GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

Why in the News?

People around the world paid tribute to Dr. Manmohan Singh, known for opening up India’s economy and making it a global player, who passed away at the age of 92.

How did Manmohan Singh’s reforms transform India’s economic landscape?

• 1991 Economic Liberalization (LPG):  He abolished the “License Raj,” which required businesses to seek government approvals for setting up industries.
  • Example: The IT sector flourished, with companies like Infosys and Wipro gaining international prominence.
• Tax Reforms and Currency Devaluation: Singh’s government implemented substantial tax cuts and devalued the Indian rupee to enhance competitiveness.
  • Example: Corporate tax was reduced from 50% (pre-1991) to around 35% by the mid-1990s, boosting business sentiment.
• Welfare Schemes: Alongside economic liberalisation, Singh’s administration introduced welfare initiatives aimed at sharing the benefits of growth with the rural poor, thereby addressing socio-economic disparities.
  • Introduced schemes like MGNREGA (2005) and expanded rural credit, improving employment and poverty alleviation.
  • Poverty rates dropped from 37.2% (2004-05) to 21.9% (2011-12), and India’s middle class expanded significantly due to higher income levels.
• Economy growth: As Finance Minister, in 1991 economic reforms addressed the balance-of-payments crisis by reducing the fiscal deficit from 8.4% of GDP (1991) to 5.7% (1993) and reviving GDP growth from 1.1% (1991-92) to 5.3% (1992-93) through measures such as dismantling industrial licensing, devaluing the rupee, and encouraging foreign investment.

How did he left a lasting imprint on external relations?

• US-India Civil Nuclear Deal (2008): He played a pivotal role in finalising the Civil Nuclear Agreement, which ended India’s nuclear isolation and strengthened strategic ties with the United States.
  • It also marked a shift in global recognition of India as a responsible nuclear power.
• Strengthening India’s Strategic Partnerships: Deepened ties with major global powers, including the US, EU, Japan, and Russia, enhancing India’s diplomatic and economic engagement globally.
• Championing India’s Role in Global Governance: Advocated for reforms in international institutions like the UN, IMF, and World Bank to reflect the rising stature of emerging economies, particularly India.
  • His leadership elevated India’s voice in global forums like G20 and BRICS.
• Focus on Regional and Economic Integration: Fostered closer economic and diplomatic ties with ASEAN, SAARC nations, and other Asian neighbours, reinforcing India’s position in regional trade and security frameworks.
  • His outreach contributed to India’s Act East Policy and improved relations with key partners in the Indo-Pacific region.

Conclusion: The Indian government should embrace Dr. Manmohan Singh’s legacy by prioritizing bold economic reforms, fostering global partnerships, and championing inclusive growth. Emphasizing strategic investments in infrastructure, skilling, and technology while deepening ties with regional and global partners can sustain long-term growth, reduce disparities, and solidify India’s leadership in global governance.

Mains PYQ:

Q Has the Indian governmental system responded adequately to the demands of Liberalization, Privatization and Globalization started in 1991? What can the government do to be responsive to this important change? (UPSC IAS/2016)

Why in the news? 

India’s Rural low wages pose a significant challenge, but adopting a ground-level perspective on employers’ daily realities highlights policy measures to increase the number of high-productivity employers.

What are the root causes of the current wage stagnation in India?

• Economic Structure: The shift from agriculture to non-farm jobs has not been accompanied by a corresponding increase in productivity. Despite significant government spending, the flow of jobs since 1991 has not reduced farm employment, leading to wage stagnation in rural areas.
• Skill Mismatch: There is a disparity between the skills available in the labour market and those demanded by employers. Many workers remain under-skilled for the higher-paying jobs that are available, perpetuating low wages.
• Economic growth vs wage stagnation: Despite India’s GDP growing at a strong rate, averaging 7.8% in recent years, this growth has not led to substantial wage increases for rural workers. In fact, real wages, when adjusted for inflation, have either remained stagnant or decreased. This disparity underscores a crucial issue: the underlying nature of economic growth.
• Shift to Capital-Intensive Growth: India’s recent economic growth is driven by capital-intensive sectors, which create fewer jobs, limiting the demand for rural labour and keeping wages low.
• Inflation vs. Wage Growth: While nominal wages have risen, inflation has outpaced wage growth, reducing the real purchasing power of rural workers. For example, rural wages grew by 5.2% nominally, but real wage growth was negative at -0.4%.
• Increased Labour Supply: Government schemes like Ujjwala and Har Ghar Jal have increased rural women’s workforce participation, intensifying competition for jobs and putting downward pressure on wages.
• Agricultural Wage Stagnation: Despite steady agricultural growth (4.2% and 3.6% in recent years), wages in agriculture have not increased proportionally, limiting overall wage growth in rural areas.

How can India effectively implement a living wage system?

A living wage system ensures workers earn enough to meet basic needs like food, housing, healthcare, and education, enabling a decent standard of living beyond mere subsistence wages.

• Policy Framework: Establishing a clear definition of what constitutes a living wage based on local cost of living metrics is essential. This framework should be adaptable to different regions and sectors.
• Incentives for Employers: Providing tax breaks or subsidies for businesses that pay living wages can encourage compliance and support workers’ livelihoods.
• Strengthening Labor Rights: Ensuring robust enforcement of labor laws that protect workers’ rights to fair wages and safe working conditions is crucial for implementing a living wage system effectively.
• Public Awareness Campaigns: Educating both employers and employees about the benefits of a living wage can help shift perceptions and practices within the workforce.

What policy measures can be taken to address wage disparities and ensure fair compensation? (Way forward)

• Rationalisation of Regulations: Streamlining regulatory frameworks to reduce bureaucratic hurdles can encourage entrepreneurship and job creation. This includes removing unnecessary jail provisions that deter business operations.
• Investing in Human Capital: Prioritizing skill development programs aligned with market demands can boost employability and empower workers to secure higher-paying jobs.
• Encouraging Non-Farm Employment: Policies should focus on fostering private, productive non-farm jobs through digitisation and formalization, paving the way for better wages.
• Strengthening Redistribution Mechanisms: Adopting progressive taxation on higher profits can fund social programs designed to uplift wage levels across different sectors.
• Fostering Long-Term Economic Planning: Crafting a comprehensive economic strategy aligned with labour market needs is essential for ensuring sustainable wage growth and effectively addressing disparities.

Mains PYQ: 

Q Can the strategy of regional-resource-based manufacturing help in promoting employment in India? (UPSC IAS/2019)