This July marks two decades since Dr. Manmohan Singh as Finance Minister announced the beginning of the era of liberalisation. In the popular mind, this is often seen as an ideological transformation from a state-dominated economy to one led by the market. The simplicity of this formulation has its attractions, but it generates a number of paradoxes along the way. There are several areas, including labour laws and agriculture, where the apparent belief in the free market has not made much headway over 20 years. And even in a completely new area such as mobile telephony, the dominant paradigm has continued to be one of the state giving out licences.

It is convenient to treat these paradoxical situations as exceptions to the ideological shift of 1991. But when the majority of the population that is covered by agriculture and labour laws remains in the old framework even after two decades, it becomes quite difficult to distinguish between the exception and the rule.

NOT STATE VS. MARKET

We have to ask ourselves whether the simple ‘state domination to free market' exposition explains the transformation of 1991, or whether there are other interpretations that help us better understand the processes unleashed in that year.

Ironically enough, Dr. Singh himself offered a very different explanation for his actions in his 1991 Budget speech. He repeatedly referred to the goals of the Nehruvian strategy and placed his reforms as a continuation of that process. This formulation was cynically treated as no more than the appropriate sounds of a political debutant. But two decades later, Dr Singh's original formulation provides a better explanation of what has happened since then.

The Second Plan argued for India to create a base in heavy industry, which was interpreted to include not just physical assets but also the development of technical manpower. The private sector at the time did not have the ability to make the large and long-gestation-period investments required to create this base. The state thus had to step in and create public sector heavy industry as well as state-owned Indian Institutes of Technology.

Fashionable as it is today to see this as the state trampling all over the private sector, industry of the time did not necessarily see it in such black-and-white terms. The Bombay Plan by a group of industrialists in the 1940s had demanded a significant role for the state in the economy. And J.R.D. Tata continued as Chairman of the nationalised Air India.

CHANGE PRECEDED 1991

The private sector take-off from this base may not have come as quickly the planners would have liked. But when it did come in the mid-1980s, there was no stopping it. Dhirubhai Ambani proved that it was possible for private sector initiatives to tap the capital market to create a manufacturing giant beginning with textiles and linking backwards all the way to heavy industry.

The information technology revolution made it possible for private initiatives to tap global markets making use of the technical manpower generated in IITs and other institutions built on the thinking of the Nehruvian era.

This growth demanded its own imports, whether in the form of petroleum products or computers for software companies. This increased the pressure on the balance of payments. During the Rajiv Gandhi years, in the second half of the eighties, this pressure was sought to be eased through greater borrowing. But this only increased the problem in the long run. By 1991, we were famously pledging our gold and the then Prime Minister, P.V. Narasimha Rao, decided it was time to hand over the job to a professional economist.

Dr Manmohan Singh may then well have meant every word he said in his first Budget speech in 1991. The reforms were not an ideological shift from a state-led economy to a free-market one. They were designed to remove the fetters on the new industrial classes that had already emerged. It must be remembered that from Dhirubhai Ambani to Dr Reddy's Laboratories to the information technology revolution, the beginning of the rise of new industry preceded the reforms and did not follow it.

FARM, NON-FARM DIVIDE

This interpretation of reform makes it clear that the state is not ideologically committed to a free market. It would remove fetters where it saw the constraints on growth.

Unfortunately, it could also privatise where some individuals in power saw the potential for personal financial growth. It saw no real case to change labour laws on purely free-market principles. There was little reason to reform agriculture when there was no prominent group in that sector demanding change to a free market.

The consequences of such an alternative interpretation of the economy since 1991 are not merely academic. This interpretation helps us recognise that several of the features of policy-making over the last two decades are not accidental. In particular, the rapidly growing divide between a fast-growing non-agricultural sector and a stagnant agriculture is built into the nature of the reform process.

This difference affecting a majority of Indians is growing too rapidly not to have political consequences. Dr Manmohan Singh as Prime Minister has the challenge, and opportunity, to demonstrate that he has the skill, and the will, to deal with the consequences of the direction he gave the economy as Finance Minister in 1991.

(The author is Professor, School of Social Science, National Institute of Advanced Studies, Bangalore. >blfeedback@thehindu.co.in )

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