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Economic liberalization in India
1.0 Introduction
In June 1991, Indian economic policy embarked on a definite change in direction. The planned economy model which was being followed since the 1950s was abandoned in the favour of the state playing a facilitating and regulatory role, giving more freedom to entrepreneurs and the private sector and opening up the economy.
The era of planned economic development had been based on the belief that it would lead the country out of poverty to prosperity. Unfortunately, the closed economy only stifled growth. The Indian economy grew at an annual average rate of 3.5 per cent in the first three decades.
The realisation of the need for easing the controls on the economy came in the 1980s. However, this only resulted in some minor changes in the controls mechanism with no attempt at a fundamental restructuring of the economy. Though growth picked up, this was on the back of heavy public spending, which only led to huge fiscal deficits and increasing external debt. This finally culminated in a full-blown crisis in 1990-91 when the rise in oil prices due to the Gulf War put a tremendous strain on India's balance of payments position. Foreign exchange reserves plummeted to being enough for just two weeks of imports and India was in serious danger of defaulting on its external debts. The IMF came up with a bailout but there was no escaping the fact that the Indian economy needed drastic reforms. These were undertaken with a major delicensing exercise in 1991. Industrial licensing was scrapped, imports liberalised, foreign investment levels hiked. Over the years, sector after sector was slowly opened up to competition - domestic and foreign.
The liberalisation process has had its ups and downs. For the first four years, it proceeded well, but began faltering in the mid-1990s when a series of electoral setbacks suffered by the Congress Party (whose boss was PM Shri P.V. Narasimha Rao) was blamed on economic reforms. The pace picked up again from the late 1990s, with tax reforms being initiated, setting up of a Disinvestment Commission and later a Disinvestment Ministry, strategic sale of public sector undertakings (PSUs), repeal of the Urban Land Ceiling and Regulation Act (ULCRA), among others. From 2004, however, the reforms pace slowed down and even been reversed in some cases. Worse, India appears to be slipping back to being an extravagant welfare state, with several legally enforceable entitlements - from work to education to food - legislated with little concern for their fiscal or economic fallouts.
2.0 Liberalisation - the Ups and Downs Industry
The industrial sector has been the focus of much of the economic reforms. In 1991, industrial licensing was abolished for all but 18 industries; the number of sectors reserved for the public sector was reduced from 12 to 8; imports were liberalised and the Monopolies and Restrictive Trade Practices (MRTP) Act relaxed. Besides, certain sectoral measures were also taken. The 1991 Automobile Policy opened up the auto sector to foreign manufacturers and the New Power Policy allowed private participation in power generation. Since then the process of delicensing continued. In 1993, the telecom sector was thrown open to the private sector. Even defence equipment has been opened up to the private sector. Small scale sector reservation, which had discouraged industrial units from achieving economies of scale and becoming efficient, remains, but for a very few industries.
All this (accompanied by a host of other reforms in the financial sector and the capital markets, deregulation of interest rates, easier access to external finance etc.) has given greater operational flexibility to industry. Companies were now free to decide which areas they should invest in, the location of their plants, how much to produce etc. This has led to the emergence of new players in established industries as well in sunrise industries like pharmaceuticals, biotechnology etc. Entrepreneurship received a huge boost, especially in the service sector. The pressure of competition has increased but so has the ability of companies to face up to it. Indian firms that once tried to stall the liberalisation process - under the garb of 'level playing field' - out of fear of being swamped by foreign competitors soon started out-performing these very competitors.
Going one step further, Indian companies are now challenging foreign firms on home turf. The second half of the 2000s has seen the proliferation of Indian multinationals as domestic firms have set up manufacturing centres and bought companies abroad, even acquiring iconic global brands like the Jaguar Land Rover. The flip side to this is the concern that one reason for Indian firms investing abroad could be the less-than-favourable domestic investment environment.
While delicensing did end the permit-quota raj, inspector raj, however, continues to thrive, especially at the state-level where there is a plethora of regulations that industrial units have to comply with. While some amount of regulation may be necessary, especially on matters concerning safety and the like, many of these regulations give too much discretionary power to the inspectors and this only increases the scope for corruption and hence transaction costs for business. Amendments to labour laws designed to give industrial units freedom to restructure operations as and when needed, have been bypassed by successive governments. For the first time, the Modi government in 2014 took the matter head on and indicated that major revision of labour laws can be done to boost manufacturing and employment generation.
