30 years later, the reforms journey continues

Representative image (Source: ShutterStock)

This year marks 30 years of the pivotal economic reforms of 1991 when Prime Minister PV Narasimha Rao piloted the Indian economy towards a radically new path. Rao became Prime Minister at a precarious time in the history of independent India. Punjab and Assam were seeing unrests, full-blown militancy had started in Kashmir, the Cold War had ended with India on the wrong side of the victors, and political instability had gripped India even as decades of disastrous economic policy reached the crisis point with the country staring at a Balance of Payment crisis.

Rao’s greatest achievement was to implement the economic reforms despite massive resistance from within the Congress, entrenched business houses and labour unions. The need for reforms was widely recognised but no government then was able to muster the political will to do the inevitable. But the crisis of 1991 forced the hands of the government.

The reforms centred on fiscal deficit, industrial policy, financial sector reforms, monetary reforms, and liberalising trade policy. Reforms aimed at curtailing the fiscal deficit to sustainable levels by rationalising subsidies and taxation reforms. Industrial policy was reformed to end the infamous license-permit raj, which resulted in corruption, production inefficiency and monopoly by a few business houses.

Financial sector reforms aimed at ending financial repression and giving more freedom to public sector banks, than allowing the entry of private and foreign banks to induce much-needed competition in the sector. At the same time, the monetary policy was reformed to grant autonomy to the Reserve Bank of India (RBI) to end the automatic monetisation of fiscal deficit and consequent inflation and bring predictability and trust in the conduct of the monetary policy. The trade policy was liberalised by lowering tariffs and relaxing controls on export and import.

The devaluation of the rupee and above-mentioned structural reforms pulled India from the brink of a Balance of Payment crisis. Economic reforms were maintained and even continued by the successive governments despite their populist public posturing. Macroeconomic conditions stabilised, and within few years, India entered a new, higher-growth trajectory.

Now 30 years later, India is a very different place with lower poverty rates, greater opportunities, and a broader spread of prosperity despite the recent downturn caused by the COVID-19 pandemic. The middle class has prospered as opportunities outside the government sector expanded with the growth of the private sector and integration with the fast-globalising world.

But there was a major lacuna in the 1991 reforms: agricultural reforms. China started its reform process with the agricultural sector, ensuring that the masses benefited from rising prosperity. It gave broad-based legitimacy to China’s reform process, unlike India where reforms are seen as suspect as gains of rising prosperity didn’t percolate down as expected. Also, in our zeal of cutting the fiscal deficit, we took the wrong path of cutting down the size of the State, which was always among the smallest in the world. Instead of administrative reforms and restructuring the government sector, successive governments at the Centre and state opted to freeze recruitment to cut salary bills. It has led to millions of vacancies in critical areas such as police, health, and education, imposing a cost on future growth. We were stuck with a weak State and unfinished reform agenda.

Thirty years since 1991, Prime Minister Narendra Modi has finally initiated another mega round of reforms that rival the 1991 reforms in their scope; most importantly, farm laws and labour codes. But still, many critical reforms are pending. Among them, judicial reform is the first and foremost. Frequent interference by the judiciary in policy matters and reckless entertainment of PILs has created an atmosphere of uncertainty in the economy. Weak contract enforcement, insecure property rights and endless delays take a huge toll on the economy. Reforming and strengthening the lower judiciary alone can push up the economic growth rate. Police reforms, bureaucratic reforms, and legal reforms are other neglected areas with huge efficiency gain.

But it is pertinent that the reform agenda moves from the Centre to the states. Simplifying laws, market-oriented policies coupled with efficient State apparatus at the state and municipal level should be the focus of new reform agenda.