The reforms of 1991, which were a cohesive wide range of reforms, covered large segments of the economy. However, in its totality, they were hamstrung by the political economy of that time.
The charter of ORF is about India’s economic growth. Its inaugural publication in 1991 was entitled, “The Agenda for Economic Reform: Joint Statement”, by PN Dhar, M Narasimham, IG Patel, and RN Malhotra. They were people with great domain knowledge conversant with our legacy issues and familiar with the complexities of our decision-making process. They recognised the limits of what is loosely called the political economy of change.
I am privileged to write an introductory piece to a new Ensemble of Essays, which traces our journey over the last 30 years. The authors are equally conversant with our problems and challenges, and many have closely seen our evolution over the last three decades. Each one of them comments on some important aspect of the changes which we have undertaken along with those changes which we have failed to make, and, more importantly, they have focused on the future.
The 1991 Balance of Payments crisis was the culmination of many incipient crises and challenges which had built through from the ’80s, given our tentative responses to bouts of unabated fiscal profligacy.
Undoubtedly, the 1991 Balance of Payments crisis was not an isolated event. It was the culmination of many incipient crises and challenges which had built through from the ’80s, given our tentative responses to bouts of unabated fiscal profligacy. The rupee trading agreements and special relationships with centrally planned economies and elsewhere was a source of comfort and, sometimes, recourse. India had often undertaken borrowings from multilateral institutions and other sources to tide over the immediate problems. We continued to postpone integrated action, covering both fiscal, and more importantly, structural changes, even as China and many Asian countries had embarked upon them much earlier. The saying that you cannot permanently live beyond your means, however, came to haunt us in a poignant way in 1991.
The build-up had begun in 1989. This was despite the warnings given to us by the International Monetary Fund (IMF) for accepting a safety net programme. Action was postponed till the forthcoming elections. History, however, very often does not always afford you another opportunity.
Between 1989 and 1991, the government under Chandra Shekhar took many decisive steps, including the mortgage of gold to prevent a debt default. Frequent changes of government had contributed to instability. Mere political expediency was beginning to lose traction. Attempts were also made to reduce the overhang of debt and fiscal profligacy, which had reached unsustainable levels.
All that is history. The reforms of 1991, which were a cohesive wide range of reforms, covered large segments of the economy. However, in its totality, they were hamstrung by the political economy of that time, which also has been commented upon in the essay written by AK Bhattacharya. The political economy and the prevailing milieu were unable to grasp the great opportunities which this crisis had paradoxically afforded us. No doubt, in 1991, macro, fiscal and far-reaching structural reforms were undertaken in areas of trade policy, industrial licensing, improving the banking sector, a tentative opening up of FDIs, along with other sweeping changes in our regulatory framework.
The constraints to our conviction, as pointed out in the two essays by Gautam Chikermane — both “on windows to reforms” and “on constraints to conviction” — were the mental baggage we had carried. Our suspicions about private capital had persisted and the unrelenting faith in public outlays as the means to achieve higher rates of economic growth was an abiding drag.
Similarly, on financial sector reforms, the essay of Monika Halan brings out these challenges. The recommendations of the Narasimham Committee Report made some important changes in the banking sector by way of greater autonomy to banks, priority sector lending and freeing up of administratively determined interest rates. The establishment of the Securities and Exchange Board of India as an independent regulator was an important change. However, the question of freeing banks or allowing progressive privatisation of financial entities remained elusive. The issue of privatisation of banks was historically an anathema.
The interplay between reforms and foreign policy has been brought out by Harsh Pant in an important essay in this series. Undoubtedly, the disintegration of the mighty Soviet Union and the growing economic distress of Russia as well as the Kuwait-Iraq War had consequences both for our exports and the options that were available to us. Simultaneously, our growing proximity to the United States and other important bilateral and multilateral donors (based on reforms enabling the opening of the Indian economy) was an interplay of both foreign and economic policy.
So, clearly, our achievements over the 30 years of economic reforms have been visible in multiple ways. As a result of higher rates of economic growth, the number of people living below the poverty line has significantly decreased. Illustratively, a 2020 UNDP report found that a record 273 million people were lifted out of poverty in just one decade from 2005-2016. We have, over this period, also expanded access to education and healthcare, increased consumer choice patterns, and fostered a new generation of innovative entrepreneurs and small businesses. The service sector has come to occupy an important place in the pattern of our economic activity. The large bouquet of consumer choices is in sharp contrast to their limited availability in 1991. The change and the dialogue is staggering.
These are significant for a country which had, for long, been trapped in the pejorative expression used by Raj Krishna of the “Hindu Rate of Growth”. If we have transited from this low-level equilibrium trap of the Hindu Rate of Growth, our current challenges are vastly different. We now need a double-digit rate of growth which can substantially wipe out poverty; bring about significant improvements in life quality, and physical and social infrastructure; foster innovation; embrace the gains of technology; and enable the pursuit of trade as an engine of growth through openness of policies.
Many of these have been outlined in the essays contained in this publication. These include Puja Mehra reflecting on the 1991 reforms in 2021 and Mihir Sharma on reforms for the Fourth Industrial Revolution.
To achieve these new daunting rates of growth, we need a combination of action on the political economy to include the following:
First, there must be a continued recognition of the synergy between abiding structural reforms and macroeconomic stability. We need to recognise that managing levels of debt and fiscal deficit, while essential in periods of global distress or under compelling circumstances like the pandemic, is an inescapable priority. In the long run, however, the current leadership is fortunately deeply cognizant of the fact that macroeconomic stability—namely, sustainable levels of debt and fiscal deficit—must remain a critical anchor.