2.1 Agriculture
Agriculture has always remained a neglected sector, both during the era of planned development and the liberalisation period. The reforms period has not been very kind to agriculture. Agricultural growth declined to 2.29 per cent per annum during the 1990s (1989-90 to 1999-2000) from 3.72 per cent per annum during the 1980s. In the first decade of 2000, it went up marginally to 2.7 per cent per annum. Public sector investment has been crucial to the development of agriculture related infrastructure like irrigation, electricity, agriculture research, roads, markets etc. However, this has remained stagnant at 0.5 per cent of GDP. Much of the public resources being spent on agriculture are going towards subsidies instead of the creation of productive assets. Subsidies on power and water are close to 40 per cent of the total subsidies being given to the agriculture sector. Free power and water or extremely low user charges only result in wasteful use of these resources and create collateral problems. At the same time, there has been little progress in protecting agriculture from the vagaries of rainfall. Besides, blanket subsidies often result in misuse. Subsidies are enjoyed not just by large farm owners but also by owners of urban 'farmhouses' where there is little agricultural activity.
Such cases may be a very small percentage of the total spending on subsidies to agriculture but the problem needs to be addressed only to establish the principle that subsidies should go only to the deserving. Besides, given the burden on the exchequer, any saving on the subsidy bill that can be put to more productive use should be explored.
The poor performance of the agricultural sector, without a robust growth in the non-farm sector, has largely been responsible for continuing high levels of rural poverty. This needs to be addressed if the slogan of inclusive growth is to have any meaning.
The reason for the sorry state of agriculture is the fact that the sector continues to be subject to a large number of government controls - on pricing and movement of agricultural goods, marketing and credit. There was some easing of licensing requirements and restrictions on storage and movement of wheat, rice, sugar, edible oilseeds and oils, decanalising of the export of agricultural commodities and easing of export controls in the first decade of liberalisation. But these have been reversed and then restored in an ad hoc manner. When there is a shortage of a commodity in the domestic market, the government immediately clamps down on exports, raises stocking limits and brings back the Essential Commodities Act, designed to check hoarding. But when there is a glut of a commodity, the lack of cold chains and storage infrastructure results in farmers having to sell their produce at distress prices.
The state-level Agricultural Produce Marketing Committee Acts, which require farmers to sell their produce only at designated mandis, remain on statute-books despite overwhelming evidence that these do not help farmers or consumers. The restrictions imposed by the APMC Act are a disincentive to private sector investment in cold storage facilities and other supply and transport infrastructure as well as for the food processing industry and organised retail industry which can give farmers better returns for their produce. Close to 40 per cent of India's fruit and vegetable production goes waste as a result. The ad-hocism that appears to be the hallmark of the policy on agricultural exports has given India the reputation of an unpredictable supplier, and prevented farmers from benefiting from the export market.
All this combines to prevent farmers from getting better returns for their produce, whether in times of shortage or plenty. Y. Shivaji has aptly captured this conundrum when he says "often the burden of falling international prices falls immediately on the farmers and the gains of increasing international prices are cornered by middlemen." It is the inability to get a remunerative price for their produce that leads to farmers being unable to service their debts, one of the reasons for the large number of farmers' suicides.
2.2 Services
The services sector, which has largely escaped the government's heavy-handed regulation and micro-management, has flourished after liberalisation, benefiting from the freeing of controls on industry and the financial sector. With the liberalisation process throwing up new opportunities, a host of new services emerged offered by imaginative and resourceful entrepreneurs. India has also been a major exporter of services, especially in the information technology and information technology-enabled services. The Indian IT and ITES sectors are seen as a threat to companies in more advanced economies. According to the Economic Survey for 2013-14 India has the second fastest growing services sector with its compound annual growth rate at 9 per cent, just below China’s 10.9 per cent, during the last 11-year period from 2001 to 2012. India, which plays the protectionist card at the World Trade Organisation (WTO) on industry and agriculture, is aggressive in demanding more openness by advanced economies in the service sector negotiations. At the same time, it continues to be protectionist and closed when it comes to opening up some sectors like law and education.
2.3 Financial sector
Banking sector reforms were kicked off in 1992 and have been continuing since then. Private banks, including foreign banks, have been allowed to operate and their reach is now extensive. This has ushered in much-needed competition into the sector, improving services in public sector banks as well. Interest rates have been decontrolled. Both deposit rates and lending rates have been deregulated. Banks are being given greater operational freedom than before and mandatory requirements on investment in government securities, priority sector lending etc. have been eased.
