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India should grow its economy at 8-9 per cent for the next 21 years to become a developed nation. Even to grow from its current size of $2.7 billion and achieve its target of a $5-billion economy from $2.7 billion now, it will have to grow at 8-9 per cent for five consecutive years. The triad of reforms, growth and equity is the only way for the country to achieve the sustained high rate of growth, said C Rangarajan, former Governor of RBI.
He was delivering the first G Ramachandran Endowment Lecture on ‘Three Decades of the Economic Reforms in India’ at the Madras School of Economics.
Ramachandran was the youngest officer to become the Finance Secretary of Tamil Nadu in 1965 and went on to hold top posts at the Centre under Indira Gandhi and Morarji Desai.
Speaking on reforms, Rangarajan said by the end of 1960s, it was clear that the nation-wide economic planning model was not working.
Decades behind China
India continued to pursue the model while China chose to explore, in 1978, new ideas and new ways. In 1980, per capita income of India and China was similar, but by 2020, China’s was $10,500 as against India’s $1,900. India started the reform journey a decade later than China but in terms of prosperity, the country is many decades behind.
Recalling the 1991 reforms, he said it was the enormity of the challenge — hand-to-mouth existence and foreign reserves worth just three week of imports — that forced the country to embrace wholescale reforms. India removed all barriers to entry and growth by doing away with controls and licences. It also redefined the role of the State and its activities and gave up a trade policy that focused on import substitution and embraced global trade.
He said the 1991 reforms delivered. India’s GDP growth increased to 6.2 per cent between 1992-93 and 2000-01 from earlier levels of 3.5 per cent. Between 2005-06 and 2007-08, it even touched a high 9.4 per cent. On the balance of payment (BoP) front, the 10-year itch (of going to IMF for bail out) vanished. India never went to IMF again after since 1991. In terms of poverty, too, the reforms worked, he said. Between 1993-94 and 2004-05, poverty rates fell from 45.3 per cent to 37.2 per cent. In 2011-12, it fell further to 21.9 per cent, he said.
Lessons learnt
He said the lesson the country learnt is that reforms, by themselves, do not lead to higher economic growth. They create the conditions for it. He said India’s growth rate fell post-2011-12 as investment ratio declined. For a sustained high rate of GDP growth, reforms must continue. He said it is important to time and sequence the reforms. Labour reforms, he said, will do well if the economy is in an upswing. Similarly, the agriculture reforms could have worked if it would have been left to the States.
He said every government should remember equity comes from growth and growth comes from reforms. All three have to be nurtured simultaneously.
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