Growth Needs Steps Beyond Reforms

Context: While the reform agenda must continue, social cohesion and equity considerations must be guaranteed.

Characteristics of the 1991 economic reforms

• A crisis turned to an opportunity: In response to the severe balance of payments crisis, we launched a wide-ranging economic programme to reform, restructure and modernise the economy.
• Elements of new policy regime: The objective has been to improve productivity and efficiency of the system by creating a more competitive environment.
  • Liberalisation: Dismantling vast network of licences, controls and permits that dominated the economic system.
  • Privatisation: Redesigning the role of the state and allowing the private sector a larger space to operate within.
  • Globalisation: Abandoning inward-looking foreign trade policy and getting integrated with world economy and trade.

Achievements of 1991 reforms

• Phase of highest growth rate: Between 1992 2000, GDP at factor cost grew annually by 6.20%. 
• Between 2001-02 and 2010-11, it grew by 7.69%, and the growth rate between 2011-12 and 2019-20 was 6.51%.
• Balance of payments situation had remained comfortable: 
• The opening up of the external sector, which included liberal trade policy, market-determined exchange rate and a liberal flow of external resources, has greatly strengthened the external sector.
• Foreign exchange reserves touched $621 billion as of August 2021.
• Reduction in poverty ratio: 
• Going by the Tendulkar expert group methodology, the overall poverty ratio came down from 45.3% in 1993-94 to 37.2% in 2004-05 and further down to 21.9% in 2011-12.
• The per year reduction in percentage points in the poverty ratio between 2004-05 and 2011-12 was 2.18.

Way Forward: Lessons from the 1991 reforms experience:

• Growth requires more than reforms: In a developing economy, growth is driven by investment. 
• The growth slowdown in the 2010s can be explained by the decline in investment rate of nearly five percentage points since 2010-11.
• While reforms create conditions for investment but other factors such as social cohesion also plays an equally important role.
• Thus, growth and equity must go together as it is only in an environment of high growth, equity can be pushed aggressively.
• Need for continuity: The reform agenda must continue. It must be incremental in character. 
• From this angle, we need to take a relook at the financial system, power sector and governance, in terms of creating a competitive environment and improving performance efficiency.
• In terms of government performance, there should be an increased focus on social sectors such as health and education.
• In terms of the provision of services, the emphasis must be not just on quantitative expansion but also quality.