by Shreevats Jaipuria
It the late summer of 1991, three days after being sworn in as Finance Minister Manmohan Singh announced that India was on the verge of bankruptcy. India’s foreign exchange reserves had dwindled to dangerously low levels, only enough to support days of imports. The only way to bailout the economy was a short-term loan from the International Monetary Fund. The nation’s Gold, which is the ultimate symbol of pride in India, had to be flown out to London as collateral. This was followed by a gradual dismantling of the bureaucratic controls on industry and foreign trade and a devaluation of the currency – moving to a more market-oriented approach. It was out of pure necessity that India’s process of economic reforms began.
Not even the eternal optimist could have predicted the fairytale that followed. 16 years later, Mr. Singh, now prime-minister is now sitting on an economy growing at 8-9% annually, showing no signs of slowing down, a stock-market that has grown at rate of 45% (SENSEX in Rs terms as on November 23 2007) since his government came to office in 2004 fuelled by inflow of foreign capital, and an ever-increasing foreign exchange reserves that crossed $250 billion this year.
For the first time in India’s history, the last two decades have seen a movement away from agriculture as the largest sector of the economy. The absence of restrictions on foreign imports saw a surge in imports of capital goods, especially technology and machinery. Equipped with technical know-how and increased price competitiveness from a devalued currency, the Indian manufacturing came into its own in the nineties. Companies such as Reliance Industries, Tata Steel and Bombay Dyeing became world-class manufacturers of petro-chemicals, iron and steel and textiles respectively. Labor, which previously worked in agriculture, flooded newly developing industrial townships on the outskirts of Delhi and Bombay (now Mumbai). India seemed to be going down the same route taken by the previous Asian Tigers, which developed on the base of low-cost manufacturing.
But developments taking place some 17,000 miles away in the Silicon Valley in the late nineties were to change all that. Advancements in information technology had broken the monopoly of manufactured goods as the only item that could be traded internationally. The World Wide Web had made it possible for services such as tele-sales, customer-service and even medical transcription to be rendered from remote locations at negligible cost. This led to a growth in the demand for educated English-speaking individuals. Indian industry had finally found its niche. Equipped with a large urban workforce, which had been educated primarily in English, firms such as Infosys Technologies, Wipro Industries and Tata Consultancy Services became the center of a wave of outsourcing from high-cost countries in North America and Western Europe to India.
This growth in the service-industry, led to the formation of a class of urban middle-class Indians – Indians who craved for clothing from GAP, food from McDonald’s, and handsets from Nokia. India made the transition into a nation of a billion consumers. Growing consumerism induced both domestic and foreign investment, especially in sectors like real-estate, retail and telecom. Economic growth has in turn induced large inflows of foreign capital into the financial markets, which have led to an unprecedented bull run in the stock market.
There are however, a variety of challenges that still face the Indian economy and Mr. Singh’s present government in particular. They must ensure that India’s economic growth story does not end with manufacturing and service industries. Although the contribution of agriculture towards the GDP is steadily decreasing, the majority of the workforce is still engaged in this industry. Furthermore increased foreign capital inflows have led to a sharp appreciation of the Indian Rupee, which have damaged the price competitiveness of Indian industry. Lastly, the economy is showing some signs of overheating with high inflation rates, which would hurt the consumer. Although growth in the Indian economy is likely to continue, the pace of growth and its impact on the life of the people is likely to depend on the ability of the government to contend with these problems.