The Economic Reform of 1991 (Part – II)

The Economic Reforms launched by The PV Narsimha Rao Government in 1991 marks its 30th anniversary this year. The economic policy changes of 1991 were the first major changes since Indian Independence – the main focus given was on government control reduction and opening the economy to international trade and capital flows.  During those years, India did not have sufficient foreign exchange reserves that could barely finance its three-week imports. Today, the scenario is reversed where imports can be well-financed for a longer period of timeframe. The reforms had a couple of positive and some negative impacts on the economy, which are explained below –

Positive Impacts

  • The government, after opening up the economy in 1991, has regularly reformed overseas direct investment rules and regulations in order to encourage more investors to invest in the country, and since then, FDI has steadily increased in India. India, today is one among the top 100 on Ease of Doing Business (EoDB). FDI in India increased from $97 million in 1990-91 to more than $ 81,722 million in 2020-21. During the 1980s, when the concept of FDI was encapsulated in India for the first time, only a handful of global firms had initiated operations with extremely high restrictive policy – allowing Foreign Investors to hold only 40% equity in Indian Joint Venture impacting their technology transfers adversely. But all such restrictions were lifted after the reforms of 1991. Removal of mandatory approvals requirements paved an easier way for technology transfers from the foreign parent firm to the Indian Joint Ventures (JVs). After all such ease of doing business strategies by the government for the MNCs, Indians then had access to affordable television sets, new cars models, consumer durable goods and the latest communication technology (Sony & Mitsubishi started their manufacturing in India). Additionally, FDI reforms generated additional jobs and induced employment, benefitting millions of youths by creating remunerative employment and entrepreneurial opportunities in the near future.

Foreign Direct Investment (FDI) is an investment made by a foreign entity (individuals/ companies) into a business of one country based outside. The investor acquires ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (host country). With FDI, foreign companies are directly involved with day-to-day operations in the country – implying that along with money, they also bring in knowledge, skills and technology. 

Info 1

  • Info 2During the FY2020-21, India attracted a total FDI inflow of US$81.72 billion which is higher than the last FY2019-20 of US$ 74.39 billion (10% higher). As said by the government that this huge inflow is due to a series of policy steps taken for improving Ease of Doing Business, and to attract investments into domestic manufacturing capacity.
  • In FY 2020-21, FDI equity inflow grew by 19%, US$ 59.64 billion compared to the previous year 2019-20 US$ 49.98 billion.
  • For the financial year 2020-21, in terms of top investor countries, Singapore with 29% is at the apex, followed by USA 23% and Mauritius at 9%.
  • In terms of top sector, Computer and Hardware sector tops the list with around 44% share of total FDI Equity inflow, followed by Construction (infrastructure) activities at 13% and services sector with 8%.
  • Major recipient states, under ‘Computer Software and hardware’ are Gujrat (78%), Karnataka (9%) and Delhi (5%) in FY 2020-21.
  • Sectors that have recorded more than 100% jump in equity during 2020-21 as compared to the previous year are construction (infrastructure) activities, computer software and hardware, rubber goods, retail trading, drugs and pharmaceuticals and electrical equipment.
  • Top recipient with 37% share of total FDI inflow has been Gujrat, followed by Maharashtra with 27% and Karnataka with 13%.
  • During FY2020-21, there has been a record increase of 227% and 44% increase in FDI equity inflow from the USA and UK, respectively, compared to FY 2019-20.
  • In terms of % increase, Saudi Arabia is the top investor for this year.
  • The foreign exchange reserves as of March 1991 stood at around $5.8 billion, declining even further, which eventually led to shipping out its gold to avoid further default. The crisis led to the liberalization of the Indian economy in 1991. A by-product of those reforms was an increase in reserves, which, according to the RBI’s annual reports, was largely driven by foreign direct investment in the early years. By March 1997, India held $29.3 billion in reserves. The reserves were quite steady with the beginning of the new century. The then RBI governor Bimal Jalan mentioned that the foreign exchange management should take into consideration account liquidity as well as import requirements and unforeseen contingencies. As of March 2004, the forex stood at $107.4 Billion, and the reason for the accumulation of reserves through the period of 2001-07, given by the experts was a low Current Account Deficit. During these years, India’s CAD averaged 0.1% of GDP, while capital flows were strong. As a result, India’s reserves increased by $232 billion between Q1 2001-02 and Q1 2008-09, a period in which cumulative net FPI inflows stood at $66.3 billion.

