Faced with a real prospect of default on external debt in mid-1991, the Government of India was forced to take a U-turn on economic policies. On 24 July 1991, the then finance minister Dr. Manmohan Singh told Parliament that “the room for manoeuvre, to live on borrowed money or time, does not exist any more.” He attacked the prioritisation of producers over consumers, ended the licence-permit-quota raj designed to micromanage firms, slashed tariffs, freed imports and vowed to integrate the Indian economy with the world economy.

There was no dearth of Cassandras predicting gloom and doom. Leftists, and quite a few Indian industrialists also, warned that the Indian economy would be taken over by foreign multinationals, Indian industry will be wiped out, Indian industrialists would be reduced to being serfs or salesmen of foreigners and the country would be mortgaging its economic sovereignty to West-dominated multilateral lending agencies.

They proved wrong. The reforms unshackled India in many ways and pushed its economy from 9^th to 4^th place in the world in terms of dollar purchasing power parity. A GDP growth of 8 per cent is rightly interpreted as slowdown where 5 per cent was regarded as an ambitious target by central planners.

This (8+ per cent) rate is the Hindu rate of growth, properly so called. A Hindu rate of growth is what Hindus can achieve when they are not handcuffed by bankrupt ideologies. It will be closer to what Narayan Murthy or Dhirubhai Ambani achieved for their companies. The measly 3.5 per cent rate of growth, derisively labeled as ‘the Hindu rate of growth’ by the late economist Raj Krishna, should be called the Socialist or Nehruvian rate of growth to place the blame where it belongs. That is the best that Nehruvian socialism could give to this country.

Interestingly, like the leftists, the lackeys of neo-conservatism have also proved wrong. We were told that India cannot develop without foreign investment and needed FDI as large as 8 per cent of GDP to add 2 per cent to its growth rate, that India’s infrastructure needs investment of $400-700 billion which cannot be met from domestic savings and that India can develop only by accessing foreign markets. Domestic demand cannot sustain high growth. The assumption underlying all the three assertions was that Indians cannot build India.

Now it is true that exposure to global markets and foreign competition has improved competitiveness of Indian companies and foreign investors have been catalysts in improving corporate governance in India. But the experience, particularly in the last decade, has totally disproved the above assertions. The net FDI in India in the last 20 years adds up to less than 2 per cent of the total national investment. Yet India did manage to increase its economic growth rate to an impressive 8 per cent. This growth has been funded largely by domestic savings, which have risen dramatically. Then again, India’s export has always been less than its imports. So, it is only its domestic demand that is sustaining the economic growth, unlike China’s.

Indian economy is far less vulnerable to global uncertainties than most other emerging economies since it is more inward looking. This was demonstrated in the global financial crisis in 2008.    

No doubt, the growth has some glaring anomalies. Services have boomed to make 57 per cent of GDP whereas industry is languishing in late twenties. India has world-class information-technology exporters but imports lots of fridges; it has 15 times more phone subscribers than taxpayers; Coke and Pepsi are available in villages that do not have drinking water sources; and in the coming years more Indians may be connected to a national, biometric, electronic identity-system than to a sewer.

Still it would be churlish to deny that the Indian people (more correctly, large sections of the total) have flourished. Managers and workers in enterprises, at home and abroad; entrepreneurs at home have done quite well for themselves. For consumers the reforms have brought manifold benefits.

The middle class has seen a breath-taking expansion, leading to an explosive growth in product markets. Many product and service markets have grown tenfold and more in the last two decades, product quality is usually unrecognisable when compared to what was on offer in 1991, and prices in relation to salaries have fallen in most cases, making goods and services far more affordable. The solitary exception would probably be housing, which remains an area of soaring costs.

The growth has percolated down to the poor, although data on poverty are unreliable and methods of measuring it are controversial. Informal but irrefutable evidence that growth is reaching hinterlands is provided by the surge in demand for consumer goods - durable as well as non-durable - in rural areas.

Yet, the reforms remain half-baked. As per the Index of Economic Freedom, brought out by the Heritage Foundation, India ranks 124^th out of 183 countries and is classified as “mostly unfree”. India remains a very difficult place to do business in. According to the Doing Business Report of IFC-World Bank for 2011, India is rated 134^th out of 183 countries in the ease of doing business. It ranks 166^th in starting a new business, 177^th in getting a construction permit and 182^nd in enforcing contracts.

This is not surprising. Economic reforms in India originated from and were driven by economic crisis, and not ideological conviction. The moment the economic crisis vanished, politicians hastened to go back to their traditional way of functioning. No wonder, crony capitalism continues to prevail in many sectors. And, there is no talk of administrative reforms. High economic growth has created a need for large-scale institutional changes (in bureaucracy, judiciary, police) but India has studiously avoided them. The result has been a sharp gap between our existing state structures and what the country needs.

The half-baked nature of reforms and lack of institutional overhaul explains both the massive corruption pervading the system and the threat to sustainability of growth. 

There are vast areas of economy where permits and allocations are still needed, enabling politicians and their cronies to mint money. The 2G scandal, the Adarsh housing scam, the Commonwealth Games scam and many others are the consequence of politicians making money out of allocations, permits and contracts. The licence permit raj has shrunk in area, but become far more profitable. And there is a consensus among politicians of all parties on half-baked reforms where some sectors are liberalised (helping expand the economic cake), while other sectors are tightly controlled to enable politicians to extract more than ever out of an expanding economic cake.

Rickety institutions, stranglehold of rent-seeking politicians and massive corruption are threatening sustainability of growth by discouraging investors. Dazed by exposure of a series of massive scandals, the government has been paralysed into inaction, unable to take any important decision. Private sector investors, domestic and foreign, who are supposed to provide capital that will push India from the world’s tenth-largest economy (measured at market exchange rates) into its third-largest by around 2030, have become fed up. Several Indian companies seem happier to invest abroad than at home. This is often hailed as a symbol of the country’s growing clout but may sometimes highlight its weaknesses.

The way forward is clear enough. From the present half-baked liberalization, we must move to full liberalization of all legitimate economic activity. Liberalization eliminates corruption and black money. For instance, if industrial licensing is abolished, nobody can demand or receive bribes for licences. Foreign exchange convertibility on current account has killed the black market premium on the dollar. The freeing of imports and slashing of duties has virtually ended the once massive smuggling of gold, electronics and synthetic fibres. To minimise corruption, cut down discretionary powers of bureaucrats and ministers and expand the scope of rule-based transparent governance.

The government must keep vigil on fickle footloose foreign capital roaming the globe in search of better returns. Such capital flows can play havoc with the economy by destabilizing capital markets and investor perception on the one hand and exchange rates, exports and employment on the other. Discouraging short-term speculative capital flows is part of reform, not anti-reform.

Finally, the reforms that began in 1991 have so far freed product markets, bringing about a vibrant competition from shampoo to ring-tones to cars. Now it is time to reform what the economists call factor markets or input markets - land, minerals and natural resources like spectrum, labour and to a lesser extent capital. These are areas still dominated by the politicians and act as a constraint on growth. It is not at all an accident that all the major recent scandals pertained to land, spectrum and minerals.

That is easier said than done. Persuading politicians to give up sources of power, pelf (or pilferage) and patronage is an uphill task. As Rohan Samarajiva tells us in an apt simile, reform of government is like repairing a moving ship in mid ocean. The option of pulling into dry dock is not available. In India, it is even worse. The repair is not limited to the ship; it must also include the crew. Those supposed to do the repair, are also in need of repair. This requires leadership. Or a crisis. Wait for a crisis that will jolt the government from its stupor…

The author is Executive Editor, Corporate India, and lives in Mumbai