In 1991, India went bust and rushed to the International Monetary Fund (IMF) for help. At the time, India was famous (or perhaps infamous) for being the biggest beggar for foreign aid and food aid in the world. Attempts for three decades after becoming independent in 1947 to promote economic development through self‐sufficiency, socialist planning, and public‐sector dominance had yielded only 3.5 percent GDP growth per year, half that of the four Asian tigers (Korea, Taiwan, Singapore, and Hong Kong).
Five‐year plans directed not only public but also private investment. Government permits were required for any production, import, technical collaboration, or access to foreign exchange. Industrial capacity was limited to meet domestic demand, leading to tiny factories lacking scale economies. Over 800 industrial products were reserved for production by small‐scale industries. The government owned banks, insurance companies, and other term‐lending institutions.
At the peak of the socialist phase in the 1970s, the top income tax rate was 97.75 percent—buttressed by a wealth tax of 3.5 percent. Prime Minister Indira Gandhi’s slogan was “garibi hatao,” meaning “abolish poverty.” Alas, the poverty ratio did not fall at all in three decades after becoming independent, during which the population virtually doubled, so the absolute number of people who were poor practically doubled. Creeping liberalization began in the 1980s. This facilitated faster GDP growth and some poverty reduction but depended on massive, unsustainable fiscal deficits. Foreign debt piled up, and India went bust in 1991. Clearly a new policy was needed. The USSR’s collapse showed that more socialism was not the answer. And so the government turned from autarky to globalization and from public‐sector domination to an economy driven by the private sector.
Opposition parties castigated policies that they saw as impositions by the World Bank and IMF and swore to reverse these policies when they came to power. But GDP picked up so smartly that all subsequent governments of different political stripes stayed in the same economic direction. After 2003, the cumulative impact of years of reform and globalization helped Indian GDP to average more than 7 percent annually, making India a “miracle” economy.
Per capita income rose from $304 in 1991 to an estimated $2,600 in 2023. In purchasing‐power terms, India now has the third‐largest GDP in the world after China and the United States. Poverty has plummeted, and an IMF working paper suggests that the proportion of people in extreme poverty—defined by the World Bank as those living on less than $2.15 a day at 2017 prices—has fallen below 1 percent. India has graduated from being the biggest beggar of foreign aid to a substantial donor. It has become an economic power to reckon with. An op‐ed in The Guardian says India is quietly establishing itself as an economic superpower.
Globalization of Trade
India accounted for 2 percent of world exports when it became independent in 1947. Its leaders believed that globalization meant colonial domination. They sought self‐sufficiency to gain what they saw as economic independence to buttress political independence. Autarkic policies reduced India’s share of global exports to 0.45 percent by 1986, but this was cheered as an achievement instead of being decried as a disaster. By 1991, import duties exceeded 300 percent on some items, and the import of many items was banned.
Economic reforms reduced import duties gradually from over 300 percent in 1991 to a simple average of 12 percent by FY 2010–2011 (Figure 1). Curbs on private‐sector investment and imports were lifted rapidly. Pessimists predicted that opening up the economy would lead to a flood of imports and chronic balance‐of‐payments crises. Instead, India thrived. The ratio of foreign trade to GDP had already risen from a low of 8.5 percent in 1965 to 17.0 percent by 1991 but then soared to 49.4 percent by 2022 (Figure 2). India’s current account deficit has remained manageable, and so, unlike most Asian countries, India did not require IMF assistance even in the Asian financial crisis of 1998 or Great Recession of 2008. Foreign exchange reserves rose from virtually zero in 1991 to $580 billion in mid‐2023. India in 2023 is a haven of stability even as its neighbors—including Pakistan, Sri Lanka, and Bangladesh—have sought IMF assistance.
