India's economy can be divided into two major eras: The pre-liberalisation era and the post-liberalisation era. While the former deals with the time before 1991, the latter deals with the post-1991 phase. Before 1991, India's economy and, to an extent, the Indian economic culture were primarily based on the Licence-Permit-Quota Raj.
This 'Raj' referred to a very high bureaucratic interference in the day-to-day functioning of various sectors of the economy where for even minute details, a businessman or an industrialist had to take licence and permit from bureaucrats sitting in government offices. This led to high red-tapism, corruption and a sense of unease in conducting businesses in India.
Because of the relatively slow-paced nature of the bureaucracy in those days, the business class found it difficult to get its work done smoothly, which thereby impacted both in their business inputs and outputs. Despite many calls from within and outside the industrial and business classes to make a shift from this old Licence-Permit-Quota Raj, the political leadership in India was just not ready to do away with a whole system and its structure that had worked reasonably well till then, despite its obvious shortcomings.
The reasons for not doing away with this old system were many. First, it had to do with the fear of the foreign. What this phrase 'fear of the foreign' means is that the political leadership, the larger civil society and public in general were deeply suspicious and wary of allowing foreign investments in India. The reason was that for generations, the citizens of India learnt about the entry of the East Indian Company which paved the way for British colonial rule.
The fact that the British came in the guise of traders and foreign investors who later looted, plundered and drained India's wealth, leaving it an extremely poor nation, was hardwired into the Indian psyche. After knowing this history, it's not difficult to understand why the political leadership in India didn't want to even touch the topic of opening up the economy.
The second reason for the unwillingness of the political leadership to do away with the Licence-Permit-Quota Raj was the fear of the unknown. For several decades, we had become accustomed with a certain way of doing business. Even if that was not efficient enough, the idea to move from the known to the unknown made many Indians jittery.
Also, one didn't know whether opening up the economy for foreign direct investments would be a 'safe bet' or a 'bad gamble'. Because there was no certain foreseeable way to ascertain which of the two would it be, no political leaders wanted to put their own career and the party's future on the line.
Also, between 1947 and 1989, there was pretty much one-party dominance at the Centre " the Indian National Congress. Even the principal Opposition party like the BJP, which was the successor to the Jana Sangh, had put 'Gandhian Socialism' in the party's constitution as one of its core principles in 1980. Other political parties from the Left Front which involved Communist Party of India and Marxist Communist Party were anyway principally against privatisation and liberalisation.
So overall, the political landscape of India was not suitable for the idea of Foreign Direct Investments.
Last but not the least, the reason for not doing away with the 'Licence Raj' in India was India's social culture. Indians are not believed to be risk takers and early adapters to any new thing, idea or practice. Being a society with a large poor population, the risks of failing while trying anything new or moving away from the set path looks quite arduous and risky to many in this country, and rightly so. Even in small matters like trying a new food item in an expensive restaurant, most people hesitate to do it. What if after investing money, one doesn't find the new dish tasty!
Because there was no possible way to know whether opening up the economy would prove fruitful to India's overall economic growth and development, the risk didn't seem worth taking. The only way to know it for sure was to take a chance. This phenomenon looks like the classic case of SchrÃ¶dinger's cat in physics. Basically it's a thought experiment which works as a paradox where one cannot know whether something is right or wrong unless one does it to find whether it was right or wrong.
This was conceptualised by quantum physicist Ernst Schrodinger in the 1930s.
When India's economic situation worsened in the early 1990s, it led to the balance of payments crisis. It was independent India's worst financial crisis where due to the depreciating value of the Indian Rupee in the world market, India was unable to purchase its essential imports or service its external debt repayments. The situation became so severe that India had to forgo its old economic policies and while doing that the country pledged its gold reserves, took loans from the International Monetary Fund, and other structural adjustments (sponsored by IMF and World Bank) in the economy were initiated.
These were the initial steps towards the New Economic Policy which further led to the introduction of Foreign Exchange Management Act in 1991. Foreign Direct Investment (FDI) in India was introduced under this very Act by the PV Narasimha Rao-led government at the Centre.
Rest, as they say, is history.
Riding on the forces of liberalisation, India took a high-growth path and became what it is today. There is no denying the fact that India has come a long way since those fateful months of 1991 when India finally decided to jump on the free market bandwagon. It has become an economic power to reckon, despite all the economic failings and shortcomings in the last few years.
The writer is a Doctoral Fellow at School of International Studies, Jawaharlal Nehru University, New Delhi. The views expressed are personal.