Three decades of reforms and still miles to go

Indubitably, we have travelled a long distance from a 50 percent corporate tax rate in 1990 to 25 percent in 2021. The journey in indirect taxation has been even more spectacular. From a multitude of classifications and tax slabs in the 1980s, we have achieved a minimum number of tax slabs, and a single Goods and Services Tax (GST) in three decades.

The financial sector has also seen a metamorphosis in past three decades. Capital controls have been materially relaxed. A developed national trading and settlement system for financial instruments has been established. Foreign trade is materially deregulated. Financial inclusion has progressed materially with liberalisation of banking, insurance and pension sectors. After initial hiccups, the Insolvency and Bankruptcy Code (IBC) is now evolving fast.

The work of reforms, though, is still in progress, and we have a long way to go. The reforms in two key sectors — agriculture and industrial labour — have started by passing key legislations in 2020. The government has also outlined a clear policy on disinvestment of public sector enterprises (PSEs).

From the legacy process of reforms, the Direct Tax Code, the Indian Financial Code, the development of retail debt market, the land reforms, the GST rate rationalisation and coverage expansion, etc. are some of the areas where progress is still needed.

In recent years, an entirely new economic development paradigm has emerged globally. Sustainability and technology-driven trade and commerce have emerged as the most dominant global socio-economic trends. India has the opportunity to adapt to these trends early by implementing a futuristic policy framework.

The progress made so far appears patchy and reluctant. Comprehensive and constitutionally-enforceable policies for sustainable development and digital commerce (including currencies) need to be evolved and implemented earnestly, at the earliest.

Backdrop Of 1991 Reforms

The 1991 reforms were neither ushered in voluntarily, nor did they enjoy wider support. These were rather necessitated due to the socio-economic milieu. Four decades of pseudo-ness in policies post-Independence had introduced numerous distortions in the economy and in society.

The pseudo-socialist model of development adopted post-Independence perpetuated the colonial feudal model. The private sector monopolies were protected through licensing controls and State patronage, and hugely inefficient public sector monopolies were created. Even the implementation of the Monopolies and Restrictive Trade Practices Act in 1969, and the Foreign Exchange Regulation Act in 1973, were misused to perpetuate the dominance of already well-established industrial families.

The entire development paradigm was designed to focus on the weaknesses (risk capital and technology) of the country. India’s strengths (food, art, culture, religion, languages, etc.) were undermined and allowed to dissipate easily. The government’s effort was on discouraging and regulating consumption, rather than increasing production and productivity. Industrial and scientific knowledge and technologies were mostly imported. The term ‘imported’ became synonymous with quality and prestige, and ‘local’ became a derogatory reference. Even to date, many companies of the old era proudly include ‘imported’ or ‘foreign’ technology in their promotion campaigns.

The backdrop of the 1991 reforms was set by the convergence of many social, political and economic factors.

First, India was witnessing unrest on many counts, most notably — implementation of the Mandal commission recommendations and the Ram mandir movement had become major socio-political issues.

Congress leader and former Prime Minister Rajiv Gandhi was assassinated in May 1991. Regional socialist parties rose to capture power in the Congress strongholds of Uttar Pradesh and Bihar. Having permanently lost West Bengal and Tamil Nadu earlier, the Congress’ popular support was shrinking to a few states in central and western India.

The fall of the Berlin Wall and the collapse of the USSR meant realignment of global order. The non-aligned India, which was in fact closer to the USSR, was left vulnerable on many counts, especially on geopolitical support and crucial defence technologies.

In the post-Emergency era, the efforts of various governments to catapult India to a higher growth rate through fiscal expansion culminated in a significant Balance of Payment crisis. The 10 years of fiscal expansion did manage to break the vicious cycle of the Hindu rate of growth (3-4 percent). Briefly a higher growth rate (7.6 percent average during 1988-1991) was also achieved; but it was not sustainable. The Gulf War and two years of severe drought further aided to the economic woes.

These crises pushed the policy makers to adopt a pro-market approach. The Congress-supported minority government led by Chandra Shekhar sought help from the International Monetary Fund (IMF) and committed to a radical reform in fiscal and industrial policy. A roadmap was prepared for disinvestment of PSEs, fiscal reforms and implementation of the NIP. However, the government fell days before Finance Minister Yashwant Sinha could present what could have been the first dream budget of Independent India.

