By Shivanand Pandit
Victor Hugo said that no power on earth can stop an idea whose time has come. Thirty years ago, in 1991, then Indian Finance Minister Dr Manmohan Singh introduced the Reform Bill and quoted Hugo in Parliament. This process helped India start a new economic journey. The 30th anniversary of the 1991 reforms deserves to be revisited. He dismantled a dysfunctional power structure, which hampered the private sector and left the economy devoid of trade and investment.
One of the main objectives of the government then headed by PV Narasimha Rao was to launch a strong trade liberalization policy. Less than a month after his training, Dr Singh announced that the government had initiated changes in the export-import policy, with the intention of reducing import licenses, vigorously promoting exports and reducing ideal of imports when it first presented its budget on July 24, 1991. laid the groundwork for India’s trade and investment liberalization plan.
Confirming the government’s plan to adopt an open-door strategy, he said the time had come to gradually expose Indian industry to foreign competition.
Three decades ago India was under enormous pressure from double-digit inflation. To make matters worse, the gross budget deficit exceeded 7.5% of GDP, domestic debt was around 54% of GDP, and foreign exchange reserves were barely sufficient to cover around 15 days of import bills. Thus, there was no other option for the Minister of Finance than to embark on important reforms that were long overdue. However, as is always the case in India, not everyone was sure of the success of the reforms and did not welcome the change, which led to acute political conflict. The reforms were rejected by both the left and the right. The left was afraid that this would harm the poor and lead to unnecessary imports. The right was afraid because foreign investors would take control of the economy.
In fact, both concerns were unwarranted. Although the results of the reforms were gradual and the benefits delayed, during the first decade of the 21st century India began to be seen as one of the fastest growing markets. Liberalization began with a boost of devaluation and was followed by strategies called LPG (Liberalization, Privatization and Globalization) reforms. In 2021, India’s GDP grew to $ 2.78 trillion from $ 512.92 billion in 1991. In addition, the average annual growth rate of GDP is about 6.25% against 4.18 for previous years.
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The government of India has started the journey of trade liberalization by drastically reducing tariffs. India’s simple average import tariffs fell from around 82 percent in 1990 to 56 percent in 1992. Its trade-weighted tariffs fell from nearly 50 percent to 28 percent. The Tax Reform Committee, controlled by Raja Chelliah and founded in 1991 to design a work plan to reduce import tariffs, suggested that trade-weighted import tariffs should be reduced to 25 percent of by 1995-96, up from nearly 50 percent in 1990. met the World Bank target. Remarkably, the government moved away from this target, reducing average trade-weighted tariffs to 23.6 percent in 1996, making a simple tariff average of 38.7 percent.
India’s journey to trade liberalization was never a pleasure journey, as tariffs could not be reduced for many vital manufacturing industries, such as the automobile and, of course, the ‘Agriculture. However, the United Front government made an important decision to reduce tariffs by signing the World Trade Organization’s Information Technology Agreement and agreeing to remove tariffs on a variety of electronic products from of the turn of the millennium. In addition, post-reform development rates have been less unpredictable than in previous years due to an upsurge in the other services segment relative to the unreliable agricultural sector. The coefficient of variation of annual GDP growth rates fell from 80% in the period 1961-1990 to 30% in 1991-2020. In addition, inflation and fiscal deficits have also turned promising. Average annual inflation rates in the post-reform period were considerably below around 5% and the gross budget deficit below 4.80% of GDP.
The reforms have also had a notable influence on foreign trade. India’s trade openness increased from 13% in 1990-91 to 42% in 2020. Forced by the devaluation of the rupee in 1991 and further depreciation in subsequent years, exports fell from 17.96 billion dollars in 1990 to 324.43 billion dollars in 2019. Reduction in unnecessary regulations and the removal of “license raj” have increased foreign direct investment (FDI). Net FDI inflows increased from $ 236.69 million in 1991 to $ 50.61 billion in 2020. Many foreign players have entered India and domestic players have benefited from vigorous competition in the market. In addition, there has been substantial progress in foreign exchange reserves, which are now sufficient to protect 15-month imports.
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The liberalization movement was not without the risk of external upheavals. In 1997, India had to face the first challenge of its neighbors in East Asia. Later, the world economy was hit by the dot-com collapse and the third challenge came in the form of the international financial crisis in 2008. Thanks to sound economic strategies and systematic financial markets, the economy Indian managed to fight back and recover from all these disasters quickly. It is important to note that the reforms have significantly influenced the socio-economic structure of India. From about 45 percent of the population below the national poverty line in 1994, rates have declined to about 7 percent in 2021. Literacy rates, gross enrollment rate and life expectancy, etc. . have also improved considerably. Nonetheless, the main blame about the reforms has been that it widened the gap between the rich and the poor. According to World Bank estimates in the Gini Index, the measure of income inequality has worsened from 31.7 in 1993 to 35.7 in 2011. The heterogeneity of our population is one of the main causes of the increase in inequalities, which leads to adjustment problems of the reform process.
After pushing for trade liberalization three decades ago, India still remains a reluctant liberal. The main reason is that Indian business units have shown a low level of eagerness to compete in the world market. In view of this scenario, the government must act urgently to prevent future disasters. While the pandemic was a mega setback, the economy was already showing signs of development failure ahead of Covid-19. This justifies the involvement of the ruling party to tackle the difficulties of unemployment, poverty and serious social problems. The pandemic has also raised concerns about the current health infrastructure and the future of education. The government needs to invest more in these segments. It’s time to do some soul-searching and reflect.
The road ahead is more frightening than during the economic crisis of 1991 and the government should readjust its primacies to ensure a healthy life for all Indians. Due to the deadly virus, many key social sectors, such as health and education, have fallen behind and have not kept up with economic development. The process of economic liberalization in 1991 was sparked by an economic catastrophe that challenged our nation. It was not limited to crisis management exclusively, and the structure of the reforms was built on the will to flourish, confidence in our abilities, and confidence to relinquish government control of the economy. Current and future governments should understand this.
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Although Dr Singh argued for the need to increase the efficiency and global attractiveness of industrial manufacturing by domestic firms, successive governments have not provided this wholehearted support which was very fundamental to achieving the goals. Under Prime Minister Singh, an attempt was made to ameliorate the gloomy state of India’s manufacturing sector. However, in the period since then, the consolidation of the manufacturing segment’s strengths has not achieved the expected booster dose.
The 1991 reforms helped the economy emerge from a dangerous crisis and then flourish. The time has come to configure a reform agenda that will not only bring GDP back to satisfactory levels, but will also ensure higher rates of growth than it had when it entered the pandemic. Three decades later, as a nation, we must remember Robert Frost’s poem: “I have promises to keep, And miles to go before I sleep ……”
—The Writer is a financial and tax specialist, author and speaker based in Margao, Goa