However, public sector banks are still not completely free of government control and political interference. A Bill on reducing government stake in public sector banks to 33 per cent was tabled in 1999 but nothing came of it.
The public sector monopoly in the insurance industry finally came to an end in 1999. Apart from the six public sector insurance companies that were the only insurers in 2000 when the sector was opened up, there are now close to 50 insurance firms and the stiff competition among them has been a boon for consumers. A strong regulator - the Insurance Regulatory and Development Authority -has set strict guidelines for insurance firms. However, there are still restrictions on the extent of foreign investment in insurance firms.
The Indian capital markets have seen far-reaching reforms, the biggest being the setting up of a statutory regulator, the Securities and Exchange Board of India in 1992. This has resulted in better governance of the stock markets and there is far more transparency than before. One financial sector reform that is still pending is full capital account convertibility, though the capital account has been liberalised quite extensively in phases. But this is still an issue on which there is little consensus, even among economists who favour liberalisation.
2.4 Infrastructure
Realising that rapid economic growth is not possible without quality infrastructure, and that it is not possible for the government alone to provide for all the infrastructural needs of a growing economy, the sector was opened up to private players gradually since 1991. Roads, electricity, ports, civil aviation, telecommunications are no longer state monopolies that they once were. In some areas like roads and highways where private sector interest is a bit subdued, the government is encouraging public-private partnerships.
A new Electricity Act, which replaces the multifarious and outdated laws that governed the sector and which allowed private participation in generation and distribution of power, is now in place. But the overall infrastructure sector presents a mixed bag of achievements.
Electricity: Once a state monopoly, the sector has been opened to the private sector in both generation as well as transmission and distribution. There is an open access system in place at the interstate transmission level, which gives freedom of choice to both buyers and sellers of power. Distribution too is no longer a public sector monopoly. It has been privatised in some cities like Delhi while franchising arrangements - where a private firm manages the distribution network and collects revenue - are in place in others. However, there is no competition in this area and public sector monopolies have only been replaced by private sector monopolies. The sector is regulated by an independent Central Electricity Regulatory Commission at the centre and state-level state regulatory commissions, which set tariffs. But there is still political interference in tariff setting and governments have been known to reverse tariff hikes recommended by state-level regulators. The whole idea of depoliticising tariffs does not seem to have worked.
Roads: The poor state of Indian roads is a hindrance to industrial and agricultural development. The private sector has not responded too enthusiastically to attempts to attract private investment in the roads sector. The concept of toll roads has now been introduced in the roads sector. After some initial resistance, road users are now reconciling themselves to the idea of paying for road use.
Telecommunications: The telecom sector has been a success story of private sector involvement in infrastructure and testimony to how free competition ultimately benefits the consumer. Starting with opening up email, voice mail and cellular services to the private sector in 1991, competition has now been allowed in basic services and national and international long distance services as well. All this has led to a tremendous increase in connectivity. Tele-density, which was less than 1 per cent in March 1991, is now over 70 per cent. Cellular phones, once considered a luxury, are now a lifeline for service providers like electricians, plumbers, food hawkers, roadside tailors - the very section the market was not expected to cater to. There are over 800 million mobile phone connections across the country now.
Unfortunately, telecom is also one sector that has been beset by scams. But this again relates to the granting of licences and sale of spectrum, which are in the domain of the state. This, however, is not to argue that the state not have a role at all in this.
3.0 External Sector
Since 1991, the Indian economy's exposure to the world economy has increased tremendously.
The phased reduction of tariffs and removal of quantitative restrictions (QRs) on imports has meant more competition for domestic industry (though the government does tend to intervene from time to time to protect different industry segments). The use of tariff walls has become limited because of obligations to reduce rates under the World Trade Organisation obligations. But the use of non-tariff barriers is still quite common. While this may help the producing industry, this often works to the detriment of the user industries which are denied the benefit of cost-competitive inputs and consumers in general.
A stronger domestic industry has also been able to take advantage of opportunities in the export markets.
India is also more receptive to foreign investment than it was in the pre-reforms era. The first steps towards a more open foreign investment regime were taken in 1991, when the Industrial Policy of that year allowed foreign direct investment (FDI) up to 51 per cent in high-priority industries. Foreign portfolio investments were first allowed a year later, in September 1992.
