Irreversibility of Economic Reforms in India

Economic reforms introduced in India since 1991 has already created a mixed reaction, among the cross section of people at different levels. After the completion of five years of economic reforms, the country has experienced a lot of changes in its policies and performances.

Although the country has attained considerable achievement in post-1991 period, particularly in respect of higher GDP growth rates, like in industrial growth, inflow of foreign capital, fall in the price level, rise in foreign exchange reserves etc. but at the same time, growing external debt, supremacy of multinational companies, loss of economic sovereignty, rise in the degree of corruptions etc. have become a cause of concern for a developing country like India.

Under the changing political scenario of the country, particularly after the formation of new United Front Government as per the verdict of people through general election, a pertinent question that arises at different levels is—“How far economic reforms in India is irreversible under the present context?”

Although it is quite premature to come to the conclusion about this pertinent question of non-reversibility of economic reforms right at this stage but in order to prepare a broad-based answer to this question, cross-section of ideas coming from different experts, parties and institution should be considered.

The country has been experiencing an apprehension about the fate of economic reforms in the context of change in political scenario after the 1996 General Election. One thing that must be remembered is that the fate of economic reforms in India should not be considered in isolation rather it must be considered in international perspective.

Economic reforms are being undertaken at such a pace that they are sweeping the entire Eastern Europe and a broad and wide spectrum of developing countries which include India to Vietnam and from Peru to Morocco and even in China and Cuba.

From the discussions at the various levels, it can be safely argued that economic reforms in India are irreversible at this stage. But with the formation of new UPA Government at the Centre, with different political ideology, the thrust and content of economic reforms will change considerably.

Dr. Manmohan Singh, the main architect of economic reforms in India, argued recently that a broad consensus had emerged among all political parties in the country over the need for continuing economic reforms which were responsible for putting the economy back on rail. However, the full benefits of the new policy would take some time to percolate down to grassroots level.

Rejecting the argument that liberalisation amounted to compromise on country’s economic sovereignty, Mr. Singh pointed out that India has made a phenomenal turn-around now with inflation rates being kept below five per cent, industrial growth rate of 12 per cent, surplus food stocks, rising foreign exchange reserves and agricultural production receiving a major boost.

With the new world system in order, competition in production and services will increase. Competition and entry of domestic and foreign private capital would necessitate structural adjustment and massive redeployment of labour. The new government at the Centre will face formidable economic challenges with limited options.

Attaining a higher rates of economic growth is a common objective and this is possible only if the economic reforms are taken forward. There appears to be a broad consensus on liberalised economy, even though the emphasis on particular parameters may differ. There are several unfinished agenda of reforms.

The problem that the new government will face relate to the area of resource mobilisation, liquidity crunch, high interest rates, anomalies in company and labour laws, is x8fsMiiting to foreign investment, especially in infrastructure sector and policy of disinvestment and privatisation of public sector undertakings.

Control of inflation particularly in specific commodities used by common man, stability of the rupee, bridging the trade deficit and tackling wide circulation of black money which is creating distortions in the economy will also have to be dealt with. Broad-basing the tax structure and issues pertaining to tax rates will also have to be addressed.

A major task lying ahead is in ensuring that the benefits of the reforms pass on the masses in terms of poverty reduction, employment generation and improvement in the standard of living. Issue pertaining to the country, joining the regional economic grouping will need to be decided.

Sufficient stress must be laid on attaining self reliance in the field of production and technology. However, there is a general feeling that the achievements of economy so far are falling short of targets and expectations of the reforms to date.

The factors which are mostly responsible for such shortfall include:

(a) Slowing down of the reform process,

(b) Many significant omissions or inactions and

(c) The partial nature of reforms with several neglected areas.

However, there is complete unanimity on the non-reversibility of economic reform, although the need for proper checks and balances in the strategy is widely recognised. Political changes and economic reforms should not he mixed up beyond certain point.

Even the leftist are of the view that there could never be a consensus on economic reforms in a country like India where a range of political parties existed from extreme right to extreme left and the basis of all these was economic. However under the present circumstances no party could afford to take India back to pre-1991 era.

Asian Development Bank (ADB) in its Annual Asian Development Outlook Report (April 1996), argued that India must carry out further reforms in public sector and in the labour market and increase investments in infrastructure if it is to sustain its high rate of growth over a long period.

Predicting a strong economic growth for India in 1996 and 1997, the Report observed that India had recorded a high rate of economic growth in 1995-96 with its GDP rising by 6.3 per cent. Lauding the 1991 economic reforms which led to faster economic growth, the report argued that more rapid progress was needed in human resources development.

The report observed, “Inadequate progress has so far been made in public sector and labour-market reforms, while poverty alleviation and human resource development remain important task.”

