IMPORTANT

ECONOMY

EVENTS in the History of

INDIA'S

SOURCE : FORBES INDIA

The IMF and the World Bank in October this year prognosticated

an identical 5.6 per cent growth rate for India in 2014 and a

higher 6.4 per cent in 2015, citing renewed confidence in the

market due to a series of economic reforms pursued by the new

government. While experts believe that Indian Economy is at

inflection point, here is a synopsis of series of decisive events in

India's history post independence that shaped contemporary

Indian Economy.

While India's first Five Year Plan in 1951 was largely penned in response to

shocks such as Partition and World War II, its second was all about

industrialisation. The young nation needed building and industry was on the

agenda of the second Five Year Plan, which was announced by the Planning

Commission on May 14, 1956.

Prime Minister Jawaharlal Nehru was influenced by the industrialisation that

had swept the then USSR. In fact, the 2nd plan was nicknamed the

'Mahalanobis Plan', after one of its architects, renowned statistician

Professor Prasanta Chandra Mahalanobis, who used resource allocation

ideas from Soviet economist GA Feldman. Nehru outlined the central role of

government when he said, “The public sector must grow not only absolutely but also relatively to the private sector.”

The second Five Year Plan centred on a shift towards developing capital goods and heavy industry for long-term economic benefit.

Of the Rs 4,672 crore in public spending, there was a significant shift in allocation from agriculture to industry between the first

and second Five Year Plans. During that period, agriculture spending fell from 37 percent of public spending to 20.9 percent,

while industry allocation increased from 4.9 to 24.1 percent.

About 70 percent of the funds allocated for industry were allotted to large- and medium-sized businesses, while the rest lay with

mineral development and village and small industries. There was a marked emphasis on boosting public sector activity; setting up

steel plants in Rourkela, Bhilai and Durgapur is an example of this. India's coal production also increased during the same period.

Second Five Year Plan (1956)

As India battled bitter memories of the 1943 Bengal famine,

and the prospect of another threatened the nation in the '60s,

renowned geneticist Dr MS Swaminathan invited American

biologist Dr. Norman Borlaug to help increase the country's

food production. Borlaug, known as the 'Father of the Green

Revolution', was famous worldwide for developing high-

yielding, disease-resistant wheat varieties. He came to India in

1963 and, along with Swaminathan, examined its food

situation and advised the government on a new course of

action. Their work led to a surge in food production and a

decline in food prices, and eventually contributed to Borlaug

winning the Nobel Prize in 1970. Meanwhile, Swaminathan

was hailed as the 'Father of the Green Revolution in India'.

Dr. Devesh Roy, a research fellow at the International Food Policy Research Institute, says the Green Revolution is important

because it helped India move from being a massive food importer, heavily dependent on aid, to a food exporter. “It still depends on

the geographic distribution but, overall, India became food-independent. Reaching self-sufficiency in food had huge political

implications,” says Roy.

By 1966, Swaminathan and Borlaug started using the American biologist's high-yielding variety of wheat in Punjab. Their work

attracted the attention of the Ford Foundation, The Rockefeller Foundation and the Indian government. The most significant pilot

scheme was the introduction of IR8, a rice variety now known as 'miracle rice', which yielded 10 times more than traditional rice

did.

Green Revolution (1963)

In June 6, 1966, in one fell swoop, the Indira Gandhi

government devalued the Indian rupee by 57 percent, from

Rs. 4.76 to Rs. 7.50 to a dollar, triggering bitter criticism

in the Parliament and media. The people, too, joined in

claiming that this was the ultimate “sell-out to America and

the World Bank”.

The move, however, was in the offing for some time. Since

Independence, India had held the dollar constant at Rs.

4.76 in spite of increased trade deficits and a reliance on

foreign aid to maintain a constant valuation. The final straw

was the wars India fought (with China and Pakistan) and the

shock of a major drought in 1965-1966. Each instance

increased deficit spending, further accelerating the already

severe inflation. Besides, the World Bank, largely funded by

the US, fell short of its promised aid inflows to India.

