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Decades After 1991 Reforms, Role of State Remains Misunderstood

Economic liberalisation never meant letting the markets rule; the state, too, has a more nuanced role to play.

Updated
India
4 min read
Decades After 1991 Reforms, Role of State Remains Misunderstood
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(License Raj was brought to an end on 24 July 1991 as the country liberalised its economy. On this day in 2021, The Quint is reposting this article from its archives to mark the occasion. It was originally published on 24 July 2017.)

On 24 July 1991, Prime Minister Narasimha Rao announced the end of the license-permit Raj and Finance Minister Manmohan Singh presented a historic budget that rolled out economic liberalisation in India. We have now arrived at the 26th anniversary of that watershed moment.

Also Read: 25 Years on, Manmohan Singh Talks About the Liberalisation of 1991

Young people today have no memory of a time when footwear meant Bata shoes and Ambassadors roamed the roads. Two decades later, notes Rana Dasgupta, the roar of Ferrari engines – rich kids racing around Lutyens Delhi after midnight – kept Manmohan Singh tossing and turning in his bed at the former Prime Minister’s residence. Liberalisation woke up a slumbering economy while its consumerist thunder also kept its chief architect awake at night.

Activists of the pro-communist All India Youth Federation shout anti-government slogans outside the Delhi’s Stock Exchange on 21 February 1991. About 70 members of the Federation occupied a part of the exchange for five hours to protest against the government’s radical economic reforms. (Photo: Reuters) 
Activists of the pro-communist All India Youth Federation shout anti-government slogans outside the Delhi’s Stock Exchange on 21 February 1991. About 70 members of the Federation occupied a part of the exchange for five hours to protest against the government’s radical economic reforms. (Photo: Reuters) 
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To many, 1991 was simply a second freedom movement to liberate us from the nanny state. To others, it was a surrender to capitalist greed and the Washington consensus. These simplistic thumbnails do not capture the spirit of the new economy launched under Narasimha Rao’s minority government, which showed a boldness and vision that subsequent governments with larger mandates have failed to reproduce. Liberalisation did not merely diminish the importance of the state; it gave it a far more profound role whose challenges it is struggling to meet to this day.

People often talk about how the task of reforms was left unfinished. India still ranks a dismal 130th globally in the ease-of-doing-business. Its restrictive labour laws make exit difficult and hence, entry unattractive for businesses, discouraging growth of the formal sector and large-scale enterprises. The government stubbornly holds on to poorly managed public sector companies like Air India and BSNL, whose losses are a drain on the exchequer and which have outlasted their utility thanks to a thriving private sector in the airline and telecom industry.

Our Biggest Failure: Launching A Manufacturing Boom

The major disappointment of the post-liberalisation era cannot be blamed entirely on these unfinished reforms. The big failure is our inability to launch a manufacturing boom, which is the only known path to development and higher living standards for the masses anywhere in the world. Growth in all sectors picked up after 1991, but the share of manufacturing in GDP continues to hover around 15%, no higher than what it was before liberalisation. This figure is more than 30% for many of the Asian tigers – China, Korea and Thailand. Job growth in the formal manufacturing sector has been minimal, so our demographic dividend may turn into a curse.

Manufacturing failed to really take off due to several bottlenecks, including infrastructure, skills and quality control. This is where the state’s dismal failure to do its job comes into sharp focus. Infrastructure spending as a percentage of GDP has been going up steadily under both UPA and NDA regimes, so there is some hope that we will be able to get over our crippling power shortages, poor connectivity and clogged ports.The prospect of creating the human capital that forms the backbone of any prosperous economy seems much more distant.

ASER reports reveal that although school enrollment is now very high, an alarming fraction of children in the country are not even learning the three R’s properly. Malnutrition is still widespread – 39% of children are stunted and 31% of adult women suffer from low BMI. The problem is not merely that public health, education and sanitation are underfunded – they are – but there is massive organizational failure in providing these services. Government schools and health clinics are riddled with absenteeism and demotivated staff – studies show that the private sector can produce roughly the same results with less qualified personnel and at a fraction of the cost.

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The Role of the Government In Diffusing Stresses of Growth

A second reason the state’s role has become very important is that rapid growth produces stresses and conflicts that only smart and vigilant governments can diffuse. One example of this is the conflict over land acquisition that erupted all over the country in the last decade. It threatens to stall the very success – industrialisation and urbanisation – that created it. Another example is the fumes of growth – massive air pollution and congestion that are choking our cities. Ironically, governance in these areas can be effective if it relies on some tricks of the market – using auction based methods to determine land value or employing congestion pricing to control traffic volume. Our governments have either been indifferent or responded with unimaginative and bureaucratic solutions.

Heavy and increasing vehicular traffic has contributed to the rise of air pollution exponentially. (Photo: Reuters)
Heavy and increasing vehicular traffic has contributed to the rise of air pollution exponentially. (Photo: Reuters)

Even in the matter of creating a greater role for the private sector, one must not forget the lessons of the Soviet Union, where the collapse of communism quickly led to crony capitalism and a race to strip off public assets. Opening up the mining and infrastructure sectors to private capital made it possible to get around the chronic funding crunch and inefficiency of the public sector. It also created the mega scandals that sank the UPA. More than a decade after privatising the utility sector, our governments are still floundering on how to regulate the discoms or how to price the gas that Reliance pumps. Productive privatisation must rely on transparent mechanisms; done willy nilly, it becomes open season for corruption and inefficiency.

Liberalisation did not mean the state should wither away and let markets rule. It redefined their complementary roles, and made each more important in the process. Twenty six years on, we are in danger of forgetting that.

Also Read: Privatisation Is Not a Bad Word, Let’s Give It a Shot At Least

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