India Transformed

Rakesh Mohan on India Transformed at #Thinkers Sandbox

There has been a continuity in our reforms now for more than 25 years spanning across six governments, six Prime Ministers, and six Finance Ministers.

The most capitalistic society in the world is the United States where education up to the secondary level is free and where health services are provided as part of the public services so that it is the government who is responsible for them.

There is no question that both education and health are the biggest tasks ahead of us particularly in the next five years.

India’s GDP has grown almost by a factor of five in the last 25 years. However, an important point to note is that the Chinese GDP is already five times larger than our own. So, even if India grows at a faster rate than what she has in the last 25 years then our real GDP in 20 years from now will be where China is presently todayOur per capita income is nearly a quarter of what Thailand has got so even if we grow at 10% GDP, then 20 years from now our GDP per capita will be what Thailand is living with today. It is clearly a wake-up call for India that it cannot be content with what it has done in the past. There is a need to instill confidence in our people and tell them that we first made a major change at the time of independence where we moved from zero growth for about 100 years to 3%-3.5% growth in the first 30 years of our independence.  Of course, many people have decried this but looking from an intrinsic point of view, it was a big economic change that brought our country from virtually no growth to a 3.5% growth.  The economy then obviously faltered out for about 15 years until 1991 when the country embarked on a major change in its economic policymaking.  

One of the very interesting features of economic reforms of 1991 is the fact that there has been a long debate on whether it was homegrown or was imposed from the outside.  India was amongst the first countries that got independent from colonial rule and was also in line with the global view of development at the time of having to shut the economy through import substitution. The world, however, started changing from the mid-1960s and the 1970s, essentially with the example of South Korea and Taiwan starting off to promote export-led growth.  By then, China also started changing in 1979 out of hidden ways but it was India which took another 10 years to bring about such kind of change. The fact that our country was too late by this time is a realization that kicked in to tell us that the 1970s proved to be a truly lost period for Indian economic policy and growth. As a result, this realization was beginning to dawn right through the 1980s so that there was a whole succession of government committees that went on recommending different kinds of changes which must be adopted to get the country on a high growth path. Therefore, India was well prepared when the crisis of 1991 came in. Of course, there was an IMF Program and a World Bank Program but interestingly, we had an IMF Program in 1980-81 as well after the 1979 oil price shock. However, our country chose to not do much then because it was not homegrown at all. Since there was an emerging technocratic consensus and this time it was homegrown, everything was done quickly in 1991.

The second feature is that in most of the countries where significant economic reforms take place, there is usually a charismatic maximum leader who is associated with delivering on those reforms.  In India, however, the reforms process was initiated by a trio. The first person associated was late Shri. P.V Narasimha Rao who had never been known for his economic policies or strong political leadership but what he indeed did as a Prime Minister was to provide a strong cover and political management to propel the economy in the right direction for the next five years.  Second came in Dr. Manmohan Singh as the Finance Minister who provided the full intellectual framework of almost every economic reform right through the five years of Shri Narasimha Rao’s government.  The third part of the trio who is much less known and unfortunately passed away in 2004 was Mr. A. N. Verma, who was the Principal Secretary to the Prime Minister at that time. He was the real bureaucratic enforcer responsible for bringing in major reforms. 

A third feature which is very important, at least from the point of view of an observer is that there has been a continuity in our reforms now for more than 25 years spanning across six governments, six Prime Ministers, and six Finance Ministers.  It may seem every now and then that our people are not agreeing to various things and that there are political differences. However, what is interesting at the same time is the unstated political and technocratic consensus that India currently has on the direction of our reforms. The latest being the Goods and Services Tax (GST).  

Giving a much closer look, we can see that the idea of a Value Added Tax (VAT) was first mooted by the L.  K.  Jha Committee around 1980-81. Further down the line came in a long-term fiscal policy and the concept of MODVAT. Another 10 years later, Shri Yashwant Sinha brought in the CENVAT which almost centered on getting to a single rate for the excise duties at that time.  Again, seven years later or so, a process that was started by him under the Empowered Committee or the State Finance Secretaries got then implemented by Shri. P Chidambaram as the Finance Minister in the form of State VAT.  The organizational innovation was to set up an empowered committee of state Finance Ministers that had never existed before. It was Mr. Chidambaram who got the Empowered Committee of State Finance Ministers to start talking about the GST first after the State VAT had been implemented.  Almost after more than a decade it was finally done in July 2017 even though today there are some issues with it in terms of multiple rates.  This is nothing but the reflection of the continuity of our reforms process. There are many other examples like the GST where similar continuity can be traced.  Therefore, this is a very significant feature of the Indian reforms process which is unusual compared to any other country in today’s times. 

