Three decades of reforms and still miles to go

Three decades of reforms and still miles to go

Three decades ago, on 24th of July, 1991, when Pallath Joseph Kurien, Minister of State for
Industry in Government of India, tabled the New Industrial Policy (NIP) in the Lok Sabha,
not many would have realized how big was the moment in the socio-economic history of
Independent India. After six years of preparation and facing political challenges, the new
policy, which sought to end the Nehruvian Socialism in the country, finally saw the light of
the day.

The process of economic reform was set in motion by Vishwanath Pratap Singh, the finance
minister in the government of Rajiv Gandhi (1984-1987). It gained further impetus when
Ajit Singh, the MIT educated, tech savvy industry minister of National Front’s government
assumed the charge (1989-1990).

The original draft of NIP was prepared by Amar Nath Verma (then Industry Secretary) and
Mohan Rakesh (then Chief Economic Advisor to Industry Minister Ajit Singh) in 1990. The
proposal to radically reform the industrial policy of India were patronized first by Ajit Singh
& Vishwanath Pratap Singh (1990), then by Yashwant Sinha & Chandrashekhar (1991) and
finally by Manmohan Singh and Pamulaparthi Venkata Narasimha Rao (1991).

The NIP was followed by supporting reforms in the financial sector and fiscal policy. The
committees set up in 1991 under the chairmanship of Raja Jesudoss Chelliah and
Maidavolu Narasimham for Tax reforms and Financial Sector Reforms respectively. The
recommendations made by these committees and several follow up committees like
Narsimhan Commmittee 2.0, Shome Panel, Kelkar Task Force etc. have formed the basis of
the economic and fiscal reforms in the country in past three decades.

Indubitably, we have travelled a long distance from 50% corporate tax rate to in 1990 to
25% in 2021. The journey in indirect taxation has been even more spectacular. From a
multitude of classifications and tax slabs in 1980s, we have achieved minimum number of
tax slabs and a single Goods and Services Tax (GST) in three decades.

Financial sector has also seen a metamorphosis in past three decades. Capital controls
have been materially relaxed. A developed national trading & settlement system for financial
instruments has been established. Foreign trade is materially deregulated. Financial
inclusion has progressed materially with liberalization of banking, insurance and pension
sectors. After initial hiccups, the Insolvency and Bankruptcy Code is now evolving fast.

The work of reforms though is still in progress and we have many more miles to cover. The
reforms in two key sectors Agriculture and Industrial Labor have started by passing key
legislations in 2020. The government has also outlined a clear policy on disinvestment of
public sector enterprises. From the legacy process of reforms, The Direct Tax Code, The
Indian Financial Code, Development of Retail Debt Market, Land Reforms, GST rates
rationalization and coverage expansion, etc. are some of the areas where progress is still
needed.

In recent years an entirely new economic development paradigm has emerged globally.
Sustainability and Tech driven trade and commerce have emerged as the most dominant
global socio-economic trends. India has the opportunity to adapt to these trends early by
implementing a futuristic policy framework. The progress made so far appears patchy and
reluctant. Comprehensive and constitutionally enforceable policies for sustainable
development and digital commerce (including currencies) need to be evolved and
implemented earnestly, at the earliest.

Backdrop of 1991 reforms

The reforms in 1991 were neither ushered voluntarily, nor enjoyed wider support. These
were rather necessitated as the socio-economic milieu of the country had reached the brink
of disaster. Four decades of pseudo-ness in post-independence policies had introduced
numerous distortions in the society and economy.

The pseudo socialist model of development adopted post-independence in fact perpetuated
the colonial feudal model. The private sector monopolies were protected through licensing
controls & state patronage, and hugely inefficient public sector monopolies were created.
Even implementation of Monopolies and Restrictive Trade Practices Act and Foreign
Exchange Regulation Acts in 1972, were misused to perpetuate the dominance of already
well-established industrial families.

The entire development paradigm was designed to focus on the weaknesses (risk capital and
technology) of the country. The strengths of the country (food, art, culture, religion,
languages, etc.) were undermined and allowed to dissipate easily. The effort of the
government was on discouraging and regulating consumption, rather than increasing
production and productivity. Industrial and scientific knowledge and technologies were
mostly imported. The term “imported” became synonymous with quality and prestige and
“local” became a derogatory reference. Even to date, many companies of old era proudly
include “imported” or “foreign” technology in their promotion campaigns.

The backdrop of 1991 reforms was set by convergence of many social, political and
economic factors.

Firstly, the country was witnessing unrest on many counts, most notably – Implementation
of Mandal commission and Ram Mandir movement had become major socio-political issues.

The Congress leader Rajiv Gandhi had just been killed by Sri Lankan Tamil suicide
bombers. Regional socialist parties had risen to capture power in the Congress strongholds
UP and Bihar. Having permanently lost West Bengal and Tamil Nadu earlier, the Congress
party’s popular support was shrinking to a few states in central and western India.
The collapse of USSR and Berlin wall meant realignment of global order. The non-aligned
India, which was in fact closer to USSR, was left vulnerable on many counts, especially
geopolitical support and crucial defense technologies.