Info 3In the backdrop of the global financial crisis, which brought the external sector and forex under stress – Indian economies faced vulnerabilities. The central bank announced a special swap scheme to draw in foreign currency non-resident deposits. A special swap window at a fixed rate of 3.5 % per annum was offered by the central bank for FCNR (B) funds, mobilised for a minimum tenure of 3 years or more. Banks were able to raise $26 billion under the scheme.

As of July ’21, the forex was $612.73billion, and this increase in reserves has been prompted by an attempt to prevent large rupee appreciation and provided the central bank with enough ammunition to fight against future currency depreciation.

  • Rising of Exports and Imports of Goods and Services after 1991 Reforms Integration of Indian economy with the global economy led to an increase in the country’s exports and imports. Exports during April-June ’21 jumped to USD 95.36 billion as against USD 51.44 billion in the same period last year. Imports during April-June 2021 were at USD 126.14 billion, an increase from USD 60.65 billion in the corresponding three months last year.
    Info 4In 1991, India’s peak tariff was reduced from approximately 150% to now 10% over time. Quantitative Restrictions for protectionist purposes, and Objectives such as health and safety, technical compatibility of requisite standards, moral reasons, environmental reasons, etc., have been reduced since 1991 reforms. Trade opening has offered new opportunities to the consumers, who gained access to a much wider spectrum of goods, and for firms, as they could import improved quality inputs and become more competitive.
    The export basket of India had a noticeable shift away from the traditional sectors of textiles and agricultural products – increasing the share of engineering and pharmacy exports. Companies of rich nations have outsourced business processes and other IT-intensive and knowledge-based operations to Indian partners. Increasing trade enriches the country as it extends the scope of efficient Division of Labour (DOL) and thus, raises productivity. Foreign trade has certainly made a difference in India’s economic affairs.
  • Rise in Gross Domestic Product (GDP) – growth in India has accelerated to about 4.4 % during the 1970s and 1980s and to about an average of 5.5% in the 1990s and 2000s. Sharp stability of GDP has been noticed after 1991 reforms, prior to which the growth accelerated episodically, punctuated by large annual variations, and often failed to sustain. Info 5Hence, post-liberalisation, growth not only accelerated but was also stable. Growth has accelerated the fastest in services, followed by industry, and less so in agriculture. Over the long run, India’s growth has been driven by an increasing share of investment and exports, with a large contribution from consumption. Growth has also been characterized by productivity gains – both in labour productivity as well as in total factor productivity.
    India’s GDP stood at Rs.5,86,212 crore in 1991 whereas, in 2020-21, it is Rs. 135.13 lakh crore. In the year 2020 sharp decline of GDP has been due to the lockdown and restrictions in business activities caused by the Coronavirus Pandemic.
    The Indian economy is gradually recovering from the adverse impacts of the pandemic.
  • Air Transport – A major industry that provides important inputs into wider economic, political, and social processes. Air transport can facilitate a region’s economic development or of a particular industry such as the tourism industry, but of course, there has to be demand for the goods and services which is offered by a particular industry or a region. Due to the 1991 reform, there was an increase in air travel and expansions in the civil aviation sector. Info 6The government of India adopted the open-sky policy and allowance of air-taxi operators were done for operating flights from any airports, and also the decision of scheduling flights, passenger fares and cargo were left free on them. Monopoly in the air transport services was ended by the government gradually. Several private airlines ventured into the aviation business by 1995. From just 10.72 million passengers approximately carried in 1991, airline in India carries approximately 167.50 million passengers now – reflecting growth and success of a competitive sector in the post-liberalisation era.
