India’s 1991 liberalisation leap and lessons for today

What is the issue?

It is three decades after India embarked upon the path of economic liberalisation in 1991.
In this context, here is an assessment of the decision and the results of the reforms.

How were the pre-reforms years?

The private sector was not allowed to invest in a number of sectors thought to be critical for development.
Key sectors were reserved for the public sector despite its lacklustre performance.
Where the private sector was allowed, it could invest only after getting an industrial licence.
That was especially hard to get for “large” industrial houses.
Over 860 items were reserved exclusively for small-scale producers.
These included many items that had very high export potential.
So, imports were more strictly controlled than in almost any other developing country.
This was because it was felt necessary to conserve scarce foreign exchange.
Consumer goods simply could not be imported, so domestic producers faced no import competition.
Producers could import capital goods and intermediates needed for production.
But this again required an import licence.
This was given only if the government was satisfied that the import was essential and domestic substitutes were not available.
Finally, the import of technology was controlled and Foreign Direct Investment (FDI) was discouraged.
Clearly, it was not a system geared to encourage enterprise or innovation.
Efforts were made in the 1980s to liberalise the system but these were incremental changes.
By 1990, it was clear that drastic change was needed.

What have the 1991 reforms achieved?

The reforms were aimed at unleashing the energies of the private sector to accelerate economic growth.
This was to be done in a manner that ensured an adequate flow of benefits to the poor.
The reforms certainly succeeded in this objective.
The full benefits took time to materialise because a gradualist approach was adopted.
But the results are dramatic if seen in a longer time frame.
The GDP growth averaged 7% in the 25 years from 1992 to 2017.
The preceding ten years had an average of 5% and the preceding 20 years, 4%.
Importantly, as growth accelerated, poverty declined.

What are the shortcomings though?

Some of the reforms begun in 1991, especially in the financial sector, are yet to be completed.
Also, in the health and education sectors, what have been done is much below the potential and need.
Environmental concerns have not been adequately built into the development strategy.
India is still at the lower end of the middle-income group of countries.
Many more reforms are needed to get to the top of the group.
The need for labour market reforms was recognised.
But attention was given first to get the industrial, trade and financial sector reforms, and take up labour market reforms later.
Employment - There was a fall in employment in agriculture after 1991.
But it was accompanied by sufficient growth in total employment in non-agriculture sectors.
Also, total employment actually increased.
The disappointing thing was that employment in manufacturing did not increase as rapidly as one would have liked.
This was because Indian was not able to replicate the East Asian experience of rapid growth in the export of labour-intensive manufactures.
Also, most of the increase in employment, including in manufacturing, was not regular contractual employment but informal non-contractual employment.

What about import tariffs?

India progressively lowered import tariffs from an estimated 57.5% in 1992 to 8.9% in 2008.
But this trend has been reversed over the past few years.
This appears to be in line with rising protectionism globally.

But increasing the import tariffs will hamper India's stated ambition to become part of global supply chains.

Indian industry has legitimate complaints about poor infrastructure, poor logistics and time-consuming trade procedures, which reduce its competitiveness.
But the solution lies in addressing these problems directly.
Raising import duties, which will only raise costs in the economy, is not the right solution.

The government should engage with Indian industry and other experts.
Moving to an average duty rate of about 7%, gradually narrowing the range of variation across products and eliminating duty reversals would be the right approach.

What lies ahead?

India cannot expect to replace China.
But, it can reasonably expect to become a major player in non-China-dominated supply chains.
In this context, RCEP membership would help, as it will reassure partners that trade policy will not be arbitrarily changed.
In the RCEP context, as far as unfair competition from China is concerned, the solution lies in a faster method of imposing anti-dumping duties on China, not raising import duties across the board.
Also, working on agreements with important groups bilaterally than multilaterally seems to be a better option for assuring market access.
The economy is clearly recovering from the contraction induced by the pandemic, but how quickly it will recover is uncertain.
Once the pandemic is brought under control and 2019-20 level of production is back, the government should look at what caused the slowdown before the pandemic.
A set of mutually supportive policies that will counter these forces and lead to higher growth and higher employment will be crucial.

Source: The Hindu