The Indian economy has travelled through an eventful period through the last three decades.
In the post-independence economic history of our country, 1991 stands out as a watershed year.
This was the year in which the economy was faced with a severe balance of payments crisis.
In response, we launched a wide-ranging economic programme, not just to restore the balance of payments but to reform, restructure and modernise the economy.
A near tragedy was averted and a new path was laid out before the country.
The shift, key players:
- It is important to recognise in what way the new regime was different from the earlier one.
- The break with the past came in three important ways:
- In dismantling the vast network of licences, controls and permits that dominated the economic system;
- In redesigning the role of the state and allowing the private sector a larger space to operate within, and
- In abandoning the inward-looking foreign trade policy and getting integrated with the world economy and trade.
- The last was particularly important because it was the opposite of what we normally did when faced with a balance of payments crisis.
- Manmohan Singh as Finance Minister spearheaded the new policy and articulated the need for change and provided not only the broad framework but also the details of the reforms.
- V. Narasimha Rao as Prime Minister gave the valuable political support and shield which were very much needed.
- It must be noted that as Prime Minister, P.V. Narasimha Rao also held the portfolio of Industry which was directly responsible for initiating the changes that led to the dismantling of various types of controls and licences related to the industrial sector. This was indeed a key element of the reform programme.
The balance of payments situation had remained comfortable.
There were three years in which the current account showed a small surplus.
Most of the years showed a small deficit. The exceptions were 2011-12 and 2012-13 when the current account deficit exceeded 4%. This was taken care of quickly.
Foreign exchange reserves showed a substantial increase and touched $621 billion as of last week.
The opening up of the external sector, which included liberal trade policy, market determined exchange rate and a liberal flow of external resources, has greatly strengthened the external sector.
Of course, we still run a high merchandise trade deficit which is offset to a large extent by the surplus in services.
Growth and Reforms must be go hand in hand:
- Growth requires more than reforms. Reforms are, in the words of economists, only a necessary condition. It is not sufficient.
- In a developing economy, in the final analysis, growth is driven by investment. It is the decline in investment rate of nearly five percentage points since 2010-11 that has led to the progressive decline of the growth rate.
- Reforms normally create a natural climate for investment. But ‘animal spirits’ are also influenced by non-economic factors such as social cohesion.
- Reforms supplemented by a careful nurturing of the investment climate are needed to spur growth again. This should become the sole concern of policy makers.
Priorities looking ahead:
- The economy is clearly recovering from the contraction induced by the pandemic, but how quickly it will recover is uncertain.
- Much depends upon whether we are hit by a third wave, and more importantly on how severe it is. The priority now must be to get the vaccination coverage expanded as soon as possible.
- This will create conditions conducive to a return to normalcy. The government has set an ambitious target of covering the entire adult population by end-December.
- Achieving this target or getting as close to it as possible will make the best contribution possible for a quick recovery.
- Global supply/production chains not only destroyed the manufacturing base in developed and developing countries; they also resulted in loss of jobs and poor working conditions in these sectors.
- Developing countries were asked to ease their labour protection laws to facilitate global production and supply chains popularly known as global value chains.
- As a result, people were forced to work in precarious working conditions without any social security net.
- This created an unorganised army of labourers and is preventing many developing country governments from effectively offering relief.
- A virus has made us rethink our obsession with the economic efficiency theory. It implores us to put in place an industrial policy to maintain core capacity in health products so that we can face the next crisis more decisively.
Way Forward: Need for continuity of reforms agenda:
The reform agenda must continue. It will be incremental in character. It has to be. Policymakers should be clear about the directions in which they should move.
- First of all, there is a need to move in the same direction in which we have been moving in the past three decades.
- Policymakers should identify the sectors which need reforms in terms of creating a competitive environment and improving the performance efficiency.
- From this angle, we need to take a relook at the financial system, power sector and governance. Centre and States must be joint partners in this effort.
- Second, in terms of government performance, there should be increased focus on social sectors such as health and education.
- In terms of the provision of services, the emphasis must be not just on quantitative expansion but also quality.
- To achieve the quality is even more difficult. The advent of COVID-19 has clearly shown our inadequate health facilities and preparedness.
Reforms are necessary to improve the productivity of the economy and achieve higher growth. But the story does not end there.
We cannot ignore equity considerations. Growth and equity must go together. They must not be posed as opposing considerations.
They are truly interdependent. It is only in an environment of high growth; equity can be pushed aggressively.
Thus, the crisis was converted into an opportunity to bring about fundamental changes in the approach and conduct of economic policy.
The words of Charles Dickens in somewhat reverse order seem appropriate: “It was the worst of times, it was the best of times, it was the winter of despair, it was the spring of hope.”