Since then, the FDI regime has been progressively liberalised, with only nine sectors barred from receiving foreign investment. Even the defence industry is allowed FDI up to 49 per cent. FDI up to 100 per cent on the automatic route is allowed for most sectors. Approvals from the Foreign Investment Promotion Board is required for some; investment ceilings exist for others like telecom, civil aviation and insurance; certain requirements for investors have been stipulated in yet others. But there is still stiff resistance to FDI in certain sectors like retail. The resistance is mainly from domestic business lobbies and other sections whose rent-seeking actions will lose their rationale. No government has been able - or indeed appears willing - to manage this opposition politically. After the end of UPA-II and coming of Mr. Modi’s government, all sides have their own expectations. Though 2015-16 proved pretty bad for Indian exports, hopefully things will start looking up soon.
4.0 Privatisation of the Public SecTor
This has been one of the most disappointing aspects of liberalisation, one in which there has even been a reversal. The public sector undertakings, often referred to as India's crown jewels are little more than bleeding ulcers (barring a few well-performing ones). The public sector initially came into areas where the private sector could not or did not want to invest large sums of money (though this is the subject of debate). But over the years, the areas of operation increased to cover hotels and manufacturing of bread.
Realising the drain on the country's resources, disinvestment of government stake in PSUs was first proposed in 1991. Initially only piecemeal sale of government equity was done. The strategy changed in 1998, when the government went in for sale of majority stake to strategic partners along with transfer of management control. The National Democratic Alliance government took the boldest steps in this respect, with then finance minister Yashwant Sinha mentioning the word privatisation in a budget speech. Fifteen PSUs were privatised, ranging from bread manufacturer Modern Bakeries to telecom major VSNL to mining companies like Balco and Hindustan Zinc and petrochemicals company IPCL.
But privatisation came to a halt since 2004, when the United Progressive Alliance came to power. One of the first actions the government did was to remove a section on the disinvestment ministry website that listed out the rationale for privatisation. The government said it will not let its stake go down below 51 per cent in PSUs, ruling out strategic sales altogether. As a result, disinvestment was once more about offloading bits of government stake in PSUs.
Even this process became a farce - and a method of plugging the fiscal deficit - with cash-rich PSUs being made to buy back their shares or other PSUs like the Life Insurance Corporation of India buying shares of PSUs when investor interest has been low. This amounts to the government taking money out of one pocket and putting it in the other. The logic of privatisation/disinvestment should be to end/reduce government control of PSUs, not generating revenues for government coffers.
In the 2014 budget, Finance Minister Arun Jaitley raised the disinvestment target for 2014-15 to Rs. 58,425 crores. However, only Rs. 24, 348 crore could be achieved. Similarly, for 2015-16, the target set was Rs. 69,500 crores but performance was dismal.
5.0 Independent Regulators
Independent regulators are necessary in a free market to check market distortions and safeguard the interests of the consumers. To this end, several independent sectoral regulators have been set up since 1991. These are the Securities and Exchange Board of India (SEBI) to govern the stock markets; the Telecom Regulatory Authority of India (TRAI) for the telecom sector; the Central and State Electricity Regulatory Authorities (CERC and SERCs); the Insurance Regulatory and Development Authority (IRDA); the Petroleum and Natural Gas Regulatory Board; the Competition Commission of India to check anti-competitive practices and the Pension Fund Regulatory and Development Authority to regulate the pension sector.
However, the functioning of some of these regulators has not been satisfactory. The government has been reluctant to give up control over the various sectors these regulators oversee and has failed to give them genuine independence, as they are dependent on the government for finances and basic infrastructure. The regulators are mostly headed and staffed by retired and serving bureaucrats, often from ministries overseeing the sectors they regulate. The government has a tendency to ignore the advice of the regulators when it suits it. Where the regulators set tariffs, as in the case of the electricity sector, tariff hike orders tend to get overruled.
6.0 Tax Rationalisation
Tax rationalisation has undoubtedly been one of the success stories of the reforms process. However, there are a large number of exceptions and concessions on various grounds in both direct and indirect taxes. While some concessions are necessary to encourage savings or give a fillip to some sectors of the economy, as a broad principle, exemptions increase the complexity of the tax structure, reduce government revenues, shift the burden of taxation to other non-exempt groups and encourage lobbying by vested interests.
6.1 Direct taxes
The maximum rate of personal income tax was brought down from 56 per cent at the onset of reforms to 30 per cent now. Corporation tax, which ranged between 51.75 per cent and 57.5 per cent in 1991-92, is now a uniform 30 per cent. There are now only three slabs for personal income tax (10-20-30 per cent) and one for corporate income tax (30 per cent).
