1991–2021: What India gained & what we lost in the last three decades
Former Union Finance Secretary Arvind Mayaram reflects on the last thirty years since liberalisation and questions why the economy is still struggling and why the Government is looking so helpless
Former Prime Minister Manmohan Singh, while reflecting on his path breaking 1991 Budget resulting in a paradigm shift in governance, recently warned that “It is not a time to rejoice and exult but to introspect and ponder. Our priorities as a nation need to be recalibrated to foremost ensure a healthy and dignified life for every single Indian.”
Indeed, the caution is timely when the country is going through one of the worst crises it has had to face since independence. Covid-19 has not only ruined lives of a very large number of Indians, but has also devastated the economy with millions of jobs destroyed and almost 200 million people falling back into poverty, a regression the country would find difficult to reverse for many years to come. Therefore, it is imperative that we look back at what we had dreamt of achieving and where have we gone wrong.
From a state-controlled economy struggling to negotiate the regulatory maze and grow in a control driven environment, 1991 saw a paradigm shift in the philosophy of governance with liberalisation and unshackling of the private sector at the core of it. Even though parties with diverse ideological hues have governed since 1991, virtually every government has pursued this path. There has been a remarkable national consensus on the broad principles of liberalisation.
Unfortunately, a body of evidence is now emerging to indicate that in recent years, the government is steadily moving back towards a controlled economy. There is also a clear sign of politics trumping the economy following a series of decisions aimed at pleasing the constituency of the ruling dispensation that have wreaked economic havoc. Demonetisation is clearly one such decision.
With liberalisation in 1991, the private sector became increasingly market oriented. Whereas a class of rich businessmen emerged and a small but vocal middle class grew in urban areas, economic inequality also widened. This was addressed by the UPA-I in 2005, when the government took the path breaking decision to enact the National Rural Employment Guarantee Act (MGNREGA) which entitled every household in the rural areas 100 days of work to be provided by the government on demand.
This single scheme not only ensured minimum assured income to the rural households but by a stroke of the pen changed the wage negotiating power of the poor vis a vis the rich farmers, real estate developers etc. This resulted in a significant reduction in poverty in India. Even though Prime Minister Narendra Modi once described MGNREGA as ‘the living monument of Congress-led UPA’s failures’, the present government has had to fall back to the same scheme to provide relief to the poor including the millions of migrant workers who went back to their villages after the first lockdown.
However, since 2014, with change in the governance philosophy, widening inequality can be seen not only in households’ income or consumption, but also between urban and rural areas, and between developing and developed states. In the last two years of the pandemic, the digital divide and over-dependence on the private sector (through health insurance schemes like Ayushman Bharat) have sharpened the disparities in terms of access to health and education and several other human- development indicators.
The situation is equally alarming on employment. Latest data show an absolute decline in employment and an unprecedented rise in unemployment rates. According to CMIE, unemployment rate in July 2021 was 7.02% (8.32% in the urban and 6.43% in the rural areas). There are studies that show that for the first time, there is a decline in real consumption due to significant demand destruction. Why is the Indian economy looking more and more in difficulty and struggling? Due to the pandemic, The Economist has termed India as “the sick man of Asia”.
Does the government have no policy instruments to deal with this situation? It would be wise to recall that a determined government can take measures that can bring the economy out of its downward spiral. By 2012, with inflation going double digit and fiscal deficit mounting, the economy was in the grip of severe recessionary pressures. In 2013, India faced the ‘rupee tantrum’ with the INR falling sharply to a then record low of more than Rs 68 to a dollar. With 2G, coal and other crises, and the Parliament up in arms, the government was in a serious crisis.
From 2012-14, Government of India took several unconventional and far- reaching policy decisions which resulted in the quick recovery of the economy over the next two years. Apart from clearing bottlenecks for large infrastructure projects, the FDI policy was liberalised. Capital market instruments like InVITs and REITS, which are now the flavour of the day with both the public and the private sector, were introduced. Price deregulation of diesel was put into motion to reduce subsidies, which had a major impact on fiscal deficit.
At the same time fiscal consolidation roadmap was laid down as per the recommendation of the Kelkar Committee report. Through the FCNR (B) bonds and other measures, confidence in the Rupee was restored. The results were dramatic. The GDP growth rate went up to 6.9% in 2013-14 as against 5.1% in the previous year. Economic growth rate in 2014-15 was 7.4%, built on the foundation laid over the previous two years.
Dealing with the crisis through a paradigm shift in policy framework, as in 1991, or through a very well-coordinated positive shock through policy actions, as in 2012-14, requires clear thinking and the courage to take bold decisions. After 30 years of the 1991, country is slipping back into an economic crisis and requires strong but deft handling. Why is the government looking increasingly more helpless in the face of the crisis?
(The author is former finance secretary, Government of India. Views are personal)