Time to build a valuable economy
This July marks the thirtieth anniversary of the economic reforms launched by the Narasimha Rao government in 1991. Evaluations, mainly celebratory, have appeared in the media. A dispassionate assessment would be appropriate as the economic policy changes of 1991 were the first major change in the policy regime since the nineteen fifties. The hallmarks of the reforms were lessening of government control and opening the economy to international trade and capital flows.
As the timing of the economic reforms was determined by a balance of payments crisis, it would be natural to assess the reforms in terms of their consequence for this aspect of the economy. In mid-1991 India had foreign exchange reserves that would barely finance three weeks’ imports. In mid-2021 the import cover is estimated at well over 12 months. Furthermore, in the three decades since 1991 there has not been a balance of payments crisis. On the other hand, in the preceding three there had been several. This marks a significant reversal. A disappointing feature, though, is that the foreign exchange reserves have accumulated as a result of financial inflows rather than export surpluses, as was expected. It is now apparent that competitiveness cannot be established by simply reducing government control over the private sector. The history of globally successful economies shows that publicly provided infrastructure, private R&D and a facilitating government machinery are crucial for a country’s export competitiveness. Most of these ingredients have been present in the case of India’s software services-exporters but are not equally available for her exporters of goods. The occasions since 1991 when there has been a trade surplus have been rare. The balance of payments have been shored up by portfolio capital. Such capital can flow out just as easily, leaving reserves to deplete rapidly. The only guarantee against balance of payments stress is a consistently strong export performance. The reforms are yet to take us there.
The reforms were also meant to raise the rate of growth of the Indian economy. This they succeeded in doing. Though the acceleration took some time coming, the rate of growth of the Indian economy has been higher after 2001. However, it started slowing progressively after the demonetisation of 2016, dropping to less than pre-reform levels even before we were struck by the pandemic in 2020. Since then output has actually contracted, and there is no certainty on how growth will play out in the immediate future. Much depends upon whether there will be a third wave of the epidemic, necessitating the shutting down of economic activity once again. Returning to the question of long-term growth, it needs to be pointed out that its acceleration after the reforms of 1991 was not the first time it has happened. Not only had this occurred in the 1950s and then in the 1970s but also the degree of acceleration had been greater then.
In 1991 we were, in effect, dealing with a cash-flow problem, albeit in foreign exchange. Now COVID-19 has brought home to us something larger, the absence from the economy of certain crucial services and the underlying assets that enable their production. We have realised how inadequate is our health system, as we watched helplessly the scramble for oxygen, the overflowing hospitals and the overburdened crematoria. But our rickety healthcare infrastructure is merely a metaphor for the absent eco-system for living in India. Sanitation, transportation, urban governance and the producer services, from power supply to waste management, needed to undertake economic activity, are all inadequately available. This deficit cannot be bridged by legislating changes to the policy regime as was done in 1991. The necessary infrastructure would have to be first created and then managed to supply the stream of services expected. We have learned the hard way that the value of an economy depends on the extent to which it serves our needs. The current crisis of lives and livelihood in India is the time to start building a valuable one.