Far from leading to lower collections, tax revenues have been buoyant and actually increased, proving the point that lower tax rates actually increase compliance. Of course the lower tax rates were accompanied by measures to widen the tax net, but it is a moot point if this would have been successful without a lowering of tax rates and simplifying the tax structure. The share of direct taxes in total tax revenues increased from 19.1 per cent in 1990-91 to 56.6 per cent in 2010-11. The share in GDP has also increased, from 1.9 per cent to 5.4 per cent in the same period.
The government has tabled a Direct Taxes Code Bill in Parliament which will replace the Income Tax Act, 1961. The purpose of the Direct Taxes Code is to widen the tax base, moderate tax rates and cut down exemptions, thus increasing tax collections. But the government's latest move to retrospectively amend the Income Tax Act, 1962, to tax certain capital gains in corporate acquisitions, after it lost a case against telecom company Vodafone was a worrying development. Amending tax laws with retrospective effect creates uncertainty and unpredictability of tax laws. This matter remained undecided till 2014 even after the new government took charge.
6.2 Indirect taxes
The simplification and rationalisation of the complex system of indirect taxes, especially excise duty, has been a major achievement of the reforms process. In the 2000-01 budget, the excise duty structure was rationalised to a single rate of 16 per cent Central VAT (Cenvat).
The 2001-02 budget replaced the three special rates of 8 per cent, 16 per cent and 24 per cent with a single rate of 16 per cent. Currently, there are three rates - the highest rate of 12 per cent, a merit rate of 6 per cent and a minimum rate of 2 per cent. But there is still some tinkering with rates that finance ministers do, depending on requests from industry.
Importantly the country has moved towards a nation-wide single value-added tax (VAT) system. The next step, a single Goods and Service Tax has got delayed because of concerns over revenue loss on the part of state governments.
In line with the policy of import substitution, India's customs duties were among the highest in the world. Tariffs in India once were as high as 300 per cent. Peak customs duties on non-agricultural goods are now down to 10 per cent. However, the doubling of the import duty on gold to 4 per cent in the 2012-13 budget was a regressive step. The increase was explained as a step to discourage Indians from parking their money in gold, an unproductive but safe and guaranteed returns investment, instead of financial markets. Though the government has argued that the 4 per cent duty was not high enough to encourage gold smuggling (quite common in the pre-reforms era when the Gold Control Act, 1962, placed a number of restrictions on gold holdings), such measures only show the government's inclination to meddle in economic decisions of individuals and perhaps later companies.
One large segment of the economy, agriculture, continues to be outside the tax structure. The subject of agricultural income tax is a political minefield which no party is willing to negotiate.
7.0 Impact of Liberalisation
7.1 Macro - economic stability
The reforms that were kicked off in 1991 did have an impact on the economy. Growth of gross domestic product (GDP) spurted from 0.8 per cent in 1991-92 to 5.3 per cent in 1992-93. GDP growth kept up this upward spiral and averaged 5.5 per cent in the 1990s. Inflation, which had soared to 13.7 per cent prior soon came down to single digits and has remained at that level since then, even going down to 2 per cent at several points of time. The reforms also strengthened India's external sector substantially. The share of both exports and imports in GDP rose. This was prompted by liberalisation and decline in real exchange rate in the case of exports and strong domestic demand and lowering of tariff and non tariff barriers in the case of imports. From a current account deficit of 3.1 per cent of GDP in 1990-91, India had a current account surplus of 0.8 per cent of GDP in 2001-02, for the first time in 23 years, though current account deficit levels are now at worrying levels.
The economy did go through its ups and downs. There was a slowing down of growth in the late 1990s following the East Asian financial crisis and again in the early 2000s in the wake of a slowing down of the world economy. But the economy bounced back and growth crossed the 9 per cent mark for three years in a row in the mid-2000s. Another, more serious, economic crisis in the western economies once again saw growth slowing first to 8 per cent and then to 6.9 per cent between 2010 and 2012. This, of course, is an indication that the Indian economy is now more integrated with the global economy than it was before. The growth rate went below 5% in 2012-13, and stayed there, for the new government formed in 2014, this is the biggest challenge.
