The Indian sub-continent gained independence from the British in 1947. The British had laid the foundation of the Indian economy and unified the country. Their rule however, did not empower the Indians. The Indians, galvanized by Gandhi managed to wrestle power from the colonialists. On gaining independence, the country continued on the ‘Gwadeshi’ philosophy of self-sufficiency. The country industrialized along socialist policies modeled on the Soviet Union command economy. The government closely regulated the economy. It put great emphasis on agriculture, being the major employer in the economy. 72% of population and 45% of the budget was in agriculture. While agricultural production grew over the year, the GDP growth stagnated at below 3.5%. (Vietor, Richard and Thompson, Emily, 2006)
In the 1950s and 60s, the budget had an ever increasing budget deficits. The country could not secure either foreign aid or domestic funding. It currency was further devalued. Its economy was also weakened by severe droughts and the oil crisis of 1974. Indian economic woes continued all through the Eighties. It experienced Balance Of Payment problems even as it continued with it protectionism. It retained its socialist policies and strengthened its ties Soviet Union. The Soviet was the main destination of Indian exports. It also gave India weaponry and financial support.
On the onset of the nineties, Communism fell. The Soviet Union became balkanized. India had to turn to the West for aid that had conditions attached. The Indian economy growth rate hitherto averaged at 3.5 % since independence. This was as a result of several challenges facing the country.
At independence, the country had very diverse people with difference cultures and religions. It was hard to bring these people under one nation. The country remained highly polarized. The country engaged its neighbour, Pakistan in numerous wars over the Muslim state of Kashmir claimed by both side. The two countries entered an arms race. It also went to war with China in 1962. Eastern Bengal also broke away to form modern day Bangladesh. These wars presented a distraction from economic advancement. They drained the country’s resources and presented a problem of resettling Hindu refugees from Kashmir.
The country also had command economy that was largely inefficient. It determined who was to produce, the production rate and location. It favored of a few family business. The government also exercised strict protectionism. Foreign company investments were capped at 40%. The government also enforced punitive licensing on private firms expansion. In a bid to encourage homegrown innovations, it put high tariffs on imported producer goods. The economy was dominated by numerous inefficient cottage industries. Its exports were low with little value addition. There were strict price controls and a regulated currency. It also had a skewed tax regime. The government also subsidized numerous non-performing parastatals. In the absence of competition, the counting developed huge inefficient bureaucracies. (Vietor, Richard and Thompson, Emily, 2006)
The sub-continent also experienced exponential population growth. The over 1.05 billion population put pressure on food production, land and employment opportunities. Illiteracy levels were also high hampering manpower development. The population also strained the sparse infrastructure.
With the fall of the Soviet, India had to accept Western aid conditions under the Washington consensus. It had serious BOP problems and could not raise domestic funding. The planned economy had clearly failed. The Washington consensus stipulated the country opens up the economy and reduce government subsidization. The government also had to liberalize its economy and be more receptive to F.D.I. It also had to stick to its budget and review its tax system. It also had to raise its budget allocation on health and education. The country under Rao’s leadership started implementing the conditions.
The programs aimed at reducing the trade deficit, boosting exports and savings, eliminating bureaucratic inefficiencies and further reducing poverty. It aimed at economic recovery and stabilization. The economy grew after implementation of the SAPs for a few years but later slumped. Agriculture, public administration and defense remained the main recipients of government expenditure. Direct taxes were reduced while several barriers were abolished. Tax revenues also grew as the tax base was broadened.
In real terms however, the economic growth was not very significant. The liberalization of the economy led dumping of substandard goods and obsolete technology. Foreign investments also stunted homegrown initiatives. The nation experienced high-income inequalities. A big proportion of the population could barely afford basic services. This SAPs were a foreign solution to Indian problems. However, the consensus can be credited for laying the foundation for economic advances India is making in the 21st century.
The Hindu-Muslim conflict that had caused the war with Pakistan ranged on through the years. India has a Hindu majority but some Northern states has a big Muslim presence. Pakistan backed by the West gave the Muslim dominated states support in their attempt to secede. India opposed these secession attempts, as they would have fueled further secessions. Hindu extremists also opposed any empowerment of the Muslim minority. These were two hardliners who would not negotiate. This conflict drains the country a lot of resources. There also exists a conflict between Sikh hardliners and Hindu extremists. The country also faces discrimination along the rigid caste system. There exist huge imbalances between the classes both economic and political. (Vietor, Richard and Thompson, Emily, 2006)
The country has persistant deficits fueled by politics. The ruling party cannot cut expenditure in some areas for political survival in a very competitive political arena. The treasury cannot reassign its funding to key areas of development and achieve full economic growth potential.
India is an attractive destination for foreign Direct Investment. It has a big population to provide a big market and cheap labor force. Its literacy levels have also gone up. The government investment in infrastructure and manpower development is huge. This is despite many challenges in the form of corruption and government red tape. The privatization program is also slow. Religious polarization and a growing population also present a big challenge. But these risks can be overcome and are far out weighted by the benefits of investing in India.
The IT sector presents the best investment opportunities in India. It is a major outsourcing center. Education institutions are churning out highly skilled but cheap labor. This services sector has become a big employer and a major component of the country’s exports. It also has huge growth potential.
Vietor, Richard, and Thompson, Emily, 2006. India on the Move.