Aug. 15 commemorated the 74th anniversary of India’s political independence from the United Kingdom. But less venerated is July 24, 1991, when Indians were granted their first modicum of economic freedom.
In the setting of a balance-of-payments crisis that year, India dismantled a labyrinthine regime of bureaucratic market controls known as the “License Raj.” Private companies were finally allowed to coexist with state-owned behemoths. Industrialists no longer had to procure licenses from stodgy bureaucrats anytime they wanted to expand output or import capital equipment. International trade and foreign finance were no longer scorned as a colonialist redux. India ended its self-imposed autarky, assiduously courting overseas investment and slashing import tariffs. From 1991 to 2003, economic growth leaped at an average annual rate of 5.4%. By 2016, nearly 300 million Indians had been liberated from extreme poverty.
And now, India, under Prime Minister Narendra Modi, is accelerating his push for free-market reform. Everything is on the table with radical overhauls of corporate taxes, decontrol of labor and agriculture factor markets, an aggressive privatization drive, the liberalization of foreign direct investment, and even backdoor land reform.
Despite the conspicuous success of the 1991 market reforms, India’s divorce from socialism remained incomplete. Archaic labor regulations disincentivize hiring by mandating firms with more than 100 employees to seek government approval before terminating jobs. This precludes Indian manufacturing from achieving competitive economies of scale. Ambiguous land deeds owing to byzantine, colonial-era laws hobble industrial development. In 2013, the ruling Congress Party exacerbated matters when it decreed that all land sales undergo the consent of at least 70% of owners. Without well-delineated property titles, a few uncorroborated claims can stymie commercial projects and jam already backlogged courts. Compensation was also set at double the market value for urban plots and quadruple for rural land.
Reigning for more than 70 years, an agriculture “License Raj” has obligated farmers to sell harvests to licensed intermediaries at government-controlled stockyards instead of directly to private buyers. Farmers are restricted from selling across district lines. Consequently, Indian agriculture is fragmented into more than 4,000 markets. Commission agents are lavished with expansive scope for economic rent-seeking. Monopolistic brokers can extract as much as a 14% fee on sales. By the time produce reaches the end of the value chain, Indian consumers are paying a 65% markup. Thanks to anachronistic anti-hoarding laws, nearly half of foodstuffs perish before reaching the marketplace because of a dearth of refrigeration investment.
A credit leverage cycle during the 2000s masked these structural inefficiencies as an unsustainable bubble drove up demand for production factors such as land, labor, logistics, and electricity. Inflationary supply chain bottlenecks ensued. Foreign investment came to a trickle when the Congress Party-led government in 2012 empowered buccaneering tax authorities to slap retroactive levies on multinationals. Vodafone was marauded with a surprise bill of $2 billion. After the bubble burst, the hangover laid bare the uncompetitiveness of the Indian economy. Growth remains elusive today with the COVID-19 pandemic. India’s gross domestic product contracted by 7.3%, and unemployment is at a 40-year high.
But all crises are pregnant with opportunity. After seven years of cautious incrementalism, the government of Modi and his Bharatiya Janata Party are advancing the most audacious free-market reforms in a generation. Starting in the fall of 2019, the Indian premier ratcheted down corporate tax rates, slashing the base rate from 30% to 22% — and from 25% to 15% for manufacturing start-ups. Indian business tax slabs are now competitive with the “tiger” economies of China and South Korea.
The Modi government additionally reduced the cost of doing business by streamlining India’s 44 cumbersome employment laws into four simple codes. The employee threshold for which firms need government licenses to redeploy labor has been raised to 300 workers. State governments are free to raise the limit further. The militancy of trade unions is subdued. Labor groups are only recognized if they represent at least 10% of the workplace. Unions can no longer be composed of nonemployees or “professional unionists.” Moreover, unions must submit a two-month notice before striking.
Modi deregulated India’s cosseted farm sector. Agriculture privatization allows farmers to sell harvests to any buyer of their choice. Legalized contract farming will wean the sector off of taxpayer crutches and provide sorely needed price relief to consumers. Stock limits are now abolished, creating incentives for cold storage. Farm reform is estimated to raise cultivation output by $175 billion. Bain & Company predicts that liberalization will midwife an agrilogistics industry worth more than $30 billion and double farmers’ incomes.
Privatization of state-owned enterprises and the reform of foreign investment and taxation laws are high on the Modi government’s radar. In February 2021, Modi crooned, “The government has no business to be in business.” Finance Minister Nirmala Sitharaman has vowed to slim the Leviathan state to a handful of government-backed companies in four strategic sectors. All remaining public sector undertakings, such as India’s second-largest petroleum company and the chronically insolvent Air India, are to be privatized. Two government banks were budgeted for disinvestment in a tacit rejection of India’s shambolic bank nationalization of 1969. In a complementary move, rules on long-term capital inflows were relaxed, with the cap on foreign direct investment in the insurance sector raised from 49% to 74%. The Indian Parliament is now passing legislation to abolish the government’s ability to engage in retroactive taxation, giving entrepreneurs and foreign investors a stable, predictable tax regime conducive to external investment.
Modi is also stealthily pursuing the holy grail of Indian economic reform: land acquisition. India’s citizen biometric identification system known as Aadhaar is actively getting linked to land records. The digitization of property rights has the potential to foster an ownership society in which even a slum-dweller could liquidate land parcels for cash or use them as collateral to obtain a loan. Clear property titles could unlock a substantial amount of wealth and give 1.4 billion Indians a vested stake in a free enterprise system.
For the first three decades after independence, statist India’s per capita GDP rose by an anemic 1.8% each year. A moniker was coined for the sclerosis: “the Hindu rate of growth.” But there was nothing Hindu or Indian about a dalliance with socialism. In fact, it was a dramatic rupture from antiquity. In the Sanskrit treatise the Arthashastra, the scholar Kautilya stressed that “the root of wealth is economic activity” and the king should “remove all obstructions to economic activity.” The Mauryan and Gupta dynasties blazed far-flung trade routes to China and the Roman Empire. The Tamil Chola rulers were renowned for their commercial and maritime prowess with an imperial directive declaring, “Make the merchants of distant foreign countries … attach to yourself by … allowing them profits.” Classical India’s receptiveness to private enterprise afforded it unbridled prosperity, accounting for one-quarter of the world’s output.
The 1991 market reforms turned 30 years last month, marking India’s rediscovery of its own glorious, indigenous tradition of capitalism. The milestone is reinforced by a full-throated embrace of “Modinomics.” At a time when the developed world is borrowing trillions to reflate demand, Modi stands athwart with a bevy of historic supply-side reforms to resurrect animal spirits. Modinomics is precisely the set of structural overhauls that India needs to revitalize entrepreneurship, boost productivity, and subdue inflation. Perhaps India will finally bid adieu to its tryst with socialism, adding a new meaning to its Independence Day.
Nathan Punwani is the secretary and treasurer of the United States-India Relationship Council. His views do not necessarily reflect those of the organization.
