Indian Economy, 5th edition (21 page)

*
Twelfth Five Year Plan (2012–2017)
, ‘Faster, More Inclusive and Sustainable Growth’, Volume I, pp. 34-36, Planning Commission, GoI, N. Delhi, 2012

Introduction

The economic reforms initiated in 1991 is now into the 22
nd
year. In this period there was hardly a day that some news, news analysis, write up or article did not appear in the newspapers. Several highly acclaimed books have been authored on India’s economic reforms by some of the best experts of economics from India and abroad. Still students, especially coming from non-economics background, are generally at a loss on the ‘pros’ and ‘cons’ of the reform process.

economic reforms

Popularly, economic reforms denote the process in which a government prescribes declining role for state and expanding role for the private sector in an economy. So let’s unravel the reform process based on the author’s classroom interaction with students. It is safer to see economic reform as a policy shift
in an economy from one to another or
‘alternative development strategies’.
Economists attribute the differences in the performance of economies to the differences in the ‘strategies’ they follow. The different strategies of development evolved through a long period of trial and error by the different countries under the influence of different sets of ideologies. But the process has been like an educational trip. To understand the term ‘economic reform’ and more so to clarify the confusion concerning it in the Indian context, we must see the different ‘alternative development strategies’ which evolved through time. A brief description is given below:

1. Planning Model

Till the rise of the Soviet Union, the prevalent development strategy in the Euro-American countries was the capitalist system of economy which promoted the principles of the laissez-faire and dominant role for the private capital in the economy. Once the Soviet Union went for the planning model (including the East European countries and finally China in 1949) most of the developing countries after their independence were influenced by socialism and the governments there took a central role in planned development. As these economies were dominated by foreign colonisers, they worried that opening themselves to foreign investment would lead to a new form of domination, the domination by large multinationals. That is why most of these countries went for ‘protectionist’ economic policy with
import substitution
as one method, side by side. But by the 1970s, the world was having convincing proofs that the socialist as well as the planned economies
1
were inclined to follow their kind of development strategy—because either they had very slow and lower growth rates or were stagnating. The experiences of these economies gave rise to a new ideology which is popular as the
‘Washington Consensus’
.

2. Washington Consensus

By the early 1980s, a new development strategy emerged. Though it was not new, it was like the old idea getting vindicated after failure of a comparatively newer idea. After the world recognised the limits of a state-dominated economy arguments in favour of the market, i.e. the private sector, was promoted emphatically. Many countries shifted their economic policy just to the other extreme arguing for a minimal role of the government in the economy. Governments of the socialist or the planned economies were urged/suggested to privatise and liberalise, to sell off state-owned companies and eliminate government intervention
in the economy. These governments were also suggested to take the measures which could boost the aggregate demand in the economy (
i.e. macroeconomic stability measures
). The broad outlines of such a development strategy were called as the
Washington Consensus
2
.

This consensus is broadly termed as the popular meaning of the ‘economic reform’ followed by almost all the socialist, the communist and the planned developing economies during the 1980s in one form or the other
3
-the term economic reform got currency around the world during this period. The term was usually seen as a corollary of promoting ‘naked capitalism’, openness in the economy and an open attitude towards foreign investments, etc. The Governments of the developing economies were criticised by the political parties in the opposition and the critiques for being soft to the dictates of the IMF and the WB and becoming a party to promote ‘neo-imperialism’.

But these policies, in many cases proved little better than the previous policies in promoting growth over an extended period of time. But somehow a mood in favour of the market economy had gained ground. The United Kindom under Mrs. Thatcher had gone for politically most vocal privatisation moves without any political debates (The only such example of privatisation moves among the democracies, till date).
4
It should be noted here that after the Great Depression of 1929 a ‘strong state intervention’ was suggested (by J.M. Keynes) and such a policy did really help the Euro-American countries to mitigate the crisis. The favour for the state intervention in the economy was being reversed by the Washington Consensus. But soon this consensus was also to be replaced by another development strategy.

3. Mixed Economy

By the mid-1990s, it had become increasingly clear that neither of the extremes—the Washington Consensus or the state-led planned economy—were the ultimate strategies of development
5
. The success achieved by the East Asian economies even if we take into account their setback due to the financial crisis of 1997–98, stands out in marked contrast to the experiences of the other economies of the time who were following the Washington Concensus strategy of the planning model.
6
The East Asian economies have not only been able to propel higher growth rates but they have been greatly successful in reducing poverty, promoting education and healthcare, too.

The East Asian economies had promoted a development strategy which had its most distinctive feature as the balance they were able to strike between the roles of the state/government and the market/the private sector in their economies. This was really a new kind of the mixed economy which was never permanently inclined towards either state intervention or the free market, but always a balanced mix of the state and the market according to the requirement of the socioeconomic situation of the economy. The East Asian countries had pursued market-oriented policies that encouraged development of the private sector—augmenting and governing the market, not replacing it.
7

