The long, winding road to a free market

For Indians under age 30, who make up more than half the country’s population, it’s perhaps hard to imagine a world without consumer choices, but which had government restrictions on every aspect of running an enterprise, limits on money for foreign travel, and other such shackles in day-to-day life.

Yet, this was what India looked like for more than four decades following Independence in 1947.

“When I set up a tannery business in 1965, I needed a bewildering number of permissions and licenses,” recalls Rafeeque Ahmed, Chairman of the Tamil Nadu-based Farida Group, who today runs one of the country’s largest shoe and leather goods manufacturing and exporting enterprises.

Ahmed’s business did expand in the licence era, but the going was tough. “The government’s trust in businessmen ran low, so it restricted and monitored all of their activities. It would tell you how many pieces of leather you could make, and if you exceeded the number there would be a penalty. If you wanted to expand, approvals could take a year or more” he says.

The rationale for control

But there was a purpose behind the licence control regime, explains Biswajit Dhar, Professor, JNU.

Independent India, he notes, had inherited a handful of big industrial houses – the Tatas, the Birlas, and the Walchands – who controlled the industrial space. To ensure that entrepreneurial power was not so concentrated, the expansion of existing capacities was managed. The government effectively restricted licences to big houses and tried to promote others, especially small enterprises, Dhar adds.

But like any system controlled by government and bureaucrats, this went awry. “There was reservation to help the small sector come up, but the licences were manipulated. The big guys got them by breaking up their capacities into smaller plants,” Dhar recalls. So, rather than seeing smaller players coming up, the stranglehold of big business was strengthened.

Given the government’s heavy hand, GDP growth was sluggish, averaging 4.4 per cent a year during the 1970s and 1980s.

“For my overseas business trips, foreign exchange was severely restricted,” Ahmed recalls. For a trip in 1965, he was allocated only £13 for a day’s expense – grossly inadequate for the hotel, food, travel and business meeting expenses!

The dawn of reforms

It was only when a deteriorating foreign exchange position led to a full-blown balance of payments crisis in 1991 that the PV Narasimha Rao government, with Finance Minister Manmohan Singh, began dismantling economic barriers. Industries were freed to a large extent from licensing controls, foreign investments were encouraged, restrictions imposed by the Monopolies and Restrictive Trade Practices Act were lifted, foreign technology collaboration was allowed and foreign trade was freed from controls.

The reform-driven, newly unshackled economy roared ahead. Foreign investments started flowing in, more businesses came up, and GDP growth accelerated, even touching a high of 9 per cent in 2007-08.

As Madan Sabnavis, Chief Economist, CARE Ratings, points out, “Market forces are at play in commodity prices, interest rates and exchange rates. Production is possible without any limits… and exports are largely allowed except in exceptional conditions for some farm products. Investment is permitted everywhere now with the restricted list for foreigners being limited.”

TV Narendran, MD and CEO of Tata Steel, echoes these views. “Citizens are now exposed to a much wider choice of products and services than earlier. The availability of personal loans at a reasonable cost has made consumer durables, automobiles and housing affordable for a larger section. The expansion of private enterprise has created jobs that were earlier not available,” he says.

But even three decades after the economy was opened up, some believe that the reform process is incomplete. The pace of opening up varied from one sector to another, and there is an unwillingness to accept market outcomes at times, Sabnavis adds.

The farm conundrum

Indicatively, he notes, “we have, for political reasons, pre-decided that farmers should get a higher price irrespective of market dynamics.” Similarly because the government wants interest rates to come down, it nudges the central bank, which in turn nudges banks, to lower rates. “Why not let banks decide based on their perspective?” he asks.

A generation of Indians have been lifted up by the economic growth of the past two decades, but there is still a need to bring more people out of their low economic bases, says Srinath Sridharan, an independent markets commentator.

“We are more digital-literate now, thanks to greater penetration of satellite TV and internet”, and this, he adds, has reduced the information asymmetry and levelled the playing-field of economic opportunities,

And yet, he points out, despite the removal of numerous licensing restrictions, businesses still have to comply with a spaghetti bowl of regulations. “We need to move to a ‘one country, one business, one compliance’ philosophy.”

Permissions and approvals can be given on self-declaration basis with random checks rather than inspection of every case, reasons Narendran.

With the Indian economy slowing down considerably in recent years, the time has come for a course correction, reckons Dhar.

“When you allow market forces to take over, industry should be in the driving seat and should spell out to the government what its aspirations are. This has happened in all mature economies – be it the US or Europe – but not in India, where the government still calls the shots. This has to change,” he says.

COMMENT NOW