India’s 1991 Liberalisation Leap And Lessons For Today

Context: The 1991 reforms of liberalisation, privatisation and globalisation (LPG) were hugely successful, but a lot remains to be done.

A pretext of the pre-1991 era: Main features of control system before reforms restricted entrepreneurship  - 

• Restricted Private sector: The so-called “commanding heights” was reserved for the public sector despite its lacklustre performance.
• License Raj: Where the private sector was allowed, it could invest only after getting an industrial licence, and that was especially hard to get for “large” industrial houses as over 860 items were reserved exclusively for small-scale producers.
• Controlled Imports: To conserve scarce foreign exchange.
• Consumer goods could not be imported, so domestic producers faced no import competition.
• Producers could import capital goods and intermediates needed for production, but this generally required an import licence.
• Import of technology was controlled, and Foreign Direct Investment (FDI) was discouraged.

Evolution of economy since 1991 

• A gradualist approach: Due to democratic pressures, resulted in a delay, yet the benefits were materialised.

• Revamped growth: GDP growth averaged 7% in 25 years from 1992 to 2017, compared with an average of 5% in the preceding ten years and 4% in the preceding 20 years.
• Steep decline in poverty: Between 2004-05 and 2011-12, 140 million people were pulled above the poverty line.

Shortcomings in India’s developmental strategy

• Pending reforms: 
• Some of the reforms begun in 1991, especially in the financial sector, yet to be completed.
• Pending labour market reforms: Idea was we should first get industrial, trade and financial sector reforms to show positive results and take up labour market reforms later.
• Policy neglect of health and education sectors, environmental concerns not been adequately built.
• Complexities in land market reforms: Not part of initial agenda as land is state subject; later, intervention through legislation introduced too many conditions, which greatly delay processes.
• Persisting competitiveness concerns: Regarding poor infrastructure, poor logistics and time-consuming trade procedures. 
• Rising tariffs: India progressively lowered import tariffs from 57.5% in 1992 to 8.9% in 2008, but the trend has been reversed over the past few years in line with rising protectionism globally.
• Raising duties on individual products could encourage a flood of demands, further adding to the complexities of tariff regime and loss of competitiveness.
• Reversal in liberal trade policy outlook: 

• Decision to stay out of RCEP, mainly in the wake of unfair competition from China, went against India’s earlier signal of moving from “Look East” to “Act East”.
• FTAs with other major partners such as US, Europe and UK are also stuck in contentious issues such as intellectual property rights and bilateral investment protection.
• Growth slowdown and worsening unemployment scenario: Substantial slowdown in GDP growth after 2016-17 led to employment actually falling from 474 million in 2011-12 to 469 million in 2018-19.
• Employment in agriculture continued to decline, but unlike earlier years, non-agricultural employment grew much more slowly and opened unemployment increased.

Way ahead

• Prioritise effective pandemic management: Averting the third wave by speeding up vaccination coverage could create conducive conditions for return to normalcy.
• Address structural constraints in economy: India needs to raise its investment in health and education without compromising the upgradation of infrastructure to improve economic competitiveness.
• Rationalise tariff policy: One recommendation is to move to an average duty rate of 7%, gradually narrowing the range of variation across products and eliminating duty reversals.
• Revisit trade policy and leverage current geopolitical scenario: Decision on RCEP shall be revisited in light of geopolitical compulsion on major powers to reduce their economic dependence on China.