By Shivanand Pandit
Victor Hugo said that no power on earth can stop an idea whose time has come. Thirty years ago in 1991, the then finance minister of India, Dr Manmohan Singh, introduced the reforms bill and quoted Hugo in Parliament. That process helped India begin a new economic voyage. The 30th anniversary of the 1991 reforms merits revisiting. It disassembled a dysfunctional structure of powers, which hobbled the private sector and left the economy lacking in trade and investment.
One of the primary objectives of the government then led by PV Narasimha Rao was to launch a strong policy of trade liberalisation. Within a month of its formation, Dr Singh announced that the government had launched modifications in the export-import policy, with an intention of reducing import licensing, energetic export promotion and ideal import compression during his maiden Budget presentation on July 24, 1991. That laid the foundation of India’s trade and investment liberalisation plan.
Upholding the government’s plan to adopt an open-door strategy, he said that the time had come to expose Indian industry to competition from overseas in a phased manner.
Three decades ago, India was under the huge pressure of double-digit inflation. To make the scenario worse, the gross fiscal deficit rose above 7.5 percent of the GDP, internal debt was around 54 percent of the GDP and foreign currency reserves were barely sufficient to cover around 15 days of import bills. Thus, there was no other option for the finance minister than to embark on important reforms that were pending for a long period of time. However, as is always the case in India, everyone was not sure of the success of the reforms and did not welcome the change, leading to acute political conflict. The reforms were rejected by both the Left and the Right. The Left was scared these would damage the poor and lead to needless imports. The Right was scared because foreign investors would take over the economy.
Actually, both worries were uncalled for. Although the outcomes of the reforms were gradual and advantages were delayed, by the first decade of the 21st century, India started to be seen as one of the quickest developing markets. Liberalisation began with a booster dose of devaluation and was followed by strategies which were termed as LPG (Liberalisation, Privatisation and Globalisation) reforms. By 2021, India’s GDP has grown up to $2.78 trillion compared to $512.92 billion in 1991. Moreover, the average yearly growth rate of the GDP is around 6.25 percent against 4.18 for the previous years.
The Government of India commenced the trade liberalisation journey by reducing tariffs steeply. India’s simple average of import tariffs decreased from around 82 percent in 1990 to 56 percent in 1992. Its trade-weighted tariffs fell from nearly 50 percent to 28 percent. The tax reforms committee, controlled by Raja Chelliah and founded in 1991 to design a work plan for decreasing import tariffs, suggested that the trade-weighted import tariffs should be cut to 25 percent by 1995-96, from almost 50 percent in 1990. This was consistent with the target of the World Bank. Remarkably, the government moved outside this objective, by lessening average trade weighted tariffs to 23.6 percent in 1996, making a simple average of tariffs 38.7 percent.
India’s trade liberalisation journey was never a pleasure trip as tariffs could not be decreased for many vital manufacturing industries, such as automobiles, and, of course, agriculture. However, the United Front government took a significant decision towards lessening tariffs by signing onto the Information Technology Agreement of the World Trade Organization and assenting to remove tariffs on a variety of electronic goods from the turn of the millennium. Furthermore, the development rates, post-reforms, have been less unpredictable than earlier years due to an upsurge in the segment of other services over the unreliable agricultural sector. The coefficient of variation in the yearly growth rates of GDP has dropped from 80 percent during 1961-1990 to 30 percent in 1991-2020. Besides, inflation and government deficits have also turned promising. The average yearly rates of inflation in the post-reform era were considerably lower at about 5 percent and the gross fiscal deficit lower than 4.80 percent of GDP.
The reforms made a noteworthy influence on external trade too. India’s trade openness enhanced from an insubstantial 13 percent in 1990-91 to 42 percent in 2020. Forced by the devaluation of the rupee in 1991 and additional depreciation in subsequent years, exports have enlarged from $17.96 billion in 1990 to $324.43 billion in 2019. Reduction in the unnecessary regulations and removal of “license raj” heightened foreign direct investment (FDI). The net FDI inflows increased from $236.69 million in 1991 to $50.61 billion in 2020. Numerous foreign players entered India and domestic players gained from vigorous market competition. Additionally, there has been substantial progress in forex reserves, which are now adequate to shield 15 months’ imports.
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The liberalisation move was not free from the risks of external tremors. In 1997, India had to face the first challenge from its East Asian neighbours. Later, the global economy was struck by the dot-com bust and the third challenge came in the shape of the international financial crisis in 2008. Due to sane economic strategies and systematic financial markets, the Indian economy managed to fight and recover from all these disasters rapidly. Importantly, the reforms have significantly influenced India’s socio-economic structure. From around 45 percent of the population below the national poverty line in 1994, the rates have decreased to around 7 percent in 2021. Literacy rates, gross enrollments ratio and life expectancy, etc also improved drastically. Nonetheless, the chief blame about the reforms has been that it has broadened the gulf between the rich and the poor. As per World Bank estimates in the Gini index, the measure of income inequality has worsened from 31.7 in 1993 to 35.7 in 2011. A main cause for increasing inequality is the heterogeneity of our population, leading to problems over tweaking the reform process.
After its encouragement of trade liberalisation three decades ago, India still remains an unwilling liberaliser. The main reason is that Indian business units exhibited a low level of eagerness to compete in the global market. Considering this scenario, the government needs to act urgently to avoid coming disasters. While the pandemic has been a mega setback, the economy was already indicating signals of failing development before Covid-19. This warrants involvement of the ruling party to tackle the difficulties of unemployment, poverty, and serious social concerns. The pandemic has also raised worries over the present health infrastructure and the future of education. The government must make greater investments in these segments. It is time to introspect and ponder.
The road ahead is scarier than during the 1991 economic crisis and the government would need to readjust its primacies to guarantee a healthy life for all Indians. Due to the deadly virus, many key social sectors, such as health and education, have trailed behind and not kept up with the economic development. The economic liberalisation process in 1991 was activated by an economic disaster that challenged our nation. It was not restricted to crisis management exclusively and the structure of the reforms was erected on the wish to flourish, trust in our abilities, and the confidence to surrender control of the economy by the government. The present and future governments should understand this.
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Although Dr Singh upheld the necessity to augment the efficacy and global attractiveness of industrial manufacturing of domestic business firms, succeeding governments did not give this full-hearted support which was very fundamental to realise the goals. Under Singh’s prime ministership, an attempt was made to improve the gloomy condition of India’s manufacturing sector. However, during the period since, consolidating the strengths of the manufacturing segment has not got the anticipated booster dose.
The 1991 reforms assisted the economy to come out of a dangerous crisis and then blossom. The time has come to configure a reform schedule that will not just bring GDP back to satisfactory levels, but also guarantee progress rates more than it had when it moved into the pandemic. Three decades later, as a nation, we must recall Robert Frost’s poem: “I have promises to keep, And miles to go before I sleep……”
—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa