'Beyond Macroeconomic Reforms', 7 June, 2004.

In July 1991 we witnessed the first major shift in the economic policy regime in India in over four decades. Actually the significant shift had been with regard to the trade-policy regime, for, though the MRTP was scrapped and compulsory industrial licencing repealed in the nineties, some incipient liberalisation of the domestic policy regime had been initiated in the eighties itself. Rodrik and Subramanian describe the last as Mrs. Gandhi’s pro-business tilt, deftly distinguishing it from the "pro-competition" beloved of true-blue reformer. On the other hand, trade protection – measured by import duty as a share of the value of imports – actually increased in the 1980s, a feature that proves troublesome to economic historians devoted to claiming the successes of the period for trade liberalisation. Be that as it may, the trade-policy shift of the nineteen nineties was radical indeed. Not only was it reversing the general policy of closedness to the rest of the world followed for close to a half-century but also it had come on the heels of a further tightening of the screw, as it were, in the 1980s. The radical nature of the shift in trade policy in India may be understood from the data that the average nominal tariff was lowered from its three-digit level in the late 80s to the lower end of the two-digit range within about five years. The process of trade liberalisation is now complete, with quantitative restrictions having been scrapped as part of India’s obligations to the WTO.

At the time of its initiation the liberalisation was received with much protest across the Indian political spectrum, notably from the two extremities. It appears that while the right protested the intrusion of the foreigner the left was protesting the expanding reach of international capital, but we would never fathom the difference really! From a purely economic point of view, however, the policy is to be judged in terms of its consequences for the economy, and these are easily evaluated. Quite simply, India’s balance of payments is by now on a sounder footing and every indicator of the external sector improved. In particular, external indebtedness as a share of national income is lower, and the loud predictions vociferously made in 1991of an impending surge of imports relative to exports have been belied. Thus it is by now apparent that a great deal of the response to the liberalisation has been purely oppositional in intent, not amounting to a critique. A critique can be provided though and is indeed much needed today.

A critique would start by recognising that apart from the delicencing of capacity much of what has occurred in India since 1991 may be termed macroeconomic reform. Thus tariffs have been lowered and, though relatively recently, the interest rate has been reduced; QRs have vanished; and private entry has been allowed in insurance, banking and telecom. While services of many of the central public sector units have improved wherever the private sector has been allowed entry, the industrial growth rate does not yet show a break from its longer-term trend. This needs to be digested first by all those who speak of raising the rate of growth of the economy to 8 or 10 percent - or whatever rate takes their fancy – through more reforms. Among this section is the current Finance Minister who in his meeting with representatives of the stock market in Mumbai said precisely this. Interestingly, it underlies an agreement in objectives and instruments across governments even when there is a change in them. For over a decade now the discourse on reforms in India has centred on macroeconomic reforms. However, these macroeconomic reforms have by now more or less run their course. In principle, such reforms serve to stabilise the economy, and in India have succeeded remarkably in bringing the balance of payments and the inflation rate under control by now. But much remains to be done elsewhere in the economy.

So what lie beyond the exclusively macroeconomic reforms that have been pursued since 1991? While it would be tempting to refer to this area of the economy as ‘microeconomic that would not be a sufficient description of what we are after. More substantially, the counterpart to the macroeconomic sphere is the terrain of production. This attractive term due to Ronald Coase is self-explanatory. However, as may be expected of a died-in-the-wool Chicago man, Coase restricted it to mean economic institutions, especially the market-invigourating assignment of property rights. We on our part need not be shackled by any such ideological purity, though, while addressing this hugely important aspect. We may make a start by turning directly to the myriad constraints faced by entrepreneurs in setting up and sustaining profitable production in this country. Till then an 8 percent growth rate is just a good idea. Beware of a ‘dream budget’ bearing gifts!