Remarkably, India has become a major exporter of services. Historically, countries started as exporters of commodities, graduated to manufactures, and ultimately achieved service exports. Because of restrictive labor policies and poor infrastructure, India never achieved its potential as a low‐cost manufacturer of labor‐intensive products as the Asian tigers once did. But India leapfrogged richer developing countries to become a services exporter. This started with call centers and computer software in the late 1990s, leading to a swift rise up the value chain. During the Indian fiscal year 2022–2023 (which began in April 2022 and ended after March 2023), India’s services exports rose by more than 27 percent to $325 billion while merchandise exports rose by just 5 percent to $452 billion (Figure 3). Services exports look set to overtake merchandise exports within a few years. India currently accounts for only 1.5 percent of global merchandise exports but 4.1 percent of global services exports. India’s top software exporters—Infosys, Tata Consultancy Services, and Cognizant—are world‐famous.
Global capability centers of multinational corporations have become major service exporters. A NASSCOM‐Deloitte report estimated in 2021 that 1,430 multinational corporations had set up these centers in India, initially for low‐tech, back‐office work, later for software, and now increasingly for high‐value activities such as engineering services and research and development (R&D). In 2021, their turnover was $36 billion. They employed 1.38 million staff, of whom 42 percent were in engineering R&D. Accenture, the world’s largest information technology consultancy company, had 300,000 of its 700,000 global workforce in India. Over 40 percent of global capability centers globally are in India. Through the centers, the internal trade of multinational corporations has become the international trade of nations.
Globalization of Industry
India’s first prime minister, Jawaharlal Nehru, wanted a dominant public sector. His 1956 Industrial Policy Resolution committed India to a socialist pattern of society, reserving 17 economic areas for the public sector. His socialist thinking was carried forward by his daughter, Indira Gandhi, who became prime minister in 1967. She nationalized several industries—banks, coal, copper, and general insurance. The export and import of thousands of items had to be channeled through public‐sector trading corporations. Indian private‐sector companies remained pygmies by global standards, and foreign investment was rarely permitted and never wooed.
Limited liberalization after 1980 eased the most stringent controls. But true liberalization had to wait until the reforms of 1991 that ended the era of industrial and import licenses and made the rupee convertible on current account. Critics claimed that globalization meant Indian companies would be crushed by multinational corporations or converted to their vassals. But foreign investment was allowed only gradually, notably in automobiles and telecommunications. Virtually all the multinational auto corporations entered to take advantage of what was going to become the most populous country in the world in the 21st century, but many—including General Motors, Ford, Chrysler, Fiat, and Peugeot—struggled for over a decade to make a profit and then exited. Suzuki and Hyundai emerged as the top foreign brands. Two Indian companies, Tata Motors and Mahindra, came up as competitive producers and exporters. By the 2000s, India became a major exporter of cars, scooters, motorcycles, and auto parts.
Most Indian political parties strongly opposed the new patent rules flowing from the creation of the World Trade Organization (WTO) in 2015. Indian drug companies had come up using reverse engineering to produce drugs under patent in the West and feared being bankrupted by the new patent regime. In fact, the WTO rules created a huge global market for generics in which Indian companies soon became one of the biggest global players. They now supply 40 percent of the U.S. generic market.
Some Indian companies were indeed killed by foreign competition. But other Indian companies became multinational corporations in their own right. The Mittal Group acquired France’s Arcelor to become the biggest steel company in the world. The Tata Group purchased Corus and Jaguar in the UK and became the biggest private‐sector employer in the UK.
India’s most unexpected success was in computer software and other business services. India’s software exports picked up steam in the 1990s. So many U.S. jobs were outsourced to India’s top software city, Bangalore, that the phrase “Bangalored” came to mean jobs lost to outsourcing. India’s information technology industry during FY 2022–2023 accounted for 5.4 billion jobs and $194 billion of exports.
Foreign investment in most sectors was muted until the late 2010s. Foreign direct investment into India has never been as high as in China, rising from a negligible $70 million in 1991 to $83.57 billion (3.1 percent of GDP) during FY 2021–2022 . With the deterioration of political relations between China and the West, some multinational corporations have recently started shifting out of China, and India has been a beneficiary. The star example is Apple, which during FY 2022–2023 produced $7 billion of iPhones in India, of which $5 billion were exported. Apple aims for revenues of $20 billion by 2025, and many of its component manufacturers are also expanding fast in India.