  • Evolution of Automobile Industry- In the 1940s, India’s indigenous passenger car launched with the establishment of Premier Automobile and Ltd. and Hindustan Motors. Most of the market share till the 1970s were garnered by these two companies together, with companies such as the Ashok Leyland, Telco, Mahindra and Mahindra and the Bajaj Auto. This industry had a very slow-paced growth until the 80s as the market for automobiles was not that large given the low economic growth rate during that time. Info 7However, things began to reverse and gradually demand for passenger cars was emerging as the population and per capita income started rising. In 1983 and 1993 FDI in the automobile assembly were allowed in two phases. This FDI was mainly market-seeking. An Indian company Maruti Udyog Limited was incorporated in 1981 as a government company along with Suzuki Motor Corporation as a partner to make an efficient people’s car affordable to middle-class Indians. For light commercial vehicles, Japanese companies such as Toyota, Nissan and Mazda were allowed to enter the market as Joint Venture (JV) with Indian Companies and shared some equity with the state-level governments. Eventually, the Indian Government brought significant changes in 1991, and in 1993 new Info 8automobile policy was launched. Auto-licensing was abolished and weighted average tariff was also lowered from 87% to 20.3%.
    Post 1992 period played a crucial role in bringing diversification, dynamism and immense competition in the industry – regarded as the second wave of FDI in the sector. Special urpose vehicles were introduced by Tata Motors creating a platform to enter the passenger car segment. Creation of wide networks were observed in this period as most companies had full technology and the competence in producing state-of-the-aret models of the vehicle. In addition to this, they had contractual arrangements with their component suppliers. In financial year 2020, automobile export reached 4.77 million vehicles.
  • Telecommunication- In the year 1981, liberalisation of the Indian telecommunication industry was started under former PM Indira Gandhi but was let down by the political opposition. Soon under the Rajiv Gandhi Government, with the guidance of Sam Pitroda, Centre for the development of telematics (C-DOT) was set up, which manufactured electronic telephonic exchanges in India for the very first time. Info 9In 1991, India had just 5 million telephone subscribers that grew to 1187.90 million (wireless and wireline) as of February 2021. Among the infrastructure industries, telecommunication is the only industry that has shown significant improvements over the reform period and has registered strong growth.
    Currently, India is the world’s 2nd largest telecommunications market. Exponential growth has been witnessed over the last few years in this industry which has been basically driven by wider availability, affordable tariffs, rolling out mobile number Info 10portability (MNP), conducive regulatory environment and growing subscribers consumption patterns. Telecommunication has played a significant role in narrowing down the rural-urban digital divide to some extent and has also supported the socioeconomic development of India. Furthermore, the introduction of e-governance helped to enhance transparency in India. Today, mass education delivery to the rural folks is being done with the use of modern telecommunication facilities by the government.
  • Poverty Reduction- Poverty is a state of a person where he or she does not have enough resources to satisfy the basic need of food, clothing or shelter. India has almost halved its poverty since 1990s and enjoyed strong improvements in most human development outcomes. Since 1991, urban growth has been responsible for about 80 percent of the total fall in poverty. It happened directly through urban growth having a larger impact on urban poverty, and indirectly when urban growth had an impact on rural poverty. Basically, this implies that the growth of cities, which are larger in population and higher in productivity is helpful for poverty reduction for the whole nation. Rural growth before 1991, especially in the agricultural sector, had mattered most for poverty reduction – attributing poverty reduction to any specific sector is difficult now. Post-1991, all sectors have contributed to reducing poverty. With the passage of time, as the size of the primary sector has reduced, its overall contribution towards poverty eradication has also declined – having less than 10% as its contribution to poverty reduction (before 1991, primary sector accounted for two-fifths of poverty decline). Post 1991, 25% of poverty decline was accounted to the secondary sector while 60% alone was contributed by the tertiary sector.
    India’s construction boom since 2000 due to the usage of low-skilled labour has also contributed towards pro-poor secondary sector growth.
    Currently, the poverty situation in India has again deteriorated by due to the ongoing coronavirus pandemic.


