20 Years Later, India's Transformation Is Incomplete: World View

Exactly 20 years ago this week, Manmohan Singh, now in his second term as prime minister of India, made, as the greenhorn finance minister of a newly elected Congress government, the most important and far-reaching budget speech in the modern history of his country. In response to an unprecedented balance of payments crisis -- which left India with about two weeks of foreign-exchange reserves -- Singh, with the support of Prime Minister P.V. Narasimha Rao, announced a host of reforms in his inaugural budget speech on July 24, 1991. His two-hour oration left no one in doubt that he intended to turn a crisis into an opportunity.

By dismantling government control over the economy, opening up Indian markets to foreign investment, cutting trade tariffs, devaluing the rupee, Singh broke down, in one go, the walls between the sluggish, protected economy of socialist India and the rest of the world. "I do not minimize the difficulties that lie ahead on the long and arduous journey on which we have embarked," Singh said at the conclusion of his speech. "But as Victor Hugo once said, 'No power on Earth can stop an idea whose time has come.' I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea."

Today, Singh's words, which then seemed an implausible dream, are a reality. In absolute terms, India is now the 10th -largest economy in the world; and when figures are adjusted for purchasing power parity, it is the fourth-largest. Since the second half of the 1990s, the economy has consistently posted a growth rate of 7.5 percent or more -- about twice the rate of the years between Independence in 1947 and liberalization in 1991 -- and is now a hotspot on the map of global business. Per-capita income has almost quadrupled compared with 1991. Long starved of access to consumer goods, Indians of all classes have taken advantage of a consumer revolution of colossal dimensions. Economic liberalization has greatly affected Indian attitudes toward money, business, development and politics, and opened doors for the ambitions of millions of young people. A laggard in the world for much of the 20th century, India now confidently inhabits the 21st.

Yet there was less excitement this week about the 20th anniversary of liberalization than there might have been. This points, on the one hand, to the success of something that has now been so thoroughly absorbed that it seems to have always been around, and on the other, to a negative mood in the country and an ambivalence among large sections of the population about liberalization's consequences, whether real or imagined. One reason is that, inevitably, the gulf between the rich and the poor has widened enormously in the last two decades, as those able to take advantage of the opportunities afforded by the new India have raced ahead of those left behind. India's middle-class is growing rapidly, and numbers about 400 million, but it is disconnected from the rural poor and often uncomprehending of its needs and problems. The poor themselves have good reason to be skeptical of a mood that would extol India as a rising economic superpower. While most realize that sometimes inequality must rise for poverty to fall, they say to themselves: not these levels of inequality.

Worst of all, the government -- including, ironically, the UPA coalition in power at the center for the last seven years with Singh at the helm -- largely hasn't kept up its side of the bargain. It failed to adequately fulfill its responsibilities in the fields of infrastructure, health, and education (especially primary education), leaving many citizens weaker and often resentful in the post-liberalization world. India ranked an abysmal 119 among 169 countries in the United Nations Development Program's 2010 Human Development Index. The government also has neglected its responsibilities as a regulator, leading to the mushrooming of crony capitalism. Indian politics retains a backward approach to economics, choosing to offer freebies, subsidies, and special privileges to groups of voters rather than make a case for the advantages of liberalization.

Reforms themselves have suffered because they have been implemented in a piecemeal, stuttering way, without a comprehensive, intellectually coherent "second phase" to follow the advances made by the first. It would appear that, two decades after he first shook the earth beneath Indian feet, Singh doesn't have the energy or the political backing to take his project forward. The most prominent pieces of legislation of the current UPA government have beenmassive government programs to achieve what it calls "inclusive growth," such as the NREGA plan for employment generation.