7.2 Public finances
Public finances continue to be a major source of worry. The fiscal crisis of 1991 was in no small measure due to the high fiscal deficits of the 1980s, caused by huge public spending. The combined fiscal deficit of the Centre and the states touched 10 per cent in the crisis year. Fiscal consolidation, therefore, became a crucial element of the reforms process. Initially, the fiscal deficit at the Centre did fall from 8.3 per cent of GDP in 1990-91 to 5.9 per cent in 1991-92 but increased to 7.4 per cent in 1993-94. Since then it hovered around the 5 per cent mark for several years but started going up again since 2008-09.
A major step in the direction of fiscal reform was taken when the National Democratic Alliance government tabled the Fiscal Responsibility and Budget Management Bill (FRBM) in 2000. It was enacted in 2003 and the FRBM Rules notified in 2004. Under the Act, the central government was to reduce its revenue deficit by 0.5 per cent of GDP every year from 2003 and eliminate it entirely by 31 March 2008. The fiscal deficit was to be reduced to 3 per cent of GDP by 31 March 2008, with an annual reduction of 0.3 per cent of GDP from 2003.
Yashwant Sinha, the finance minister who introduced the FRBM Bill in 2000, started working towards meeting these targets even before it became an Act. Initially, the United Progressive Alliance government worked at keeping to the targets of the Act. Fiscal deficit came down to 2.5 per cent of GDP and revenue deficit to 1.1 per cent of GDP in 2007-08 - the deadline year.
However, fiscal slippage set in the very next year, with the fiscal deficit soaring to 6 per cent in 2008-09. This was attributed to the fiscal stimulus packages in the form of tax sops and stepped up spending on infrastructure given to industry to help it tide over the global economic crisis. In addition to this, there was stepped up spending on welfare projects like the National Rural Employment Guarantee Scheme, which saw a 144 per cent increase in outlay. The revenue deficit also soared to 4.5 per cent of GDP.
Though the finance minister said this was a matter of concern and that the government would "address this issue in right earnest to come back to the path of fiscal consolidation at the earliest" this did not happen. The states have been doing better in this respect but the combined deficit of the Centre and the states is close to 7 per cent in 2011-12.
There is a point of view - much debated, however - that a high fiscal deficit can be condoned if it results in the creation of physical assets and infrastructure. Unfortunately in India, the high fiscal deficits are often because of unproductive expenditure like subsidies or welfare schemes which create a dependence on government doles.
7.3 Subsidies
It is perhaps too much to expect subsidies to be eliminated entirely. The poor perhaps need a measure of government support, though the extent of such assistance is debatable. The welfarist view is that the poor need to be given most things free of cost or that the government has to step in to cater to them since the market does not. But there is enough anecdotal evidence that the poor are willing to pay for goods and services and that the market does cater to them. In any case the extent of subsidies in India - they accounted for 28 per cent of the government's revenues as of 2011-12 - shows that these are going even to the better off and even affluent sections of society. In 2015-16, the drop in Crude Oil prices came as a blessing, reducing thye overall subsidy load.
Subsidies usually take the form of government control on prices, so that a good costs the same for persons at two entirely different points on the income scale. If the government compensates the producer of the good, it is a drain on the exchequer and a waste of tax payer's money. If the producer is not compensated for selling the good at a loss, then there is no incentive for him to produce more, leading to scarcities which, in turn, lead to the development of a black market. If there is dual pricing of a good - one for the poor (through fair price shops) and one for the non-poor - this leads to diversion and black marketing.
In 2002, an ambitious programme of phased dismantling the administered pricing mechanism (APM) in the case of petroleum products was kicked off. Public sector oil marketing companies were to be free to sell some petroleum products at market-determined prices. This worked well for two years but since 2004, the government deprived the oil companies of this freedom and has not been allowing price increases when and to the extent they are needed. This is really reversing a much-needed reform measure, both from the point of public finances (the government subsidises part of the losses the oil companies suffer) and the financial health of the public sector oil companies (they have to suffer losses for a part of the underrecoveries).
This is also proving to be a disincentive for private players since they are not in a position to offer the highly subsidised rates of the public sector oil companies and lose customers to the latter. Reliance Petroleum, which had entered the retail petroleum product market, had to close these operations precisely for this reason (as per the company’s claim). So the retail sector continues to be a public sector monopoly.
A better way of delivering subsidies - one that eliminates leakages and diversion and ensures that only the poor get it - is to shift to direct cash transfers. For a long time, this remained only a topic of academic-ideological debate in India. However, since the 2010-11 budget it has moved into the realm of policy. Some pilot programmes are under way to see how direct cash transfers work at the ground level.
