30 Years of Economic Liberalization in India
The inspiration to write this article came from a YouTube video that popped up in my feed recently. It was a debate on one of our News channels back in 2016 on the eve of 25 years of Economic Liberalization. The show had invited a distinguished panel of economists, policy makers and politicians which also included a couple of members from the Communist party. Not surprisingly, they had their objections to the liberalization process and how it wasn’t the right thing to do given its consequences on society.
That got me wondering, how can there be any debate on whether we should have carried out those reforms given the empirical evidence we have over the last 30 years? Now I must admit without any hesitation that the liberalization process hasn’t been perfect. It has had its problems, but if I were to give a categorical answer to the question “Should we have liberalized the economy when we did?”, the answer is a clear and simple “Yes”. There is absolutely no ambiguity in my mind. I only wish we had done it earlier.
Growth and Success
Just to highlight some numbers, back in 1991, our GDP was approximately $270 Billion in nominal terms, which increased more than 10 fold to reach $2.8 Trillion by 2019. Now, that's an average of over 7% year on year. Compare this with the paltry 3.5% average growth rate India had between 1947–91 under License Raj. People might argue that the average growth rate which was 2.9% in 1970’s improved to 5.6% in 1980’s. Therefore, we should not ignore the economic growth that happened in 1980’s. However, this needs to be tempered with the fact that the increased growth rate in the 1980’s was also as a consequence of smaller measures of economic liberalization(India in the 1980s and 1990s, Arvind Panagariya). What is striking is that between 1947–91, our economy grew very slowly even though the base value was small, however after liberalization we achieved high growth rates even with an ever increasing base.
Our achievements post Liberalization have been substantial, Contrary to popular belief that cheap imports would kill Indian Industry, we have seen the contrary take shape in India. Indian Automotive, Pharma , IT Industry have blossomed and become major exporters for the country earning valuable foreign exchange. Uncompetitive firms have exited the market, but that void has been filled by more efficient firms. Probably the sectors where the delivery of products and services still remain poor are the ones which are still protected and run by the government like the Defense manufacturing, Railways etc. Also, liberalization has made India a more level playing field for Entrepreneurs. No longer do individuals need to run after the influential to get a permit to start a business, as was the case before 1991 and also one of the biggest sources of corruption. Further steps to liberalize the economy will only improve the ease of doing business in India with the expectation that we do move towards a more efficient and wealth generating economy.
Social Indicators
Beyond mere GDP numbers , another metric which we need to consider is fertility rates and population growth. Back in 1991, we had a population of 838 million (1991 census of India) with the fertility rate at close to 4 births per woman with the decadal growth rate of the population during 1971–81 and 1981–91 being 24.7% & 23.9% respectively. Post liberalization, incomes increased, female education improved, female marriages got delayed with increasing economic activity and also better access to contraceptives. Thus, we saw the decadal population growth rate during 1991–2001 dropped to 21.5% and further declined to 17.7% during 2001–2011. Today fertility rates have fallen to 2.2 births per woman which is a major achievement in our struggle to stabilize our population as we are not far from the world bank prescribed replacement fertility rate of 2.1 births per woman. Having said that, we must acknowledge that fertility rates were falling in India even before 1991 but Liberalization gave an impetus to falling fertility rates and we were able to achieve the present fertility rates much faster than expected not withstanding that female participation in the labor force has actually declined over the last 2 decades, which might seem very counterintuitive but that deserves another article on its own.
Putting population and GDP together to calculate our GDP per capita, we see that it was a mere $375 in 1991, but it increased to over $2000 by 2019, thus India transitioned from a low income country to a middle income country crossing the threshold of $1045 set by the world bank to define low income economies, Only caveat here is that GDP per capita has declined during this pandemic hit year. Now, had we not liberalized, India would have remained a low growth economy with our GDP in all probability growing at 3.5–4% with a much higher population to feed as highlighted above. Again, as I reiterate that liberalization hasn’t been perfect and probably the India growth story has also hit a road block for multiple reasons with slowing of the economy, we have also seen a retrogression to pre 1991 days with increasing tariffs and trade protectionism. I encourage people to listen to Rathin Roy’s address at Manthan 2020, who has painted a rather gloomy picture for the Indian economy . It just brings another perspective to where we were in 1991, where we are today and what needs to be done. However, the key is more Liberalization and Reform.