  • Service Sector Given Much Attention Instead of Manufacturing Sector – The relative share of the manufacturing and service sector in an economy depends on its development. As per the general structural economic transformation of a developed nation, economies whose primary economic activity has been agriculture, witnessed a gradual supremacy of manufacturing as and when they develop. Eventually, when the contribution of the manufacturing sector is at its peak, a strong Service Sector is developed in the economy. Such a transition has been seen in most developed countries, including the East Asian middle-income countries – from agrarian to industrial, and, finally, to being service.
    India has been an exception to such a structural transition. Since independence, the share of agriculture in India’s GDP has fallen consistently, whereas, manufacturing has remained almost constant. Info 11The sectoral share of services has risen instead of the manufacturing sector. The rapid pace of growth of the service sector was due to the liberalisation of the economy in 1991 – as outsourcing was found to be lucrative by the MNCs of the developed country as wages were low in India and the workforce also possessed English-speaking skills. Consequently, much of the investments by the MNCs were made in the service sector, while due to less competitive advantage, the manufacturing sector failed to reap many benefits.
    An economy that has managed to benefit through its competitive advantage in manufacturing is China. China has gained a reputation over the past few decades for exporting manufactured goods. In the process, the country has grown at a faster pace and at a more sustained rate than that of the Indian economy. India’s growth, in contrast, has been primarily led by the services. Such a pattern of growth of the Indian economy has resulted to a ‘Jobless Growth’. The service sector, inspite of having a larger share in GDP, has not been able to absorb the huge labour force of the country. This structural disturbance has led to several questions on the country’s development strategies.
    The manufacturing sector/industry, which creates a large volume of employment outside the agricultural sector, provides a sustainable living opportunity to the expanding population. For a country like India with such a huge population, manufacturing can be a solution for finding employment and income opportunities. Developing the manufacturing sector is a way to deliver inclusive growth as it helps people of rural areas to find employment in the manufacturing sector.
    The exports in India are also not much satisfactory as India has skipped the manufacturing step. Boost to the manufacturing sector, large-scale production at a competitive price, creation of Special Economic Zone (SEZs), easier clearances, and relaxed tax regimes can raise the exports in the country. The heavy industry sector of India is also underdeveloped due to the jump from agrarian to services, and hence, through NIMZs and other ventures, foreign investments in manufacturing areas should be encouraged, which will eventually lead to a growth in infrastructure and production abilities of the country.
  • Companies did not come to India even when its Ease of Doing Business Rank Improved – Many manufacturing companies are moving out of China and opting to set up their manufacturing hub and starting a business in other countries. India’s Ease of Doing Business rank has drastically improved from 77th in 2019 to 63rd in 2020 – which might draw a picture that it is attracting huge FDIs, but investments have no correlation with the ranking.
    Before starting to explain about India, we shall talk about why companies are moving out of China in the first place.
    China, also known as a manufacturing hub, started to grow in the late 1970s as the western world began to shift to the service sector and confronted issues regarding high labour costs and elevated standard of living – resulting in high manufacturing costs. In this backdrop, the western countries were attracted towards China due to its huge manpower and low labour costs. Many SEZs were built by the Chinese government to boost manufacturing in the country, and subsequently, China started producing the same products at a much cheaper rate. All these added advantages to Chinese manufacturing and made China the 2nd largest economy after the USA. But now many companies are moving out of China due to the following reasons –
  • Trade War Between USA & China – This started in 2018 when the USA imposed a tariff of 25% on Chinese goods – accusing China of importing $100 billion goods whereas the USA imported $500billion goods. In addition to this, China has been accused of not playing fair as an added advantage is given to the Chinese companies by its government, making it very critical for the western companies to compete with them.
  • Global Supply Chain Disruption – Many countries are dependent on China for the supply of goods, but due to the Coronavirus pandemic, all product supply chains have been largely disrupted. Despite being the top manufacturer of pharmaceutical medicines and equipment, it failed to meet the demands. It is in this backdrop that foreign countries have given a thought about dependency on China for goods.
  • Increase in Labour Cost – The labor cost paid per year has increased drastically, resulting in an increase of manufacturing costs in China. Consequently, companies are not making much profit and hence, relocating their facilities.

