Editorials, GS-3, Indian Economy, Uncategorized

The ease of living in India: 25th Anniversary of 1991 Reform

The Hindu

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.

Forex today:

  • 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.

Natural capital

  • 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.

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