On Business: India's path to liberalisation

India has never followed the normal patterns of capitalism and democracy, but its entrepreneurial spirit is flourishing.

by R Gopalakrishnan
Last Updated: 23 Jul 2013

The world is passing through strange times. A large part of the world has huge savings and the US is the biggest borrower. The IMF has very few clients with a balance of payments crisis; in fact, it is the US that is experiencing the greatest balance of payments stress. Global growth is not led by just a few countries; for example, sub-Saharan Africa, which includes South Africa and Nigeria, is growing at 5.5% compared with 3% in the 1990s. Ten out of 24 emerging markets are experiencing growth rates of 7% plus, including Pakistan, Argentina and China.

India's performance too has been impressive with growth rates of more than 8% in recent years. While the story of India's economic liberalisation is known, the societal and psychological liberalisation of India are not well known. These have huge implications for the country and the sustainability of her future role in the global economy.

In 1993, the 73rd amendment to the Indian constitution was passed, resulting in mandatory elections in several hundred thousand village clusters (India has 600,000 villages). By law, a third of those elected had to be women.

As a result, a staggering 3.2 million local legislators have been elected at the village-cluster level, a million of them women. The stirrings due to local empowerment and the positive role of women in achieving social change are heartening. The type and scale of social change that will follow are likely to be unprecedented.

In all countries, urbanisation drives economic growth and social change.

Just 40 years ago, there were only eight Indian towns with a population of more than 1 million; today, there are 36 such towns. The software and BPO activities used to be centred in a few metropolitan towns; today, medium-sized towns such as Coimbatore in the south and Meerut in the north are growth centres for such activities.

My father's generation grew up amid the passion of the national independence movement. My generation grew up with an obsession about India's poverty, fanned by austere socialism and policies of distributing poverty. My children's generation is infected with the growth virus, seeking out opportunities within and outside the country.

Unlike Japan, Korea and China, all of which had two or three centuries of economic and social isolation during the past few hundred years, India has never suffered from isolation. Even the 43 years of economic insularity from 1947 to 1990 were an aberration in a long tradition of vigorous entrepreneurship.

Indeed, for many centuries until 1700, India, along with China, had been the entrepreneurial engine of the world. The industrial revolution shrank the shares of both countries, but the process has begun to reverse in the last 15 years. India is expected to account for 8% of world GDP by 2015. The young in India are inheritors of a centuries-old and vigorous entrepreneurial gene, which, mercifully, colonialism and socialism have failed to quell. The entrepreneurial mentality, once fired, is contagious; it creates a herd mentality, like gold prospecting.

Tata Group has spent $2 billion buying British tea company Tetley, British soda ash company Brunner Mond and Korean truck-maker Daewoo, and winning the contract to run the Pierre Hotel in New York. Indian companies are estimated to have spent more than $10 billion over the past five years buying up companies in Europe, Asia and a few even in the US. The most telling evidence of this vigorous gene is that several Indians, unknown just 15 years ago and not inheritors of a family business, are now listed in the Forbes list of global billionaires.

The government has lowered tax rates, yet increased its revenue due to growth. These larger tax revenues are at a peak as a percentage of GDP compared with the past, and they have enabled the government to allocate more resources for rural India and the social sector. Full-franchise democracy is a young form of governance. Historically, even in Europe and the US, capitalism came first with the industrial revolution, followed by constitutional liberalism, and full-franchise democracy came last - after all, women and blacks have had the vote only in the last 80 years. Even South Korea, Thailand, Taiwan and Malaysia first liberalised their economy, then the legal system, and, decades later, held some form of elections.

In 1947, a young India adopted a young form of governance, democracy, but in a different sequence to any other country in the world. First came full-franchise democracy and then came constitutional liberalism; capitalism has been unleashed only during the last decade, after being suppressed for a long time. Events in India may, therefore, appear incomprehensible to many. However, just as Christian theology states that pain, purgatory and penance must precede paradise, Indian democracy requires that some chaos will precede the calmer order that will inevitably follow. Even God made the universe in the same way.

Welcome to India, work-in-progress.

R Gopalakrishnan is executive director of Tata Sons

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