man with immense clarity of mind. No doubt, there are many others who played crucial roles behind the scenes. The political leadership of the time also deserves a lot of credit for building a political consensus around the reforms.

IT and ITeS: The Poster Child of Liberalization

A direct consequence of the economic reforms was the boom in India’s software industry. While the seeds of competitiveness were sown in the late 1970s and early 1980s, it is only post economic reforms that these companies became global giants. From $100-million revenue in 1990, the software industry brought home revenues of $1 billion by 1996, Kris S. Gopalakrishnan, one of the founders of Infosys, informs us.

In fact, the story of Infosys is perhaps synonymous with India’s software boom. Recounting to Vedica Kant, management consultant, author and historian, in an interview, Narayana Murthy recalled how tough it really was for Infosys. It took years to get a telephone connection. Banks did not understand the concept of software and required tangible collateral. By the time Infosys won its first contract, they did not even have enough money to buy their first computer. By offering on-site services to clients and paying an Indian salary to engineers, Infosys was able to negotiate advances with discounts to incentivize advance payments. This is how they were able to get the clients to finance their business. More international contracts followed and by 1987, it had set up offices in the United States (US), one on each coast.

The legendary former CEO of General Electric (GE), Jack Welch’s visit to India in 1989 proved to be a seminal moment for the Indian IT industry. This is around the same time that the business process outsourcing (BPO) industry saw its genesis. General Electric and American Express were pioneers in this space. As Nilekani explained, working with a leading global company made Infosys think differently and ultimately played a key role in its global expansion. In 1990, Software Technology Parks (STPs) were promoted by the Ministry of Electronics and Information Technology. These played a crucial role in the development of India’s IT industry. Here, an enabling environment was created for industry to grow. The STPs provided plug-and-play facilities and high-speed connectivity along with export benefits to help foster growth in this industry. India’s success in STPs can be thought of as analogous to China’s success with large-scale special economic zones (SEZs) in manufacturing.

(Excerpted with permission from Amitabh Kant’s ‘Made in India’; published by Rupa Publications)