Essay: Indian Economy and Economic Reforms

Economic reforms were introduced by the Government of India in July 1991. The reform process has completed 17 years. It would, therefore, be both interesting and instructive to make an overall assessment of the reform process so as to ascertain whether the country is moving in the right direction, or, to terminate the reform process altogether.

Goals:

The objectives of the reform process were:

(a) To promote a faster rate of growth,

(b) To enlarge employment potential leading to full employment,

(c) To reduce the incidence of poverty,

(d) To promote equity, leading to a better deal for the poor and less well-off sections of society,

(e) Reduction of regional disparities, i.e., the gap between the rich and the poor states, and

(f) Improving the BOP position.

We may now examine economic reforms in terms of the above goals:

1. GDP Growth:

The annual growth rate in the post-reform decade (1990-91 to 2000-01) was the same as that of the pre-reform decade (1980-81 to 1990-91), viz., 5.6% per annum. After the teething troubles of the first two years, viz., 1991-92 and 1992-93, the growth rate during 1993-94 and 1997-98 has averaged to more than 7% per annum.

After 1991-92, the growth momentum has been sustained. Reforms have, no doubt, improved the growth potential of the economy. This is clear from the fact that the growth rate of GDP during the 5-year period (2000-01 to 2005-06) was 7% p.a. It increased to about 8.9% in the next year. (2006-2007)

2. Poverty Alleviation:

The overall poverty ratio declined from 36% in 1993-94 to 27.5% in 2004-05—a decline of 8.5% during the 11-year period. Annual average reduction of poverty during this period was 0.74%. However, the rate of poverty reduction during 1973-74 and 1987-88 was from 54.9% to 38.9%—a reduction of 14 percentage points during the 14-year period.

So, poverty reduction was at the rate of 1 % p.a., which was higher than that during the post-reform period, even though GDP growth rate during the post-reform period was much higher than that in the pre-reform period.

The number of persons below the poverty line was 300 million in 2004-05 compared to 320 million in 1993-94. This means that the absolute number of poor declined very slowly during the post-reform period. So, the trickledown effect of the growth process did not benefit the poor.

3. Employment Generation:

One of the causes of poverty is growing unemployment or underemployment. Total employment increased from 302 lakhs in 1983-84 to 3,568 lakhs in 1990-91 and then to 3,829 lakhs in 1997- 98. The rate of growth of employment was of the order of 2.39% p.a. during 1983-84 and 1990- 91, which was just equal to the rate of growth of labour force during this period.

But over the period 1990-91 and 1997-98 the overall growth rate of employment was only 1%. Since the reform process is limited to the organised sector, more so to the large corporate sector, the growth rate of employment in the organised sector decelerated to 0.60% during 1990-91 to 1997-98 as against 1.73% p.a. witnessed in the 7-year pre-reform period of 1983-84—1990- 91.

There was also a substantial slowdown in the employment growth rate of the unorganised sector to merely 1.1% during 1990-91 and 1997-98 as against employment growth rate of 2.41% witnessed during the 7-year pre-reform period.

4. Economic Reforms and its Impact on Labour:

(a) Person Days Lost:

The number of person days lost due to strikes and lockouts declined during the period 1991- 2000 compared to that in the period.

1981-1990. This can be treated as an index improvement of industrial relations in the post- reform period.

(b) Downsizing:

Although the government has not formally accepted an exit policy, by the scheme of voluntary retirement, the load of workers is being reduced, both in the public and private sectors. So workers are being pushed from the organised to the unorganised sector and from secure to insecure employment.

5. Increase in Productivity and Movements, Real Wage:

Although labour productivity had increased by 3.32% during 1987-88 and 1993-94, the real earning of workers increased at the annual average rate of 1%. In other words, the gains of increased labour productivity were not shared by the workers.

