Big Picture, GS-3, Indian Economy, Uncategorized

25 years of Economic Liberalisation: Where are we Heading?

Historical note

It has been 25 years since Dr. Manmohan Singh as the Finance Minister of India presented a historical budget on July 24, 1991 which changed the face of economic India forever.

The economic reforms embarked upon in that budget leading to economic liberalisation, privatisation and globalisation led to far reaching changes. It changed not only the nature of our economy but also the way we lived. It brought in dramatic changes in next 25 years.

  • India’s economy which was ranked 17th in 1991 now ranks 8th in the world.
  • Poverty was 46.1% in 1991 has come down to 21.3% in 2016.
  • Forex which was 9.22 billion dollars in 1991 is now 355.56 billion dollars.
  • STD call rates which were Rs. 22 per minute in 1991 is now Re. 1 per minute.
  • The length of National Highways which was 33700 km is now over 1 lakh km.
  • Number of computers which were just 18,000 in 1991 has now reached to 220 million!
  • Life expectancy has improved from 58.4 years to 67.7 years.
  • The TV sets in the country which was 33.3 million in 1991 is now 168 million.
  • Rural wages which was Rs. 46/day is now Rs. 277/day.

The list goes on of the development that has taken place in last 25 years.

However, there are also very disturbing signs of

  • Jobless growth
  • Increasing gap between rich and poor
  • Malnourishment among children
  • Growth in corruption and crony capitalism

The benefits and the pitfalls of the reforms and liberalisation and our stand today is to be known.

Background

The goals of the liberalisation in 1991 embarked upon were short term as well as long term. The immediate provocation was the critical fiscal situation that India faced in terms of foreign obligations as well as stagnancy in the growth of the economy. To overcome it, certain actions were taken. It also included devaluation of rupee.

A lot of thinking was done by the government to make the organised sector moving. The organised sector, industrial sector, finance sector, trade sector- all of those were experiencing minimal growth rates. This was the background in which the liberalisation process started. It can be clubbed as

  1. Industrial licensing- where most products and lines were de-licenced
  2. Trade liberalisation- a whole lot of items in which the trade was not allowed were removed from the restricted list. Also, to facilitate freer trade, the duties on export as well as on imports were done away with. However, there was no question of India participating in any of FTAs.
  3. Changed attitude towards FDI- it was not a direct impact. It has happened in tranches over 20 years and continues even now.
  4. Financial changes- privatisation of banks

One of the major aims of liberalisation was to create more wealth, create more jobs and shrink poverty and the gap as much as possible.

There was a philosophical change

  • In 1947, the philosophy of all policies was that collective was the key and not individual to blame. So, the states were given a large role and markets were to follow. It continued till 1991.
  • In 1991, a major turnaround happened where the individual is responsible and can be blamed and the collective is not to be. So, individual has to go to market and fulfil the needs by itself, for itself. The market became dominant and the public sector retreated with privatisation in education, health care, employment etc.

Understanding 1991 reforms

The markets are not good masters. It leads to marginalisation of those who are at the margins. Therefore, it happened so that the growth did not pick till first 12 years i.e. till 2002.

  • India had achieved 5.8% growth in 1980s and it remained average from 1991-2002 at 5.3%.
  • It is only from 2003 that India had a 9% growth for four years till the global financial crisis came.
  • The rate of growth dropped but again it picked up in 2010 and then again from 2011 it came down.
  • Now, India is again trying to reach higher growth rates.

Due such dynamic situations, instability has increased, the gap between the rich and the poor has expanded. There are 4th largest number of dollar billionaires in India. This shows the rising inequality.

For example, the minimum wage in 1991 was Rs. 35 which has risen to Rs. 165.

But, on the other hand managerial salaries having cap of 3,12,000 has risen to even 30 crores. Thus, it has risen by almost a 1000 times.

Poverty

In agriculture, the incomes have not risen very much. But in other sectors, there has been a substantial increase in income known. So, gap between agriculture and non-agriculture has increased. Thus, disparities have increased, instability of the economy has increased. So, when it is said that poverty has decreased as a result of new economic policy, the absolute numbers are still on rise. The social consumption necessities are also rising.

A Kerala study shows that

  • Between 1991 and 1999, the bottom decile cost of health increased 750% whereas for top decile it rose only by 250%.
  • Because of the massive environmental pollution that has taken place, there have been massive health issues plus privatisation so health costs have risen.
  • Education costs have risen as far as poor and others are concerned.

If all this is taken into consideration, there is not much clear about how many people have been brought above BPL. Thus, many people argue that poverty has not been much affected, inequality has definitely increased but poverty has declined at same level or not is not very clear.

It is important to recognise that for the first time in the Indian history of poverty, the absolute number of poor from 1973-1993 have declined absolutely.

By the Lakdawala poverty line, there was an absolute decline in poverty line. Though it was only 20 million.

Post 2003-04 when the growth really picked up, there was dramatic decline in the absolute numbers of the poor by the new Tendulkar poverty line of 140 million. Not growing of sufficient jobs is another reason for increase in inequality.

Jobless growth

The jobless growth could have been corrected rapidly if right policies had been adopted.

Even after 25 years of economic reforms, when 50% of the work force is still in agriculture, it is unacceptable.

