Home >Politics >Policy >Liberalization in India: Glasnost? Yes. Perestroika? Not much.

Not too long before India’s reforms started in 1991, Mikhail Gorbachev had pushed two buttons—glasnost (openness) and perestroika (restructuring)—which dramatically changed the course of the USSR’s economy and of history. Gorbachev embraced market forces with open arms, much like P.V. Narasimha Rao and Manmohan Singh did in 1991 when faced with similar circumstances. The government ushered in much more openness towards foreign capital, imports, currency and industrial licensing, and tried to restructure the economy by increasing the share of manufacturing and services jobs, and higher productivity and wages in the economy. Twenty-five years later, it appears we did a good job on openness (glasnost), but the report card on restructuring (perestroika) still has several red marks. The elephant has covered a lot of ground but can’t yet dance!

Starting from 1991, successive governments have increasingly opened up the economy, and the results are clearly positive.

As foreign investment in different sectors was opened up, foreign direct investments (FDI) grew from $129 million in 1991-92 to more than $32 billion in 2014-15, increasing by a factor of 250. Similarly, annual foreign institutional investments increased from zero in 1991-92 to nearly $41 billion in 2014-15. Recently, the government opened up many sectors to automatic FDI along with 100% ownership for aviation and a relaxed policy for single-brand retail—continuing down the path of more openness to foreign investment.

Trade was opened up through removal of quantitative restrictions, lower customs duties, simplified taxation and a more competitive exchange rate—and has made tremendous gains. Our share of global merchandise trade more than tripled from 1.1% in 1990–91 to 3.9% in 2014–15.

As a result of increased openness and reforms, India’s gross domestic product (GDP) growth rate moved from lower than 5% in the 1980s to a new normal of 6.5–7% from 1990 to 2015, with some years in this period hitting even higher growth rates. Moreover, the GDP growth rate is projected to be 7.6% during 2016-17 (per World Bank), so the overall GDP growth story seems intact.

Openness notwithstanding, restructuring efforts have been far less successful than originally envisaged or currently desired. Attempts to restructure labour and land markets and to pursue investment and export-led growth have seen incremental success—and, more often than not, have been met with a chorus of protests. While the latter may be an aspect of our vibrant democracy, the pivotal restructuring we are seeking is, by its nature, far more difficult to achieve than openness.

Sample the state of our labour market. First, the employment structure has remained more or less static and is increasingly out of sync with sectoral GDP split. Agriculture today is less than 20% of India’s GDP but still accounts for 50% of the labour force. Second, overall jobs have not grown much—National Sample Survey Office data shows that only 1 million jobs were added per year between 2004-05 and 2009-10, during a period of more than 8% GDP growth. Third, women’s share in the labour force has gone down from 27% in 1990 to 24% in 2014, a trend driven by women in poor rural households leaving the labour force as men migrated in search of better job prospects. And finally, India is stuck in a low-wage, low-innovation equilibrium. The services sector is dominated by low-wage sectors such as construction and retail, which together employ more than a quarter of the workforce, up from around 12% in 1993. And formal employment has been stuck at around 7-8% over these 25 years. Innovation, leading to higher productivity and wages, suffers from limited financial and infrastructure support: India spends just 0.8% of GDP on research and development, compared with China’s 1.9% and the US’s 2.8%.

Next, our GDP continues to be driven by consumer expenditure rather than investment and net exports. The investment share of GDP has risen gradually from 22% in 1990 to 31% in 2015, according to Euromonitor data, while the comparable numbers for China are 33% and nearly 50%. The GDP structure thus continues to be consumption-led without getting the stimulus from investment and exports—a reflection of the limited restructuring in our labour and land markets.

A final sign of limited restructuring is that India’s tax-to-GDP ratio has remained in the 15-17% range since 1991 despite the growth in per capita GDP. This ratio is significantly lower than the emerging market average of 21% and the Organization for Economic Co-operation and Development average of 34%. While there are multiple reasons for our low tax-to-GDP ratio—falling tax rates, multiple exemptions and the limited tax net—the implication is a much reduced government budget, which in turn hampers the scale and effectiveness of restructuring efforts.

Over the past 25 years, we have done the relatively easier bit of opening up our economy, but as we have seen, restructuring our factor markets has been far less successful. While we must continue on the path of increasing openness, we must turn our attention to restructuring our factor markets. This will require changes at multiple levels—individual, firm and sector—enabled by appropriate regulations and governance. A number of programmes launched over the past few years—skill development, Make in India, Start-up India and agriculture sector spends—are all in the right direction. These need to be scaled up and accelerated, and supported by measures such as greater ease of doing business, better tax-to-GDP collections and GST goods and services tax regulations. A concerted set of actions across all these areas will drive us toward a middle-income country, one where land, labour and capital markets are structured for sustained growth and productivity.

Joydeep Bhattacharya is a partner with Bain & Co. and leads the firm’s consumer products and retail practices in India. Nikhil Prasad Ojha is a partner with Bain & Co. and leads Bain’s Strategy practice in India. He is the co-editor of the Mint-Bain series, 25 Years of Reforms.

This is part of a special Mint-Bain series on 25 years of economic liberalization. For more on 25 years of reforms go to

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