The basic problem with economic reforms is not to treat labour as an asset but as a mere instrument which can be disposed with when it is no longer useful. Thus economic reforms so far had an adverse effect on labour welfare, more so in view of the fact that there is no comprehensive social security system in India.

6. Neglect of Agriculture—The Main Drawback of Economic Reforms:

A major criticism of the process of economic reforms is the neglect of agriculture—the mainstay of livelihood of two-thirds of the population. Due to inadequate attention given to agriculture food grains production did not increase much. Even during 2004-05 and 2006-07, food grains production stagnated at around 2008-09 million tones. As a result foods prices rose sharply. This created inflation and, thus, was one of the causes of poverty.

The reform process has emphasised the growth of manufacturing and service sectors and thus neglected agriculture. As a result, agricultural growth has stagnated around 2% during the last decade. It was 2.1% during the Ninth Plan (1997-2002) and was estimated to be 2.3% during the Tenth Plan (2002-2007).

The structural weakness of the agricultural sector reflected in low level of investment, exhaustion of the yield potential of new high yield varieties of wheat and rice, an inadequate incentive system and post-harvest value addition all conjointly accounted for slow agriculture growth, or virtual stagnation since 2000-2001. Moreover, public sector investment in irrigation, flood control, water harvesting, rural infrastructure, reclamation of degraded lands, etc., also had a spread effect.

The neglect of agriculture casts a shadow on sustainability of agricultural growth unless there is a reorientation of priorities with much greater emphasis on agriculture and rural industrialisation. It is time the state, instead of withdrawing from investment in agriculture, irrigation and rural infrastructure, strengthened public sector investment in these areas.

7. Economic Reforms and Industrial Growth:

Economic reforms were mainly intended to remove the bottlenecks which acted as obstacles to industrial growth. The reform process dismantled the system of industrial licensing which was considered to be a main roadblock to the progress of India’s industrial economy, measured in terms of industrial growth and diversification.

In spite of this, India’s industrial sector took a back seat. Whereas, in the pre-reform period (1981-82 to 1990-91), the general index of industrial production recorded an annual average growth rate of 7.8%, the growth rate of industrial production slowed down to 6.7% during 1993-94 and 2004-05, which is generally identified as a period of wide-ranging reforms in the industrial sector.

The growth was much below the target. It failed even to equal the performance observed in the 1980s, not to speak of improving the performance, as a consequence of the reform process. The failure of the basic goods and capital goods sectors really put a question mark on the success of the reform process.

8. Performance of the Public Sector Enterprises:

The Central Public Sector Enterprises have shown an improved performance during the 10-year period of reform (1993-94 to 2003-04). In spite of this, the Government has undertaken disinvestments of these enterprises instead of improving their performance still farther through the reform process.

9. Economic Reforms and the Movements of WPI and CPI:

In the post-reform period (1993-94 to 2005-06) the movement of the CPI (IW) was slightly higher than the movement of WPI (IW). This indicates that retail inflation in the post-reform period was slightly higher than wholesale inflation. The weighted price index (base 1993-94 = 100) showed an annual average increase of 6.3% during 1993-94 and 2005-06.

10. Trends of Growth in Infrastructure:

In case of saleable steel and cement, the growth rates were higher in the post-reform period than in the pre-reform period for acceleration in the production of cement was largely the result of introduction of dual pricing in case of cement introduced in 1982 with progressive reduction in the percentage of controlled cement, to eventually freeing cement prices from state control. This led to massive increase in the production capacity and output of sugar.

Similarly, the gradual easing of steel price control introduced since 1983 led to rise in output. All these measures, taken in the pre-reform period, helped to create an environment to these industries to raise their production capacity and output without any bottlenecks.

However, other infrastructure industries—electricity, coal and petroleum—did not fare well during the reform period. Excessive dependence on the private sector did not yield the desired result.