Reason: never in the history of India, including post economic reforms, has the agriculture sector shown growth higher than 3.2%.

This is half of what East Asian countries achieved on an average.

China’s economic reforms began with agriculture. First decade was dedicated to agricultural reforms. Industrial reforms began only towards the end of 1980s.

India did the opposite and with respect of industry, there was a stratospheric failure which still survives:-

There was an illusion among the policy makers that domestic liberalisation and external opening was going to lead suddenly to industrial growth which it didn’t.

Instead, premature de-industrialisation happened.

Reason: Rapid reduction in tariffs in such industries which had never been exposed to international markets earlier, got wiped out.

East Asia shows the way. The way they moved forward was through an industrial policy focusing on employing workers, labour intensive industries received very significant support. That didn’t happen in India. Thus, jobless growth.

The share of manufacturing in GDP was 15% in 1991 and it is still 15% in 2014.

The share of manufacturing in employment was 11.5% and now it is 12.8%.

Non-agricultural focus

The lives have changed dramatically. Everything we did and now do has changed. India is seen as the fastest developing country in the world. But still, gap between rich and poor continues to grow. This is because the kind of sectors focused on reform period have been more towards non-agriculture.

There has been skewness in rural growth particularly. The middle class growth has been outcome of the reform process. Service sector which grew much faster than others can be one of the reason of growing gap as well as middle class growth. The agriculture is growing less than 2% and industries are also not faring top gear. Thus, service sector made its mark in the post reform era.

However, inspite of increase in gap, there has been overall improvement in the life of each and every person in society.

India’s social status

Considering a broader perspective, globalisation has not affected India alone since 1990s onwards. Globalisation is part of world’s growth process. In growth comparison with other countries, India has performed well.

But, in social sector, India is far behind many emerging economies. India has good framework in MDGs yet it stands below many countries in improving some social indicators.

The reason for rise in inequality is that in 1991 vast majority of the population had low levels of education and health. Unfortunately they were not able to take the advantage of market friendly policy and the growth in jobs that happened. This was the foundational difference between India and other countries

For example, China began its reforms in 1979. Its vast majority of people were literate, had access to good health service, there was equality of land ownership. None of these were in place in India in 1991.

The left out agriculture sector

The liberalisation benefits has not taken place in agriculture sector, labour sector, education, health and other social issues. Privatisation was there but it was not the cure.

The accessibility is the key issue where market can be accessed by only those who can afford it. The above mentioned areas are largely a state responsibility. The state and private sector can handle some of these sectors concurrently, thereby distributing the burden as well as providing basic opportunities for development.

In agriculture, the investment is only 3%. For the 50% of population which in is agriculture, they have only 3% investment and that too is going at the modern sector which is labour displacing. There is mechanisation, farm implements, tractorisation and other things. Hence, agriculture is not generating employment.

The result is that in the unorganised sector of service and industrial sector etc. people are going for employment at very low wages. Yet, they have no protection in employment. Thus, 94% population going in unorganised sector with low skill levels.

The ACER report shows that in last 10 years children of 8th class can’t read class 3 textbooks or do maths. So these 50% of the children either drop out or don’t know any of the skills will remain poor for next 50 years because they won’t be doing any skilled jobs.

Less structural reforms

India hasn’t really begun with the structural reforms which come largely within the purview of state. The investment pattern, the choice of technology is very important for employment generation. What has happened of late is that public sector is in retreat and the private sector is getting the push. The private sector is more capital intensive than labour intensive as it argues that it has to survive in the globalisation period.

  • Thus, 80% of the investment is going to the organised sector.

The organised private sector employment has increased from 7.5 million to 9.5 million but theworkforce has increased from 250 million to 450 million

So, the balance of the 198 million has to actually go to unorganised sector

Today the manufacturing sector is not expanding because of lack of demand from rural areas. To revive it, there has to be labour reforms, land issues tackling, financial market reforms. However, the labour reforms have to be more labour beneficial.

Conclusion

We are the stage where the time has come to take the full benefits of the reforms. This will be possible when sectors like industries, finances become sustainable and deepen where sectors in which they had not reached also get the benefit of 1991 reforms.

There is a need of dedicated reforms for social sector and the rural sector. The rest of the economy can take care of it.

It is not that all states are performing poorly in the post liberalisation period. Some states have lagged behind in becoming a part of reform process and some states like Gujarat, TN, Kerala, AP, have already adopted the best practices. In MP, for past 5 years, the agriculture sector is growing at double digits. Thus, the lack of political will at state levels to some extent is also responsible for slow reform.

India has good policies. The need is that state and districts implement it well so that the outcomes are visible, qualitatively and quantitatively.

The 1991 reforms focused too much on market and hence balance needs to be restored by the state intervention. There has to be a holistic change. Individual and unconnected changes in agriculture or business will not help as the resources are limited. And hence, the resources have to be allocated in such a way that all the sectors have something to gain. More emphasis on agriculture and employment generation through investment pattern and choice of technology pattern changes.  Thus, the future course of action should be focused on greater concern for agriculture and an Industrial policy.

Connecting the dots:

  1. Evaluate the impact of 1991 reforms in 25 years.
  2. The 1991 reforms were market oriented. Critically analyse the need of reforms in social and agricultural sector

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