It has become fashionable these days to evaluate the performance of governments and RBI Governors over short time-spans. This, though interesting, may not be logical, but has nonetheless become an acceptable habit. Evaluating economic reforms, however, requires a longer time-span and this is where a retrospective on this package—which started a quarter century ago—is pertinent.
Two points should be kept in mind when we speak of economic reforms. The first is that there has been a continuity over the years, notwithstanding the government in power. While it is interesting, if not sensational, to typecast certain parties as being for or against reforms, ex post it has been proved that all governments have worked in the same direction. The pace of change could have differed depending upon the circumstances. Also, the law of diminishing returns sets in after the initial outburst. This makes it possible to have only incremental changes subsequently, as the economies of scale are exhausted and the resulting contradictions are resolved.
The second point, which may not be familiar to those who became cognisant of the economic surrounding post-1991, is that this entire package was, in a way, not voluntary, but enforced by the IMF when the nation was close to bankruptcy and required resuscitation. Such conditions being imposed by the IMF were common; ironically, these have been criticised of late by economists such as Joseph Stiglitz and Paul Krugman for being one-sided which worked against these nations.
Interestingly, various members of different governments have contended that these ideas were already on paper and were on the verge of implementation. There could be some merit here, as while the reforms package were comprehensive in 1991, we had witnessed several measures such as delicensing, broad-banding, FDI enhancement and trade liberalisation in limited doses in the 1980s. The post-1991 phase accelerated these measures in more areas.
Economic reforms must be interpreted more in the terms of changing the environment for enhancing economic activity and removing impediments that were offshoots of a different ideology pursued prior to the period. While it is tempting to juxtapose data in the ‘before’ and ‘after’ periods, the linkages could be due to serendipity, as there are cyclical movements in economic variables due to a plethora of factors—both domestic and global—that affect them. Hence, just like it cannot be concluded that industrial reforms have failed, given three low-growth numbers leading to FY16, we cannot exult in saying that FDI has moved from $5 billion to $50 billion due to reforms; global liquidity had played a more important part. Thus, evaluating reforms depends largely on how one looks at them subjectively.
A different way would be to look more at the environment created in this era. One, the banking sector has witnessed a major transformation in the last 25 years and the foresight shown by the Narasimham report is remarkable. Cleaning up the banking system, changing accounting systems, making banks cognisant of asset quality and adhering to global best norms on capital would be the major innovations that came about. Add to this the freeing of the banking sector from restraints, permitting more banks to operate and making the system resilient through calibrated reforms—all this has made the Indian banking system stand out in the global context.
Two, the sea-change seen in the capital markets has been quite amazing. While the primary and secondary markets have witnessed substantial buoyancy in activity, the entry of FIIs has added a new dimension in terms of both providing liquidity to the system as well as providing important foreign currency to the economy. The creation of online exchanges with derivatives trading and a regulator for the same has worked very well to make the Indian market a more distinguished one.
Three, a major step was to make the rupee flexible as we moved away from a fixed exchange rate regime in stages. A controlled floating rupee has helped keep the currency closer to the fundamentals and provided a market rate which is essential to keep trade competitive. We can seriously talk of internationalisation of the rupee.
Four, trade liberalisation has made the economy more buoyant and responsive to global developments. With virtual freedom on imports, the government has made it easier for companies to procure goods, with selective intervention being exercised when there have been cases of dumping. Also, any measure to control imports has been through the tariff route (on gold) rather than by quotas, which is a more efficient way.
Five, reforms brought in the concept of fiscal discipline and the transformation has been done in a coherent manner. From bringing in the concept of fiscal deficit to ensuring that RBI does not monetise the same, we have come a long way through the FRBM which has been assiduously pursued especially by the state governments.
Six, tax reforms have come in a big way, and while we are on the threshold of getting in GST and direct tax reforms, the tax rates per se as well as the processes are being streamlined, which is positive.
Seven, while investors clamour for more, FDI norms have been substantially eased, with flows permitted in almost all sectors. The result is evidenced in the resulting flows into the country.
Last, liberalisation led to substantial changes in the corporate sector, which is vibrant with diversification, M&A activity, foreign acquisitions and innovation. This has made the sector look more than comparable with other developed nations, as some of the best global brands function in India.
While we do tend to take a lot of pride in the results presented by the economic data, one should remember that this was the phase when almost all countries did similar things to improve their economies. Hence, what could be more important is the ranking of India on a global scale. Here, the picture is mixed. The World Bank’s ‘Doing Business’ puts us at 130 out of 189 countries. The WEF’s ‘Global Competitiveness Index’ has us at 55 out of 140, which looks promising. We do quite disastrously at the UN’s HDI, where we remain low at 130 out of 188 countries. Transparency International’s Corruption Perception puts us at 76 out of 168 nations, while the World Bank Governance Index gives us a negative score on all the six parameters tracked, such as government effectiveness, corruption, quality of regulation, etc. We are also not a happy nation according to UN’s Happiness Index, where we stand at 118 out of 156.
The way forward is not so much as opening up more sectors for FDI or lowering the deficit, which is what global agencies ask for, but improving basic human conditions and governance; these are mammoth tasks, given that the absolute level of poor ranges between 300-400 million based on the criteria used—and the level of scruples ingrained in us is low. This is the biggest challenge for the government.
The author is chief economist, CARE Ratings. Views are personal