11. India’s Foreign Trade and BOP:

During 1981-82 and 1987-88 India followed a restrictive import policy. During 1988-89 and 1990-91 the Government adopted a policy of export promotion. So, there was a shift of emphasis in trade policy in the second half of the 1980s. A very distressing aspect of this period is the steady decline in exports of net invisibles and the consequent fall in export earnings from invisibles.

Economic reforms went in for a rapid globalisation of the Indian economy by reducing and/ or abolishing quantitative restrictions and also reducing tariff barriers which hindered trade. The reform measures were mainly directed toward boosting exports as well as to facilitate developments imports (mainly capital and intermediate goods) as also imports of some basic raw materials which were so vital for increasing industrial production.

The post-reform period can be divided into three parts:

i. Period 1: 1991-92 to 1995-96:

During this period the annual average growth rate of exports was 11.8%, while imports increased at the rate of 9.3% p.a. As a result the current account deficit was restricted to $3,025 million.

ii. Period 2: 1996-97 to 2000-01:

During this period exports increased at an average rate of 6.8% per annum, while imports increased at the rate of 6.3%. This implies that export promotion could not become effective. Consequently, trade deficit as on average reached a record level of $15,156 million.

But a very encouraging effect of this period is the sharp increase in surplus from net invisibles to an average level of $10,667 million which neutralized the trade deficit to a large extent. Consequently, the current account deficit was restricted to $4,489 million.

iii. Period 3: 2001-02 to 2005-06:

During this period a big boost was given to export promotion and exports grew at an average annual rate of 18.4% p.a. As against this, the rate of growth of imports was of the order of 21.4% p.a. The most notable achievement of this period was the big surge in net invisibles which more than offset the trade deficit. The current account turned positive in 2001-02. The surplus, which was $3,400 million in 2001-02, increased to $14,083 million in 2003-04.

An Overall Evaluation of India’s External Account:

On balance it seems that India’s foreign trade position was quite satisfactory during the reform period. Exports have grown faster than imports in percentage terms. No doubt trade deficit has increased, but the massive increase in net invisibles has helped to reduce current account deficit. The emergence of a favourable current account balance during 2001-02 and 2003-04 is, no doubt, a major achievement of the post-reform period.

The situation has taken a turn in 2005-06, since imports increased faster than exports. Consequently, the trade deficit touched a record level of $51,554 million. No doubt net invisibles were positive to the extent of $40,492 million.

Yet they were not adequate as to wipe out the trade deficit. The net result was the emergence of a negative balance on current account to the tune of $10,612 million. The situation did not change much in 2006-07 and the trade deficit was likely to be $60,600 million.

Lessons to Learn:

No doubt, the Government took credit for a rise of exports, but was oblivious of the sharper rise in imports.

Three lessons can be learnt from the BOP situation:

i. Re-Thinking on Full Convertibility of the Rupee:

Policy-makers are giving a second thought to the full convertibility of the rupee after the East Asian crisis.

ii. Improving the Balance on Current Account:

There was a surplus in the current account during 2001-02 and 2003-04. This is, no doubt, an encouraging trend. However, there is need to strengthen this healthy development. The emergence of a negative current account balance in 2004-05 and 2005-06 has again resulted in an adverse situation and India needs caution in this regard.

iii. Reviewing Import Policy:

Finally, with an increase in oil prices and also with the revival of industry, imports are likely to increase. So India has to be vigilant in pursuing a very liberal import policy.

12. Reduction of Regional Disparities:

One of the declared objectives of India’s planning as also of industrial policy is to reduce regional disparities. However, the reform process initiated in 1991 has been emphasizing the use of the market forces, which naturally attract investment to regions which are more developed in terms of infrastructure—both economic and financial. However, it did not pay any attention to the question of regional imbalance.

The reform process helped the forward states much more than their backward counterparts and was responsible for widening regional disparities. More than two-thirds of investment proposals were concentrated in the forward states. A similar situation prevailed in terms of financial assistance disbursed by all-India financial institutions as well as SFCs.