8.0 Conclusion
Economic liberalisation in India, thus, has been a mixed bag of achievements and failures. The failures have led to a lot of scepticism with liberalisation and globalisation. This has become more marked with the economic crisis in the western economies after 2008, and the very logic of free markets has come to be questioned.
The future is bloated
But what is lost sight of is the fact that the failures can largely be attributed to either the lack of genuine reforms, half-hearted reforms or the wrong kind of reforms which benefit only certain groups. Reforms have been carried out only in areas which benefit large industry and vocal groups, while those affecting the less articulate sections - small farmers, small and medium industry, unorganised sector - have been delayed, often because these hurt more influential groups.
It has become fashionable to blame the slow pace of reforms after 2004 on coalition politics. But recent Indian history shows coalitions do not stand in the way of tough economic measures. P. Chidambaram earned the reputation of a liberaliser during the tenure of the United Front coalition government, which was not only a shaky coalition but also had the Communist Party of India (CPI) participating in it. The National Democratic Alliance (NDA) government also took several bold steps, especially on privatisation and dismantling the administered price mechanism for petroleum products.
Indian industry must also take some blame for stalling reforms, though it is the one that complains the loudest about the lack of it. Industrialists and businessmen who benefited the most from liberalisation and competition have no compunction in lobbying against policies and measures that will make them face a more competitive market place. Political groups and others who oppose the move to a more open economy often claim to speak on behalf of the ordinary people who, they insist, will be hurt by steps to reduce or withdraw subsidies, open up sectors to foreign investment and the like. It is this mindset that sees any reform or tough economic decision being put off whenever elections are round the corner. What this points to is the need for political management of reforms - going out and explaining to people why certain steps are necessary, how the short term pain will be offset by long term benefits and how current economicallyunsound policies are unsustainable.
The political class cannot be expected to undertake this. It benefits from the lack of awareness in the public, which allows it to continue with its sweetheart deals. Unfortunately, even economists and other intellectuals who support a more open polity and economy have not addressed themselves to the larger body of people in whose name reforms are opposed. This needs to change. A broad-based support for reforms needs to be built up.
There is no doubt that liberalisation is not just inevitable, but also desirable and needs to be taken forward. What the country needs are reforms to ensure genuine competition.
2014-2019 will be the period that will determine how strongly the NDA government brings India back on its growth trajectory and remains committed to economic reforms. Halfway through it, in 2016-17, the intentions are strong but the outcomes are yet to be seen.
HOW THE WORLD SAW THE INDIAN ECONOMIC REFORMS PROCESS
- In 1991 India embarked on major reforms to liberalize its economy after three decades of socialism and a fourth of creeping liberalization. Thirty years later, the outcome has been an outstanding economic success on many fronts, but a mixed socio-political success. India has gone from being a poor, slowgrowing country to the fastest-growing major economy in the world in 2019, but with huge social iniquities.
- Once an object of pity globally, India has become an object of envy among developing countries; it is often called a potential superpower and is backed by the United States for a seat on the UN Security Council. Yet those successes have been accompanied by significant failures and weaknesses in policies and institutions.
- The past 30 years of liberalization are largely a story of private sector success and government failure and of successful economic reform tarnished by institutional erosion. Even as old controls have been abolished, new ones have been created, so what leftist critics call an era of neoliberalism could more accurately be called neo-illiberalism.
- The quality of government services remains abysmal, and social indicators have improved much too slowly. The provision of public goods—police, judiciary, general administration, basic health and education, and basic infrastructure—has seriously lagged improvements in economic performance. Many of these are borne out by the HDI and IDI rankings.
- Political appointees and government interference erode the independence and quality of institutions ranging from the courts and universities to health and cultural organizations. India’s economic reforms have been highly successful in moving the country from low-income to middle-income status, despite little improvement in its institutions and quality of public goods.
- To sustain rapid growth and to become a high-income country, India will need major reforms to deepen liberalization and build high-quality institutions. It will neither be an automatic nor an assumed outcome.
- Until 1991 many superpowers (notably the United States) equated India with Pakistan in foreign affairs, even though Pakistan had barely one-eighth of India’s population. India’s slow-growing, inward-looking socialism madeit unimportant in global terms, save as an aid recipient. Pakistan’s military ties with the United States made that country seem a more important global player. But today, the United States views India as a potential superpower.