The Indian government took the step to counter soaring inflation, but it turned out to be very unpopular and laid the foundation for

distrust between the people and the government. The devaluation had its ramifications abroad as well; Oman, Qatar and the UAE,

countries which used the Gulf Rupee (issued by the RBI), were forced to come up with their own currencies.

Even though PM Indira Gandhi took all the flak for the move, her predecessor Lal Bahadur Shastri had set the stage for it.

According to Rohit Lamba, post-doctoral fellow at Cambridge-INET at the faculty of economics, University of Cambridge, “Strictly

speaking, public perception/reception should not matter for macroeconomic policy. History remembers politicians and

policymakers who do the unpopular but economically sound. However, no policy decision is or should be devoid of the politics of it,

especially in a democracy. With the state of affairs as they were in 1966, the devaluation was unavoidable. We can argue how we

got into that state but that is another debate.”

Devaluation of the Rupee (1966)

In the end, it was politics that trumped economics in 1969 when Prime Minister Indira Gandhi nationalised 14 banks. She had

been under pressure from older, more experienced hands within the party (known as the Syndicate) who wanted banks to be

nationalised to neutralise them.

Morarji Desai, who was finance minister then, remained adamant and refused to go ahead with the proposal. “Recent experience

does not suggest that large banks need to be taken over so as to do something they have not been doing,” he wrote. However, on

July 19, 1969, the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance resulted in the ownership of 14

banks being transferred to the state. This made Desai's position in the cabinet untenable. Indira Gandhi, however, offered that he

could stay on as deputy prime minister, but Desai declined.

The 14 banks controlled 70 percent of the country's deposits. In 1980, six more banks were nationalised. (Imperial Bank had

been nationalised in 1955, making it the State Bank of India.)

Nationalisation of Banks (1969)

The latter half of the 1970s was a tumultuous period in Indian politics

fuelled by a wave of anger towards the Indira Gandhi-led Indian National

Congress, which had declared a state of emergency on the nation

between 1975 and 1977. In the general election of 1977, held after

emergency was withdrawn, the Congress lost its seat of power to the

Janata Party, formed by an amalgamation of non-Congress parties, and

led by Prime Minister Morarji Desai and other leaders.

At the time, several international companies, including IBM and Unilever,

had a presence in India. However, it was becoming increasingly difficult

for them to operate effectively because of the Foreign Exchange

Regulation Act (FERA), which had come into effect in 1974. Under FERA,

the country placed a cap on foreign equity participation at 40 percent,

though the limit was higher for pharmaceutical companies. The newly

elected government's decision to become more insular and focus on

promoting agriculture, rural and indigenous industries made the economy unsuitable for multinational companies (MNCs).

According to data from the Reserve Bank of India (RBI), at least 54 companies applied to exit India. By 1978, Coca-Cola, IBM,

Mobil and Kodak had already quit India or had applied to do so. Coca-Cola, for instance, was the leading beverage giant until it

chose to exit the country because of FERA norms and the Janata government's insistence that it reveal its secret formula.

Exit of the MNCs (1977)

Maruti Udyog Ltd. was incorporated on February

24, 1981, but its history can be traced back to

1971. Sanjay Gandhi launched Maruti Motors

Ltd., a private company, which would design,

manufacture and assemble small cars. The firm

was dissolved in 1977, but later resurrected by

Indira Gandhi under her nationalisation drive,

paving the way for a new public sector entity that

went on to become India's largest passenger car

manufacturer.

The company rolled out its first people's car,

Maruti 800, a 796 cc hatchback, in December

1983. The vehicle went on to rule Indian roads for

two decades.

Vikram Kirloskar, president, Society of Indian Automobile Manufacturers, adds: “Maruti brought about a change in

manufacturing in India. Indian industry had gained skills in local content and the ability to make anything in small quantities.” He

contrasts that with the fact that India exported more than half a million cars last year, a little more than China. That speaks of the

progress made, he says.

Maruti Rolls Out People's Car (1983)

Liberalisation of India's telecom sector started in 1984

when Sam Pitroda assisted by government set up the

Centre for Development of Telematics (C-DOT) to

develop indigenous digital switches. Until the 1980s,

Indian telecom was dominated by electromechanical

switches.