Most Fortune 500 companies are in India but are there more through global capability centers than factories. Many Indians working in these centers have later left to start their own ventures. Thus, global capability centers have become incubators of Indian entrepreneurs. One example is Bhavish Aggarwal, who started in Microsoft but left to create Ola Cabs, the Indian equivalent of Uber, and is now building what could become the biggest electric two‐wheeler company in the world, Ola Electric.
Globalization of Agriculture
In the 1960s, India was the biggest recipient of food aid in the world. Environmentalist Paul Ehrlich predicted mass starvation. A best‐selling book declared that the world lacked enough food for all needy countries, arguing that unviable countries such as India should be left to starve, conserving food aid for viable countries. India’s green revolution in the 1970s proved that to be nonsense.
By 1991, India was largely self‐sufficient in food grains but still needed food aid in drought years. But after economic liberalization, India has gradually become a major food exporter. In 2022, it exported 22.26 million tons of rice, more than the next four largest rice exporters put together—Thailand, Vietnam, Pakistan, and the United States.
The 1995 creation of the WTO subjected India to new patent laws on agriculture. Opposition parties claimed this would kill Indian farming by forcing expensive patent costs on farmers and flooding the country with cheap imports. In fact, Indian agriculture fared very well. Foreign seed companies such as Cargill became major providers of hybrid seeds, which facilitated the production and export of maize. Monsanto brought in genetically modified cotton that made India a major cotton exporter, exporting a peak of $10.8 billion in 2021. New shrimp farming techniques made India one of the world’s biggest shrimp exporters. Meanwhile, India has become the world’s largest importer of vegetable oils and a significant importer of fruit. So globalization has expanded both exports and imports.
Globalization of Financial Flows
Until 1991, foreign financial flows into India were largely foreign aid and borrowings by public‐sector corporations. India prohibited foreign portfolio investment in Indian stocks and bonds. This gave protection from sudden stops of capital flows that adversely affected other developing countries, but in the bargain, India lost a source of economic dynamism. Even after 1991, India avoided financial liberalization for a long time and liberalized foreign direct investment only gradually.
As a consequence, India’s total foreign debt has risen at a modest rate, from $84.8 billion in 1991 to $612.4 billion in 2021. This is 19.2 percent of India’s GDP, one of the lowest ratios in the world. The share of the government and public‐sector companies in external debt has fallen from almost 100 percent in 1991 to 20 percent by 2020. India has convertibility on capital account for foreigners but not yet for Indians.
Indian stock markets historically had a bad reputation for malpractices before 1991, and the Bombay Stock Exchange was called a snake pit. A stock market scam in 1992 led to major reforms, including the replacement of paper shares (which were often forged) by electronic shares in approved depositories. A new Indian national stock exchange was fully electronic with no trading floor—all trades were matched automatically by computers, reducing the scope for malpractices. Thus, Indian stock markets went electronic even before the New York Stock Exchange (NYSE) did in 1995. The NYSE still takes two days to settle payments after a trade, but India has progressed to settlement after one day and proposes to move to instant settlement the same day. This has helped make India one of the most attractive among emerging markets.
India’s two stock exchanges now have a total of 7,424 listed companies, against 2,079 in Shanghai and 2,597 in Hong Kong. Foreign portfolio flows fluctuate widely, but the biggest monthly inflow was $21.7 billion in December 2020. The total value of foreign portfolio investment in India touched $578 billion in June 2022. India’s resilience in the face of economic headwinds made it a favorite of global investors in 2022 when markets fell almost everywhere else in the world. The Morgan Stanley Capital International (MSCI) World Index in 2022 declined 18 percent. But the MSCI India Index rose 4.4 percent, the second best in the world after Brazil.
Historically, banks and bond markets financed mainly established companies and avoided newcomers, inhibiting the rise of fresh talent. That changed with the rise of private equity and venture capital funds that now provide unprecedented billions to newcomers. This global capital is patient and so facilitates very rapid growth that may entail losses for several years.
Global capital has helped India create more than a hundred “unicorns”—unlisted startups valued at more than a billion dollars each. According to the Hurun Global Unicorn Index, the United States in 2022 led the world with 666 unicorns, followed by China with 316 and India with 68. But Indian founders also launched 70 unicorns abroad (of which 64 were in the United States), making a total of 138 Indian unicorns. India has not only benefited from global startup capital but also has contributed to it. However, with the sharp rise in interest rates in 2022, global money has become much tighter. Many unicorns have lost their once stratospheric valuations and are cutting costs.
