3 decades of reforms: Cup is only half-full
Manmohan Singh’s July 24, 1991, budget speech is considered as the harbinger of economic reforms in India, although many believe that the process began on June 21, when PV Narasimha Rao took over as Prime Minister, and discovered that the economy was on the brink. While political regimes since the 1980s had started diluting the shackles of India’s command and control economy, it was the 1991 budget which signalled a strategic and radical shift towards unleashing liberalisation. This unshackling of markets yielded rich dividends for the Indian economy and economic growth gained momentum.
As India completes three decades of economic reforms, the question is not whether economic reforms were good for the economy. It is whether the best of the reform years are already behind us and what this means for India’s per capita incomes, which are still very low.
In a four-part data journalism series, HT will look at various aspects of this question. In the first part, we take a broad view of the post-reform period in India.
Reforms did boost growth in a big way, but has India’s growth story already peaked?
The 1960s and the 1970s were worse in terms of economic growth than the 1950s. According to the 2004-05 GDP series, India’s GDP in 1961-62 was 1.5 times its 1951-52 value. This multiple went down between 1961-62 and 1971-72 and 1971-72 and 1981-82. This trend reversed itself in the 1980s and kept gaining momentum for the following four decades. The period between 2001-02 and 2011-12 was the best in terms of economic growth and India’s GDP increased by a multiple of 2.1 during this decade. A slowdown since 2016-17 and the pandemic-driven contraction in 2020-21 has made the decade from 2011-12 to 2021-22 (assuming the RBI’s projection of 9.5% growth in 2021-22 holds) the worst in terms of GDP growth in the post-reform period. This raises questions whether the India growth story has already peaked. Even pre-pandemic official targets such as making India a $5 trillion economy by 2024 seemed to have given up on the aspirations of double-digit growth.
Per capita income gain shave been more modest
Because India’s population was growing at a faster rate in the first two decades of post-reform phase than the last decade, gains in per capita income were modest, even though GDP grew at a faster rate. For example, the compound annual growth rate (CAGR) of GDP was 1.8 times the CAGR for per capita GDP between 1981-82 and 1991-92. This number has come down to 1.3 between 2011-12 and 2021-22. A slowing population growth means that India’s per capita income would have risen at a faster rate had the growth momentum been maintained. It is the latter which seems to have faltered in recent years. To be sure, the composition of population (workers versus dependents) also matters for economic growth. While GDP is an important indicator of a country’s economic prowess, per capita GDP is what matters when it comes to living standards.
Reforms gave a bigger push to services than manufacturing
Modern capitalism owes its origins to the industrial revolution. When India became independent, reducing import dependence for manufactured goods – nationalist historians believed that colonialism led to a deindustrialisation of the economy – was adopted as a strategic goal of economic policy. The pre-reform policy pursued this objective through an import substitution strategy, where the public sector was expected to play a leading role. Pro-reform voices believed that a state-led inward-looking economic policy generated headwinds for private enterprise and deprived it of the tailwinds of global exports. If regulations were the only thing holding back India’s industrial revolution, the 1991 reforms should have taken care of it. That does not seem to have happened. The share of manufacturing in India’s GDP has not changed significantly over the last 30 years. It was 15% in 1990-91, reached a peak of 18.4% in 2017-18 and had come down to 16.9% in 2020-21. While the pandemic’s disruption could explain the lower share in 2020-21, manufacturing accounted for 17.1% of Gross Value Added (GVA) even in 2019-20. An analysis of India’s post-reform growth story by sectors shows that services, not manufacturing, have been a bigger beneficiary of economic reforms in India.
But this skewed development has left a huge economic imbalance
Growth per se in any economy does not guarantee well-being for all. For the people at large to experience an improvement in living standards, additional incomes need to accrue to a large majority. Income distribution, in a modern economy, is a function of distribution of income and employment across sectors. If a small minority is engaged in highly productive (and paying) work while the bulk of the workforce is employed in subsistence level sectors, an economy can continue to experience a high growth rate and poor living standards for a majority. The Indian economy fits this description. At least 40% of India’s workforce is still engaged in agriculture, even though this contributes less than 15% of the total Gross Value Added (GVA).
This is the first of a four-part data journalism series on three decades of economic reforms in India. The second part will look at the question of inequality in the post reform period.