Some unsustainable and adulterated policies of the first phase of liberalisation in 1991 have overshadowed some of the remarkable achievements that came with the reforms. The economic agenda needs a serious relook
For long, keeping status quo in the economy was seen as a virtue, and anything that went in any other direction was kept away. But the realisation for a paradigm shift was reckoned in 1980s. On July 24, 1991, then Finance Minister Manmohan Singh delivered one of the most decisive speeches ever given in Parliament. This was to help the Indian economy, which was in the midst of a deep financial crisis.
Singh said, “I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, ‘no power on earth can stop an idea whose time has come’. I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. let the whole world hear it loud and clear. India is now wide-awake. We shall prevail. We shall overcome.”
That idea was to rationalise the state’s hold over the economy and allow it flourish under a competitive ecosystem that could trickle down to the last person of society. Policymakers anticipated the future and brought a radical change in the banking space by negating the trend where ‘profit’ as a dirty word. They placed profit at the core of the Government’s operating strategy.
The economic reforms impacted Indian businesses in unprecedented ways. The goal was to make the economy market-oriented and expand the role of private and foreign investment. Specific changes included a reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment. These changes were made to usher India into the next level of economic advancement.
Following the reforms, the Indian economy witnessed high economic growth in the 1990s and 2000s. But opponents blamed it also for increased poverty, inequality and economic degradation. Higher economic growth significantly increased the scope of welfare programmes — India strove over the last two-and-half decades to find a balance between growth and equity through remodelled public policies.
At times, the opponents of economic reforms have doubted if these could be part of an inclusive economic growth strategy but the ground realities tell a different story that is positive sans the rise of comparative income inequality. But rising income has improved the spending capacity of masses in India. Hence, today India is one of the strongest markets in the world. This is the most important contribution of economic liberalisation in India.
Before 1991, the Government had closed the Indian economy to the outside world. The Indian rupee was inconvertible, and high tariffs and import licensing prevented foreign goods from reaching the markets. India also had a system of central planning for the economy, in which firms required licenses to invest and develop.
The unfriendly bureaucracy often led to absurd restrictions — up to 80 agencies had to be satisfied before a firm could be granted a license to produce, and the state would decide what was produced, how much, at what price and what sources of capital were to be used.
The central pillar of policy was import substitution: The belief that India needed to rely on internal markets for development, not international trade. A belief generated by a mix of socialism and the experience of colonial exploitation. State Planning, rather than markets, would determine how much investment was needed in which sectors.
Economic reforms did away with the licence raj, reduced tariffs and interest rates and ended many public sector monopolies, allowing speedy approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, yet no Government has tried to take on powerful lobbies and contentious issues.
By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than rural residents.
Nevertheless, relative deprivation is the spoiler for new Indian economy, which has developed itself through an interface of different processes and greater participation of corporate resources. This is unsustainable, and shall certainly be attended without the prisms of political ideologies.
The grave issue today is proliferation of easy money, with discriminatory tendencies. The economic reforms agenda needs a serious re-looking. The way the strategies were made in the early phase, couldn’t last for long — and the adulterated policies have overshadowed some of the remarkable achievements that came with reforms.