Twenty-five years later, Indian companies not only have held their own but also have become multinationals in their own right.
Comparing State-level policy responses to economic reforms in India
Reddy's Labs — are now multinationals with higher sales abroad than in India. Through acquisitions, ArcelorMittal became the biggest steel company in the world. Today, the global slump in metals and the dumping by China have made many acquisitions that were completed in the boom years look like bad deals. Yet the fact remains that Indian companies are now viewed as having global management skills worthy of global takeovers. Ironically, although Tata has decided to sell its steel assets in the United Kingdom, one of the potential buyers is Liberty House, founded by another person of Indian origin, Sanjeev Gupta.
India is about to reap a demographic dividend that will give it a big edge over rivals. The number of working-age people between 15 and 60 is expected to rise by million between and , even as China's workforce dwindles from 72 percent to 61 percent of a soon-to-be declining population. India's working-age population has started rising, yet participation in the workforce has actually fallen in recent years, especially for females.
The reason is partly that more young people are now studying in high school and college instead of working. It is partly because, as families rise from low-income to lower-middle-income status, they pull their women out of manual work as a mark of social superiority. Indeed, young women who do not work can expect to get a better class of husbands in the arranged marriages that dominate Indian social behavior. However, as families move up to upper-middle-class status, their daughters become college graduates and re-enter the workforce.
That change means that India's demographic dividend has been delayed, but will soon come, and its quality will improve because its workforce will be better educated. That holds promise for future GDP growth. As Table 5 shows, the male work participation rate has remained unchanged in rural areas and has risen marginally in urban areas since But the rural female participation rate has crashed from Given that India has roughly million females, the data suggest that over 40 million women pulled out of the workforce between and That number is more than the entire female population of all but a handful of countries in the world.
That factor makes India's rapid GDP growth in the s even more remarkable: all other miracle economies in Asia had rapid increases in workforce participation in their fast-growing phase. A sudden scarcity of rural labor has helped raise rural wages quickly, a phenomenon buttressed by rapid GDP growth and a National Rural Employment Guarantee Act ensuring days of work per family on government projects after During the 11th five-year plan , nominal farm wages in India increased by Those wage increases were an important cause of the record drop in poverty.
The Indian word jugaad has crept into management literature. It originated when Indian farmers wanted an inexpensive vehicle and got the idea of strapping an irrigation pump on a steel frame with four wheels to create a functioning vehicle called a jugaad. Many variations of that vehicle are assembled by small local companies in many rural towns using spare parts of existing vehicles. It represents grassroots homegrown ingenuity. The vehicle can ferry goods or carry up to 50 passengers. Jugaad no longer means just the original vehicle.
It has now come to mean, simply, innovation around obstacles of all sorts — in designing, selling, managing, and even surmounting government controls. Thus, jugaad includes forms of corruption and tax evasion no less than frugal engineering. By solving problems by hook or by crook, it raises moral issues but gets things done under the most difficult conditions. India has become a world leader in frugal engineering, a concept that did not exist in Frugal engineering is the capacity to design and produce goods that are not just percent cheaper than in Western countries but percent cheaper.
It was a commercial flop and did not meet Indian consumer aspirations.
The importance of structural reform
But it was nevertheless an engineering feat. Bajaj Auto has developed a low-cost quadricycle that could put three-wheelers and small cars out of business. India's telecom industry is the cheapest in the world, with calls costing just two cents per minute. The Jaipur Foot is an Indian artificial limb that is sold at th the price of competing artificial limbs in the United States.
Narayana Hrudayalaya and Aravind Netralaya are hospitals that provide heart and eye surgery, respectively, at one twentieth or less of the cost of surgery in the West — one reason for the emergence of what is now called medical tourism. The Bombay Stock Exchange, set up in , is one of Asia's oldest. Yet before the economic reforms of the s, it was viewed as a snake pit.
A handful of brokers could rig prices at will, fake share certificates abounded, and settlement periods were extended for months on end if that suited the brokers controlling the exchange. A major scandal in — when broker Harshad Mehta shamelessly rigged the market using illegal borrowings from government banks — led to a stock market overhaul. Various financial agencies created a completely new National Stock Exchange with high technical and ethical standards. It was fully electronic, with no trading floor at all, and bids and offers were matched automatically by computer, preventing a lot of old-style rigging.
The National Stock Exchange went fully electronic before London and New York did: it was a state-of-the-art exchange, a rare case when India leapfrogged global bourses. That change both slashed costs and ended most forms of rigging. The Securities and Exchange Board of India was created, along the lines of the Securities and Exchange Commission of the United States, and gradually brought order and trustworthy practices that were earlier absent. It decreed that paper share certificates must be dematerialized and held in electronic form by depositories, to end the menace of fake certificates.
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To survive, the Bombay Stock Exchange had to clean up its act and also go electronic. So since the s, India has developed one of the most efficient stock markets in Asia.
