Former Governor of the Reserve Bank of India (1992-97) and Distinguished University Professor of Ahmedabad University Dr C Rangarajan led audiences through a deep sequential understanding of India's journey from a colonised region to a developing country in three-quarters of a century. He talked about India at 75 and Beyond in his valedictorian speech at the 4th Annual Economic Conference organised by the Amrut Mody School of Management. He is renowned for his 1991 economic reforms that were kickstarted by his unprecedented decision to devalue the rupee when India faced its biggest balance of payments crisis.
Dr Rangarajan pointed out that India's growth in the first five decades of the 20th century was stagnant as under British rule, between 1900-50, India grew at a mere 0.89 per cent per annum while the population was growing at 0.84 per cent. He said, "India's growth journey began in earnest after Independence. Unsurprisingly, one of the main concerns of policymakers then was to usher in a higher rate of growth in the economy. In the 1950s and 60s, the dominant view was that the State had an important role to play." With newly independent India's stakeholders not foreseeing a bright future through investment, the role of the State came to be emphasised, with the Soviet Union being a shining example. Dr Rangarajan said, "One cannot blame the policymakers of the 1950s and 60s for the decisions they have taken because, at that particular time, there was no clear blueprint for a strategy of economic development in developing countries. They had a four-pronged strategy — first, the development strategy by raising the savings and investment rates. The second was the dominance of State intervention. The third element in the strategy was import substitution, and the fourth element was industrialisation with an emphasis on heavy industry. There was export pessimism. One consequence of this was that we lost our export markets." In 1947, India's share of world exports was two per cent; by the end of 1990, this share went down to 0.5 per cent of the GDP.
The inward-looking policy of the government began to manifest its consequences during the 1980s; the balance of payment deficit increased, and the fiscal deficit went through the roof even though the growth rate picked up. At the end of the 1980s, the country faced an enormous crisis. There was a crying need for reforms, he said. "With the reforms, there was a break with the past in three important ways. One was to dismantle the framework of permits and controls which dominated the system. The second was to re-define and reorient the role of the State, and the third was to give up the import substitution policy, and to embrace and become part of the world trading arrangement."
Dr Rangarajan reasoned that the best performance of the Indian economy was between 2005-06 and 2007-08, with the average annual growth rate in the three years exceeding nine per cent. "We had the international financial crisis in 2008-09, and even though the growth rate fell, it bounced back in 2008-09 and 2009-10. If we look at the six-year average annual growth rate, it was still between eight and nine per cent. That shows the potential of the Indian economy."
Speaking about the impact of the poverty ratio on an economy's growth, he said that the poverty ratio in 1993-94 was 45.3 per cent; in 2004, it shrunk to 37.2 per cent, and in 2011-12, it came down to 21.9 per cent. "If we have a sharp rise in growth rate and if that growth rate is utilised to provide social safety nets, the poverty ratio can come down. Growth alone cannot do it. Between 2005-06 and 2011-12, the Mahatma Gandhi Rural Employment Guarantee Scheme was introduced. It was the same period during which the extended food security program was introduced."
Dr Rangarajan emphasised that introducing reforms must be complemented by creating the appropriate investment climate. He said, "The timing and sequencing of reforms are also important. Reforms are not ends in themselves. The purpose of reforms is to improve the efficiency of the system and bring about bigger changes in the economy and a faster rate of growth. Even growth is not an end in itself. The purpose of growth is to enable a large number of people to benefit from it, to enable an equitable distribution. Reforms, growth, and equity constitute the triad of economic administration. I would say the three are mutually reinforced. We have talked about equity in this country since the time of Independence, but equity will remain a distant dream unless it is supported by growth triggered by reforms."
Estimating a 6.8 per cent growth rate for the economy this year, he highlighted a few challenges and opportunities for India. Dr Rangarajan said, "Private investment, both corporate and non-corporate, must increase, and that is how we can raise the investment rate and consequently raise the growth rate. The arrival of new technologies will be a problem not only for developing economies like India but also for the world's developed economies because of their labour replacement. It is true that the Industrial Revolution also replaced labour, but the output was growing at such a fast rate that it was able to absorb the labour. But with new technologies, the problem is different. It is not replacing repetitive labour; it is replacing mental activity. We have to recognise labour-intensive activities that can absorb labour. The third is that we need export-led growth as a test of efficiency. We should promote exports and manufacturing because that provides employment for a wider cross-section of talent in the country." He concluded with how India could become a developed country: "To reach a USD 13000 per capita income, we need to grow at a real rate of growth of eight to nine per cent for the next 25 years. That is the magnitude of the challenge."