In the post emergency era, the efforts of various governments to catapult India to higher
growth rate through fiscal expansion had culminated in significant balance of payment
crisis. The ten years of fiscal expansion did manage to break the vicious cycle of the Hindu
rate of Growth (3-4%). Briefly a higher growth rate (7.6% average during 1988-1991) was
also achieved; but it was not sustainable for obvious reasons. The gulf war and two years of
severe droughts further aided to the economic woes.

The multitude of crisis pushed the policy makers to adopt a pro market approach. The
Congress Supported minority government of Chandrashekhar sought IMF help and
committed to a radical reform in fiscal policy and industrial policy. A roadmap was prepared
for disinvestment of PSEs, fiscal reforms and implementation of NIP. However the
government fell days before the finance minister Yashwant Sinha could present, what could
have been the first dream budget of Independent India.

Impact of reforms

There is little argument over the fact that the economic and fiscal reforms initiated in 1991,
India were inevitable. These reforms did help in bringing the Indian economy back from the
brink of disaster; even though the adequacy and efficiency of reforms has remained a
matter of intense debate ever since.

Three decades of reforms have resulted in many structural changes in Indian economy. The
contribution of agriculture has reduced to about one sixth, while services now contribute
more than half of the GDP. The structure of foreign trade has also changed in favor of
manufactured goods and services. The balance of payment has remained robust. We have
faced three global crises (2000, 2008, and 2020) without an iota of problem.

Financial markets have remained an example to the world. India has perhaps been the only
major global financial market that neither shut down nor imposed any trade restrictions
during 2000 and 2008 market crisis.

Positives:

In my view, the 1991 reforms made three most important contributions to the Indian
economy:

1. The process of reform dismantled the pseudo socialist mindset of the policy makers;
unleashing the private enterprise which had remained constricted since independence.
Consequently, the minority socialist government of United Front in 1996-1998
presented the second dream budget. Another minority government supported by
socialists (NDA 1998-2004) divested numerous government monopolies like coal, ports,
mobile telecom, roads, power, airports, etc. without much trouble. The response to
global sanctions post 19998 nuclear test was not lower spending, but larger capex on
building local capacities. The UPA-1 government supported by communists made a
nuclear deal with USA and UPA-2 allowed foreign capital in retail trade. The final
epithet of older policy regime was written by NDA-2 with dismantling of planning
commission; permitting off the shelve banking licensing; and move to privatize two PSU
Banks (NDA-3).

2. Shifting of policy focus on increasing production & productivity rather than
constricting consumption. This allowed the Indian businesses and consumers to
globalize; aspire more and achieve more. We could become part of global alliances and
treaties without much resistance. We could set up large scale capacities in automobile,
pharmaceutical, textile, space technology, civil aviation, ITeS, and housing etc. Private
enterprise could attract significant capital from global investors.

3. The horizons of the entrepreneurs expanded materially. The post reform generation of
entrepreneurs was not infected by the traditional constraints. The new generation
could think about globally competitive scale. They were not constrained by traditional
characteristics like complacency, frugality, austerity, contentment etc. Targtes were
now being frequently expressed in “Billion dollars” terms rather thn millions. Dreams
not only became larger but also started to get realized. Consequently, the Indian MNCs
started to grow in diverse areas like metals, automobile, ITeS, pharmaceuticals,
hospitality etc.

Not so positive

However, statistically speaking, the reforms have not been adequate in putting India firmly
on the path to become a middle income economy.

The reforms implemented so far have no dramatic impact on growth. As per Macrotrends in
the USD terms, India’s GDP grew from ~US$37bn in 1960 to ~US$321 in 1990, a CAGR of
7.46%. In the next 29 years (1991-2019) India’s GDP grew to ~2.89trn, a CAGR of 7.84%.
Though, the per capital growth rate was little faster as population growth began to taper
from late 1990s. The per capita GDP of India grew at a CAGR of 5.12% during 1961-1990.
During 1991-2019 this rate has been 6.19%. (Avoided 2020 as it was an exceptional year).

The Gini coefficient that measures the inequality in income distribution, increased from ~35
in 1990 to ~48 in 2018, making India one of the worst countries in terms of inequality. This
highlights that the growth has not be equitable.

On relative basis, the peer economies like China, South Korea, Thailand etc. have done
better than India. Our share in global trade has only marginally increased to ~3%, while
China more than tripled it share in global trade to over 17%.

Not making national education & youth policy an integral part of reforms has perhaps been
a grave mistake. The growth in India has definitely failed in ensuring adequate employment
generation. Despite significant reduction in agriculture’s share in national income, the
percentage of population dependent on farm sector continues to remain in excess of 60%.
We have miserably failed in exploiting the demographic dividend.

Though, the financial markets developed a global scale infrastructure, we have not been
able to implement a robust system for early detection of frauds and scams. Consequently,
the investors continue to lose significant amount of money due to frequent scams and
frauds in banking system and financial markets.

Many recent steps taken by the government indicate that the policy makers are full
cognizant of the inadequacies of Indian economy. The new education policy, schemes and
incentives to promote local manufacturing and exports, farm sector reforms, etc. are
important steps that shall help in overcoming these inadequacies in the decade of 2020s.

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Author: Midas Finserve

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