25 Years of Economic Reforms – Where India Stands Today ?

 

By Zulfiqar Sheth 
Doctoral Fellow, Dept of Economics, Aligarh Muslim University. Aligarh

“It would be folly to assume that an Indian Rockefeller would be better than the American Rockefeller. Impoverished India can become free, but it will be hard for any India made rich through immorality to regain its freedom … money renders a man helpless.” — Mahatma Gandhi

On July 24, 1191,The economic reforms(popularly known as Liberalization, Privatization and Globlization) kick-started and brought about expansion of the services sector helped largely by a liberalised investment and trade regime. It was Manmohan Singh’s 1991 Budget that changed India forever. LPG is one of the most significant reforms in the Indian history that changed structure of our economy ; Agriculture based to Services based. Agriculture now contributes around 14% to GDP, down from 30% since the liberalisation process began. Reforms also increased consumer choices and reduced poverty significantly. However there are also criticms that India could not achieve much on the front of employment, Inclusion and Rural development. In his paper[1]published in EPW Aseem Shrivastava notes “Statistics may show record-breaking growth rates since 1991. Yet, the truth is that formal employment, especially in the corporate sector, has been stagnant, leading to mounting demands for caste-based reservation for government jobs. India is now, effectively, an outpost of global finance. We have preyed on our own culture and ecology, while the economy we chose to import hides our torn social fabric. Beneath the glitter that our politicians wish to plug is the ugly truth: cultural colonisation is at a historic peak, while we march confidently towards ecocide.”

Background : What led India to initiate reforms ?

By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had been reduced to such a point that India could barely finance three weeks’ worth of imports which led the Indian government to airlift national gold reserves as a pledge to the International Monetary Fund (IMF) in exchange for a loan to cover balance of payment debts. Arunabha Ghosh in her paper[2] highlights “the crisis was caused by currency overvaluation; the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation.” The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the mid-eighties, India started having balance of payments problems. Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up, and investors took their money out.[3]

 

Economic Reforms – A way forward …

A program of economic policy reform 1991 has since been put in place which has yielded very satisfactory results so far. While much still remains on the unfinished reform agenda, the prospects of macro stability and growth are indeed encouraging.[4] “The economic liberalisation in India refers to the ongoing economic liberalisation, initiated in 1991, of the country’s economic policies, with the goal of making the economy more market-oriented and expanding the role of private and foreign investment. Specific changes include a reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment. Liberalisation has been credited by its proponents for the high economic growth recorded by the country in the 1990s and 2000s. Its opponents have blamed it for increased poverty, inequality and economic degradation. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet solved a variety of politically difficult issues, such as liberalising labour laws and reducing agricultural subsidies. There exists a lively debate in India as to what made the economic reforms sustainable”[5][6]

