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02 August, 2016

A quarter century of reforms

BRP Bhaskar
Gulf Today

The 25th anniversary of economic reforms passed unnoticed last month. A strong votary of economic liberalisation, Prime Minister Narendra Modi is trying to carry the reform process forward. There was, however, no official celebration of the jubilee.

The reform process was initiated by a Congress government. Some give Prime Minister Rajiv Gandhi credit for taking the first steps in this regard. However, if the process is to be assigned a date of birth it must be July 24, 1991. On that day Dr Manmohan Singh, as Finance Minister in PV Narasimha Rao’s government, presented his first budget in which he outlined proposals to move away from the path charted by Jawaharlal Nehru in the 1950s.

Nehru, who set before the nation the ideal of a socialist pattern of society, envisaged a mixed economy in which the private sector will have an assured place but the public sector will occupy the commanding heights. The attempt to establish a regulated private sector led to the evolution of a corrupt system which critics dubbed licence raj.

Narasimha Rao did not formally repudiate the socialist ideal, but acute economic distress compelled him to change the course. A sharp fall in the foreign exchange level had forced the country to raise money from the Bank of England by mortgaging a part of its gold reserves. Later the International Monetary Fund provided a loan to tide over balance of payments difficulties.

The reforms comprised three elements: liberalisation or freeing the economy from bureaucratic control, privatisation or divesting of state undertakings and globalisation or integration of the domestic economy with the world economy. The Left and some sections within the Congress party opposed them on ideological grounds. Businessmen who had prospered under the licence raj were not keen on changes.

In the circumstances, the Rao government and its successors chose to hasten slowly, much to the chagrin of global promoters of the new international order. As Prime Minister, Manmohan Singh too moved cautiously. Ground realities have impeded Modi’s efforts to accelerate the pace of progress in the past two years.

India began globalisation more than 12 years after China did. Today, in terms of exchange rates, China is the world’s second largest economy with a gross domestic product of $10,983 billion, after the United States with a GDP of $17,947 billion. India stands seventh with $2,091 billion. Purchasing power parity valuation puts China above the US with a GDP of $19,392 billion and India in the third position with $7,965 billion.

Manmohan Singh recalled recently that the economy had recovered faster than he had expected. Inflation came down. The balance of payments position improved.

Just as the economic progress achieved during the Mao regime stood China in good stead as it opened up, the foundations laid by Nehru provided the ballast as India ventured into choppy seas. Information Technology units’ earnings from software exports and Non-Resident Indians’ remittances helped the country stabilise the foreign exchange situation quickly after the rupee was effectively devalued.

The service sector is now the main driver of the economy. It contributed as much as 69 per cent to the GDP last year. The manufacturing sector is almost stagnant, despite Modi’s vigorous pursuit of foreign investments under his Make in India programme. Agriculture which is still the mainstay of a large section of the population recorded a meagre 1.1 per cent growth.

The flip side of the economic success story is the heavy price the poor is called upon to pay. Tribes are being dislocated from their traditional homelands to make room for industries. While the rich get away defaulting on bank loans, small and marginal farmers are driven to suicide. The Centre’s slashing of expenditure on health and education adds to the misery of the poor.

A feature of the recent economic growth is that it is not accompanied by job creation. According to the latest census report, the unemployment rate rose from 6.8 per cent to 9.6 per cent during 2001-2011. The trend continues.

What marks the post-liberalisation era apart from the past is the emergence of a middle class pleased with easy availability of consumer goods. Its seeming prosperity deflects attention from the sharp rise in inequality.
In a lecture two years ago International Monetary Fund managing director Christine Lagarde said the net worth of India’s billionaire community had increased 12-fold in 15 years, “enough to eliminate the absolute poverty in this country twice over.” --Gulf Today, August 2, 2016.

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