The Long Road

Two events in the recent past have signaled a profound transformation in India’s economic trajectory. The first was the twentieth anniversary of economic liberalisation which was announced by then Finance Minister Manmohan Singh. Economic reforms have left an indelible mark on India’s growth story. It was a symbolic move which unshackled India from years of red tape which had stifled growth.

The second was the government committee’s recommendation to approve 51 per cent foreign direct investment (FDI) in multi-brand retailing. Kudos to the government for shedding its paternalistic image which had hitherto prevented it from taking politically sensitive decision and espousing forward looking policies which are associated with an adverse effect in the short term. Needless to say that the concerns are galore but this is a very bold step from a policy perspective.

                                                                

These developments have once again allowed us to revisit the process via which economic reforms are initiated in a diverse democracy like India where priorities and concerns are bound to conflict. The evolution of FDI policies since 1991 has been fraught with a multitude of concerns and sentiments.

Former Prime Minister Narasimha Rao, who shepherded the economic reform process, was forced to consider the consequences any draconian policy change would have on the organized work force. Prior to embarking on any ambitious move, Rao appointed several committees to carefully vet the consequences of reform in any area. This was especially the case where the issues involved were more contentious: such as taxation, public sector and the languished financial sector. Rao was intensely averse to hurting the sentiments of any interest group since he was well aware of the fact that unionized workers, once provoked, could wreak havoc across urban India. Furthermore, organized labor constituted an important political force within the Congress itself.

Subsequent to liberalization in 1991, politicians carefully vetted the repercussions of any policy change. Even incumbents at the central level responded to the sentiments in their constituency. The ‘East India Company Syndrome’ had not petered out. The Bhartiya Janta Party (BJP) emphasized the need for ‘Swadeshi’initiatives. It advocated domestic liberalization and unsuccessfully instructed the government to eschew globalization. The Communist Party of India CPI (M) meanwhile, in line with its principles, decried the new policy on the grounds that it was anti-public sector.

The bewildering array of obstacles, both ideological and economic, the Congress government confronted ensured that the ride was long and far from smooth; punctuated by formidable challenges at some stages.

From 1996-1998 a series of motley coalitions led by Prime Minister Deva Gowda and Inder Gujral fumbled. In the midst of this turbulent time period, when the stability of the government was not assured, one could expect little progress in terms of economic policies.

So if the interest groups are always challenging the government, why has the reform process carried forward? This is because Indian politicians have one tool in their arsenal- obfuscation tactics. At times, one interest group would be provoked, but then it would be left alone for a while. Interest groups lack the ability to present themselves as a monolithic group. Indian politicians were also far too aware of the malleability of different interest groups. This was used as a potential source of leverage to further divide the interest groups and pursue economic reform by stealth. This ensured that critical decisions regarding FDI were made, but this was a slow and steady process.

By 2004, a consensus had emerged that FDI was important. There was a profound sense of confidence in ‘urban’ India regarding the prospects of the economy. The BJP, in a bid to harness this new found potential, spearheaded its ‘India Shining’ campaign in the run- up to the national election. But its efforts, as we know now, ended in vain. The Congress Party, under the leadership of Prime Minister Manmohan Singh has carried forward the reform process ever since.

During his tenure, Prime Minister Manmohan Singh has made some bold policy decisions. Despite the slew of corruption allegations, it is important to underscore that we have come a long way since the dark days of economic catastrophe in 1991, when India had to pawn gold abroad. And there is little reason to believe that the journey ahead will not contribute to greater economic prosperity.