The fourth very interesting feature is the seemingly cooperative and a corporative relationship particularly in the 1990s between the government and business where they both started working as a team in the economy.  One of the probable reasons that this happened was because from the mid-1990s to the late 2000s and until 2010, there was a remarkable number of both IAS civil servants as well as lateral and free economic advisors who worked together in tandem for many years with the members of the private sector. There were disagreements at times but everybody knew that each one of them was working for the country i.e., for its good, so that there was a degree of trust that came to be built. This alone has really made a big difference in terms of the implementation of India’s economic reforms.  

The fact that there were in total 50 business families in 1991 which had come down to 15 later on, one might think that because of having many losers instead of gainers from the economic reform process, there must have been much opposition from the private sector.  To some extent, there was opposition; nevertheless, it is quite remarkable to see that there had not been a very significant opposition from the private players. This feature too is very different from many other countries that went through a phase of economic reforms, particularly in a democratic framework.

Another big feature of the liberalization phase is that the whole growth process has been without any major disruption. This resilience unfolded during a period when the global economy was going through disruptions like the Asian Financial Crisis of 1996-97 and the financial crisis of 2008-09. There were many countries that got affected by these two crises but India remained insulated and faced very little disruption in the face of its reforms process.

In the same vein, one of the biggest changes that have taken place in the last 25 years is the opening up of our economy. India was quite a closed economy in 1991 i.e., before the changes took place. This can be seen in any economic metric such as the trade-to-GDP ratio or the capital flow-to-GDP ratio or the number of licenses required for import and so on. However, today our trade-to-GDP ratio is much higher in the United States than it was in 1991. Similarly, India is more open than the US in terms of actual capital flows as a proportion of GDP. This is not to indicate that India need not do anything more on these fronts but to point that we all must be proud of what we have done, not just in the last two years but for the last 25 and 70 years.  So, if our country has been capable of achieving the mark that it holds today over the last 25 years particularly starting from the 1990s, then why can’t she do it with even greater capability now?  There must be a way to give our citizens the confidence that if they could do reforms in the last 25 years then nothing should be stopping them now. Our country is much more qualified today, has far higher incomes now and is much more open.

The goal is to not make our people complacent of our achievements. India possesses one of the worst health and education indices amongst its peers. It cannot grow at a 10% rate per annum for the next 20 years unless it is successful in bringing about major improvements in health and education parameters. Since it is not going to come through an invisible hand, India will need to take committed reforms in these sectors in the years to come.

Of the many reforms that India kicked in the year 1991, one was to empower the private sector to do what it could best do by removing all the shackles, and with this, the country was able to unleash a huge amount of entrepreneurship that we see today.  However, at the same time it failed to enable the public sector to broadly determine what the central government, the state government, the local authorities, etc. had to deliver in terms of services it ought to provide to the citizens. The most capitalistic society in the world is the United States where education up to the secondary level is free and where health services are provided as part of the public services so that it is the government who is responsible for them. However, these are the two key issues that India has fallen behind and does not have good answers even today on how to improve on them.  Whether it is the government itself providing these services or the finances of contracting others to provide such services, there is no question that both education and health are the biggest tasks ahead of us particularly in the next five years. There is no time to lose for us if we want to grow at the kind of rate that we want for the next 20 years.  

Another issue that comes out from here is the general issue of governance in our country.  India has a colonial system of administration that has not changed much during all these years.  The need is to have a much greater local government.  India will not be able to run at lower-middle income levels aspiring to have middle and high incomes with the kind of administrative framework that it currently has, which is a part of its governance. Taking the case of cities, there are now more than 50 cities in India having about a million populations but with almost no governance at place. Many of our young people who want to work in public service cannot do so just because there is no entry gate. So, it is imperative for us to open up opportunities for these people to contribute their part in building our country.

Lastly, an important feature of our reforms process has been the neglect towards our agricultural sector. In China, the first reform was in its agricultural and rural areas in the 1980s. Industrial reforms were introduced much later. On the other hand, India did concentrate on agricultural activities for about 10 years after the drought of 1967. As a result, there was a huge move forward in the 1970s to bring to bear the advances of science and technology in agriculture where India succeeded in finding many state agriculture universities in almost every big state. As such, India has not changed its view about the importance of agriculture in the country but the angle can be seen to be changing completely. This is why today in agriculture the value add in non-cereals i.e., in dairy, meat, fish, fruits, vegetables, etc. is much higher than the value add in cereals. All of this gets even more complicated simply because you have a much greater public-private participation now in the form of a big supply chain from the fields to the market but we do not know how to put them in perspective to yield results.

To get a 10% or an 8% growth rate in the next 20 years which is what India ought to be aiming at presently, reforms in the arena of governance, health and education and agriculture is needed. Keeping our industrial sectors on track is equally important here. Unless India pushes for labor-intensive manufacturing, it will not be able to create the kind of jobs that people need to move out of agriculture where more than 50% of the population is dependent but churns out less than only 15% of the country’s GDP.  Hence, unless India pledges to take on these issues, she will not be able to get 10% or 8% of growth in the next 20 years. 

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