After independence in 1947, in 1951 the First Five Year Plan was introduced which mainly focused on the development of the primary sector. The Second Five Year Plan largely emphasised on government led industrialization. This started the License Raj, wherein government controlled the production amount and the price of commodities along with having full control over the manufacturing company. The rupee was devalued in 1966 with two major wars against China and Pakistan and multiple changes to India’s leadership in the post-Nehru era. With nationalization of banks in 1969 and the Monopolies and Restrictive Trade Practices Act of 1970, the License Raj further strengthened. This created a smaller pool of opportunities and resulted in stagnation in growth. Due to the limited choices on account of scarcity of resources, a ‘scarcity economy’ emerged. The annual growth rate of economy of India was stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%.
From 1980s to 1990s, the economy grew at an annual rate of 5.5% or 3.3% on a per capita basis. Industry grew at an annual rate of 6.6% and agriculture at a rate of 3.6%. Investment increased from about 19% of GDP in the early 1970s to nearly 25% in the early 1980s. During the late 1980s, India relied increasingly on borrowing from foreign sources. This led to a balance of payments crisis in 1990 which in turn resulted in economic reforms by the government in Jun, 1991.
Liberalization Period (1990s-2000s)
1991: The government of India introduced reforms which liberalized the industrial policy and invited foreign investment by privatization of industries and abolished the license system as a part of liberalization. In many industrial sectors, automatic approval for FDI was introduced. The reforms influenced the national income and the standard of living of the people. Thereby, increasing the consumption expenditure after the introduction of reforms. The reforms saw the country breaking free of the low growth trap of 3.5% per annum. Real GDP growth averaged 5.7% per annum in the 1990s.
The economy grew at 5.7% during the 1990s irrespective of the meagre 1.1% growth in 1991- a crisis year for the nation.
The government of India introduced measures for the ease of FDI in the country. Some of the highlights were removal of ceiling of 40% foreign equity under FERA, introduction of the dual approval systems for FDI proposals (through an automatic approval channel for FDI in 35 priority sectors by RBI up to equity participation 51% and through formal government of India channel via FIPB/SIA). Also, existing companies could hike their foreign equity up to 51% in priority sector. The sector which attracted higher inflows was services.
India’s IT boom started in the mid-1990s after the liberalization of the Indian economy in 1991 which enabled the foreign IT companies to outsource their work to India and it in turn provided many young Indians with well-paid opportunities.
The creation of corporation called Software Technology Parks of India (STPI) provided satellite links to major IT developers which in turn enabled them to transmit the work done in India directly abroad. Companies like Oracle, GE Capital International Services, Microsoft Corp, Motorola Inc, IBM and SAP established development centres, R&D centres and software development centres.
1992-1993: Indian mining sector was opened to foreign direct investment.
1993-1994: Permission was granted to foreign investors and NRI investors to repatriate their profits and capital.
1996-1997: The upper limit for foreign equity participation under automatic approval was raised from 51% to 74% of the equity capital in select industries. The list of industries open for automatic approval was also expanded. NRIs and OCBs (Overseas Corporate Bodies) were given automatic approval for equity in priority industries. FDI in cash and carry (wholesale) with 100% rights was allowed under the government approval route.
The first wave which contributed to the ecommerce boom now started. B2B online portals and online matrimonial and job portals were launched. The liberalization of the country’s international trade policies was the key factor that accelerated the growth of B2B online portals. The first wave of E-Commerce in India was characterized by low internet penetration, a small online shopping user base, slow internet speed, low consumer acceptance of online shopping and inadequate logistics infrastructure.
1998: Simplified procedures for automatic FDI approvals were announced by Reserve Bank of India. This in turn implied that there is no need for Indian companies to acquire prior clearance from the Reserve Bank of India for inward remittance of foreign exchange or for the issuance of shares to foreign investors.
1999: As the Indian government simplified the FDI rules, the entry of foreign brands into India became easier and more hassle free. The Dubai based Landmark group forayed into India with the Lifestyle department stores and later expanded to include Max and Home Centre. Its stores drew in the crowds, especially those from the higher income bracket and gave Lifestyle, a premium positioning.
2000s: As the 2000s approached, fear of the Y2K bug made the US corporations outsource all the equipment and upgrading work to Indians. As a result, the modification of all the codes and software, which were initially designed till a date of 1999 was to be edited and huge work was outsourced to the Indian IT industries. Accenture, Yahoo Inc, Dell, Google and Cisco opened their technology development centres, R&D centres, globalization centres. Certain companies like IBM and SAP further invested in the country.