Liberalisation’s children, that is, those born after 1991, do not know the significance of July 24, 1991. The ball set rolling that day went on to spur India to claim a seat in the front row of the global economic order especially when the country, along with the global political order in the 1990s, was being transformed forever. As Prime Minister Nehru said, August 15, 1947, was the day of “India’s tryst with destiny”, ushering in political freedom, redeeming a pledge made long ago. But India had to wait another 43 years to acquire an economic and entrepreneurial dimension that resulted in full freedom for India’s innate entrepreneurship, innovation, intellectual ability, and soft power.
When the Indian polity and the economy were sliding downhill, The Economist magazine in a lead article in April 1991 described India as a “Caged Tiger” – a tiger that had willingly walked into a cage. It may be difficult for millennials to comprehend the situation inviting such a description of the country. The following anecdotes may give them an idea of how dire the situation was.
In the early 1980s, a non-resident Indian (NRI) from Hong Kong wanted to make calculators in India in collaboration with the US firm Texas Instruments. The latter was then the world’s leading maker of calculators and electronic business machines. The government had set up a special economic zone (SEZ) in Santacruz, Bombay, specifically to encourage NRIs and resident Indians to invest and produce goods for both domestic consumption and export. After a wait of 18 months, the Indian licensing authority permitted the investor to make a few thousand machines, because in the official mindscape that was the size of the expected market for calculators. According to reports circulating at the time a close aide of the prime minister, a scientist who was an adviser on electronic industry matters, had said that calculators had a limited market and were not a priority.
He seemed not to have realised that the technology embedded in a machine like the calculator does not stand still and often gives birth to disruptive new technologies and businesses. For example, the Japanese Walkman came out of the radio and tape recorders, according to its parent company, Sony.
This tale of woe concerning calculator-making was narrated to the finance minister of India, VP Singh, who visited Hong Kong for an investors’ conference in 1984 (I was present at this meet as a news reporter). An NRI from Hong Kong narrated his experience of operating an export production unit in the Santacruz export processing zone (EPZ). According to him, it took him weeks to import vital spare parts and he had to grease the hands of several customs officials before he was allowed to export anything from this dedicated EPZ. On the other hand, his export–import firm in Hong Kong was able to import an item required for making any electronic equipment from Latin America and export the final product with the imported part fitted in to Australia in a matter of five days.
The ease of doing business in Hong Kong had enabled a few thousand Indian entrepreneurs to contribute nearly one-third of the export earnings of Hong Kong, then a British outpost. According to a former official of the Planning Commission, when the seventh five-year plan (1985–1990) was being prepared in 1984, the demand for TV sets for the entire five-year period was estimated at one million. Around this time, an upstart Indian firm put out advertisements that it had obtained technology from Sony of Japan to produce TV sets and invited customers to deposit Rs 2,000 as an advance booking amount.
In a few months, it collected several crore rupees from customers. This story in the media forced the Planning Commission to substantially revise its forecast of demand for TV sets and the production capacity to be permitted. But the permission for higher capacity had to be given exclusively to the small-scale sector, effectively denying TV production the economic advantage of scale, making products more expensive and poorer in quality.
The IDRA and other laws and institutions it spawned stifled competition and entrepreneurship, shutting the door on the flow of technology, capital and other external economic forces and virtually creating a domestic sellers’ market. A whole range of bureaucratic institutions such as the Monopolies and Restrictive Trade Practices Commission (MRTPC), Directorate General of Technology and Development, Import and Export Controller and a host of others could interfere with any entrepreneurial activity at any time. This was also known as the “import-substitution economy”.
Politically, the IDRA was a holy cow because under the socialist economic model the state was expected to control the commanding heights of the economy. This policy had been adopted in the 1950s by the Congress government headed by India’s first prime minister, Jawaharlal Nehru. This was partly because availability of private capital was scarce, and the policy served to ensure that vital projects with long gestation periods and high capital intensity were unattractive to private sector industrialists. These were funded by the government so that India could build the requisite capabilities. The private sector willingly supported this policy and profited by becoming suppliers to government companies. However, over the years, the policy transformed into a labyrinthine maze of bureaucratic rules and institutions that stifled genuine enterprise.
As part of a severe import substitution and “self-reliance” policy, soaps, detergents, radio or TV sets could not be marketed under foreign brands. Some of these attitudes stemmed from the Gandhian thinking and values of self-denial that were idealistic and motivating during British rule but did not serve aspiring citizens post-Independence. Typical of the prevalent mindset was the declaration in a government budget (1970) that refrigerators and air conditioners were “luxuries” deserving of prohibitive taxes. It is difficult to believe today that this budget wanted to tax maida as it was mostly used in those days to make bread which was thought to be consumed by the wealthy.
Advertising such products and jewellery on electronic media was banned as part of shunning items of conspicuous consumption. Only public sector companies, not private companies, could be named in government-controlled news media. Investment bankers and stockbrokers were officially denied free access to economic and financial news from across the globe.
There was a host of other such policies, ostensibly to promote indigenous entrepreneurship. For instance, production of most consumer durables was reserved for the small-scale industries, which did not have the advantages of scale and technology, and in an economy of shortages the consumer had little choice. The IDRA epitomised the political mindset that had translated into a much-venerated socio-political philosophy influencing economic policy.
Had the IDRA not been abolished in 1991, today if someone wanted to be an entrepreneur or a manufacturer in India, they would first have to obtain a hard-to-get licence from the central government. Then they would need to apply for approval to import machinery and equipment if they were not available in India, which was often the case. The entrepreneur’s wait got further extended if they chose to import technology – they would have to satisfy official regulators that the particular technology was unavailable in India. A further hurdle had to be crossed to buy equipment or technology abroad – they would have to obtain a foreign exchange permit.
The most difficult licence to get was one to raise capital from the market. It was the government that decided how much capital industrialists could raise, what they produced and how much they produced. In the 1960s, a government-appointed committee (Hazari committee) had revealed that a handful of business houses with political connections had managed to corner most industrial licences to block competition but they had not used the licences for either investment or production, thus creating artificial shortages and a sellers’ market. When such bureaucratic controls prevailed, corruption flourished.
Excerpted with permissions from India’s Tipping Point: The View from 7 Race Course Road, S Narendra, Bloomsbury.