Reliance Industries Ltd. has announced its intention to invest $75 billion in green energy, especially in green hydrogen. The Adani Group also aims to invest $70 billion in the same areas. They aim to develop totally new technologies that will cut the price of green hydrogen by two‐thirds and so carry high risks. Nevertheless, global finance is forthcoming.
Globalization of Indians
Indians have been migrating in millions for over a century, creating a large Indian diaspora. In the 19th century, many went as indentured laborers or traders to the Caribbean, East Africa, and Southeast Asia. In the 20th century, millions went to the Persian Gulf to meet the demand for labor after the area became oil rich. The liberalization of immigration by the United States in 1965 induced substantial flows of Indians. Today, an estimated 13.4 million Indians reside temporarily abroad, and another 18.7 million have become foreign citizens, making a total diaspora of 32.1 million. That exceeds the entire population of many countries.
Starting from just a few thousand before 1965, the United States has become the biggest destination for India’s diaspora, with 4.46 million people of Indian origin, of whom 3.18 million are now U.S. citizens (Figure 4). Canada has 1.69 million people of Indian origin. In the Persian Gulf, the United Arab Emirates has 3.42 million Indians, Saudi Arabia 2.59 million, and Kuwait 1.03 million. In Africa, South Africa leads with 1.56 million. In Asia, Malaysia has 2.99 million, Myanmar 2.09 million, and Sri Lanka 1.61 million.
Indian immigrants in the United States are exceptionally well educated. There is a best‐selling book titled The Other One Percent: Indians in America. This refers to the fact that 1 percent of U.S. citizens are of Indian origin and are very well off. Households headed by an Indian immigrant in 2021 had a median annual income of $150,000 in 2021, compared with $70,000 for all immigrant‐ and native‐led households. Eighty percent of Indian immigrants aged 25 or older had at least a bachelor’s degree, compared with about one‐third of all foreign‐born and U.S.-born adults.
Indian immigrants have risen to top positions in politics and business. Rishi Sunak has become Britain’s prime minister. Two of the contenders for the Republican nomination in the 2024 presidential election, Nikki Haley and Vivek Ramaswamy, are of Indian origin. So is Kamala Harris, Democratic vice president. The next U.S. presidential election could be a contest between Republican and Democratic candidates of Indian origin. Four Indian Americas have won Nobel Prizes: Har Gobind Khorana (medicine), Subrahmanyan Chandrasekhar (physics), Venki Ramakrishnan (chemistry), and Abhijit Banerjee (economics).
CEOs of Fortune 500 companies of Indian origin have become so common that they no longer constitute news. Current and former CEOs include Sundar Pichai (Google), Satya Nadella (Microsoft), Raj Subramaniam (FedEx), Shantanu Narayen (Adobe), Ajay Banga (formerly of MasterCard, now of the World Bank), Indra Nooyi (Pepsi), Vikram Pandit (Citibank), and Parag Agrawal (Twitter). They have raised the image of India globally and helped instill confidence in foreign investors.
During the Cold War, India was nonaligned and often tilted toward the USSR, so U.S. foreign policy gave little priority to India. Those days are over, and the United States now views India as a potential superpower and perhaps the only one in Asia that can check China. In 2005, President George W. Bush unofficially gave India entry into the nuclear club by lifting a three‐decade‐old moratorium on nuclear trade with India. In 2010, President Obama pledged to help India get a permanent seat in the UN Security Council.
The diaspora sends home large remittances, touching $107.5 billion during FY 2022–2023. This has proved to be a stable flow even in years of global panic when exports and other sources of foreign exchange shrink and so has been an important economic stabilizer. The diaspora has also been a major foreign investor in India, with outstanding bank deposits of $135 billion, apart from large investments in Indian stocks and bonds.