The report observed, “The vigour of growth now being displayed by the industry sector in India is related to the various policy initiatives affecting the sector taken by Government since 1991……………………….These include the deregulation and licensing of industries, rationalisation and reduction of import tariffs, the removal of import licensing and reduction of corporate taxes.”

The bank report further observed that despite the high growth, the Indian Government faced a number of difficult issues, including fiscal deficit, poor infrastructure and poor implementation of Central policies by the states. The fiscal deficit, although lowered over the past two years, was still too high and needed to be reduced further. The country’s infrastructures needed to be modernized and expanded.

However, to do so would place a heavy pressure on public finances unless an attractive climate for private investment in this area could be established. Besides, the State Government had so far made little progress in fiscal adjustments to bring their expenditure in line with available revenue.

Unless the reforms planned by the State Governments are “implemented expeditiously and include revenue-enhancing and expenditure reducing measures, there is a risk that fiscal adjustments by the Centre could be undermined by the expansionary policies on the part of the states.”

A premier research organisation, the Birla Economic Research Foundation (BERF) in one of its recent study entitled “Industrial Policy in India” (December, 1995) had observed that liberalisation and industrial de- licensing, which was introduced in July 1991 with great fanfare has come to a virtual standstill.

Even in some areas there have been moves to apply the reverse gear and the government has felt obliged to enter the sphere of competitive populism with the slate something which it used to smear at earlier. The policy makers are now faced with dilemma: whether in deference to socio-political pressures, the process of economic reforms should be slowed down or halted.

According to the BERF study, the industry finds that despite the policy of deregulation and re-licensing, clearances have still to be obtained from 13 different agencies. The study recommends further pruning of the list of industries still requiring an industrial license.

It argued that industries like coal mining, coal washers, sugar, chemicals and fertilizers, drugs and pharmaceuticals, electronics, mineral oil-prospecting, should be de- licensed because they need huge additional investment and new units should be allowed to be set up and expand as needed by the forces of demand and supply.

The efficiency of the units would improve if they are exposed to competition first within the country itself and later on, internationally as well.

The BERF study further says that it is also conceded that in the larger national interest some regulations would have to be continued but these can be reduced to minimum and confined to issues like land use, pollution control and environment protection,, for which separate laws are already existing.

The study further recommends that while foreign direct investment should be generally welcome, it cautions that our low-tech labour intensive industries which meet the daily needs of common man and provide large-scale employment opportunities, should not be suddenly exposed to unequal competition by foreign corporations and multinationals.

They should be given a minimum degree of protection for a reasonable period so that they are not wiped out and cause avoidable unemployment and social unrest. This is no doubt a very serious issue.

Thus while giving approval to the entry of foreign corporations and multinationals in its liberalisation regime, the government should consider the interest of these indigenous low-tech labour-intensive industries of the country.

The BERF study further adds that some provisions, if necessary, even through a statute, should also be introduced in the policy in regard to the entry of foreign capital and knowhow in sophisticated area, to the effect that they would share their research and development programme with corresponding Indian firms or units.

Indian units should also be enabled to set aside a percentage of their profits for setting up the R&D facilities.

The foreign direct investment should, however, be encouraged in industries and services in the infrastructure sector. For, they are not only vital hut essential to enable the country to expand its exports and complete successfully in the international markets.

The BERF study further felt that different investment and asset limits for small scale and ancillary industries cause avoidable confusion as well as loss of revenue to the government. Therefore the limit should be raised to a realistic level of Rs 5 crore, so that these industries are able to employ better techniques of production, quality control, distribution and sales.

Thus the BERF study made an in-depth analysis on the irreversibility of economic reforms in India under the present context and recommended to broaden the scope of economic reforms in the country. Thus the BERF is a pointer to the course directions to be adopted by the new Government at the Centre towards broadening the scope of economic reforms in the country.

The liberalisation policies adopted by the Government in the post-1991 period has also been criticised by the experts on different angles. Recently, a group of well-known Indian economists in press conference held at New Delhi on 11th April 1996, criticised the Government’s “unfocussed and reckless liberalisation” policies and argued that selective state intervention was necessary to get a better deal for the poor.

They also argued that the post-1991 policies of economic reforms have considerably reduced the degree of freedom available to the new government to tackle the fundamental problems.

The prominent among those economists who addressed the press conference included Dr. Arun Ghosh, Dr. Prabhat Patnaik, Dr. Deepak Nayar, Dr. Ashok Mitra, Dr. C.P. Chandrasekhar. Dr. I.S. Gulati, Dr. Abhijit Sen and Mr. C.T. Kurien. These economists called for a stricter import regime, lesser role for foreign investment, higher rates of direct taxation and a much more bolder programme for the poor.