At the time of independence India was bequeathed with a shattered economy, widespread illiteracy and shocking poverty. The entire politico economics structure has to be reconstructed for genuine development of the country. Contemporary economists divide this story of India’s politico- economic growth into three phases, first phase being the 45 years after independence and then the decades from 1990s is called the second phase when the idea of free market economy was introduced and currently we are in the third generation reforms where existing measures are scaled up and new delivery mechanisms are being created.
After Independence the policymakers in India launched the project of economic development with a heavy involvement of the state and a democratic polity.
The economic development in India followed socialist-inspired policies in the early phase of its independent history. This included state-ownership of many sectors. As a result, in the first three decades after independence India’s per capita income increased at a rate of around 2.5 % annual rate.
This modest economic success, led to the foundation of a complex industrial economy and fairly reasonable rate of agricultural growth, with subsidized irrigation and chemical fertilizers.
In terms of the democratic experiment, apart from consolidating a massively diverse polity into some unified political and administrative framework, the ripples of democratic equality spread out to ever increasing numbers of hitherto subordinate groups.
If these were the successes the major failure was the growth rate in national income was very slow, particularly in per capita income. A colossal and highly inefficient public sector became a drain on the resources mobilized by the government. There was rampant corruption, both political and bureaucratic; some of this corruption flowed from the regulatory structure of the economy, particularly the nightmarish maze of controls and regulations that the government imposed.
The sluggish growth could not match the growing aspirations of the upcoming subordinate groups and created a chasm between the political and the economic development. The political mobilizations gave rise to aspirations of groups that now came up from below overcoming a long history of social inequality and oppression, but the economy could not match those aspirations.
Due to the slow growth, the political elite did not have adequate state resources to placate those groups who were increasing in assertiveness. This obviously led to economic and political frustrations and social fragmentation that was widely felt by the middle 70's.
As a result the political elite in India launched a process of economic reform came with the launching of a policy of liberalization and privatization since 1990s. This was with a view to unleashing the entrepreneurial forces from the shackles of controls and regulations, hoping that some of the ensuing economic growth would trickle down to the clamoring masses.
The changes introduced, particularly since the early 90’s, were dramatic by past standards. The major elements of changes in policy over the de-licensing and deregulation of investment and production, discontinuation of exclusive reservation of many key industries, gradual abolition of quantitative restrictions on imports, movement towards a market-determined exchange rate, reduction of average levels of direct and indirect taxes and some streamlining and rationalization of the tax structure etc.
The flexible industrial licensing policy and a relaxed FDI policy started getting positive responses from international investors. Among the major factors that drove India's economic growth following the economic reforms were increased FDI, adoption of information technology and an increased domestic consumption.
As far as political power is concerned, the de-centralization of governance began since the early 1990’s with the implementation of 73rd and the 74th constitutional amendments. This political reform happened in the country around the same time when economic reforms were also launched. This saw shift in power from national to the regional governments and regional parties. It raised hopes for better delivery of public services, sensitive to local needs from the regional parties that in turn demanded more funds from the center to pursue their parochial interests.
After the new political shift when the national government became increasingly depended on the support of powerful regional parties, the economic reforms and fiscal consolidation had a bearing. Similarly, the tension between the demands of the better-off states for more competition and those of other states which are weaker clamoring for protection and to whom Centre can ill afford to ignore politically.
The politico economic transformation of the country continues to be pushed forward with third generation reforms. Third generation reforms deal with administrative and judicial reforms, labour market and FDI reforms. The center and state governments are working closely to make further progress.
Third generation reform is the bottom-up approach and not the trickle-down approach that was pursued in the first and second phase of reforms.
The emphasis is on the institution of Panchayati Raj that is made to play an interventionist kind of role to bring the fruits of growth to door steps of common man. The introduction of the Kisan Credit Card, micro-credit and encouragement of the Self Help Group movement has shown good results.
Moving further, cottage industry, small entrepreneurs, artisans, etc., are encouraged for skill development. They are being financially educated to develop the banking habit. Greater employment opportunities are created through institutional mechanism.
It can be safely said that the first generation reforms were aimed at institution building for macroeconomic stabilization and structural adjustments. The second generation reforms focused on liberalization and privatization. Third generation a reform is aimed at mobilizing technology, skill development and creating knowledge based infrastructure. In the third generation reforms the overall socio-economic development is designed for creating new delivery mechanisms and strengthening existing measures.