Twenty Years On: A Second Wave of Reforms

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Twenty Years On: A Second Wave of Reforms

"Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.” (Manmohan Singh, Budget Speech, 24 July 1991)

In 1991, the Reserve Bank of India (RBI) airlifted 47 tons of gold to the Bank of England as collateral for an emergency loan of $2.2bn from the International Monetary Fund. With Manmohan Singh in place as the new Minister of Finance, the government of Narasimha Rao swept away the swathes of public sector restrictions and unshackled the Indian economy. 20 years after Shri Manmohan Singh’s revolutionary Budget Speech, India’s GDP has quadrupled and is growing at 8.6% compared with 2.5% in 1991, while its foreign exchange reserves have exploded from $5.8bn to $279bn. Foreign Direct Investment (FDI) has surged from $0.13bn to $30.3bn, while exports have grown from $18bn to $245bn.

Manmohan Singh, now the Prime Minister of India, unleashed a second wave of reforms in 2012, targeting civil aviation, the retail sector, and the insurance sector. He also announced the reduction of diesel and cooking fuel subsidies, with more reforms in the pipeline. Economists have estimated that these reforms will cut the fiscal deficit by 0.1-0.2% of GDP, while allowing for investment and higher growth opportunities for modern India. Yet India today is no longer the inefficient economy that existed 20 years ago, and these reforms pale in comparison to the shake-up that Singh engineered then. This isn’t 1991 again.

The 1991 reforms were implemented in the backdrop of a serious financial crisis. The gross fiscal deficit amounted to 10% of GDP, with expenditure growth far surpassing the growth of revenue, straining the amount of resources available for public investment. At the same time, funds from savings were diverted away from private investment toward public. India’s current account deficit doubled in the 1980s to an annual average of 2.2% of GDP, forcing it into a Balance of Payment crisis, with its foreign currency reserves falling to a mere Rs 2500cr by mid-1991, enough only to “finance imports for a mere fortnight.” Other economic indicators showed similar problems – the average rate of inflation reached 13.6% in 1991, while external debt was over 30% of GDP. India was known to be home to a wasteful government with a heavily and unnecessarily protected economy. Manmohan Singh’s sweeping reforms were designed to be the pill that would open up India to the world.

India’s current government is facing similar pressures. Its budget deficit widened from 4.2% of GDP in 2007 to over 9% in 2009 after a spate of improvements following the 1991 reforms. Expenditure rose through the 200s without a commensurate increase in revenues, while its current account deficit stands at approximately 5.4% of GDP. Despite the structural limitations that the deficit imposes on both the Reserve Bank of India (RBI) and the central government, India still stands in a position of considerable strength because of the initiatives implemented during the reforms. India is the 10th largest economy in the world, and boasts a healthy 7.5% growth rate since the second half of the 1990s, with its per-capital income quadrupling since the 1991 crisis. India today is a very different place from the India of 1991, and its reforms will require something much deeper to match what was done before.

While the effects of the reforms have been nothing short of impressive, the reform process has yet to be completed, and much remains undone. The liberalisation of the early 1990s launched India into the world, yet the momentum since has been halting. Singh’s latest proposals take aim at several sectors previously held closely guarded, but it falls short of targeting the real problems that plague the economy. India’s growth has been uneven across geographies and sectors, with rural industries and agriculture posting dramatically poorer growth figures of 2.8%, compared with the 9% growth in services. The uneven growth has led to an enlarging gulf between the poor and the rich, at the same time creating a middle class that was not clearly demarcated before. The structural changes that are required to firm up India’s economy – labour law reform, provision of basic services – are nowhere in sight. Businesses are finding it difficult to turnover their employees, and new workers have been kept out of jobs by draconian laws enacted during India’s independence. Its priorities in this bout of reforms are clear – economic reforms over governance reforms.

India’s economy has developed a very bad reputation of crony capitalism and stifling political problems. Economists and businessmen cry out against the apparent lack of free competition, an economic and political field plagued with corruption, alongside a corrupt and bumbling judicial system. The World Bank ranks India 132nd in the ease of doing business, with its ease of ‘Starting a Business’ ranked 173rd in the world, and its ability in ‘Enforcing Contracts’ ranked at 184th. The 2012 reforms were aimed at restoring confidence in India’s economy, by further opening up the economy to foreign entities, and cutting the heavy bill the government carried in subsidies. Yet these reforms do not tackle the major structural problems that continue to hinder India’s progress. Some investors will be pleased with the changes the government seems to be implementing. Whether they bring about any significant change, however, is a different matter altogether.

India prides itself on being the largest democracy in the world, and politicians have come out in a show of the problems a democracy brings. In a show of her frustration with the new set of reforms, Chief Minister of West Bengal Mamata Banerjee, who helped to support the Congress Party in the elections, pushed for a no-confidence motion against the Congress-led government, reaching out to other opposition parties for support. The political maze that P. Chidambaram, India’s Finance Minister, will have to traverse in order to push through its changes is substantial, and he will require leading Congress politicians to throw their weight behind Manmohan Singh amidst the backlash against the reforms. It is a delicate situation for the Congress party. Its proposals involve unpopular policies that will threaten the comfort of many individuals and corporations. Any political party will have to balance the wants of the people against what the economy needs. The important reforms are usually unpopular and will elicit a lot of pain during their implementation.

The 1991 crisis created an opportunity for India to implement sweeping reforms that opened India up to the world, and set the foundations for 2 decades of drastic economic improvements. The lesson then was that it took a major economic conundrum to generate the support needed for reforms to be successful, and for the people to accept the pain of executing those reforms. India today is a very different from India in 1991, and while it stands in the face of major economic problems and lagging indicators, it still remains attractive to many investors, and continues to stand in a position of strength. Yet despite this, there are still many serious problems that plague the Indian economy and the government; structural issues still have to be ironed out, and there are industrial sectors and draconian legislation that require attention. Two decades on, India has been presented with a chance for a second generation of its 1991 reforms. A comprehensive set of reforms that will lay flat the kinks in its economy and governance will be painful, and to deal with bureaucratic and corruption problems will require large amounts of willpower and support. India requires a massive shake-up of the economy and its governance, and an extension of the liberalisation that took place in 1991. Till then, the current set of reforms does not match up to what India needs. This isn’t 1991 again.


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