With India’s EoDB Rank coming to 63rd position yet not many companies have invested in India – which implies investment has not much to do with the improvements in Ranks. To begin with, we shall first discuss why companies of developed countries did not opt for India.

    • Difficulty in starting the business due to complex and lengthy procedures for documentation and obtaining licenses – ranking 136th.
    • Enforcing a contract in India takes approximately 4years – ranking 163rd.
    • Registering a property takes approximately 58days and on average costs 7.8% of the property’s value – ranking 154th.
    • Resolving a commercial dispute takes 1445 days for a company through a local fist-instance court.
    • Manufacturing units have to conform with numerous compliance norms, which is considered a tedious and time-consuming task. Furthermore, goods take a longer than usual time to reach a port in comparison to other countries.

What are the reasons for improvement in ranks?

Various reforms taken by the government over the years led to an increase in EoDB rank of India given the size of its economy. Such a ranking has been achieved by making it easier to do business in “4 out of 10 areas” of business regulation that the report measures.

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    • Due to abolished fee for SPICe company incorporation form, electronic memorandum of association and article of association it is now less costly to start a business in India.
    • Authorities of Mumbai and Delhi have made it convenient to obtain construction permits by allowing commencement of submission of labour inspector and notification for completion through a single window clearance system.
    • Export and import have been made easier by the integration of government agencies into the online system. In addition to this, some other reasons making such cross-border trade convenient are port infrastructure upgradation, enhancements of document submission online, etc.
    • Successful implementation of the Insolvency and Bankruptcy Code is another reason behind the improvement in India’s rank. Prior to its implementation, the secured creditors had huge difficulties in getting hold of the companies when they defaulted on their loan – the process of foreclosure took not less than almost five years, which ultimately made procedures for recovery quite difficult. With the new laws being effective, the creditors can now negotiate successfully and money could be repaid when the insolvency proceedings are concluded.
    • Attracting the foreign investments, upliftment of private sector, especially the manufacturing sector, and improving India’s overall competitiveness have been the primary focus of the Make In India initiative.
  • India’s Growth is Consumption-Driven – The Gross Domestic Product (GDP) of an economy or the National Income (Y) is represented by the following formula-

GDP = Consumption + Investment + Government Spending + Net Exports

where, Consumption (C) – Private Final Consumption Expenditures (PFCE) which are household and Non-profit Organisation Expenditures.

Investment (I) (Gross fixed capital formation (GFCF), also called “investment”, is business expenditures and house purchases by households, which is acquisition of produced assets (includes second-hand asset purchases), including such assets produced by the producers for their own usage from which ‘disposal’ are subtracted) refers to expenditures by businesses and home purchases by households

Government Spending (G) – expenditures on goods and services by the government.

Net Exports (NX) – a nation’s exports minus its imports.

India is a consumption-driven economy or, in other words, India’s GDP growth is due to the Consumption factor. Such a consumption led growth relies on higher consumer spending to raise Aggregate Demand and lead to higher investment and hence, faster economic growth.

Info 13In contrast to this concept, which India lags behind is the Investment-led Growth perspective. This relies on investments to create new capacity – resulting in the creation of more employment and higher demand, and simultaneously, increasing more productive capacity. As the supply side rises in tandem with the higher demand, growth takes place. Hence, investment or GFCF is an essential factor, and such a declining trend does not portray a good picture of the economy.

Info 14Such a consumption-led growth is sustainable to a certain point – after reaching its full capacity or being excess, it starts declining (concept to the law of diminishing marginal utility). In the short term, consumption-led demand can increase imports (in response to higher demand) and may lead to a current account deficit. Consumption, often backed up by personal lending or borrowing increases the debt factor. The share of PFCE in GDP has always been higher than that of GFCF, implying that India is having economic growth led by Info 15only consumption.

In the absence of adequate supply response, demand pressures from rising incomes could lead to Demand-pull inflation, where Aggregate Demand Exceeds Aggregate Supply. This increase in the aggregate demand might occur due to an increase in the money supply or income or the level of public expenditure.

The following diagram depicts a situation where supply remains constant, but demand for a commodity rises with the Info 16increase in its price due to an increase in consumption. In such cases, Consumption-driven growth increasingly destabilizes as inflation continues to rise. India must replace consumption with investments as the key driver of growth.  Lower consumption is necessary to help bring down inflation, re-build savings, and keep CAD contained. The shift from consumption to investments, thus, will become inevitable for the economy. There could be some disturbances during the transition; however, this is important to create a sustainable model of development.

Likewise, Capital investment is vital to India’s growth as after establishing a factory, people need to be employed to start the production process. The factory will pay remuneration to the workers, and their income will again be spent, resulting in consumption growth. In the absence of a large innovation base, it is the only way to increase labour productivity. However, inefficient capital formation has led to low corporate profits. Also, it is a matter of concern as to where to invest because inappropriate investment often leads to a high capital/output ratio and lower return on capital.

  • Declining Economy Even Before the Covid-19 Pandemic – The Indian economy had lost growth momentum even before the deadly virus hit our country, beginning from 2017-18, where the GDP had fallen for three consecutive years. Such a situation did not take place since 1991. Indian economy faced a demand-driven and structural slowdown from before the pandemic.

