20th anniversary of India’s economic reforms — half full or half empty?

If we assume India’s reforms started in 1991, we just completed twenty years of economic reforms. On 24 Jul 2011, then Finance Minister Manmohan Singh ushered landmark reforms and liberalised the economy.

At the end of the speech FM said:

Sir, I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “no power on earth can stop an idea whose time has come.” I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.

There is little doubt that India did wake up and even woke up the world with some impressive growth numbers and creation of wealth. The perception of India being a country of snake-charmers and elephants changed dramatically to a country having software and amazing potential. Based on this, current FM Pranab Mukherjee says – Glass is indeed half full if not full.

However, in terms of absolute numbers barring growth much looks the same.  Niranjan of Mint did point this out in a Feb-11 article. Final inflation numbers might actually be higher than those seen in 1991.

I was just reading the Budget Speech by FM in 1991. He explains the background and what made such a budget necessary. One could just use 1991 speech to explain today’s times as well (except that it is not a crisis background):

The price situation, which is of immediate concern to the vast mass of our  people, poses a serious problem as inflation has  reached a double digit level. During the fiscal year ending 31st March 1991 the wholesale price index registered an increase of 12.1 per cent, while the consumer price index registered an increase of 13.6 per cent. The major worrisome feature of the inflation in 1990-91 was that it was concentrated in essential commodities. The prices of these commodities rose inspite of the three good monsoons in a row and hence the three successive bumper harvests. Inflation hurts everybody, more so the poorer segments of our population whose incomes are not indexed.

….For improving the management of the economy, the starting point, and indeed the centre-piece of our strategy, should be a credible fiscal adjustment and macro-economic stabilisation during the current financial year, to be followed by continued fiscal consolidation thereafter. This process would, inevitably, need at least three years, if not longer, to complete. But there can be no adjustment without pain. The people must be prepared to make necessary sacrifices to preserve our economic independence and restore the health of our economy.

In the macro-management of the economy, over the medium-term, it should be our objective to progressively reduce the fiscal deficit of the Central Government, to move towards a significant reduction of the revenue deficit, and to reduce the current account deficit in the balance of payments.

Macro-economic stabilisation and fiscal adjustment alone cannot suffice. They must be supported by essential reforms in economic policy and economic management, as an integral part of the adjustment process, reforms which would help to eliminate waste and inefficiency and impart a new element of dynamism to growth processes in our economy. The thrust of the reform process would be to increase the efficiency and international competitiveness of industrial production, to utilise for this purpose foreign investment and foreign technology to a much greater degree than we have done in the past, to increase the productivity of investment, to ensure that India’s financial sector is rapidly modernised, and to improve the performance of the public sector, so that the key sectors of our economy are enabled to attain an adequate  echnological and competitive edge in a fast changing global economy.



Further, role of public sector:

For the founding fathers of our Republic, a public sector that would be vibrant, modern, competitive and capable of generating  large surpluses was a vital element in the strategy of development. The public sector has made an important contribution to the diversification of our industrial economy. But there have been a number of shortcomings. In particular, the public sector has not been able to generate internal surpluses on a large enough scale. At this critical juncture, it has therefore become necessary to take effective measures so as to make the public sector an engine of growth rather than an absorber of national savings without adequate return. This has been widely accepted, but thought and action in this regard are still far apart. To bridge this gap, the portfolio of public sector investments would be reviewed so as to concentrate the future operations of the public sector  in areas that are strategic for the nation, require high technology for the economy, and are essential for the  infrastructure.

Amazing really.

This para on India at crossroads still exists. In terms if vision and public policy this para sums it all:

As we enter the last decade of the twentieth century, India stands at the cross-roads. The decisions we take and do not take, at this juncture, will determine the shape of things to come for quite some time. It should come as no surprise, therefore, that an intense debate rages throughout the country as to the path we should adopt. In a democratic society it could not be otherwise.  What can we learn from this debate?

The most important thing that comes out clearly is that we cannot realise our goal of establishing a just society, if we abandon the planning process. But India’s future development depends crucially on how well the planning process is adapted to the needs of a fast changing situation. I believe that without an intelligent and systematic coordinated resource use in some major sectors of our economy, development will be lopsided. It will violate deeply cherished values of equity and it will keep India well below its social, intellectual and moral potential. But our planning processes must be sensitive to the needs of a dynamic economy.

Over centralisation and excessive bureaucratisation of economic processes have proved to be counter productive. We need to expand the scope and the area for the operation of market forces. A reformed price system can be a superior instrument of resource allocation than quantitative controls. But markets can only serve those who are part of the market system. A vast number of people in our country live on the edges of a subsistence economy. We need credible programmes of direct government intervention focussing on the needs of these people. We have the responsibility to provide them with quality social services such as education, health, safe drinking water and roads. In the same way, the development of capital and technology intensive sectors, characterised by long gestation periods, such as transport and communications and energy will need to be planned with much greater care than ever before. The control of land and water degradation, which threatens the livelihood of millions of poor people in this country, will also require effective Government leadership and action.

Just read on. Apart from above, you see the same kind of issues you see now- excessive non-plan expenditure, subsidies, money not reaching the needy, infrastructure deficit, lack of investments in science and technology etc.

So, how does one make sense of this whole twenty year of reforms? India is one of the fastest growing economy in the world but most people are not happy with the growth and some even suggest pre-1991 was much better. Others question Is this India’s gilded age? 

India is a pretty curious case at this point of time. True, 20 years is a short time to make any judgement but is not really that short a time. If policymakers say India has grown (which we also believe) people overall should be happier. This does not look like the case. One can say without reforms we would have been a lot worse. And these are all interesting questions emerging from the Indian growth story.

Actually, it is not 20 years of reforms. Reforms in India were never rolled back but were never really with any major intent except using the word repeatedly. It was just  as per political scenario. As per Arun Shourie, there were just two phases of reforms: 1991-96 and 1999-04. Rest have just been caught in political quagmire.

Since 2004 it has been very disappointing as Dr Manmohan Singh was Prime Minister now nad had much more power to keep the momentum going. But as it is the case, the reforms created by government in 199-04 were enjoyed by the subsequent government.  The lack of reforms were blamed on coalition politics. People had faith and reelected the government again in 2009 and gave a better majority, but still nothing much happened. Only in last couple of months we some moves here and there under relentless pressure.

India is also a curious case study in political economy. How when nothing much was expected from India we did all those reforms. And now when so much is expected, little is being done barring talking. The social indicators never really changed and now even macro indicators look so much similar as well. Importance of crisis before reforms needs to be understood better. Have countries really reformed without a crisis?

It is not enough that perceived reformist people come to power. What is needed is institutions and rules that make them work towards reforms. India remains a puzzle and much more needs to be done.

Meanwhile, a few  more interesting articles on this huge event in India’s history:

Will keep adding if come across more interesting links…


One Response to “20th anniversary of India’s economic reforms — half full or half empty?”

  1. What If Economists Ran Nations? (One can look at India for the answers…) « Mostly Economics Says:

    […] under the PM. Some even call it India’s gilded age. Things do not look good when we look at 20 years of reforms India between 1991 and 2011. Arun Shourie goes on to say it is not important to simply elect people who are seen as reformers. […]

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