In short, the reform process has favoured the forward states in terms of approval of investment proposals as well as financial assistance. Consequently, the already better-off states are in a position to accelerate their growth process further. In sharp contrast to this, backward states, being unfavourably treated, face a retardation of growth. This explains the growing disparities in terms of NSDP—both total and per capita.

The ongoing reforms with stress on stabilisation and deregulation policies as their prime instrument and a very significant role for the private sector seem to have aggravated the inter­state disparities.

Globalisation and Indian Agriculture:

Globalisation refers to the trend for people, firms & governments around the world to become increasingly dependent on and integrated with one another. This can be a source of tremendous opportunity, as new markets, workers, business partners, goods & services and jobs become available; but also of competitive threat, which may undermine economic activities that were available before globalisation.

The term globalisation was coined during the 1980s to characterize huge changes that were taking place in the international economy, notably the growth in international trade and inflows of capital around the world. Usually, the term is synonymous with international integration, the spread of free markets and policies of liberalisation and free trade.

Firms enjoying some natural protection and farmers (receiving subsidies) have been some of the main opponents of globalisation, along with advocates of free trade. Moreover all gov­ernments have not embraced globalisation warmly. It is against this backdrop that we study the effect of globalisation in Indian agriculture.

Effect of Globalisation: A Summary View:

In short, globalisation and economic reforms have had negative effects on Indian agriculture. The post-reform period of 1990s has witnessed a distinctive trend on the farm front. This gets reflected in the deceleration in agricultural growth as well as in rural employment growth with slow reduction in poverty in India. This can be explained in terms of unfavorable initial conditions, viz., failure to implement land reforms effectively, low rate of saving and infrastructure deficiency (both physical & social).

As Hanumantha Rao has commented, “The opening up of the economy & the significant reduction in protection to domestic industry did result in an improvement in the terms of trade for agriculture which led to a significant rise in private investment. But because of continued decline in real public investment in irrigation research and extension and other rural infrastructure owing to reform induced erosion of tax revenues and compression in public expenditures, agriculture could not derive full benefit from macroeconomic reforms and globalisation especially because, there was hardly and slack in the pre-reforms period”.

Policy Implications:

The major areas of concern in the post-reform period are the expansion of irrigated area through enhanced ‘public investment’, efficient management of available water resources and rural electricity through the involvement of actual users and regeneration of degraded land areas through direct participation of the actual tillers of the soil.

In the opinion of Hanumantha Rao, “Decline in public involvement, inefficiency in the management of available infrastructure and degradation of natural resources are attributable, in a significant measure, to the steep rise in subsidies on water supplied from public irrigation systems, electricity for pumping water and chemical fertilisers”.

It is high time steps were taken to reduce these subsidies progressively by targeting them to only small & marginal farmers who really deserve them. This will go a long way in stepping up productive investment in agriculture & preserving agricultural land.

Conclusion:

It is a fact that the reform process will not be able to achieve its socio-economic objectives because of excessive private participation in the economy and the private sector is solely guided by the objective of profit maximisation. No doubt the liberalisation process has reduced the role of public sector investment.

But it has failed to fill the vacuum created by the withdrawal of public sector investment in infrastructure, more so in the backward states. Obviously, this calls for a review of the reform process and taking corrective measures.

The three way fast lane of liberalisation, privatisation and globailisaion (LPG) failed to make a dent on the problem of unemployment. The whole reform process makes at least one thing clear—the market forces do not help the poor.

Four main drawbacks of the reform process are:

1. It increased disparities among states.

2. It displaced people having little, if any marketable skills.

3. It increased the incidence of poverty and inequality.

4. It failed to ensure human development whose key indicators are life expectancy, literacy rate, infant mortality rate, death rate and birth rate.

The true challenge before us is to combine the economies of growth with the economies of equity and social justice. The age-old problem of planning has been the conflict between growth and distributive justice.