India was a closed economy with a falling growth rate, high inflation, over-valued exchange rate, extraordinarily high import duties and bankrupt foreign exchange reserves in 1991. That year, on the verge of defaulting on its international payment obligations, India was truly in big soup.
With the Indian economic kitchen on fire, the team of policy Chefs—Narasimha Rao, Manmohan Singh and P Chidambaram, ably assisted by the team of accomplished cooks: A N Verma, Naresh Chandra, Montek Singh Ahluwalia and Rakesh Mohan, designed, baked and served nourishing meals using a broad-based reform recipe to get India out of trouble. That reform recipe and dish, is now, after 30 years, being given a review rating of ‘half-baked’.
Were 1991 reforms half-baked or well-cooked? Did 1991 reforms catapult India on a path of recovery, from a malnourished country to a strong fifth largest economy? Was there some unfinished reform agenda which the current dispensation taking over the kitchen in 2014, could have accomplished?
Economic Apocalypse Raged On
A look at the data for 1991-92 in the 'Economic Survey of 1992-93' still sends a shiver down the spine. India was in deep crisis, staring at an abyss- close to what has later came to be symbolised as a 'Lehman moment'.
GDP grew only by 1.4% in constant prices. Consumer price inflation rose by 13.9%. Agriculture production had fallen by 2.8% with food production contracting by 5.3%. Industrial production rose by a measly 0.1%.
Money supply was spurting between 15%-19.5% in the previous four years with Government running large fiscal deficits financed by an unlimited overdraft from RBI. It rose by 18.5% in 1991-92. Foreign exchange reserves were down to $2.2 billion in 1990-91, having plummeted by 33.6% in the year.
India was a foreign exchange bankrupt and on the verge of default. India could have defaulted as many other developing countries had done in 1970s and 1980s.
Indian policy makers knew the ignominy, pain and dysfunctionality which defaulters faced. In 1960s, Prime Minister Lal Bahadur Shastri of a food scarce India had begged for food and implored Indians to eat only one meal a day so that everyone could at least eat something every day. India could have lost access to fuel imports as well.
There were no easy choices but India decided to take the bull by the horn and embarked on the path of bold reforms.
Bittersweet but Nourishing Effects of Liberalisation
The reforms undertaken by India in 1991 were nothing short of extraordinary, risky and audacious. These reforms turned on head the dystopian policies India was following for 35 years since independence.
India’s industrial economy was built on the twin pillars of reservations of basic and capital industry for the public sector and constraining the private sector under the asphyxiating yoke of licence-permit raj.
Inefficient industrial public sector had mushroomed in India in the quest for a utopian socialist pattern of society. Capital formation had shuttered with the efficiency of capital measured by capital-output ratio declining to its lowest rate in independent India.
In what was simply inconceivable in the India of 1980s, the Government abolished the reservation for public sector and relieved the private sector from the slavery of licence-permit raj. The reforms revived the Indian industry, which has become globally competitive, at least in some areas.
Sweeping Trade Reforms
India had become a closed inward-looking economy under the mistaken notions that self-reliance and import substitution can build strong Indian economy. Our exchange rate was so over-valued to make imports big attraction and exports no taker.
High tariffs had forced businessmen to become quota-seekers and smugglers. Foreign exchange inflows had grounded. Whatever the official aid and borrowings brought was used for unavoidable consumption imports and capital imports for inefficient public sector.
Unsurprisingly, the foreign exchange reserves got totally depleted despite massive import squeeze. Instead of going for quick-fix solutions like rupee depreciation of 1965, the Government decided to act tough and smart.
Considerable foreign trade reforms were undertaken. Export subsidies abolished. Rupee was substantially depreciated and a good part of export proceeds liberalised to be sold in market at market-determined rates.
Soon, the entire current account was liberalised and foreign exchange rates became more or less market determined. From being on the verge of default in 1991, India crossed $100 billion reserves mark in 2003 and $300 billion mark in 2007-08.
India’s Nod to Foreign Investments
India was pathologically averse to foreign investments and technology pre-1991. There was no concept of Foreign Direct Investment (FDI) or Foreign Portfolio Investments (FPI) or External Commercial Borrowing (ECB).
Technology imports were controlled with a tight fist and paltry royalty payments were only grudgingly allowed. In a broad big sweep of reforms in 1990s, FDI was permitted in several sectors and technology imports and royalty payments liberalised. ECBs were also permitted from the middle of 1990s.
FDI stock crossed $100 billion in 2007-08 and $200 billion in 2011-12 from literally zero in 1990-91.
There were many other reforms. Ill-advised reservations for small scale sector, which had emasculated India’s industrial growth, were done away with. The reforms unleashed in 1991 were truly massive a big multi-course meal.
The Last Serving
Not everything could have been understandably done in 1991-92. There are two particularly important reforms which the Government did not take up. One was the privatisation of public sector and the second, reforms in agriculture.
The incumbent industrial and financial public sector continued unreformed post 1991. Some encouragement to bring commercial orientation to public sector was initiated. Government also stopped nationalising the private sector and funding the capital requirement of public sector.
This was, however, not sufficient. The Atal Bihari Government took up privatisation in some seriousness but could only touch a fringe. Agriculture sector remained entirely unreformed. Probably the fact that India had become self-sufficient in agriculture by 1990s made the government quite complacent about it. The government continued to do only more of the green-revolution policies entailing higher minimum support prices (MSP), subsidies extended to all agriculture inputs and also loan write-offs.
These two big, unfinished reforms awaited the BJP Government when it assumed power in 2014. The government began well by reposing faith in the maxim of 'minimum government maximum governance'. This implied that the Government would follow policies and reform agenda to unwind the public sector and liberalise agriculture.
A Recipe For Success or Disaster?
Unfortunately, nothing significant has happened on any of these two fronts. Barring Air India, no public sector enterprise- industrial or financial- has been privatised in the last eight years despite lot of announcements. Disinvestment/privatisation programme has literally floundered in the last three years. On the contrary, Government has been investing much more in the equity of sick and non-commercial public sector (e.g. BSNL, NHAI and Railways).
In agriculture, there is enormous expansion of subsidies and government. MSPs have become larger with 50% minimum profit (though not effectively implemented) and fertiliser subsidies are now 90% of cost (public sector has also grown in fertilizer).
New fiscal resources guzzling programmes like PM KISAN and doubled-up food allowance under PM Garib Kalyan Yojana for 80 crore Indians have assumed centre-stage.
It is ironic that the Government which is serving completely uncooked food to 80 crore Indians, is calling the 1991 reforms half-baked.
(Subhash Chandra Garg is Chief Policy Advisor, SUBHANJALI, author of The $10 Trillion Dream, and former Finance and Economic Affairs Secretary, Government of India. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)