NEW DELHI: Manmohan Singh will be remembered as the statesman who saved the Indian economy from going over the edge. When he took over as finance minister in the minority government of Narasimha Rao in 1991, the Indian economy was very close to sovereign default. Foreign exchange reserves were barely enough to cover a month of imports and the country had to suffer the ignominy of having to ship its gold reserves to England. The looming economic disaster was a result of fiscal and trade profligacy in the 1980s when the Indian economy, both public and private arms of it, had been spending beyond their means.
The crisis was a result of a deeper economic malaise in the economy where the post-independence State-led planning model had failed to deliver and private enterprise had become shackled in what was infamously referred to the Licence-Quota Raj. All of that would change with the famous 1991 Budget which Manmohan Singh presented, and the industrial deregulation which accompanied the Budget. More than three decades later, there is as big a consensus for reforms in India just as there was opposition to it when the process started. Having said all this, what have the economic reforms done for India? Here are five charts which try and answer this question as briefly as possible.
India is on its way to becoming the third-largest economy in the world in a couple of years, and the seeds of India’s growth story were sowed during the economic reforms. World Bank data on India’s share in global GDP (in current dollars) shows this clearly. India’s weight in the global economy declined steadily from the 1960s (the earliest period for which this data is available) and reached a trough in 1991. Since then, this number has been on an upward trajectory even though the pace of this has varied in the last three decades.
That the reforms delivered growth in India is pretty much an undisputed fact now. The more controversial question is whether this growth has reached the proverbial last person in the line or been hogged by a smaller clique. On this count, one can say that the glass is half full. World Bank data on various measures of poverty shows that India has had significant success in eradicating extreme poverty – as captured by its $2.15 poverty line – even as poverty rates are significantly higher for poverty lines with higher income levels. Here, there is still a lot to be done. To be sure, it is unlikely even the extreme poverty eradication would have happened had post-reform growth not generated the revenue to launch welfare programs.
Concerns about poverty and inequality aside, the reforms unleashed an unprecedented virtuous cycle of wealth creation in the Indian economy as deregulation allowed private enterprise to exploit the new opportunities in both domestic and external markets. This is best seen in a rise and rise of Indian stock market almost a decade after the reforms were launched. For instance, replacing the Controller of Capital Markets with the more contemporary SEBI, and relaxing IPO norms, allowed Infosys to list in the early 1990s, sparking India’s equity culture.
The strengthening of sentiment vis-à-vis the Indian economy also attracted a lot of foreign capital into India which along with a stock market boom has also provided a much-needed stability on the external account despite Indian imports being significantly larger than they were in the pre-reform period.
Does all this mean economic reforms have succeeded in everything they wanted to achieve in the Indian economy? There are important areas where things have not moved, the biggest being India’s failure to give a big boost to its manufacturing sector. The share of manufacturing in India’s GDP has largely been stagnant in the post-reform period even as countries such as China have benefited from export tailwinds via the manufacturing route.
With the US and the developed world becoming more protectionist, there is some merit in the scepticism that India might have missed the best period to exploit this opportunity. As irony will have it, the blame for the lack of India’s manufacturing progress is often attributed to less reforms rather than reforms per se. But the fact also remains that some states have managed to do much better than others on this front in a similar national policy environment. Even as some economists who have praised reforms argue that India should focus more on services than manufacturing, it is difficult to imagine a bigger source of remunerative non-farm mass employment generation than a robust manufacturing sector. This is one area where the next generation and political and economic policy leaders will have to carry forward the work which started in 1991.
