An Appropriate Way To Judge The Famed Economic Reforms Of 1991

Context: Four big constraints have eased after 1991, savings, food, foreign exchange and a small home market.

Causes behind economic reforms of 1991

• Structural causes: Including macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology etc.
• Immediate cause: Severe balance of payments crisis that had taken India close to international default.

Impacts of reforms undertaken in 1991

• Sustainable growth: Growth rate in the 1990s remained no different from that of the 1980s. However, the growth of the 1980s was not sustainable due to the terrible Balance of Payment (BoP) mess and raging inflation.
  • There was no BoP crisis since 1991; before 1991, the BoP crisis happened every decade, say in 1957, 1966, 1981 and 1990.
• Easing of economic constraints:
  • Domestic savings rate to fund domestic investments, though coming down since the peak in 2008, but is still almost eight percentage points higher than the average of the 1980s.
  • Availability of foreign exchange is no longer a worry: Occasional BoP surpluses in recent years show that India receives more international savings than it can absorb.
  • Food stocks moved to excess: The Green Revolution provided a strong buffer against sudden shocks to farm production, though it does not mean that every Indian household has food security.
  • Aggregate demand problem eased: As rising incomes and exports created strong demand for industrial goods.

Newer constraints in the horizon:

• The health and education crises during the pandemic have underlined inadequate investments in human capital.
• India still does not have adequate state capacity and regulatory capacity for a $3 trillion economy.
• Ecological stress, as well as climate change, will create new forms of constraints on sustainable economic growth
• Incomplete transformation: The inability to generate enough jobs in formal enterprises has led to the proliferation of informal employment on the one hand and political pressure to use fiscal resources for subsidies or income support rather than on the creation of public goods.

Conclusion:

• The implicit goal of the 1991 economic reforms was to create a new economy that had learned the right lessons from the success stories of East Asia.
• Economic reform should be speedily pursued to move in the direction of East Asia rather than Latin America.