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[RSTV Archive] Economic Reforms – Journey & Road Ahead

India has completed 30 years of liberalization regime. Multi-pronged reforms agenda was launched in 1991. Over the years India has become one of the fastest growing economies in 21st century and the reforms agenda continues to be in focus along with the quest for self-reliance. In this edition we will discuss and analyse all aspects of this issue.

In 1991, India’s population was 83.8 crore. In 2021, it is estimated at 139 crore. Effectively four of ten Indians, or 55 crore Indians scarcely know of an India which existed in perpetual want – when people waited for years for a phone, LPG connection and even a scooter. Today, the Aadhaar-based digital infrastructure enables Indians to get a phone connection or open a bank account in minutes.

1991 Economic Reforms

  • The 1991 economic reforms refer to the economic liberalization of the country’s economic policies with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment.
  • It was part of a general pattern of economic liberalization and modernization occurring across the world in the late 20th century.
  • It was prompted by a balance of payments crisis that had led to a severe recession.
  • Specific changes included reducing import tariffs, deregulating markets, and reducing taxes, which led to an increase in foreign investment and high economic growth in the 1990s and 2000s.

What was the pre-liberalization economic policy?

  • Indian economic policy after independence was influenced by the exploitative colonial experience and by those leaders’ exposure to socialism.
  • Policy tended towards protectionism, with a strong emphasis on import substitution industrialization under state intervention.
  • Licence Raj established an “irresponsible, self-perpetuating bureaucracy” and corruption flourished under this system which created widespread economic stagnation.

The story of 30 years

This can be categorized into:

  • Growth: with many regime changes, fiscal deficit has been reduced to 4% from then 8%.
  • Trade policy: Tariff got reduced eventually facilitating import and multilateral trade.
  • Industry and licence policy: Except Railways and atomic energy got delicensed. India has become Startup capital of the world.
  • Financial sector reforms: Banking, NPAs were crux of this reforms.
  • RBI and Govt relations: This have been redefined since then. Govt has not been using Ad-Hoc treasury bills and replaced by T-Bills of RBI.
  • Employment: Now private companies have raised to give employment to innumerable and the hunt for govt jobs has reduced.

Major outcomes of the reforms

1991 reforms ushered in an era of high growth, declining poverty, a burgeoning, aspirational middle class and the very real possibility of a seat on the global stage.

  • By the first decade of the 21st century, India began to be seen as one of the fastest growing emerging markets.
  • The 1991 reforms unleashed the energies of Indian entrepreneurs, gave untold choice to consumers and changed the face of the Indian economy.
  • Far from poverty increasing, for the first time, there was a substantial reduction in it.
  • From 1992 to 2005, foreign investment increased 316.9%, and India’s GDP grew from $266 billion in 1991 to $2.3 trillion in 2018.
  • It redefined the role of State as facilitator & neutral regulator.

“For sure, China is enabled by the authoritarian system whereas India is a vocal democracy. Yet the fact is the authoritarian state has done better on every development indicator.”

Shortcomings of the reforms

  • When we see the growth of economy on one side, on the other side, inequality has sustained. The reforms has not reached to socials sectors like education, health, skill development.
  • The share of manufacturing in the GDP has largely remained stagnant.
  • Economic liberalization has failed to provide secure and decent jobs to the mass of the population.
  • Informality, under-employment and low inter-generational mobility persisted through the heady days of growth
  • State now has become redundant and its role in the economy has reduced only as facilitator of business. This has damaged the government’s capacity in two ways.
  • First, it incapacitated the government to respond to emergencies based on credible information. Second, the logic and policies of economic liberalization seriously undermined the manufacturing capabilities of India.

Challenges in 2021

Markets in India operate in the context of deep structural inequalities. Our 1991 economic imagination responded to these realities by framing the debate in false binaries of growth versus inequality.

  • The pandemic-induced lockdown brought the wheels of economic activity to a grinding halt, triggering a sharp economic contraction.
  • This has resulted in a collapse in production following the disruption caused by the pandemic, which, in turn, has caused a fall in demand.
  • Public expenditure must happen for the next stage of economic growth.

” The economic reforms and agenda of 1991 has lot of challenges and opportunities which lie ahead in terms of economic growth, above mentioned reforms have to be taken at the earliest”

Liberalization 2.0 needed

  • Economic growth is sustained by the virtuous cycle of income- consumption-demand-investment-growth.
  • In theory, India dismantled licence raj but permission raj persists. Successive governments have shied away from reviewing the process of clearances.
  • Small and medium enterprises are the bulwark of employment and exports but suffer from over-regulation and under-provision of capital.
  • India’s policy on FDI has been defined less by objectives and more by crises.
  • This has detained expansion in the areas where access to capital and technology could have made India a dominant player – for instance in electronics and computer hardware.
  • Growth at a macro level is but a means to achieve ends.
  • No country has progressed without investing in human development and yet India has struggled to up the spending on education and health.

Conclusion

  • The defining factor in success is a sense of political purpose and efficiency of the state.
  • Three decades after liberalization, India continues with a ministerial structure designed for state-led industrialization.
  • Five decades after the first Administrative Reforms Commission, the political economy wrestles with the very same issues which it interrogated in the 1960s.
  • To deliver on the promise of its potential, India needs to complete the unfinished agenda —install Gov 2.0 to enable minimum government and maximum governance.
  • Finally, the limitations to invest in human capital, health, education, nutrition, worse, treating these as an afterthought, a luxury of high growth. This is both an economic and a moral failure.

There can be no sustainable growth without first investing in people and enabling them the opportunity to be active participants in the economy. If there is only one lesson to be learnt from the 1991 moment, let it be this.


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