India has predominantly operated under a state-led economic model since gaining independence from colonial rule in 1947, recognizing the significance of catering to its heterogeneous population of different castes, religions, and income levels. As of 2023, the government handles spending and tax cuts while allowing the expansion of free markets, and the dilemma of achieving the correct balance between equity and debt is pertinent now more than ever.
This blog delves into the progressive journey of India's Economic growth by exploring its evolution in three distinct phases. From 1947 to 1990, India built its economic foundation while traversing the complexities of diverse cultures, languages, geography, and socioeconomic disparities. With the adoption of neoliberal policies in the early 1990s, embracing globalization and privatization amidst the rise of technology, Phase 2 witnessed a radical shift. As 2023 approached, India's prowess in manufacturing, exports, IT services, and tourism established it as a global investment hotspot. However, persistent issues such as income inequality continue to persist. The early 2000s heralded a shift toward financial inclusion, signalling a critical shift in India's national growth strategy.
It is wonderful to see that as of 2023, India is the world's 5th Largest economy in Global GDP rankings. The nation's phenomenal growth and development are setting the momentum for exciting times ahead.
India's Economic Growth: From Where It All Began...
Following India's independence in 1947, the country built its economic framework, drawing inspiration from its rich diversity in cultures, languages, geography, and socioeconomic inequality. This foundation was built on the principles of a state-led economy, a decision influenced not only by the stark wealth disparities among its citizens but also by the novel experience of leading as a democracy for the first time.
Adopting a state-led economy may appear counterintuitive to democratic ideals. Still, it was deemed critical during a time when India was navigating its nascent democratic structure and recovering from the aftereffects of colonial rule. It took some time for the populace to acclimate to their newfound freedom during the democratic transition for them to develop a new identity and, eventually, find a voice in independent India.
Subsequently, Industrialism gathered steam and the forces of globalization began to reshape the economic environment as India progressively embraced democracy and opened up commerce and travel across borders.
Neo-Liberalism in India: Phase Two of India's Economic Growth
The adoption of neoliberal policies in the early 1990s marked a turning point in India's economic trajectory, signalling a departure from its socialist roots and an embrace of globalization and privatization principles. The rise of technology and the advent of the digital age significantly impacted this shift toward free-market reform. The early 1990s internet boom transformed the landscape, ushering in a new era of accessibility, availability, and information migration to online platforms. This period also saw the beginnings of exploring untapped markets.
The lowering of trade barriers, the luring of foreign direct investment (FDI), and the privatization of state-owned businesses began to intensify India's assertiveness in the Global economy. The idea underlying these modifications was to use market forces as catalysts for economic expansion.
The economic concept underlying India's reforms was based on Neo-Liberalism, synonymous with free-market capitalism. This was a break from the previous state-controlled approach, to leverage market dynamics to achieve substantial economic growth. This move, however, has been criticized for aggravating income inequality, with the wealthy benefiting disproportionately and the income gap expanding. While not specific to India, there has been a widespread acknowledgement that neoliberalism has worsened economic inequality by giving corporations power beyond control. According to a review study published in The Economic Times, poverty in India has persisted even after independence. The study notes that India's total income is comprised of the earnings of the bottom 50%, the top 10% and the top 1%. The earnings of the bottom 50% have decreased to 13%, while those of the top 10% and top 1% are at 57% and 22%, respectively.
As India embraced neoliberalism, it experienced substantial economic progress, with industries such as information technology and telecommunications flourishing. This expansion, however, came at the expense of widening economic disparity, with the wealthy gaining disproportionately. The departure from the former state-led economy signalled a transition toward a more inclusive approach to socio-economics.
Financial Inclusion: 2024 and Beyond
At the close of 2023, India has established itself as an appealing investment destination, owing to its remarkable achievements in banking, manufacturing, exports, software and IT-enabled services, and tourism among other industries. According to projections, India's GDP is on track to secure According to projections, India's GDP will be the fourth largest economy in the world in the next five years.
However, despite this economic progress, persistent difficulties such as the income gap, unemployment, underemployment, and overall inequality continue. Despite substantial GDP growth, worries regarding GDP per capita linger, implying that the implementation of neoliberal policies may have inadvertently increased rather than narrowed socioeconomic divides.
In response to these challenges, India is shifting from a neoliberal economic model to one that prioritizes financial inclusion as a core component of its national growth plan. In this sense, inclusivity ensures that the advantages of economic progress reach all segments of society, particularly those at the bottom of the pyramid.
Financial Inclusion: India's GINI Coefficient
India has highlighted financial inclusion as a critical basis for its goal of inclusive growth. The goal is simple: to provide affordable and formal financial services to all parts of society, particularly those who have traditionally been excluded from the traditional banking system.
In 2020, India's GINI Coefficient, a measure of income inequality, remained at an alarming 82.3%, highlighting the critical need for inclusive financial services to bridge economic disparities. Despite the recognized importance of this work, difficulties have arisen. Notably, an increase in the Gross Non-Performing Assets (NPA) Ratio has heightened concern among banks, prompting them to exercise prudence in lending due to the related risks. This prudence derives from concerns about the emergence of a credit bubble and the effect of profit-driven incentives within financial institutions.
In the face of these obstacles, India is committed to promoting financial inclusion. While the GINI Coefficient emphasizes the importance of fair financial services, addressing risks associated with a high NPA Ratio, potential credit bubble worries, and aligning incentives for prudent lending are all important components of India's continued journey toward inclusive financial growth.
Setting the Benchmark: RBI's Role in Redefining Financial Inclusion
Illustrating with the banking sector, microfinance institutions (MFIs) stand out as pivotal drivers of financial inclusion. MFIs are essential in rural and semi-urban regions because they empower local entrepreneurs with small loans, encourage the expansion of small firms, and support regional economic development. Furthermore, financial inclusion efforts are greatly enhanced by the execution of Priority Sector Lending (PSL) responsibilities in conjunction with programs like the JAM Trinity.
A deeper look uncovers the sophisticated groundwork woven into these efforts, which combine technology and market research in collaboration with the private sector. While the government laid the basis for the post-independence age like a playground with the necessary legal framework and technological infrastructure, the neoliberal era ushered in free-market growth. In today's business environment, collaboration between the public and commercial sectors, catalyzed by advanced technology, is wholly exceptional, indicating a synergy that transcends prior constraints and keeps driving India towards equitable economic development.
As we reflect on India's extraordinary economic growth from colonialism and neoliberalism to financial inclusion, it is heartening to see the progress achieved toward supporting equitable growth. India is at the vanguard of revolutionary change in this continuing story of progress.
India is charting a path that prioritizes economic growth, equality, and social justice by harnessing technology, new policies, and a dedication to closing social and economic inequalities. We continue to increase financial literacy, overcome infrastructure gaps, and remove digital obstacles by viewing challenges as opportunities for innovation and collaboration. As we continue on this joint journey, we will indeed be able to realize our vision of a more egalitarian and resilient economic landscape.
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