- President George W. Bush backed India’s entry into the nuclear club, when Dr Manmohan Singh was the PM. President Barack Obama backed India for a seat on the UN Security Council. The United States saw India as potentially the only country in Asia that can check a rising Chinese juggernaut in the 21st century. With President Trump, the approach changed a bit.
- Once a poor economic laggard, India now has the third-largest GDP in the world in purchasing power parity terms after China and the United States. Per capita income is up from a low $375 per year in 1991. India has long ceased to be a low-income country as defined by the World Bank, which uses a threshold of $1,045, and has become a middle-income country. India’s annual GDP growth rose from 3.5 percent in 1950–80 and 5.5 percent in 1980–92 to an average of 8 percent since 2003, with a peak exceeding 9 percent in the three years 2005–8. It fell in the period 2018-2020.
- An unexpected new development has been the rise of India’s own aid to developing countries (though some would call it quasi-commercial loans to sell Indian equipment). India’s net aid giving is now well over $1 billion per year, with Bhutan ($813 million) being the biggest beneficiary in 2014–15. Prime Minister Modi has offered African countries a $10 billion combined line of credit and Bangladesh $2 billion. The country that used to be a bottomless pit for aid is now a bountiful financier. By 2020, this help was offered to Sri Lanka etc, too.
- In the bad old days, any major drought meant India was dependent on food aid. When two droughts occurred in a row, as in 1965 and 1966, India survived only because of record food aid from the United States. A 1967 bestselling book by William and Paul Paddock declared that simply not enough food aid existed to save all needy countries, and so hopeless countries like India should be left to starve, conserving food aid for countries that were capable of survival. The Green Revolution made India first self-sufficient and then a surplus producer of food.
- India suffered two consecutive droughts in 2014 and 2015, yet agricultural production actually rose slightly; India became the world’s largest rice exporter in 2015, exporting 10.23 million tons. India has also become a substantial exporter of wheat and maize in recent years. That is a measure of its agricultural transformation. Paddock and Paddock never imagined that India, which swallowed almost the entire food aid of the world in the mid-1960s, would become a donor of food aid to North Korea in 2010. By 2020, both agricultural and horticultural production had outgrown earlier levels, though farm distress remained.
- In 1991 India’s main exports were textiles and cut-and-polished gems.Today, its main exports are computer software, other business services, pharmaceuticals, automobiles, and auto components. Most developing countries grew fast by harnessing cheap labour. India never did so, because its rigid labour laws inhibited labours flexibility, and they still do so today.
- Software and business services are annually now more than $100 billion easily, up from virtually nothing in 1991. The range of business services has expanded from call centers and clerical work to high-end financial, medical, and legal work. Credit ratings agencies like Moody’s and Standard and Poor’s, which once gave India very poor ratings, now do a significant amount of their work out of India.
- India is now a low-cost commercial satellite launcher. By 2019, it had launched hundreds of satellites for foreign countries, with varying payloads.
- India is about to reap a demographic dividend that will give it a big edge over rivals. The number of working-age people between 15 and 60 is expected to rise by 280 million between 2013 and 2050, even as China’s workforce dwindles from 72 percent to 61 percent of a soon-to-be declining population. All the Asian tigers enjoyed a demographic dividend in their boom years, and all are aging now.
- India’s working-age population has started rising, yet participation in the workforce has actually fallen in recent years, especially for females. That is a serious concern for social stability. Lack of credible employment-unemployment data will harm efforts to plan better.
- Before 1991 very high tax rates (up to a 58 percent corporate tax) plus a high wealth tax meant that businesses kept income off the books. Many listed companies diverted profits into the hands of controlling families by dubious means, cheating minority shareholders. Improving shareholder value meant higher stock market prices, which would have been welcomed in other countries but constituted a recipe for personal bankruptcy in India. High share prices meant high wealth tax liabilities that required promoters to sell shares to pay the tax, with the prospect of losing control.
- The 30 years from Narasimha Rao to Narendra Modi moved India from low income to lower middle-income status. To reach high-income status, India must become a much better governed country that opens up various markets much further, improves competitiveness, empowers citizens, vastly improves the quality of government services and all other institutions, jails political and business criminals quickly, and provides speedy redress for citizen grievances. That is a long and difficult agenda. To top it, social and communal harmony needs to be intact, because as the history of the world shows, without harmony the GDP would always fall short of its maximum potential.
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