Technically speaking, shifting of economic policy of a country from one to the other above-given three ‘alternative development strategies’ is economic reform. But in the history of the world economy, it was inclination of the economies towards the market economy, which have been referred as economic reforms. In the Indian case, economic reform has been used always in this sense. Here, one should note that when India started the programme of economic reforms in the early 1990s, the world view was in favour of privatisation, liberalisation, de-nationalisation, etc. as the main plank of economic reforms. But by the mid-1990s, not only the world view has polarised in favour of the ‘mixed economy’ but one another change was about to sweep the world economies i.e. the favour for globalisation sponsored by the World Trade Organisation (WTO). Now, the developing economies (mixed economies with planning as their development strategy) as well as the transition economies (Russia and the whole Eastern Europe, China)—who were already promoting the market-oriented reform process were faced with a dilemma. To prosper and compete in the globalising environment while they needed immediate liberation from their state-dominated mode of economies at one hand they also needed to strike a balance between the state and the market on the other. Each one of them tried to strike the balance in their own way with mixed results. In India, the Governments have not been able to convince the masses that the economy needs reforms and the attempted reforms will benefit all. In every election since the reforms of 1991, the voters have not supported a pro-reform government. Though the process of economic reforms started in India with the slogan
‘reforms with human face’
—the slogan has utterly failed to garner the empathy of masses. We may hope that in coming times the masses will start connecting to reforms and are able to get the message clear i.e. reforms are to benefit all.

ECONOMIC REFORMS IN INDIA

On July 23, 1991, India launched a process of economic reforms in response to a fiscal and balance-of-payment (BoP) crisis. The reforms were historic and were going to change the very face and the nature of the economy in the coming times. The reforms and the related programmes are still going on with changing emphasis and dimensions but they are criticised as being slow ever since the UPA Government came to power in May 2004. Back in the mid-1980s, the Governments had taken its first steps to economic reforms. While the reforms of the 1980s witnessed rather limited nature of deregulation and ‘partial liberalisation of only a few aspects of the existing control regime, the reforms started in early 1990s in the fields of industries, trade, investment and later to include agriculture, were much ‘wider and deeper’
8
. Though liberal policies were announced by the Governments during the reforms of the 1980s itself, with the slogan of ‘economic reforms’ it was only launched with full conviction in the early 1990s. But the reforms of the 1980s which were under the influence of the famous
‘Washington Consensus’
ideology had a crippling impact on the economy. The whole Seventh Plan (1985–90) promoted further relaxation of market regulations with heavy external borrowings to increase exports (as the thrust of the policy reform). Though the thrust increased the growth rate led by higher industrial growth rate (riding on costly imports supported by foreign borrowings which the industries would not be able to pay back and service) it also led to a substantial increase in foreign indebtness that played a major role in the BoP crisis of 1991.
9
The crisis was immediated by the First Gulf War (1991) which had two-pronged negative impact on the Indian foreign exchange (forex) reserves. First, the war led the oil prices to go upward forcing India to use its forex reserves in comparatively shorter period and second, the private remittances from Indians working in the Gulf region fell down fast (due to their emergency evacuation)—both the crises were induced by a single cause i.e. the Gulf War. But the balance of payments crisis also reflected deeper problems of rising foreign debt, a fiscal deficit of over 8 per cent of the GDP and a hyper-inflation (over 13 per cent) situations.
10

The minority Government of the time had taken a highly bold and controversial step in the form of economic reforms criticised throughout the 1990s by one and all—right from the opposition in the parliament, to the communist parties, to the industrial houses, the business houses, media, experts and by the masses also. By now as the benefits of the reforms have accrued to many, the criticism has somewhat calmed down but still the reform process is considered as ‘anti-poor’ and ‘pro-rich’ by at least the masses—the people who decide the political mandate for the country to rule. At least one belief is followed by everybody i.e. the benefits of reforms are not tickling to the masses (the
‘aam aadami’
) with the desirable pace.
11
The need of the hour is to go for ‘distributive growth’ though the reform has led the economy to a higher growth path.

Obligatory Reform

Similar reform process started by some other economies since the 1980s were voluntary decisions of the concerned countries. But in the case of India it was an involuntary decision taken by the Government of the time in the wake of the BoP crisis. Under the Extended Fund Facility (EFF) programme of the IMF, countries get external currency support from the fund to mitigate their BoP crisis, but such supports have some obligatory conditionalities put on the economy to be fulfilled. There are no set rules of such conditions already available with the IMF though they are devised and prescribed to the BoP-crisis-ridden economy at the time of need. A point needs to be referred here is that the conditionalities put upon India were of the nature which required all the economic measures to be formulated by them. It means that the reforms India carried or is carrying out at present were neither formulated by India nor mandated by the public. Yes, there was a large section of experts inside and outside the Government who believed in similar economic measures to bring the economy on the right path. Some of them were arguing the same since 1970s itself while many other experts believed in them since the mid-1980s
12
.
But why after all was the Rao-Manmohan Government credited to start the reform process in India? It is because they thought it suitable to follow and make it politically possible in India. Imagine, a government proposing to sell the state-owned companies to the private sector or closing them down in a country which has been convinced that these companies will be the ‘temples of modern India’. The Masses were convinced that the Government has bowed down to the dictats of the IMF, the imperialist forces, the multinationals, etc. Even today such feelings are there in several quarters of the economy. The politics of the economic reforms damaged India more than the reform has benefitted the country. It would not be an exaggeration if we conclude economic reforms had no political consensus. Political parties in India are divided on the issue of reforms—the parties together with the masses lack the level of political maturity required for the success of the reforms programme. It is right, democratic maturity comes to a multi-party political system but it takes time. It takes even more time where masses are unaware and ignorant. The emotional issues of religion, caste, etc. play their own roles in such situation.

The
IMF conditions
put forth for India were as under:

(i)
Devaluation of the rupee by 22 per cent (which was effected in two phases and the Indian rupee fell down from Rs. 21 to Rs. 27 per US dollar).