Pre 1991- A Utopia which wasn’t
There is also a problem of perspective, since most Indians today were born in a post liberalized India including myself. We probably do not know what India was like before 1991. This lack of perspective has often led to a certain degree of myth building that pre 1991 India was somehow an egalitarian Utopia.
Was it really?
Referencing Rathin Roy again, as he beautifully put it, India before 1991 was a state where everything was Rationed. There were strict controls on everything that was produced from Food, Cars, Railway tickets, Telephone connections etc. Everything was controlled by the state and a few oligarchies. There was even control on Foreign Exchange, thus one could not even import. We lived in a closed economy with no competition from the world markets. Thus, there was no incentive for the producers to improve. Hence we were left with products and services which were of inferior quality, expensive and also were never delivered on time. That would explain the years one had to wait to get even a telephone connection or gas cylinder in this country.
Another argument often raised by critics of the economic reforms is that India before 1991 was a more equitable society and the gap between the rich and poor was very little and that opening up of the economy led to massive income inequality with widening of this gap. This was forwarded in Chancel and Picketty’s paper Indian income inequality 1922–2015: From British raj to Billionaire Raj.
However, this was rightly countered in another paper by Swaminathan Aiyar. Where he writes
“The poverty ratio did not fall at all between 1947 and 1977, while the population almost doubled. So, the absolute number of poor almost doubled. By contrast, fast growth induced by economic liberalization raised 138 million people above the poverty line between 2004 and 2011”
So then, the important question is, was India before 1991 an egalitarian and equitable society?
Yes, in the sense that everyone was worse off and poor.
It is true that since liberalization, there has been increasing income inequality, the rich have indeed gotten richer. However, the corollary to that “ poor have gotten poorer” is not exactly true as proved by Swaminathan’s observation. So while the rich were getting richer, the poor were also able to pull themselves out of poverty. It further proves what Milton Friedman had said many years ago:-
“ there has never in history been a more effective machine for eliminating poverty than the free enterprise system and free market”
Conclusion
Today, when people point to the failures of Economic Liberalization, the reason is again that we did not liberalize enough. We did not bring more fundamental changes in our labor and land laws. We did not reform agriculture for the longest time due to the political costs involved. Our banking system also needs reforms so that political interference in banking is reduced and credit is made available to businesses to grow. Another recent trend is increasing import duties to promote Atmanirbharta or Self reliance, which also meant that we walked out of RCEP. Now, this is clearly a retrogression to the License Permit Raj and something on which I have previously written another article. I seriously believe that we need to reverse this trend of increasing import duties and go back to opening ourselves to world markets. The argument promulgated for increasing import duties and walking out of RCEP was this fear of being flooded by cheap imports from China. But, the truth remains the same as it did in 1991, how long can we run away from the world markets and more importantly the Chinese?
We can’t run away from the Chinese while they sit on our borders and we need to face up to them militarily, likewise we cannot run away from them economically either. We need to bring in more reforms and improve ourselves to become more competitive to take on world markets.
Which finally brings me to my last point, The single most important thing which will ensure that we continue on our growth trajectory is “Political Will”. Nothing of what has been mentioned in this article is new or a revelation, these are things well known and understood by far more accomplished students of economics. Yet reforms always get stalled as forces that want us to maintain the status quo will lever allow change. Though, history does give us evidence of political leaders taking on the opposition to usher in reforms. 1991 was a watershed in those regards, where despite the opposition from Political Parties, Indian Industry, Bureaucracy and others we still went ahead with economic reforms. The Civil Nuclear Deal was another example of “Political Will” on part of the leadership to push through reforms even to the point of letting go of their allies like the CPI(M) who were bitterly opposed to it. The present government has also tried to reform agriculture with their new farm laws, however the process has been completely crippled with massive protests and I do ask myself , Will this deter the government from pushing through further reforms? Will we become more inward looking ? Only time will tell.
P.S: I’m not an Economist, however I have studied Economics and International Trade theory during my B-school years and continue to read about economics.