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Before very high tax rates up to a 58 percent corporate tax plus a high wealth tax meant that businesses kept income off the books. Many listed companies diverted profits into the hands of controlling families by dubious means, cheating minority shareholders. Improving shareholder value meant higher stock market prices, which would have been welcomed in other countries but constituted a recipe for personal bankruptcy in India.
High share prices meant high wealth tax liabilities that required promoters to sell shares to pay the tax, with the prospect of losing control. After direct tax rates gradually came down substantially to 30 percent plus surcharges for individuals and corporations. The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it.
Indeed, by keeping all profits in a company instead of milking them, a company could raise share prices and attract foreign investors at a handsome premium, making honesty an ingredient for success. Foreign investors soon started paying much higher prices for companies with good governance than those with dodgy tactics. So corporate honesty began to be rewarded for the first time, and that rather than any moral imperative made Indian business cleaner. It attracted household investment and enabled ordinary citizens to participate in the stock market boom that raised the Sensex India's equivalent to the Dow Jones Index in the United States from just 1, in to 28, in The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point.
That was a major reason for the revenue boom that facilitated increased spending on education, health, and infrastructure. Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent. For the first time, real estate transactions in some cities were conducted entirely by check: earlier, a big chunk of the sale price was paid in black cash to escape high capital gains taxes and the stamp duty.
The Bollywood film industry, once run entirely on black money financed by the underworld, is today reputed to make payments to top stars almost entirely by check.
In many developing countries, a handful of crony capitalists like Pakistan's notorious 22 families have dominated industries, thanks to their political contacts. India was no exception until , because the license-permit raj made all clearances a favor to those with clout.
But since then, economic liberalization has facilitated the rise to the top of a vast array of new entrepreneurs. Their market value vastly exceeds that of most traditional big business houses. Some of the new businesspeople notably in real estate and infrastructure are called crony capitalists, and certainly they have strong political contacts. Kickbacks in India are more accurately called extortion by politicians than classical cronyism, because the returns to kickbacks are uncertain and sometimes disastrously negative.
Economic liberalization and competition have led to the crash and sometimes bankruptcies of famous old companies Hindustan Motors, Premier Automobiles, JK Synthetics, DCM , indicating stiff competition and survival only of the fittest. Of the 30 companies constituting the Sensex in , only 9 were still there two decades later. This business churn indicates healthy competition across industry as a whole. Former prime minister Manmohan Singh said of the new entrepreneurs: "These are not the children of the wealthy.
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They are the children of liberalization. Economic liberalization has benefited Dalits, the lowest of the Hindu castes, once condemned to the dirtiest work, such as cleaning latrines, cremating the dead, and handling dead animals and their hides. A seminal survey in two districts of Uttar Pradesh revealed striking improvements in the living standards of Dalits in the past two decades.
TV ownership was up from zero to 45 percent, cell phone ownership was up from zero to 36 percent, two-wheeler ownership of motorcycles, scooters, and mopeds was up from zero to Even more striking was the improvement in Dalits' social status. The proportion of cases in which Dalits were seated separately at weddings was down from The proportion of non-Dalits accepting food and drink at a Dalit house went up from 8.
Halwaha bonded labor incidence was down from 32 percent to 1 percent. The proportion of Dalits using cars for wedding parties was up from 33 percent to almost percent. Dalits running their own businesses went up from 6 percent to 37 percent.
5 ways to bring about structural reforms
And the proportion of Dalits working as agricultural laborers was down from Beyond all expectation, thousands of Dalits have emerged as millionaire businesspeople and established a Dalit Indian Chamber of Commerce and Industry. Its president, Milind Kamble, says that just as capitalism killed feudalism, it is also killing casteism. In the fierce competition of a free market, what matters is suppliers' prices not their caste.
This fierce competition, brought about by economic reforms, has opened new commercial space that did not exist during the license-permit raj, and Dalits have been able to occupy part of the new space. In the two decades since , India's literacy rate has shot up by a record In the earlier two decades, it rose by less: India's literacy rate remains poor by global standards, but it has improved much faster in the era of reform than in the earlier era of socialism.
In the past decade, the improvement in all-India literacy 9. Female literacy improved even more dramatically, by Life expectancy in India is up from an average of Infant mortality is down from 87 deaths per 1, births to These are major improvements. Yet they lag well behind achievements in other countries. Despite 25 years of economic reform, India remains substantially unfree and plagued by poor governance and pathetic delivery of all government services.
Leftist critics accuse India of going down the path of neoliberalism. The actual process could better be called neo-illiberalism. Although many old controls and licenses have indeed been abolished over the past 25 years, many new controls and bureaucratic hurdles have appeared, mostly in such areas as the environment, forests, tribal rights, and land and in new areas like retail, telecom, and Internet-related activities.