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India’s 1991 liberalisation leap and lessons for today

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July 01, 2021

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?

  • Geopolitics is forcing major countries to reduce dependence on China.
  • 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

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