India’s 1991 liberalisation leap and lessons for today
- In an interview with The Hindu, Montek Singh Ahluwalia, one of the key figures in the reform process, former Deputy Chairman of the erstwhile Planning Commission discusses the transition of the Indian economy, what remains to be done, and what needs to be done.
Evolution of Indian Economy since 1991 –
- The changes were aimed at releasing the private sector’s energy in order to boost economic growth while also ensuring a sufficient flow of benefits to the poor.
- Because of the gradualist strategy used — which is appropriate in a democracy — the full benefits took time to manifest, but the effects are dramatic when viewed over a longer period of time.
- GDP growth averaged 7% over the 25 years from 1992 to 2017, compared to 5% in the previous ten years and 4% in the previous twenty.
- But at same time In the areas of health and education, we have not done as much as we should have, and environmental problems have not been effectively addressed in our development strategy.
Scenario Before 1991 –
- The private sector was barred from investing in a number of sectors deemed vital to development. Despite its poor performance, the public sector was given the so-called “commanding heights.”
- Where the private sector was permitted to invest, it could only do so after obtaining an industrial licence, which was particularly difficult to get for “large” industrial houses.
- Over 860 goods were set aside for small-scale producers only, including many with great export potential.
- Imports were highly regulated, more so than in nearly any other developing country, in order to conserve scarce foreign cash. Imports of consumer goods were simply not possible, therefore domestic producers faced no import competition.
- Importing capital goods and intermediates was possible for producers, although it usually required an import licence. Technology imports were restricted, and foreign direct investment (FDI) was discouraged.
Pending Reforms –
- The necessity for labour market reforms was recognised, but it was decided that we should focus on the industrial, trade, and financial sectors first, with labour market reforms following later.
- For a few years, we grew at a rate of above 9%, but persuading labour proved tough.
- Land reforms is also one of the thing we need to put pressure as there is requirement for centre state cooperation beyond political motives.
In the era of protectionism –
- India gradually reduced import taxes from an estimated 57.5 percent in 1992 to 8.9 percent in 2008, but this trend has now been reversed.
- The reversal of a trend that other governments had been following. It will prevent our professed goal of joining global supply chains. Inadequate infrastructure, poor logistics, and time-consuming trade procedures are genuine concerns for Indian industry, lowering its competitiveness.
- However, the solution rests in directly resolving these issues rather than raising import tariffs, which will merely increase economic expenses.
- We should go to an average duty rate of roughly 7%, gradually limiting the range of fluctuation between items and eliminating duty reversals, according to the NITI Aayog’s first Vice-Chairman, Arvind Panagariya. This is the correct strategy.
On RCEP –
- The tariff reductions necessary by the RCEP were to be phased in over several years, allowing us plenty of time to improve our competitiveness.
- When it comes to unfair competition from China, the approach is to impose anti-dumping penalties on China more quickly rather than hiking import duties across the board.
- It’s worth noting that geopolitics is pressuring big nations to minimise their reliance on China.
- India will not be able to replace China, but it can hope to become a big role in supply chains that are not controlled by China.
- Membership in the RCEP would be beneficial because it would ensure partners that trade policy would not be modified arbitrarily.
- We have typically supported trade liberalisation in a multilateral venue for FTAs with the United States, Europe, and the United Kingdom, but major industrialised countries appear to be moving away from multilateral negotiations.
- Working on bilateral agreements with significant parties appears to be the only way to ensure market access.
- However, such FTAs will necessitate greater concessions, notably on difficult subjects like intellectual property rights and bilateral investment protection, which we must be willing to accept.
Problem of Joblessness and impact of Pandemic –
- The UPA period was the first time we saw a drop in agricultural employment… but it was accompanied by enough increase in total employment in non-farm sectors to absorb the labour displaced from agriculture.
- Santosh Mehrotra and Jajati K. Parida examined the post-UPA period before to the pandemic in a recent paper. They discovered that after the significant slowdown in GDP growth in 2016-17, employment fell from 474 million in 2011-12 to 469 million in 2018-19.
- Agriculture employment continued to fall, reflecting a typical structural transition, although non-agricultural employment grew considerably more slowly than during the UPA years.
- As a result, the number of people who are unemployed has increased. The problem was most acute among the youth, who had an unemployment rate of 18 percent.
- The COVID-19 pandemic has resulted in a labour shortage. GDP decreased by 7.3 percent in 2020-21, according to preliminary National Income estimates.
- Many observers believe that this understates the decline because the negative impact on the informal sector is not taken into account.
- In any case, a substantial drop in GDP will inevitably lead to a reduction in total employment, as the data from the Centre for Monitoring Indian Economy shows.
Priorities in Post COVID era –
- Only a return to the level of 2019-20 will suffice. We will get no relief on the employment front or in eliminating poverty if we simply return to the pre-pandemic growth rate of approximately 4% to 5%.
- Past experience demonstrates that if we want to make progress on poverty reduction and provide adequate jobs for our rising labour force, we need to return to a growth rate of 7% to 8%.
- Once the pandemic has been contained and production has returned to the 2019-20 level, the government would be well advised to examine what caused the slowdown prior to the pandemic and to issue a clear statement of mutually supportive policies to counteract these forces and lead to higher growth and employment.
- It should also come out with a post-pandemic growth target.
Expected Question –
- Indian economy once experienced drastic change under LPG reforms of 1991. Currently it has become unstable again in the light of COVID 10 pandemic. What are challenges Indian economy is facing due to pandemic. Suggest way forward.