Three decades ago India embarked on a new economic journey when Manmohan Singh, then Finance Minister, placed the reform Bill and echoed Victor Hugo, “No power on earth can stop an idea whose time has come,” in Parliament. Since then, the crisis-hit economy has come a long way and marked its firm presence in the global platform.
By the beginning of the 1990s, India was reeling under double-digit inflation, gross fiscal deficits above 7.5 per cent of GDP, internal debt close to 54 per cent of GDP and foreign currency reserves were just enough to cover import bills of a fortnight. Further, there was a new government at the Centre.
With an economic crisis looming and political confidence on the verge of collapse, the economy was at its Nadir. It was a ‘TINA’ (there is no alternative) situation for Singh, to turn the crisis into an opportunity and undertake structural reforms that were long overdue.
Liberalisation started with a dose of devaluation and was followed by slew of policies which together were famously termed as LPG (Liberalisation, Privatisation and Globalisation) reforms. As is always the case, the change was not welcomed by all. There was political resistance from within and outside the ruling party since many were not sanguine about its success.
Thirty years down the line, from a GDP of $512.92 billion in 1991, India had grown to a $2.70-trillion (in constant 2010 US$) by 2020. Besides, the average annual growth rates in GDP, post the 1990s, have been around 6.25 per cent against 4.18 per cent for the three decades prior to the reforms.
Thanks to the increase in the share of services over the erratic agricultural sector, the growth rates post-reforms have been less volatile than earlier years. The coefficient of variation in the annual growth rates of GDP has declined from 80 per cent during 1961-1990 to 30 per cent in 1991-2020. Inflation and government deficits have also turned favourable.
The average annual rates of inflation in the post-reform period were significantly lower at around 5 per cent and the gross fiscal deficit below 4.80 per cent of GDP. While curbing automatic monetisation of deficits and strong monetary measures contributed to lower inflation, it was disinvestment via privatisation and fiscal restraint in form of lower subsidies that arrested the deficits.
On the external front, the reforms made significant impact too. Firstly, India’s trade openness increased from a meagre 13 per cent in 1990-91 to 42 per cent in 2020. The exports, driven by the devaluation of the rupee in 1991 and further depreciation in later years, have increased from $17.96 billion in 1990 to $324.43 billion in 2019.
Abolition of licence- raj and curbing of excessive regulations saw rewards in terms of better foreign investment. From $236.69 million in 1991 the net FDI inflows stood at $50.61 billion in 2020. With more foreign companies entering India, domestic consumers benefited from healthy market competition. For Indian manufacturing, the foreign collaborations meant access to technology and, thereby, efficient production. Also, there has been a significant improvement in forex reserves, which are now sufficient to cover 15 months’ imports.
Opening up the economy also makes it susceptible to external shocks. Within a few years after the reforms, the first challenge for India came from its East Asian neighbours in 1997. In a span of three years, the world economy was hit by the dot-com bubble, and the third challenge came in the form of the global financial crisis in 2008. It was prudent economic policies and disciplined financial markets that helped the Indian economy to resist and recover quickly from all the three crises.
The reforms also had telling impact on India’s socio-economic fabric. From about 45 per cent of the population below the national poverty line in 1994, the rates have fallen to 21.9 per cent in 2011. There have also been improvements in literacy rates, gross enrolments ratio and life expectancy, among others.
However, a major criticism about the reforms has been that it has widened the gap between rich and poor. The World Bank estimates show that the Gini index, a measure of income inequality, has deteriorated marginally from 31.7 in 1993 to 35.7 in 2011.
According to NSSO consumption surveys, while the bottom 20 per cent of population contributed to 9.20 per cent of consumption expenditure in 1993-94, their contribution has declined to 8.10 per cent in 2011-12. Further, the share of top 20 per cent of population has fattened from 39.70 per cent to 44.70 per cent during the same time period.
A major reason for the rising inequality is the heterogeneity of the Indian population, leading to varying adjustment capacity. The inequalities also can stem from structural changes induced by the reforms. While the increase in the share of service sector to GDP has its advantages, it has also resulted in reduction of share of agriculture income in the total GDP. With close to 42 per cent of workforce employed in agriculture, a reduction in income share would imply wider gap between respective incomes.
Converting crisis into an opportunity is riskier than it sounds. In the current scenario, India needs to act quickly to avoid imminent crisis. If not resolved, the growing NPA problem can aggravate the balance-sheet imbalances of the banking sector. This would require reforms to make the banking and financial sector more transparent and accountable.
While Covid-19 has been a big blow, the economy was already showing signs of deteriorating growth even in periods preceding the pandemic. This would require immediate intervention to tackle the predicaments of unemployment, poverty and other social issues. The pandemic has also raised concerns over existing health infrastructure and the future of education. The government must make higher investments in these sector.
Gopakumar is on the Faculty of Economics, SSSIHL, and Rajendra is on the Faculty of Economics and Finance, IIT Patna