Until 2019-20, the government had a supply-side policy response as in September 2019, it cut corporate tax rates to promote investments and boost the economy. The interest rates were either reduced or kept stable by the RBI to reduce the cost of capital and promote investments. The investment demand follows the capacity utilisation and this had remained low since December 2019. In other words, a firm will only invest if their existing capacity is fully utilised. Data from previous years showed that the firms did try and invest even when their capacity utilisation was low – the result did not prove good. The demands did not grow and capacity utilisation declined even further. Such investment only extracted costs from the companies. The interest coverage ratio (ratio of company’s profit and the interest on capital, falling beyond one means profits were not enough to cover the interest payments) in December 2019 was less than 1 for almost a fourth of India’s listed non-financial firms.

Besides, there have also been weakened consumer sentiments and a collapse in non-essential commodity spending took place.

In 2019-20, PFCE was approx. 57% share of India’s GDP but it declined in March’20. Due to such a decline in trend, firms started to shelve their investment plans – which can be seen from contracting GFCF. Such a collapse in investments has an adverse implication for the future growth of the economy.

The issue of Poverty in our country, although less than what it was back in 1991, is still affecting families, children and individuals in numerous ways – malnutrition, child labour, child marriage, lack of education, poor healthcare facilities, no access to clean water, hunger, and poor health and hygiene causing diseases such as cholera, dysentery, typhoid- where due to lack of proper medical facilities on time many suffer and lose their life.

Indian Economy and Corona Virus

On March 11, 2020 the World Health Organisation declared the outbreak of COVID-19 a global pandemic. This pandemic has led to the loss of human life worldwide and presents an unprecedented challenge to the public health care system, food security, and work – devastations to social and economic life. Enterprises have faced severe threats due to lockdowns. Hospitality, tourism and travel, aviation, and the automobile sector suffered huge losses as business came to a standstill due to lockdowns. Migrant workers faced severe risks in their transports, working and living conditions and confronted several challenges in accessing the support measures provided by the Government. Many were unable to feed their families and children as they had no means to earn an income due to job loss during the pandemic. As mentioned earlier, the Indian economy had an issue of Aggregate Demand prior to the pandemic. The onslaught of the virus further aggravated the unaddressed demand issue. The lockdowns to contain the virus led to the closure of almost all manufacturing units and services, resulting in low demands, production cuts, and unemployment rise. The relief packages provided by the government were focused extensively on easing the supply, restoring liquidity and building capacity – missing out on the issue of inadequate demand. Moreover, measures like credit extension to small vendors and MSMEs were not much of a success as firms would demand credit only when there are sufficient demand expectations and new investment opportunities. Even after lifting up the restrictions, MSMEs were functioning below capacity due to low demand – making it unlikely to demand new loans unless there is a rampant growth of demand.

The pandemic pushed millions of people into Poverty. As per the reports, between February 2020 and February 2021, there was a net loss of 7 million jobs, and households have suffered a 12% average income loss. As per estimations, the poor and the people belonging to the middle class have suffered higher losses. In 2020-21, 218 million people were pushed into poverty (168 million in rural and 50 million in urban) – having 12% contraction in their monthly per capita consumption. With the onset of the 2nd wave of the pandemic the situation worsened even more. The weak demand for goods and services has spread to rural areas where 71% of businesses have reported a dip in sales in rural markets. Approximately 22.8 million people have lost their jobs in April- June 2021, and daily wage-earners were the worst hit. It is estimated that people likely to fall in poverty will be increased to around 15-20% and this increase will be higher in rural areas than in the urban areas. In the pre-covid times, 265million of the rural population was poor whereas this figure has jumped to 381-418million now.

In addition to this, there is a wide disparity between the marginalised and non-marginalised group falling into poverty. For example, an additional 13-20% of people are expected to fall into poverty compared to upper caste people, who are expected to remain between 12-16%. In rural areas, self-employed agricultural, non-agricultural and casual laborers bear the highest impact because of agrarian distress caused by crop failures, indebtedness, lack of proper infrastructural facilities, and scattered land holdings. On the other hand, the informal nature of jobs, low earnings, little or no social security of the casual labourers expose people to poverty in the urban area. With an increasing number of poor people, demand in an economy will naturally tend to drop as they have no resources to purchase, ultimately leading to a contraction in GDP.