AUDIT OF 25 YEARS – SUCCESSES AND FAILURES OF ECONOMIC REFORMS

SUCCESSES	FAILURES
It  has been credited by its proponents for the high economic growth recorded by the country in the 1990s and 2000s. Expansion of the services sector helped largely by a liberalised investment and trade regime. Reforms also increased consumer choices and reduced poverty significantly	Opponents have blamed it for increased poverty, inequality and economic degradation. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet solved a variety of politically difficult issues, such as liberalising labour laws and reducing agricultural subsidies.
Kunal Bahl in Economics Times notes Agriculture now contributes around 14% to GDP, down from 30% since the liberalisation process began, Economy 8 times bigger than what it was in 1991, Saving rates is touching 33% of GDP, Exports have risen 20 times since 1991, Economy growing at the rate of 7.6%   Economic Times , July 21, 2016	“Statistics may show record-breaking growth rates since 1991. Yet, the truth is that formal employment, especially in the corporate sector, has been stagnant, leading to mounting demands for caste-based reservation for government jobs. India is now, effectively, an outpost of global finance. We have preyed on our own culture and ecology, while the economy we chose to import hides our torn social fabric. Beneath the glitter that our politicians wish to plug is the ugly truth: cultural colonisation is at a historic peak, while we march confidently towards ecocide.”   Aseem Shrivastava -Economic and Political weekly ,Vol. 51, Issue No. 29, 16 Jul, 2016, A-Meri-India
Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently, a rate of growth that will double average income in a decade…. In service sectors where government regulation has been eased significantly or is less burdensome—such as communications, insurance, asset management and information technology—output has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal. -OECD Economic survey of India 2007: Policy Brief	“The data reveals that most of the growth has been job-destroying. Millions have been laid off over the years since 1991), just like it has been in China and much of the rest of the world. Given rapidly automating technology, the outlook for the future, both short- and long-term, is equally bleak.”   ILO (2016): World Employment Social Outlook: Trends 2016, Geneva: International Labour Organization.
“Our firms both in manufacturing and especially services have become more confident and have established a global presence “ “The economy is more resilient now. India has averted major economic disruptions, both during the Asian crisis in the late 1990s and during “great recession” “India is unrecognisably different today than 25 years ago, and almost always for the better. Poverty has come down, standards of living have shot up, financial markets have become more developed, and the country is more open to capital flows and investments. These have led to increased opportunities for all.”   Arun Jaitley , Finance Minister , India Economics Times July 2016	“Jobs have not kept up pace with economic growth, manufacturing has not emerged as a vibrant sector as in many East Asian economic successes, and economic inequality remains a challenge. Experience has shown that institutional checks and balances were not strong enough to root out corruption in relation to major public assets such as spectrum, coal, and land.” “Even if poverty has come down, there is still a lot that needs to be done for the poor and for farmers. They need better schools for their children, better health, and more social protection. No government can afford to ignore these very real demands. Expanding the pie while also directing more resources for the poor and vulnerable will remain an ongoing challenge. Increasing agricultural productivity will also be important.” Arun Jaitley , Finance Minister , India Economics Times July 2016
“Indian industry had a mixed reaction. They welcomed the removal of controls on domestic investment, but they were ambivalent about the external competition via imports, and especially the liberalisation for FDI. A group of industrialists, described by the press as the Bombay Club, argued that Indian industry needed time before they could make themselves ready to face competition. We know in retrospect that these fears were overdone. Indian industry did get a lot of time. Large parts of the industrial sector, such as the entire consumer goods range, were not opened to imports until 2002, 11 years after the reforms began! FDI also did not flow in very quickly, although many foreign companies began to express interest. On the whole, those domestic companies that adapted to the new environment and opportunities came out stronger.”   Montek S Ahluwalia EPW –Vol no. 51, issue No. 29, 16 July 2016
the best testimony to the success of the 1991 reforms arises from comparing the rate of growth of per capita incomes in the 25 years preceding the reforms and those succeeding it. Between 1965 and 1990, India’s average2 annual gross domestic product (GDP) growth was a mere 4.1%, which translated to a per capita income growth of 1.9% per annum. In the subsequent period (1990 to 2015), this increased to 6.3% and 4.6% respectively. The reforms allowed India to firmly jettison the so-called Hindu rate of growth. It would not be misplaced to assert that without these reforms, the country could have faced acute social and political problems that would have arisen as a result of the economy’s inability to generate enough wealth and employment, had the economic growth remained at pre-1991 levels.   Rajiv Kumar, Centre for Policy Research and also, Founder Director, Pahle India Foundation. EPW-16 July 2016	It is noteworthy that between 1990–91 and 2013–14 (a peak year) per capita foodgrain output in the country remained virtually stagnant. What is even more striking is that per capita foodgrain availability actually declined over this period. This decline in availability has been sought to be explained in several ways, but there can be little doubt that it is the result of a squeeze in purchasing power in the hands of the bulk of the working people, an instance of “income deflation.” Underlying it is not only the rise in prices of a host of essential services like education and healthcare owing to privatisation (a rise that cannot be captured by the standard price indices), but also the lack of growth of proper employment despite supposedly impressive gross domestic product (GDP) growth.   Prabhat Patnaik Professor emeritus at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. EPW-issue no. 29, Volume 51
Most commentators—across the political spectrum—writing on the last 25 years suggest that on the growth front the introduction of economic reform was a great success. There are a few commonly identified positive features. Gross domestic product (GDP) has grown 6.3 times today in comparison to its size in 1991; foreign exchange reserves as well as the current account deficit and the centre’s outstanding liabilities are in better shape; the composition of exports has changed. We now have lower import tariffs, and access to a larger number of consumables—television sets, automobiles and mobile phones. Remittances from abroad have grown. Poverty and mortality rates have declined and literacy has improved. There has been explosion in the number of private hospitals and private educational instritutions and there is a section of the population that can now dream and aspire to access these institutions. The dismantling of the licence raj has led to the emergence of new sectors like information technology (IT) and the democratisation of the market for entrepreneurs is evident in the rise of associations like the Dalit Indian Chamber of Commerce and Industry.   Some of the negative consequences associated with the reforms identified in the mainstream writing include: uneven growth, social and economic inequality and at times, privatisation of natural resources—water, land, etc. These two sides of growth are seldom seen in any interconnected way and the popular implication drawn is that if we continue with the reforms process, it is only a matter of time that the corrections made will address the negative impacts of the reforms.   Atul Sood Centre for the Study of Regional Development, Jawaharlal Nehru University, New Delhi EPW July 2016 (Issue 29)

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25 Years of Economic Reforms – Where India Stands Today By Zulfiqar Sheth

[1] http://www.epw.in/journal/2016/29/meri-india.html-0#sthash.GsX8yE4q.dpuf

[2] Pathways Through Financial Crisis: India, Arunabha Ghosh, Global Governance 12 (2006), 413–429.- http://www.globaleconomicgovernance.org/wp-content/uploads/ghosh-pathways_india.pdf

[3] http://www.telegraphindia.com/1091104/jsp/frontpage/story_11697358.jsp

[4] https://en.wikipedia.org/wiki/1991_Indian_economic_crisis

[5] Sharma, Chanchal Kumar (2011) “A Discursive Dominance Theory of Economic Reforms Sustainability.” India Review (Routledge, UK)126-84

[6] That old Gandhi magic”. The Economist. 27 November 1997.