India sends out more than a million students abroad every year, of whom around 100,000 go to the United States. Many do not come back, but those that do bring back additional skills that have raised technical capacity in India. The R&D staff in the global capability centers of multinational corporations include Indians who have come back after studying and working in the United States in the same company. Thus, brain circulation has replaced what used to be called the brain drain.
The Unfinished Agenda
Globalization has helped India prosper. But since the Bharatiya Janata Party (BJP) assumed power in 2014, India has started diluting or reversing some aspects of globalization, moving toward a more nationalist approach. Globalization celebrates ethnic and religious diversity, but Hindu nationalism goes the other way.
The Indian constitution forbids discrimination on the basis of religion, race, caste, gender, or place of birth. The BJP pays lip service to this ideal but paints India as the product of a Hindu civilization rather than one enriched by interaction with several streams of foreigners who created syncretic forms of literature, art, music, and architecture. The BJP is revising textbooks to show India as having experienced a glorious Hindu period that suffered after invasions by Muslims and Christians. Rising religious tensions in India are bound to inhibit economic growth.
The BJP has poured contempt on foreign experts. When a Harvard study showed that demonetization of high‐value currency notes by the BJP in 2016 had harmed the economy, Prime Minister Narendra Modi declared that hard work is better than Harvard, implying that foreign experts were lazy and ignorant. Many Indian economic experts from the United States—including Raghuram Rajan, Arvind Subramanian, Urjit Patel, and Viral Acharya—were replaced by local economists. This deprives India of knowledge from the best in the world.
A major BJP affiliate, the Swadeshi Jagran Manch (a movement advocating for the awakening of Indian domestic self‐reliance), has always been anti‐globalization. Under its influence, Modi has declared that India will aim for Atmanirbhar (self‐reliance) to reduce imports. He has clarified that Atmanirbhar means producing goods for foreign markets as well as Indian ones. But the notion that imports are undesirable strikes at the heart of globalization. The BJP government has raised import duties on a wide range of goods since coming to power, and the average import duty has risen from 13.5 percent in 2014 to 18.3 percent in 2021.
The government has recently introduced a production‐linked incentive scheme, offering cash grants of 4–6 percent of production for selected companies in 14 industrial sectors. This replaces the earlier drive for liberalization with industrial policy that aims to pick winners and build national champions. It carries the risk of crony capitalism and of creating the sort of loss‐making companies that proliferated during India’s attempt at socialist self‐sufficiency.
India has long had a disputed Himalayan border with China. After border clashes in 2020 in which 20 Indian soldiers were killed, India banned 321 Chinese apps, including TikToK. It also banned the use of Chinese 5G telecommunication equipment and sought to cut imports from China. This onshoring is similar to actions of other countries that see China as a strategic threat. Thus, India’s deglobalization has strategic as well as Hindu nationalist underpinnings. These inward‐looking moves have not yet offset the earlier structural move toward globalization. The ratio of trade to GDP and inflow of foreign investment still remains high.
India’s three areas with the most problems are education, employment, and environment. School quality is abysmal. India in 2009 participated in an international school competition (Programme for International Student Assessment) and came 72nd of 73 countries. Annual surveys suggest that schooling outcomes are not improving despite high outlays on educational reforms. Only 42 percent of children in grade five can read texts suitable for grade two.
Unemployment in recent years has rarely dropped below 8 percent. In 2018, Indian Railways advertised 90,000 job openings, and no less than 25 million people applied. In 2016, the town of Amroha advertised openings for 114 janitors and got 19,000 applications, including some from engineers and people with masters of business administration. Economic growth is simply not creating enough quality jobs. The labor participation rate is barely 40 percent, and the urban female participation rate according to one estimate is barely 6 percent. These are among the lowest rates in the world and waste India’s supposed demographic dividend.
Finally, the quality of India’s air, water, and aquifers is abysmal. India has 39 of the 50 most polluted cities in the world. Free electricity for farmers encourages overpumping of groundwater for irrigation and threatens to destroy aquifers, above all in the historical breadbasket of the northwest.
India has achieved enormous gains through globalization. But it has backtracked in some areas after the BJP came to power in 2014. India still has deep‐seated problems in education, employment, and the environment. The unfinished agenda is long.
This article was originally published by CATO on October 24, 2023.