Reports and essays in the Indian media took stock of both sides of the liberalization story. In "How the Indian Economy Changed, 1991-2011," the Economic Times presented a set of tables documenting economic statistics over the period. Among the interesting leaps documented in this piece was the extent of India's telecom revolution (telephone subscribers, in the mobile-phone era, are up to 862 million from 0.5 million) and the flow of Foreign Direct Investment into the country (up to $30.3 billion from $0.13 billion). In a piece in the Indian Express called "Reforms of 1991 a one-fourth revolution," the columnist Shankkar Aiyar wrote:

On this day in 1991, the government lit a bonfire of historic vanities with the Big Bang theory of liberalisation that promised to liberate India from episodic crisis and Indians from perennial poverty. The government dismantled licence raj [the elaborate bureaucratic process for regulating business], opened up trade, unshackled the financial sector and vowed to get government out of the business of business. On their own, the political class would have gladly put off salvation until the next coming but the severity of the crisis -- India was begging NRIs [non-resident Indians] not to withdraw their monies and countries to extend credit -- obliged the political class to act. It is a travesty of fate and a reflection on India that the principal navigators—A.N. Verma, S. Venkitramanan and, of course, P V Narasimha Rao -- have never been accorded their due.

Cause for celebrating the anniversary? Yes and no. Yes because there has been no drastic reversal as in the 1960s, and no because the micro-analysis is not as cheerful. Availability of choice is not matched by availability of incomes to afford consumption. Growth has been asymmetric across sectors and geographies. Services sector growing at 9-plus percent, accounts for more than half the GDP and for 25 percent of the workforce. Rural India, which hosts 75 percent of the population, is growing the slowest. Growth is uneven across geographies too. Of the 30 small and big states, just the four southern states account for 22 percent of GDP and 28 percent of the employment. The most populous states hosting a majority of the poor are the worst off, gawkers in a multiplex economy.

And although the Indian economy as a whole grew at an average of nearly 7 percent between 1991 and 2011, agriculture grew at barely 2.8 percent. Juxtapose the growth with share of national income to appreciate the consequences. Agriculture, which accounted for 29 percent of the economy, now accounts for 15 percent of the economy, while India’s rural populace has shot up from 640 million to 810 million. This means, in 1991 nearly 640 million people or 80 percent of the population lived on 30 percent of the national income and in 2011 nearly 75 percent of the populace or 810 million people live on 15 percent of the national income. Economists may quibble about what percentage of rural populace is dependent on agriculture, but there is no doubt that 75 percent of the populace hasn’t found a place on the gravy train. This makes the 1991 reforms a 25 percent revolution.

Those words were echoed by the popular columnist Swaminathan S. Aiyar in the Economic Times:

The unfinished agenda is huge. Crony capitalism rather than free competition prevails in many sectors, especially real estate, natural resources and government contracts, making politicians millionaires on an unprecedented scale. Government services — subsidised food, employment programmes, education, health — are dogged by massive absenteeism, corruption and leakages. The police-judicial system is corrupt and moribund, and simply does not combat crime or redress public grievances. Criminals have entered politics in unprecedented numbers.

Much economic reform is still needed. India ranks only 134th of 183 countries in ease of doing business, according to the Doing Business series of the World Bank/IFC. But even more urgent are reforms to improve governance. After all, economic reform has sufficed to create miracle growth. Governance, alas, still needs a miracle.

And in Outlook magazine, Kalyani Chawla reprised the crucial role played by Rao in July 1991, and compared the Manmohan Singh of 1991 to the Mahmohan Singh of today:

Manmohan, who has been called the father of India’s economic reforms, could not launch second-generation reforms as prime minister during UPA-1. Vested interests, trade unions and the Left parties combined with votebank politics and populism to scuttle or slow down the pace of reforms. At the state level, regional parties in power delayed reforms. [...] Above all, Manmohan was not able to market these reforms to the masses, as they had failed to generate employment corresponding to the high growth. The opposition parties dubbed the reforms as pro-rich and anti-poor. During UPA-2, the government is drifting and is bogged down by corruption, especially the 2G and CWG scams.

Despite Rao’s contribution to India’s liberalisation drive, the Congress seems reluctant to commend his efforts. On the contrary, it seems as if the party would like to black out the Rao period from its history. For instance, while celebrating its 125th foundation day last December, the party enumerated the achievements of every Congress prime minister—except Rao.

