Economic reforms: Why 2021 must surpass 1991
The 30th anniversary of the 1991 economic reforms is a time for nostalgia, retrospection and introspection. Undoubtedly, for crystal-gazing, too, to consider what lies ahead.
Was 1991 indeed a magic moment or a continuation of a prior, halting processes of reforms? How have the deeper shifts stood the turbulent test of time?
To answer this, we must address a set of significant issues.
Were the reforms of 1991 an act of free choice or the compulsions of the time? Or was it a perfect storm consisting of several factors such as the disintegration of the Soviet trading system that terminated the bilateral rupee-rouble payment agreement, the Iraq-Kuwait War, the slowdown of India’s trading partners (the United States, the Soviet Union and others), and years of unabated fiscal profligacy, compounded by the political instability of having three prime ministers (PMs) between 1989 and 1991? Some might say that this is irrelevant in the rearview mirror, but it is a deeper question about our capacity to get the next set of changes right.
Did we react with the fullest conviction to that “perfect storm”? After all, as Roman poet Horace notes, “Adversity reveals genius”. Or, have the gains been the product of constant adjusting and learning?
Undoubtedly, a lot has changed in the last 30 years, and much for the better. For instance, rapid growth has dramatically reduced poverty. Metrics have varied over time, making a direct comparison of 1991 and 2021 fraught with assumptions, but a 2020 UNDP report found that a record 273 million people were lifted out of poverty in one decade (2005-16). We have realised various sustainable development goals; expanded access to education and health care; opened up new opportunities through financial inclusion; freed regulatory stranglehold in large sectors of the economy; and fostered entrepreneurs and small businesses. It is hard to even recall the limited choices we had for infrastructure, services and goods in 1991 in comparison to what we have today.
But how did this happen? We need to look back at the decision-making process in the face of uncertainty and pressure, and see what we can learn from history to enable the inevitable next pivot. This leads to several other questions and issues.
One, why did we wait so long? Many believe that the excessive hangover of the socialist mindset and faith in the power of public outlays was a debilitating influence over successive decades. Why did India delay its economic reforms more than a decade after China had begun its reforms? Many argue that the wounded ego of the Congress leadership in the unkept promises by the West or the continuation of a mindset which had not adjusted to the times remained an abiding handicap.
Two, why were we so half-hearted? Even Manmohan Singh as finance minister had to negotiate the much-needed devaluation under PM PV Narasimha Rao’s sagacious leadership. Equally, the rollback of an increase in fertiliser prices to preserve the consensus in the party was a setback in the early days of the reforms itself. The success of our negotiating ability with the international community lay not only on what we did but what we succeeded in not doing.
For instance, we did not address many important issues embedded in the Quarterly Performance Criteria, which we had negotiated with the International Monetary Fund, or the structural reforms as part of the Structural Adjustment Loan of the World Bank. Being part of the negotiating team, I look back at the inadequacy of our responses in meeting these twin conditionalities, particularly the moment the formal arrangement with them was terminated. The implementation of the 1991 reforms remained tardy such as liberalising factors of production, adoption of a Goods and Services Tax (GST) regime, revisiting the ownership issues of public sector banks, or the raison d’etre of public sector undertakings. The name of the game was that we were great negotiators. In a self-congratulatory mood, we gloated that we had outlived the crisis and parted with little concessions. However, in today’s multi-polar, fast-moving geopolitics, there is not really a negotiation to win, except with reality.
Three, we must recognise the important ways in which the implementation evolved. We have set the ball rolling for liberalising various infrastructure sectors, but the nature of what was to be managed has also evolved substantially. Consider the changes in telecommunications with wireless technologies, the internet of things and Artificial Intelligence, or the shifting sources of competitively priced energy from fossil fuels to solar and wind. Both are essentially different policy problems in 2021 than they were in 1991. At that time, the Chandra Shekhar government and finance minister Yashwant Sinha took audacious steps to prevent a default. Additionally, we had to await the initiatives of the Atal Bihari Vajpayee period. The enactment of the Fiscal Responsibility and Budget Management Act, 2003, was a watershed moment, as were changes in telecom and road connectivity that knit together the nation.
These are essential questions for evaluating the reforms in retrospect against the only metric that matters: How well equipped are we to tackle what lies ahead? By any reckoning, this is another moment, not as much of a perfect storm, but the ability to convert the pandemic into new opportunities for economic reforms.
So, what does history show us about how we can best seize this moment? Others in this series on reforms, notably the finance minister, have argued that we need to repeat the 1991 moment of transformational changes. I agree, but with the caveat that we must think about how to follow through credibly and in ways which do not replicate our tardiness of the past, but to exert constant pressure for the ongoing evolution.
Underneath the substantial changes of the past six years, there are foundations that I believe we did not have in 1991. Inevitably, the relationship between the Centre and states has shifted to new fulcrums of cooperative federalism. States will be the important theatres where many of these reforms will need to unravel and be implemented. These will be tested, but will be a foundation for next steps in green energy, sustainable development, education, health, and other constitutionally shared responsibilities. We also have a fundamental reform of the taxation system, particularly GST, such as inverted duty structure and rate rationalisation. Then there is the area of judicial reforms where action in litigations and conflict resolution has remained opaque, if not elusive.
In improving the overall competitiveness of the economy, the quality of social and physical infrastructure, along with following through with the important changes which have been initiated over the last two years, will be crucial. We need to make exports an engine of growth and ensure abiding changes in trade logistics. We need to shed the hesitation in becoming a driver of, not a reactive agent to, preferential trade arrangements.
Overcoming any subsisting hesitation of private capital in areas such as banking and insurance, and encouraging more meaningful partnerships in renewable energy, will be central to our growth. The hard-won battle on macroeconomic stability must be embedded in our memory. A return to the path of fiscal rectitude sooner rather than later is inevitable.
Fortunately, in PM Narendra Modi, we have purposive and decisive political leadership. This leadership, unmindful of the resistance that some reforms have encountered, has shown the will and ability to push a complex and difficult reform agenda. The next set of changes must be motivated not through minimalistic changes and driven, not by compulsion, but by conviction. This depends on not the gains of the last 30 years but the vision for the next 30 years. Destiny is not a matter of chance. It is a matter of choice.
NK Singh has served as the chairman of the 15th Finance Commission, member of the Planning Commission, secretary to the PM, and, secretary in the finance ministry. He is also a former member of Parliament
The views expressed are personal