Impact Of Reforms

There is little argument over the fact that the economic and fiscal reforms initiated in 1991 were inevitable. These reforms did help in bringing the economy back from the brink of disaster; even though the adequacy and efficiency of reforms has remained a matter of intense debate ever since.

Three decades of reforms have resulted in many structural changes in the economy. The contribution of agriculture has reduced to about one-sixth, while services now contribute more than half of the GDP. The structure of foreign trade has also changed in favour of manufactured goods and services. The Balance of Payment has remained robust. We have faced three global crises (2000, 2008, and 2020) without a problem.

Financial markets have remained an example to the world. India has perhaps been the only major global financial market that neither shut down nor imposed any trade restrictions during the 2000 and 2008 market crises.

The Positives

The 1991 reforms had three important contributions to the Indian economy.

One: The process of reform dismantled the pseudo-socialist mindset of the policy makers; unleashing private enterprise which had remained constricted since Independence. Consequently, the minority socialist government of the United Front in 1996-1998 presented the second dream budget. Another minority government supported by socialists (the National Democratic Alliance (NDA), 1998-2004) divested numerous government monopolies such as coal, ports, mobile telecom, roads, power, airports, etc. without much trouble.

The response to global sanctions after the 1998 nuclear tests was not lower spending, but larger capex on building local capacities. The first United Progressive Alliance (UPA) government supported by the Left parties made a nuclear deal with the United States and the UPA-2 allowed foreign capital in retail trade. The final epithet of older policy regime was written by the NDA-2 by dismantling the planning commission; permitting off the shelf banking licensing; and the recent move to privatise two PSU banks.

Two: Shifting of policy focus on increasing production and productivity, rather than constricting consumption. This allowed Indian businesses and consumers to globalise, aspire more, and achieve more. We could become part of global alliances and treaties without much resistance. We could set up large scale capacities in automobile, pharmaceutical, textile, space technology, civil aviation, ITeS, and housing, etc. Private enterprise could attract significant capital from global investors.

Three: For entrepreneurs the horizons expanded materially. The post-reform generation of entrepreneurs was not affected by the traditional constraints. The new generation could think about a globally competitive scale. A billion dollars was no longer an unsurmountable barrier. Dreams not only became bigger, but also started to get realised. Consequently, Indian MNCs started to grow in diverse areas such as metals, automobile, ITeS, pharmaceuticals, hospitality, etc.

Not So Positive

Statistically speaking, the reforms have not been adequate in putting India firmly on the path to become a middle income economy.

The reforms implemented so far have no dramatic impact on growth. As per Macrotrends, India’s GDP grew from ~$37 billion in 1960 to ~$321 billion in 1990, a CAGR of 7.46 percent. In the next 29 years (1991-2019) India’s GDP grew to ~$2.89 trillion, a CAGR of 7.84 percent. The per capital growth rate was little faster as population growth began to taper from late 1990s. India’s per capita GDP grew at a CAGR of 5.12 percent during 1961-1990. During 1991-2019 this rate has been 6.19 percent. Last year, 2020, has been avoided as it was an exceptional year.

The Gini coefficient that measures the inequality in income distribution, increased from ~35 in 1990 to ~48 in 2018, making India one of the worst countries in terms of inequality. This highlights that the growth has not be equitable.

On a relative basis, the peer economies like China, South Korea, and Thailand have done better than India. Our share in global trade has only marginally increased to ~3 percent, while China more than tripled its share to over 17 percent.

Not making national education and youth policy an integral part of reforms has perhaps been a grave mistake. Growth in India also failed to ensure adequate employment generation. Despite significant reduction in agriculture’s share in national income, the percentage of population dependent on the farm sector continues to remain in excess of 60 percent. We have miserably failed in exploiting the demographic dividend.

Though, the financial markets developed a global scale infrastructure, we have not been able to implement a robust system for early detection of frauds and scams. Consequently, the investors continue to lose significant amount of money due to frequent scams and frauds in the banking system and financial markets.

Many recent steps taken by the government indicate that the policy makers are fully cognisant of the inadequacies of the economy. The new education policy, schemes and incentives to promote local manufacturing and exports, and farm sector reforms are important steps that shall help in overcoming these inadequacies in the coming decade.

In the words of US poet Robert Frost:

The woods are lovely, dark and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.

Views are personal and do not represent the stand of this publication.