And in London's Financial Times, the economist Vivek Dehejia took issue with the use of the word "neoliberal" to describe India's current economic order, arguing that many of its problems had their roots in too little reform, not too much:

Unfortunately, the case for liberal economic reform has never been properly made in India. Reform, when it happens, comes under the weight of a crisis, as in 1991, or in stealth, as it did subsequently. This “original sin” of 1991 has contaminated all subsequent discussion of economic policy and the roots of our current difficulties.

[...]The bottom line is this: our problem at present is not too much reform, but not enough. And by that I mean not merely the quantum of existing reforms, whether in trade, tax, or foreign investment, or even much-needed “second generation” reforms, such as of labour laws. Rather, I refer to vitally needed regulatory reform which keeps big business at arms’ length from politicians and bureaucrats, and, at the same time, a rationalization of that selfsame regulatory regime to eliminate the incentive for corruption in the first place. In addition, as pointed out by commentators in this and other newspapers, we need a thorough overhaul of electoral finance in India to cut off at the knees the incentive for politicians to accumulate war chests of black money with which to fight elections. As economists are aware, there is both a supply and demand side to corruption, and both must be tackled if it is to be reined in. That would take us a long way toward a truly liberal economic order, a far cry from the unfinished avatar of today, which is being castigated by earnest but misguided critics who see the symptoms but have failed to diagnose the disease.

Dehejia's piece can be usefully read alongside one by Niranjan Rajadhyaksha, managing editor of the Indian business newspaper Mint, who wrote a few months ago in an essay titled "India, Twenty Years Later," in the Wall Street Journal:

[T]he so-called 1991 Big Bang, and the reform process since then, left a lot undone. In the past few years especially, the Congress Party-led government of Prime Minister Manmohan Singh, the finance minister who helped introduce many of the most dramatic reforms from 1991-93, has lost its nerve for liberalization. Several important second-generation reforms, like the introduction of a unified goods and services tax that will finally stop distorting the tax incentives of producers, have not progressed since the Congress came to power in 2004.

More importantly, Mr. Singh has done nothing to liberalize India's labor laws, the key impediment to job creation. A plethora of labor legislation enacted since India's independence in 1947 makes it very difficult for firms to hire and fire people as they wish. Laws to protect existing workers have kept new workers out of jobs. Because of these laws, manufacturing firms have preferred to substitute otherwise cheap labor with capital. So even when India's companies grow, they aren't taking its workforce along.

Meanwhile, the government still struggles to provide basic public services. India is terrible at making sure its citizens have the opportunity to go to schools or hospitals, or even have drinking water. In some cases, it can't even promise law and order. These problems add an edge to the old complaint that the Indian state does too much in the economy and too little in governance. So reordering priorities should involve further economic reforms on the one hand and governance reforms on the other.

The major problem now is that these earlier reform failures are creating political conditions where it may be harder to push forward with more liberalization. India's biggest political-economy puzzle, and also one of its most serious challenges, is that earlier reforms have not created an effective political constituency for further reform. Voters consistently reward candidates promising greater welfare benefits or government intervention in the economy.

Why reformers don't win votes is clearest in the labor market. Even if the potential reform constituency now has phones and consumer goods, it doesn't have steady employment. [...] 93% of working-age Indians, estimated now at 500 million, continue to work informally—outside of the organized sector and without proper labor contracts.

This lack of modern employment opportunities, coupled with poor public services, has denied millions the upward mobility that was seen in most other Asian countries. Unemployed or underemployed Indians, still living an abject life without much dignity, look at the hype surrounding the Big Bang and wonder what was in it for them.

This disconnect between rising aspirations and the inability to meet those hopes quickly enough gives rise to a fault line in Indian politics. Politicians happily exploit it: Rather than summoning the will to push through reforms that would address the roots of the problem, it's easier to pitch illiberal spending and subsidies as an easy "fix."

Although there are many gaps and contradictions in India's liberalization story, there remains little doubt that the decisions of June 24, 1991 have had a greater influence on the lives of its people (including the few hundred million born since) than any other political event in recent history. Perhaps by the time the 30th anniversary of liberalization comes around a second phase of reforms will have evened out some of the imbalances created by the first -- and hopefully this time it won't take a crisis to force action.