The organised sectors of the economy gradually adapted to the new normal, whereas the unorganized sector faced numerous challenges at every step – GST collections of $1trillion mark or stock market shooting up can be examples of such adaptations. There have been reports of inequality stating top 100 billionaires’ wealth increased by ₹12 trillion, in contrast with millions of people losing their jobs and livelihood. While the number of billionaires rose from 102 to 140 last year (combined wealth $596 billion), the number of poor in India is increased drastically. This suggests that household income at top seems to be protected with increased saving rates, ensuring future consumption, while households at the bottom with a larger share of employment lost jobs, resulting in income loss and, hence, drag on demand. The increased out-of-the-pocket situation has put people in debt situation – trapped into a vicious cycle of poverty. Even though many have joined their work back but the structure of employment has undergone a drastic change.

From April- June 2020, India’s GDP dropped by a massive 24.4%, which contracted further by 7.4% in the July-September 2020 quarter. The overall rate of contraction in GDP in India was 7.3% for the FY 2020-21. While the economies worldwide have been hit hard due to the pandemic, India suffered one of the largest contractions. The unemployment rate of India was comparatively poor than the world average and other economies. The pandemic has brought severe hardship, especially among the young individuals who are over-represented in informal work. India has a large share of young people in its workforce, and the pandemic has increased their risk of long-term unemployment. There has been a depth of continuing joblessness among younger workers in the low-income states of Bihar, Jharkhand and Uttar Pradesh – majority of them having no work or pay. Additionally, the 2nd wave has further heightened risks of long-term unemployment by increasing spells of economic inactivity.

India’s public health performance was coping up from the 1st wave of covid-19, that the 2nd wave arrived and made the situation worse. There has been massive underreporting and a low rate of vaccination. As a result, death rates and total confirmed cases might exceed the world by a large margin if under-reporting is taken into considerations.

Way Ahead

  • Modernization of India’s public sector institutions is required to provide services and regulations which is at par with middle-income country’s aspirations. This will improve effectiveness and accountability and enhance the state’s ability to interface with the private sector to improve service delivery.
  • Only 3 million out of the 13 million who enter the working-age population each year get job opportunities. To sustain the rate of growth, it is necessary to accelerate inclusion, especially through employment generation and better job opportunities. Additionally, the government also needs to focus and address the declining female labor participation force, which is only 27% – the lowest in the world.
  • Improving investment climate – investment is a key source of aggregate demand and economic growth. In this context, the policy framework must be supportive of fresh investments so that the entrepreneurs are encouraged to take risks. Non- economic factors such as social cohesion and a conducive working environment are also implicit.
  • An increase in public expenditure will provide more funds for vaccinations and cover the intensified demand for the MGNREGA which is proving to be a valuable safety net.
  • Revision of revenue targets to a more realistic level and undertaking a credible path for reduction of deficits are imperative.
  • Identification of poor and vulnerable groups to prevent them from further falling deeper into impoverishment by providing them government-directed benefits such as direct cash transfers, national food security and other social security programs. Simultaneously, more employment needs to be generated to help masses and curb adverse impacts.
  • The use of 5G will have a dramatic multiplier effect in various sectors of the economy like agriculture, education, healthcare. Faster adoption of modernized technologies will not only help to curb societal inequalities but also enhance productivity levels.
  • The start-up business needs nurturing, incentivization, fostering, tax concessions by the government. Government must step out to give the new entrepreneurs exposures to allow them to work with more ease.
  • Expenditure on Human Development needs to be increased by the government. Presently, India spends less than 1% on health and 3% on education. Moreover, the central government must focus on bringing in reforms on the states – state-centric approach as every factor of productivity viz., land, labour, capital all lies within states.
  • A Change in mindset is necessary for a more meaningful public-private partnership.


The change that happened with the 1991 reforms has exposed us to various new technology and advancements that have dramatically changed our lives. Consumers have been provided with various new consumer FMCG personal care products. However, it has benefitted only a section of the consumers who could actually afford it. Our quality of life would have been completely different without liberalization. The liberalization process helped establish some world-class companies and India to emerge as a global power in many sectors. Over the last three decades, successive governments have followed this path to build our nation to a $3million economy. In addition to this, many have been lifted out of poverty and numerous have been provided job opportunities. Although the then economic crisis triggered reforms, it was also built on the desire to prosper, belief in capabilities and confidence to relinquish control of the economy by the then government. The requirement of new and fresh thinking is a need of the hour to overcome the current economic issues that India is facing and to gradually sustain our growth and prosper even more.


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