25th anniversary of the 1991 reforms approaches, it would be legitimate to take stock of what has been achieved.
The crisis of 1991
- In 1991, the focus of the reforms had been on trade, exchange rate and industrial policies.
- This had everything to do with the immediacy of the balance-of-payments crisis the economy then faced.
- When the Rao government took charge, it was estimated that foreign exchange reserves would cover up to two weeks’ imports. A rule of thumb is that a country should aim at a cover of about six months.
- To contain the external deficit, Finance Minister Manmohan Singh had devalued the rupee and reined in public expenditure.
- He then went to the International Monetary Fund for balance-of-payments support.
- This would have required courage. Retrenchment, belt-tightening, and devaluation were unpopular across the political spectrum, even within the Congress party — though on the question of how the foreign exchange needed to finance international payments was to be acquired, the critics of the strategy had little credible to offer.
- Within three years the crisis was surmounted and the programme with the IMF ended.
- There can be no doubt that the reforms have eased India’s balance-of-payments constraint.
- India’s reserves today exceed $350 billion, compared to less than $6 billion in March 1991.
- Moreover, the period since is the longest recorded when the country has gone without a foreign exchange shortage.
- Earlier one had arisen in every decade, starting with the 1950s.
- It is also significant that this new-found resilience has been achieved while the economy has got increasingly integrated with the rest of the world.
- This outcome has gone against the pessimistic prognosis of the time that eliminating controls would suck in imports and jeopardise the balance of payments.
- This did not happen as exports also rose, though mainly in a sector unimagined in 1991, that is, software services.
- Of course, the rupee has depreciated very substantially after it was floated.
Great power ambitions
- However, the reforms were not envisaged as merely staving off a balance-of-payments crisis. In Dr. Singh’s words, spoken in Parliament, they were meant to be the harbinger of “the emergence of India as a major economic power in the world”.
- This is a worthy aspiration and the crude nationalism at times on display today should not discourage us from nursing it.
- The question is whether we are on the right path to the goal.
- If per capita income is taken as the measure then we are still some distance away from ‘great power’ status.
- The most recent World Bank data show that over 2011-15 GDP per capita — measured in PPP dollars — was 5,700 in India, 11,108 in Albania, 13,206 in China and, yes, 25,638 in Malaysia.
- Though India’s economy may not at present compare well with that of other countries, it could yet be that its rate of growth has increased after the reforms.
- While the rate of growth of the economy accelerated after 1991, it had done so twice earlier, first in the 1950s and then in the late 1970s.
- So the reforms have only maintained an existing history with respect to economic growth.
What of poverty?
- Here the record is the same as that of economic growth. Absolute poverty has declined since 1991, but this has been the trend since the early 1970s.
- Essentially, the decline in poverty has kept pace with growth.
- Thus, mirroring growth of the economy, while the rate of decline in poverty accelerated since 2004, it had already accelerated on the cusp of the 1970s and the 1980s.
- However, even after a quarter century of economic reforms, approximately a quarter of the country remains poor according to a poverty line that is low by international standards.
It is important to note that poverty measures are dependent upon the definition of poverty.
- The official index in India, on which the above cited trends are based, measures access to food a little more accurately than it does access to other conditions of life which are at least as vital.
- Even beyond health and education, the conditions of life are affected by physical infrastructure, which determines livelihood chances and well-being.
- Major components of this infrastructure would include transportation, water supply and sanitation.
- It is not as if successive governments have not recognised their significance, but they fail to convince that “more reforms” — incidentally called for by both the Finance Minister and the Governor of the Reserve Bank — will be able to provide them.
- Structural reforms as liberalisation aim to provide access to and raise the profitability of the private sector. This may be essential at times, but there is a wide swathe of an economy where the market fails to deliver.
- This it does in the presence of what are referred to as externalities and public goods.
- Public goods are important as they mitigate the impact of income poverty and inequality.
- We can think of health, education, public infrastructure and recreational facilities as constituting the space in which we actually lead our lives.
- A significant transformation of it in India would require both a strengthening of the public finances and a generation of political will.
- Then there is natural capital.
- In many spheres of the economy controls had proliferated over the decades to the detriment of both growth and welfare, and their dismantling has resulted in an increase in both.
- But markets are not always the best way to deal with nature.
- Deep and smart regulation is necessary if we are to deal with depleting natural capital, of which this is only one instance.
- Widespread liberalisation of the economic policy regime was long overdue in 1991, and has played a positive role since, but its impact has run its course and the policy has recognisable limits.
- Liberalisation cannot address all aspects of the man-made environment and now climate change threatens to change everything forever.
- We do not have another quarter century to deal with these imperatives.
- Government must be prevailed upon to match their concern for the ease of doing business with a commitment to the ease of living in India.
- The official poverty index in India measures access to food a little more accurately than it does access to other conditions of life which are just as vital
- A quarter century of economic reform has transformed the economy. But governments have been less mindful of addressing social and natural capital.