Additionally, we need to address the complexities of financial sector reforms, and facilitating faster exits through improvements in the working of the National Company Law Tribunal. Scrutinising continued public ownership of banks beyond the current pilot experiment would be part of undoing the baggage of history. Both the banking and insurance sector have an irreplaceable role to play to make affordable credit and inclusive credit institutions available for gainful economic activity—both formal and informal.
Second, the synergy between institutions and the reform process is essential to achieving sustained high rates of growth. The role of the RBI is essential, while acting within the framework of inflation targeting prescribed by Parliament, and a flexible policy of monetary accommodation in relation to the corporate sector to support growth as well.
Third, reforming institutions under the governance rubric. Illustratively, the governance architecture of the permanent civil service establishment serves the needs of both the Centre and the States to balance inclusiveness with meritocracy and act as a fulcrum of stability. The role of the permanent civil service becomes significant as many State governments experience periods of instability. The centrality of the role of the Prime Minister’s Office acting in tandem with the Cabinet Office represents the bulwark of continuity and stability. Restructuring ministries, systems and organisations, and seeking a new governance architecture is an ongoing challenge.
On the ease of doing business, judicial reforms—considering the tardiness in the litigation process and resolution of disputes—requires a mediation mindset rather than a litigative one (remembering that the government is one of the principal litigants). We need to seek greater cohesiveness between legislative and judicial action.
Fourth, social infrastructure continues to lag behind our aspirations. The implementation of the New Education Policy, which represents an innovative approach in pedagogy and teaching methods, will be an important area to monitor, orchestrate and implement. The enlarging of options and choices, the increased autonomy to higher educational institutions, and the creation of opportunities for high quality foreign institutions to become integral to our national education process, will improve and enhance skills, employment options and outcomes in unimaginable ways.
Fifth, the endemic neglect of the health infrastructure dramatically brought to the fore by the ongoing pandemic entails a number of actions. Apart from significantly enhancing public outlays — currently at a stagnant level of 1 percent of GDP to close to 3 percent of GDP — we also need a set of changes in the regulatory framework by bodies like the Medical Council of India. There is need to harness talent in the allied sector. This will include training in the Diplomate of National Board (DNB); improving health-related infrastructure at the grass root level, namely, primary health centres and district health centres; preparing the country for the current and future pandemics; and greater engagement of the third tier.
Sixth, overcoming our mental block when it comes to tariff and non-tariff barriers, which can make foreign trade a true engine of growth. This will improve total factor productivity and the overall efficiency of the economy. Few countries in the world have prospered in isolation. Countries that engage meaningfully and integrate with the rest of the world while improving employment prospects at home and harnessing their latent talent have achieved long-term prosperity. Becoming Atmanirbhar Bharat is consistent with building a more competitive trade ecosystem.
Seventh, embracing the Fourth Industrial Revolution implies embracing the use of digital technology in multiple ways. Agriculture, health, education, direct transfer benefit, monitoring project implementation capabilities, and mainstreaming artificial and machine learning as part of the pedagogy of students will enable a faster transition to the 5G world. This will inevitably become the centrepiece of our overall economic and social management.
Eighth, in the agriculture sector, there are multiple factors that need reform. The objective of at least doubling agriculture and farm incomes will reinvigorate the obstinate farm sector reforms and encourage the progressive use of technology in farming practices. These will create new employment possibilities in agro and agro-related activities, even while changing our farming patterns in consonance with challenges like water shortage and innovations like investing in more sustainable and less energy intensive crops.
Ninth, is the area of new economy. In energy, we progressively need a growth pattern in keeping with the imperatives of global warming and climate change. Harnessing newer forms of renewable energy involves an ecosystem of new and innovative economic activity, which must become our new mantra. Equally, as we transit from coal fired stations, we require much greater public private partnership to provide incentives and encouragement to the corporate sector to move towards production of solar, wind, and green hydrogen energy as well as financing research and development and manufacturing of batteries.
Tenth, Parliaments, except for enactment of legislations or providing a forum for debating and discussing important national issues, have not been mainstreamed in the evolution of our economic strategy. A greater engagement of Parliament in restructuring the work of Parliamentary Standing Committees and altered mechanisms for parliamentary debates as well as involving legislatures both at the Centre and State levels entails necessary parliamentary reforms. Further, the working of independent regulatory institutions ends up escaping the scrutiny either of the Ministry or of Parliament.
Finally, a mindset change is represented in the recent Budget of the government, which effectively transits from the baggage of Fabian Socialism to a world where public outlays must be based on optimising outcomes from public goods. Minimising the presence of public sector institutions is a tectonic shift.
Equally, a new model of federalism — a fiscal fraternity of States, where the states are active players in our growth process through improved consultative mechanisms — is central to any growth objectives. As the number of States in the future could multiply and as regional parties begin to proliferate, a purposive engagement with the present and future coalitions will need a permanent consultative mechanism that is trusted by the States, and which would be in consonance with multiple areas of ongoing and future economic reforms.
We need a fundamental review of the Constitution in multiple ways; for instance, rewriting the 7th Schedule of the Constitution, which in its original form may have been progressively eroded and lost practical contemporary relevance. The challenges of the 21st century cannot be served by the institutions of the 20th century.
“The future depends on what we do in the present.” — Mahatma Gandhi
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Mr. N.K. Singh is a prominent Indian economist, academician, and policymaker. He is currently Chairman of the 15th Finance Commission. Prior to this position, he ...Read More +