We should be thankful for the economy’s liberation

Context: The 1991 reform facilitated the dismantling of one of the most restrictive economic systems adopted by any developing country and is regarded as the main reason why India’s growth was disappointingly low.

A brief recap of the system before 1991

• Restrictive: The so-called commanding heights of the economy were reserved for the public sector, and the private sector could not invest in them even if it wanted.
• License raj: In all other sectors, private companies could make new investments, but only if they got industrial licences from the government.
• These were given on a very non-transparent basis and were especially difficult for large companies.
• Trade policy was geared to eliminate incentives for efficiency: Imports of consumer goods were completely banned, effectively insulating producers from foreign competition.
• Imports of capital and intermediate goods needed for production were allowed, but only with import licences.

Major achievements since 1991 reforms

• Higher growth rate: In the 23 years afterwards, India’s economic growth averaged about 7%. In the 23 years before reforms, it was only 4.2%.
• Leveraging strategy of ‘inclusive growth’: Accelerating growth in agriculture and supporting incomes of rural wage earners through rural employment guarantee programmes.
• Greater poverty reduction: Between 2004 and 2011, 140 million people were pulled above the poverty line.

Negative impact of neoliberal reforms: Leading to a demand for greater government control by the populace.

• Aftermath of the 2008 financial crisis and ongoing pandemic, income levels of the poor have fallen in both developed and developing countries, and the private sector, swamped by uncertainty, is unwilling to invest.

• Loose monetary policy, instead of stimulating the real economy, has only inflated asset prices.
• Wealth inequality has increased precisely at a time when poorer sections are being hurt.

Conclusion: We owe a great deal to the duo of P.V. Narasimha Rao and Manmohan Singh for liberating the economy from the dead hand of bureaucratic control.

• The covid pandemic has changed everything. But that is a new phenomenon, and we have to manage it separately.