C-DOT set up a nationwide telecom network. Pitroda, an

NRI, also introduced the concept of coin-dropping Public

Call Offices (PCOs), which led to the exponential growth

of the telecom industry. In 1987, during Pitroda's

tenure as chief technology advisor to Prime Minister

Rajiv Gandhi, he founded India's Telecom Commission—the country's highest telecom policymaking body—and became its first

chairperson.

The seed for the information technology (IT) revolution was also planted during Rajiv Gandhi's time. The government removed

controls on computers and allowed the import of fully assembled motherboards with processors which led to a reduction in the

prices of computers. Then, in 1995, the then public sector monopoly Videsh Sanchar Nigam Limited launched India's first

internet service for public access.

The next big push for telecom reforms came in 1991 as part of the liberalisation policy. An independent regulatory body, the

Telecom Regulatory Authority of India (TRAI), was set up in 1997 to minimise government interference. In 1999, the New

Telecom Policy ushered in more changes. “The new policy was an inflection point for the industry because it replaced bidding

criteria from license fee to percentage of revenue sharing,” says Vishal Malhotra, Telecom Tax Partner with Ernst & Young and

head of Telecom Tax Practice, Europe, Middle East and Africa.

Ushering in Telecom Reforms (1985)

It's often said that India only gets its act together when

pushed to the wall. 1991 was no different. Faced with a

balance of payments crisis, the country had to airlift gold to

the International Monetary Fund—an act that shook the

nation out of its slumber. People wondered how the situation

had deteriorated so much. And, more importantly, what

could be done to salvage it.

That was when PV Narasimha Rao, who led a minority

government at the Centre, chose to leave his inedible stamp

on the nation. He chose Manmohan Singh, a former RBI

governor, as his finance minister and the rest, as they say, is

history.

Rising to present his maiden Budget on July 24, 1991,

Manmohan Singh dismantled the licence raj and ushered in a gradual lowering of tariffs. More importantly, he devalued the rupee

to make exports competitive. The initial result was euphoria. The stock market rallied (the rally had begun a little before the

Budget) and foreign investors rushed in. The office of the Controller of Capital Issues was abolished and foreigners were allowed

to invest in the stock market. Companies like Coca-Cola and IBM, which had left the country in the 1970s, came back.

Liberalisation, Privatisation & Globalisation (1991)

In 1992, Harshad Mehta, a broker known for his rags-to-riches story and a

poster boy for many investors, had used receipts of public sector banks to

manipulate stock prices.

Mehta siphoned off around Rs 1,000 crore from the banking system to buy

stocks on the Bombay Stock Exchange. In the period between April 1991

and April 1992, the Sensex went into a frenzy and returned 274 percent,

moving from 1,194 points to 4,467. That is the highest annual return for

the index. The scam came to light when the State Bank of India reported a

shortfall in government securities. That led to an investigation that later

showed that Mehta had manipulated around Rs. 3,500 crore in the

system. On August 6, 1992, after the scam was exposed, the markets

crashed by 72 percent leading to one of the biggest falls and a bearish

phase that lasted for two years.

Harshad Mehta scam revealed gaping holes in India's financial systems.

Ashishkumar Chauhan, MD and CEO, BSE, said, “Though there was no

direct co-relation between the scam and the formation of the regulator, the scam became a catalyst for policy-makers to think

hard. It set in motion a chain reaction which lead to developments like the listing agreement. The first boost to Sebi's arsenal was

the Securities Laws (Amendments) Act 1995. This widened Sebi's jurisdiction and allowed it to regulate depositories, FIIs,

venture capital funds and credit-rating agencies. To secure investor interest, Sebi could also make it mandatory for disclosures

by companies issuing securities.

Stock Market Scam (1992)

As P Chidambaram geared up to present the Union

Budget on February 28, 1997, the then finance

minister was fully aware of the political and

economic uncertainties India was going through.

His predecessor Manmohan Singh might have

saved the country the blushes with his path-

breaking Budget of 1991, but the government he

belonged to was voted out of power in 1996.

