Three Decades of Economic Reforms

Three decades of economic reforms has unfolded a golden era for Indian capital-market and private-equity investors 

The past three decades have not been without its ups and downs, but it belongs squarely to India. Indeed, India’s economic revival owes its roots to the reforms of 1991. After struggling with a dire balance of payments situation, the Indian government ushered in urgent and bold reforms. Ever since, there has been no looking back.

The lowly ranked Indian economy rose to a global powerhouse, now the third largest economy in the world in terms of purchasing power parity (PPP). With fresh reforms (GST, lower corporate taxes, boost to local manufacturing), it has set its sights on a $5 trillion economy, which will be achievable this decade.

Many of us can recall the calamitous situation then. Foreign capital was scarce. Then finance minister Manmohan Singh took urgent steps to liberalise archaic laws that had been a hindrance to India’s growth. The policy changes of 1991 put paid to the license-and-quota Raj.

Unshackling India’s growth potential

We can also relate to how we waited years to purchase our first car, the Maruti 800 back in those days. The now ubiquitous telephone connection took years to come home. In comparison, India’s automobile sector is now the fifth-largest in the world by production, and getting a phone connection has never been easier. Over the last three decades, several governments continued to remove economic laws and press ahead on reforms.

Manmohan Singh scripted the first set of reforms: dismantling industrial licensing, price controls and relaxing foreign investment rules. Lower of corporate and personal tax rates was another landmark that boosted consumption and domestic capital spending, expansion and production. Besides, restrictions on managerial remuneration were lifted.

New beginnings for Indian corporates

The 1991 policy paved the way for several new multi-nation corporations in the country, while several segments of the economy were opened up to the private sector. On the removal of asset limits on corporate India, liberal licensing undoubtedly meant more competition across sectors. It also meant that prices of goods were lower. Simultaneously, with more capital and businesses opening, employment boomed. This brought in huge foreign investments in almost every sector that had been opened up.

Indeed, now India’s corporate sector sees the transition to the GST era as a game-changer that will further accelerate economic growth. The goal to become a $5 trillion economy by 2025 may have been delayed by Covid-19, but that milestone should be attained sooner or later this decade.

Major impact of capital markets and financial reforms

However, it’s the capital-market and financial-sector reforms that have strengthened the backbone of India’s economy over the last three decades, and still does. Indeed, after the SEBI Act of 1992, India’s capital markets has been on a roll. Furthermore, in the early 1990s the government liberalised financial services, foreshadowing a new era in private banking with tech-savvy new generation private banks having been granted banking licenses.

With the rapid strides in India’s capital markets from the days of The Controller of Capital Issues (CCI), abolished around 1992, the primary and secondary markets have created and built fortunes for India’s investors. With the advent of private-sector mutual funds, private equity, global institutional investors and hedge funds, the capital market segment is scaling higher peaks. The capital-market turnover in only the cash segment has rocketed from Rs 36,000 crore in 1992 to over Rs 160 trillion in 2021, not factoring the derivatives turnover.

What can be expected in the coming decade?

No doubt, a new era in the Indian capital market is now beginning as new investors continue to enter the capital markets. Domestic capital has become a big force. Inflows into equities via mutual funds and directly have zoomed. Over the course of the next few years, we could see several more tech service companies, SaaS, see listings in the secondary market. Indeed, the pipeline for tech companies IPOs is expanding given the response in the domestic market. It also goes without saying that the private equity and venture capital space will become larger. VC-focussed funds touched the highest levels of fund raising in 2021, and counting.

While the equity segment has vaulted, India’s debt market could certainly do with greater depth to enable corporates to raise more money from domestic investors. We have seen the flush of domestic investment in equity. Even if some of that enthusiasm rubs off on the debt market, the economy could get a further fillip. While equity markets will see its ups and down, suffice it to say that new reforms and the indomitable entrepreneurial spirit should chalk a new era of growth in India’s economy, capital- and private-equity markets.

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