India’s Path of Economic Liberalization and Digital Transformation

After a dramatic balance of payment crisis in 1991, which drove India on the brink of bankruptcy, a process of liberalization of the economy was initiated by the then Prime Minister, P.V. Narashima Rao. The reform diminished the excessively high tariffs, eased the import licences and brought to an end numerous public monopolies, from heavy industries to telecommunication.

The foreign investors promptly responded to this liberalization. Indian growth, which had stagnated around 3.5% between 1950 and 1980 reached 5.3% as soon as 1993 and went up to 8% in 1996. This rapid economic recovery resulted in increasing incomes, life expectancy or literacy rates. The inclusiveness of these economic spinoffs was nevertheless often limited to urbanized areas at the expense of the rural areas.

Even though this liberalization process has been undeniably beneficial to India as a whole, economically and socially, the inclusiveness of Indian economic and social policies remains a huge challenge as its population is now over 1.3 billion.

To address this challenge, Indian government has been particularly concentrating its efforts on economic reforms with a strong focus on digitalization in the last decade. Putting aside any nationalistic and pro-Hindu tendencies, Narendra Modi has presented himself as the great economic reformer India needed in order to win the 2014 elections. In the light of the recent reforms carried out by the Indian government we will try to understand to what extent his claims have been legitimate or not.

Toward a healthier and simplified economy

From an economic perspective Modi aims at making India a safe and easy place to invest in order to attract foreign investment. In his view, this means fighting corruption and the shadow economy, simplifying and unifying the tax system, liberalizing the still conservative sectors and making India digital friendly.

• Demonetisation

The most mediatised economic reform N. Modi undertook so far was the demonetisation of the 500 and 1000 rupees bank notes in November 2016. These bills represented 86% of the cash circulating in India. This unexpected decision announced at 8pm and effective at midnight aimed at curtailing shadow economy and counterfeit cash sustaining illegal activities. However, its first and direct effect was chaos as the transition between old and new bills was poorly organized. For days, banks ran out of cash and it was only after a couple of months that the situation went back to normal.

With a one year outlook on the decision, with some calling the demonetization a complete success and others a scathing failure, the results seem rather mixed.

First, 99% of the banned bills came back into the system, i.e. to the central bank. This unexpectedly high return rate made the demonetization way less profitable as, in the end, the printing costs were almost as high as the gain from the non-returning demonetized currency.

Second, the growth figures following the demonetization were astonishingly low compared to the forecasts and this difference could be imputed to the demonetization. In the first quarter of 2017, the GDP growth rate was 6.1% even though it was forecasted 1% higher by the Central Office of Statistics.

However, on a long term scale, and even though it was never publicly admitted by the government, the decision has considerably increased the number of people opening bank accounts and therefore it created new official tax payers. It also gave a strong boost to digital payments as cash was lacking. And, not to be forgotten, a digital transaction is a transaction that cannot be hidden from tax enforcement.

• Goods and Service Tax (GST)

The Goods and Services Tax reform, introduced in July 2017, is considered as one of India’s biggest economic reforms ever implemented. Indeed, this tax reform got rid of the old regional and national tax legislation and unified tax-wise the country as a single market. With the size of the country and the number of people affected by the reform, this is a considerable challenge for the government as its network (GSTN) will receive up to 3 billion invoices per month.

Looking beyond the implementation challenges specific to this reform, the GST could bring much needed fresh air to the complex and stratified old Indian tax system and offer a clearer environment for foreign investors. After only three months, the results are still lukewarm but judging a reform of this scale this early would be precipitated.

Investment-friendliness through digital innovation

As mentioned before, economic and digital reforms are deeply interconnected. Indeed, in a country where more than 1 billion phones are in circulation, the use of such an enormous existing network appears only logical when it comes to reaching all Indian citizens in each corner of the country. Therefore, parallel to the economic reforms presented, more specifically digital oriented projects were also implemented.

The first project that grew as a part of the Indian digitalisation process was Aadhaar. This massive biometric database created in 2009, today counts more than 1.15 billion member and more than 99% of India’s adult population. Even though security and privacy concerns have been raised, the size and exhaustiveness of such a database is a great achievement enabling citizens to get easier access to public subsidies as well as helping with tax collection for the government.

Increasing India’s digital and trade friendliness more recently has also been promoted through numerous projects and initiatives launched by the Indian government. Startup India promotes entrepreneurship and start up creations. Digital India aims at improving high-speed network and infrastructure to increase the country’s connectivity. Make in India encourages companies to manufacture their products in India.

This sustained political engagement toward digital transformation, the structural and investment-oriented reforms and the relatively cheap and highly qualified population did not go unnoticed by investors. As a matter of facts, over the last year, Foreign Direct Investments have been strongly increasing.

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Conclusion

In the recent year, Indian government has set economic reforms and digital transformation as the cornerstone of its social and economic development. Through numerous reforms and projects, the country has demonstrated its ambition to rise as a global economic growth engine attractive to foreign investors.

Though it might be too early to fully judge the long term efficiency of such reforms, their deeply structural nature such as the GST nevertheless allows to assess the long-term vision of Indian economic policies and sends a clear and welcoming message to the international community.

It remains, however, that if economic and digital reforms are a great path to growth, it will only reach the population if education and inclusiveness are provided together with economic and digital reforms and not expected as a fait accompli. Social, economic and digital reforms must be carried hand-in-hand to be fully inclusive.

Last but not least, communitarianism and Hindu-nationalism still casts a shadow on Modi’s political line and could rapidly and strongly hinder the good development of its economic and social policies. The recent appointment of a controversial and conservative Hindu religious leader as Chief Minister of Uttar Pradesh, India’s most populous state, was, to say the least, a mixed message to all, domestic and international economic actors, as a politically instable country is far from a safe place to invest.