Economic reforms were increasingly being seen as

anti-poor. The United Front, an alliance of 13

parties, was governing India with HD Deve Gowda,

as a prime minister.

The corporate world was lobbying for more growth

enablers, including rationalised taxes. But they wouldn't have been very hopeful as the FM had imposed a minimum alternate tax

on profits in his maiden Budget a year before. However, by the time Chidambaram finished his Budget speech, the Sensex had

risen by 6.5 percent, a booming vindication second only to Singh's 1991 Budget.

As part of a slew of measures, the FM reduced personal income tax rates from 40 percent to 30 percent and cut corporate tax

rates, including doing away with surcharge and bringing down royalty rates. He increased the limit of FII investment and laid the

ground for the first round of disinvestment in PSUs. Import duty on many products saw a steep cut as well.

One of the biggest long-term impacts of the Dream Budget has been on income tax collections, which grew from Rs. 18,700

crore in 1997 to over Rs. 2 lakh crore in 2013.

Chidambaram's Dream Budget (1997)

The noughties saw a bull run: A super-cycle for stocks and

commodities, powered by Chinese demand for resources

and exuberant US markets. But few countries were as

deeply impacted by the events of those heady days as India.

There was new hope when the UPA government came to

power in 2004. Medium-sized companies in real estate,

infrastructure and core manufacturing were mushrooming.

IPOs were able to collect funds that promoters never dreamt

of earlier: KP Singh's DLF raised Rs. 9,000 crore in 2007,

and Anil Ambani broke all records when the Reliance Power

IPO raked in Rs. 11,700 crore. The Indian elephant was

learning how to dance.

Powered by new confidence, and cash, India Inc scoured the

world for acquisition targets. Large corporate houses like

the Tatas and the Aditya Birla Group were joined by dozens of smaller and relatively unknown Indian companies. Tulsi Tanti (of

Suzlon Energy) and GM Rao (GMR Infra) were the toast of Dalal Street; they (and others) looked for ways to build scale quickly.

Fundraising was a cinch; all they needed were the right targets.

Swashbuckling Indians became the new kings on M&A league tables. In January 2007, Tata Steel beat competition to acquire

UK-based Corus for $12.9 billion, the biggest-ever Indian takeover of a foreign company. In February, Aditya Birla Group company

Hindalco bought Novelis for a $6 billion all-cash deal. Dozens of others followed to buy mines, power projects, hotels and BPOs.

The ride continued through 2008: Tata Motors picked up loss-making Jaguar Land Rover for $2.3 billion and Suzlon Energy

bought German wind turbine maker REpower for $1.7 billion.

Rise of India Inc (2005)

The first decade of the 21st century saw tremendous growth and

optimism in India. While the markets unleashed animal spirits, the

country became an idiom for development, thanks to massive

poverty reductions reflected in increased per capita income (from

$300 in 1991 to $1,700 in 2011), second only to China. India also

held its own during the 2008 global financial crisis that had brought

most of the financial powerhouses to their knees.

However, the good work was undone in 2010 as growth tanked,

inflation rose, and the current account deficit increased (to $31

billion in 2013). Just by looking at the numbers in this period, it

would seem that the high growth rate in the preceding years was an

aberration.

So what went wrong? As many economists observed, the main players which led to India's upturn were also the very reasons for

its downfall: Its economic and political institutions. On the economic front, outdated land rights and even more archaic laws, the

rise in cost of living, and India's strongest industries (steel, manufacturing and auto) going through tough times meant that the

pillars of the economy remained wobbly due to domestic policies that led to inflation and limited growth.

As if the economic churn wasn't enough, India also saw some of the most politically unsettling times of the decade. It was during

this period (2008-10) that a series of mega scams—2G, Adarsh, Commonwealth Games, to name a few—tumbled out of the

UPA's closet and exposed the widespread corruption.

The “policy paralysis” that set in gave birth to cronyism, especially in the management of natural resources, such as coal. By

2013, infrastructure projects worth an estimated Rs. 7 lakh crore or more were held up for various reasons.

Beginning of the Downturn (2010)