FROM THE EDITOR-IN-CHIEF
This month 25 years ago, I watched the Narasimha Rao government open the doors to the world in what came to be known as the economic liberalisation of 1991. There was no option really—it was more of a compulsion. The Indian economy was in a mess. It owed the world $70 billion, overspent Rs 40,000 crore annually and staggered under a soaring trade deficit. The rapidfire reforms scaled down import tariffs, deregulated markets, slashed taxes and opened the floodgates of foreign investment. The reforms were prompted by the International Monetary Fund, which pressed for deflation and deregulation in exchange for emergency loans. It seemed like a huge gamble at the time but worked spectacularly well. India’s economy rocketed into a high growth trajectory, growing by as much as 9 per cent in 2006-07, during the UPA government’s first term. Twenty-five years later under Narendra Modi’s NDA government, growth has once again revived to 7.6 per cent, even overtaking China for the first time. Now the government has announced a set of major FDI reforms, throwing open the doors to investment in nine sectors, including aviation, defence and pharmaceuticals, to accelerate the nation’s economic growth. The economy is far more robust than it was in 1991, but is confronted by new challenges. Agriculture has been hit by two consecutive years of drought, private investments are down, exports have plummeted and manufacturing is flagging. These troubles have directly impacted the job market. As I noted in my letter just two months ago, surveys have shown that job creation this year has plummeted to just 91,000 jobs— down from nearly 500,000 jobs in labour-intensive industries last year.
The government sees Foreign Direct Investment as the fuel to rev up the economy. According to government data, FDI inflows to India touched $55.46 billion in 2015-16 from $36.04 billion in 2013-14, which the government attributes to the FDI policy reforms it has undertaken in its two-year rule. The government has removed some of the conditions that were irksome to investors, as in defence and single-brand retail, and done away with needless restrictions in investing in existing pharma projects, and further opened up the aviation sector. This, it hopes, will bring in large-scale capital and generate employment. These reforms may have been in the works for some months now, but the timing, just 48 hours after RBI governor Raghuram Rajan’s decision to step down, make it seem like a balm to pacify the global investor community worried over ‘Rexit’.
The government, with some hyperbole, declared India the most open economy in the world for FDI but it still has a long road ahead when it comes to attracting global investors. Although India ranks in the top ten countries globally for FDI inflows according to UNCTAD data, it still received only 2.51 per cent of the world FDI inflows in the last calendar year. Measly when compared to the 7.7 per cent share of world’s FDI inflows that China enjoyed. The government is still holding back on permitting foreign ownership in key financial sectors—insurance, banking and pensions and on the entry of multi-brand retail stores. At the India Today conclave in 2013, I asked our keynote speaker, Narendra Modi, then chief minister of Gujarat, why his party opposed FDI in multi-brand retail. He replied it was because they wanted to protect small manufacturers. “And that is why you first need to open the window only, then, a half gate, and then open the big door.”
It seems Prime Minister Modi has finally decided to open the big door on most, if not all, key sectors. A beginning has been made. Most significantly, he’s over some of the ideological hurdles of his party and the RSS. My only fear is that while big announcements are fine, there is still a tendency to be caught in our infamous bureaucratic maze when it comes to implementation on the ground. That apart, with the government’s efforts at making it easier to do business, these measures should bring cheer to investors. The prospect of a good monsoon should also lift the uncertainty hovering over rural growth. All of which augurs well for the economy. Let’s keep our fingers crossed.