Setting the record straight on reforms

We had a celebration of a quarter century of reform. The narrative went this way: We were living in the dark ages and then there was reform and we live happily ever after.

But the reality is considerably different. It shows that the transformation began in the eighties. Actually, economic growth in the 90s was not more than in the 80s. While I had made a presentation to this effect at the Indian Society of Labour Economics at Thiruananthapuram in 1997, Arvind Virmani, former chief economic advisor, among others, arrived at a similar conclusion.

I compared the period since the late-70s with the earlier period and argued that “Per capita growth was less than 1 per cent in the early period and is 2.65 per cent in the later period. In the later period, registered manufacturing was growing at around 7.5 per cent and agriculture at above 3 per cent… In the early period agricultural growth was appreciably lower... In the decade of the fifties, GDP growth was less than 2.8 per cent in 50 per cent of the years and in the remaining years, it was more than 5.7 per cent. In the decade of the sixties, this behaviour persisted and growth was less than 3.1 per cent or negative for 50 per cent of the years and in the remaining years it was more than 5.1 per cent. However, from 1975-76 to 1996-97, a growth performance of less than 3.1 per cent was there in only three of the 21 years. There are therefore two characteristics of growth in recent years It is higher. It is more stable”.

The fact of India’s growth transformation starting in the eighties was picked up in this century by economists outside India. Once economists from Harvard, the IMF and the NBER (National Bureau of Economic Research) began saying the same thing, it became orthodoxy. We said “GDP growth from 1980-90 was 5.6 per cent and not very different from 5.7 per cent in 1991-2002.”

More recently, Vijay Joshi too has shown that the eighties saw a break with the historical growth rate. The description of the reform process, however, is tepid. But Arvind Panagariya, now the chief of NITI Aayog, writing in the Financial Express , asserted that “in contrast to the isolated ad hoc policy measures taken to release immediate pressures prior to the 1980s, (the eighties) taken as a whole, constituted significant change and an activist programme. For example, by 1990, approximately 20 per cent of the tariff lines and 30 per cent of imports had come under OGL. .. import licensing on many other products was eased up” .

The mid-eighties saw the first transition from a regime with output, investment, technology and import control at the commodity level to a regime which would use fiscal and not quantitative controls. In 1985, India designed an extensive programme of reform emphasising internal competition initially. Around two thirds of organised Indian industry was removed from price and quantitative controls to tax and tariff rate interventions, according to a paper by Raja Chelliah.

From firm level controls the economy moved to industry level interventions with strong schemes of incentives and disincentives. These would discriminate between industries, but not between firms. Lance Taylor who, in his Rocky Road to Reform argued that that the Indians had developed an alternate pattern of reform.

The policy framework was seen as a transitional regime, leading later in the early 90s to uniform and low tariff rates and freely convertible exchange rates. The reform of the 90s was clearly anticipated and, in fact, outlined by policy economists in India. Its ultimate goal of capital account convertibility is still to be engineered as outgoing RBI Governor Raghuram Rajan keeps reminding us.

The most serious criticism of the 80s is that it led to a rise in sovereign debt. The near run on the rupee in 1991 can be attributed to the denigration of the economic record of the eighties by the VP Singh government.

It does not help to argue that external debt is private-sector-driven now. So let’s celebrate cautiously and plug away for capital account convertibility. Urjit Patel understands this well.

The writer is Chancellor, Central University of Gujarat and a former central minister

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