The Indian economy had its golden days in the pre-British period, but after an era of stagnation, independent India pledged to be a socialistic economy. The basic idea behind Nehruvian socialism was an equitable distribution of resources by a wide array of reforms that struck the very foundation of the exploitative structures put in place by the colonial administration. This was the foundational idea behind the zamindari abolition, industrial and educational advancement, and, to some extent, even social reforms during his Prime Ministership. A progressive Constitution and the Directive Principles provided a plan for the future of the nation and its political economy.
From 1951 to 1991, India had changed. The economic crisis of 1991 forced the national government to pledge the 67-ton gold reserves as collateral to secure an emergency loan of $2.2 billion from the International Monetary Fund (IMF). The conditional IMF-World Bank bailout was followed by a Structural Adjustment Loan Agreement in December 1991 (terms disclosed only in 2013). The 1991 reforms cut down on large government expenditures, ended the infamous ‘License Raj’, and brought India a step close to a free-market economy. Post-1991 reforms further opened the Indian economy.
It can be argued that some of these reforms were necessary and that government intervention with unnecessary regulations had turned India into an underperforming economy. An example of such legislation would be an Emergency-era amendment to the Industrial Disputes Act that required companies with more than 300 employees to take permission from authorities to lay-off employees even if the business had failed, to somewhat guarantee income for workers, but it disincentivised companies from employing more workers and in a long run these companies could not compete globally. In 1991, the government pushed for reforms despite the pressure from powerful interest-groups like trade unions.
The Washington Consensus
The neo-liberal model of economic development, promoted by the IMF and the World Bank, is characterized by freer trade by reducing tariffs, privatisation of public sector enterprises, expansion of market forces, light regulation of the financial sectors, and, most importantly, welcome and promote foreign investment. This set of economic policy prescriptions are loosely called the Washington Consensus (although the term is used with respect to other policies as well) that was marketed in India as LPG-Liberalisation, Privatisation, Globalisation.
India saw a rise in economic growth after the reforms, the average Y-o-Y economic growth was 6.7% from 1991-1995. In the 2000s, the IT and telecom revolution soon after the Y2K crisis, which proved to be a boon for the Indian IT sector. Massive real estate boom took place in cities. The telecom sector grew by reduction of tariffs that enabled hyper-competition, at least till the cancellation of licenses in the 2G Spectrum Case. The fruits of reforms peaked in the mid-2000s when the Y-o-Y growth rate skyrocketed to an average of 8%. Successful privatisation stories such as that of Hindustan Zinc Limited and Videsh Sanchar Nigam Limited (now Tata Communications) provided sufficient evidence to the government(s) that the neo-liberal model was succeeding.
The Ignored Masses
The post-1991 economic development created a massively consuming urban middle class which fuelled the growth of the industrial and service sectors. Even though India was and continues to be an agricultural economy with most of its population (about 52%) depending on agriculture and allied activities for livelihood, the government was forced to reduce public investments in irrigation and vital rural infrastructure that have a lower rate of return and a higher gestation period to meet the conditions imposed by the IMF and World Bank. Since then, the World Trade Organization has forced India to withdraw price controls, export subsidies, and, most recently, questioning its farm subsidies that protect millions of vulnerable rural households. Lack of government support forced the farmers to take loans from institutional sources such as scheduled commercial banks or worse, from non-institutional sources such as landlords or local moneylenders which forced the rural households into a debt-trap.
Nearly 47% of farmers were indebted and 30% had taken loans from non-institutional sources at exorbitant interest rates. This is an exact HISTORIC REVERSAL, back to the days of the British-era indebtedness of the peasants founded on a system of exploitation, the only difference being that the British Raj was a passive collaborator in the name of revenue collection while the present Indian state is helpless.
The basic idea of the LPG was to promote competitiveness and introduce fiscal discipline by scaling back on unnecessary expenditure but, the plan had to be changed since the foreign investment flows were not up to government expectations. While the imports soared after the abolition of quantitative restrictions and introduction of low tariffs, exports were low since the export infrastructure could not be suddenly developed in such a short period of time and structural bottlenecks existed and the balance of payments problem came into being. Economic growth took place at the cost of the average Indian citizen.
To remain on the growth path, India had to market itself to welcome foreign capital, for which it had to make structural changes in financial markets to simplify the process of investment. This had adverse consequences in the domestic market and further constrained the ability of Indian companies to compete globally. For example, regional stock exchanges in Kolkata, Bengaluru and Chennai were shut to favour Mumbai-based National Stock Exchange and Bombay Stock Exchange, that were used by local companies to raise capital. In the post-reform India, inequality of income and wealth has risen to record levels (most economic researchers find the value of the GINI Coefficient around 0.5). Many in the bottom of the economic spectrum are heavily indebted, while India has around 200,000 high net worth individuals possessing vast amounts of wealth. While urban development has unequivocally favoured the rich and privileged, in rural parts (where most of India resides), usually the local politically dominant castes and communities have a better economic condition than the others (while a few districts may show data to the contrary) mainly due to their control and hegemony over the local bodies like the panchayats. Such inequality has forced the government to introduce legislation for equitable distribution of wealth, like the National Rural Employment Guarantee Act in 2006 and the National Food Security Act in 2013.
"In highlighting the significance of reform, my purpose is not to give a fillip to mindless and heartless consumerism we have borrowed from the affluent societies of the West. My objection to the consumerist phenomenon is two-fold. First, we cannot afford it. In a society where we lack drinking water, education, health, shelter and other basic necessities, it would be tragic if our productive resources were to be devoted largely to the satisfaction of the needs of a small minority. The country’s needs for water, for drinking and for irrigation, rural roads, good urban infrastructure, and massive investments in primary education and basic health services for the poor are so great as to effectively preclude encouragement to consumerist behaviour imitative of advanced industrial societies. Our approach to development has to combine efficiency with austerity. Austerity not in the sense of negation of life or a dry, arid creed that casts a baleful eye on joy and laughter. To my mind, austerity is a way of holding our society together in pursuit of the noble goal of banishing poverty, hunger and disease from this ancient land of ours."- an excerpt from Manmohan Singh's Budget Speech of 1991, that introduced the reforms.
The Market is not the Government
A well-regulated (neither over-regulated nor completely free) market is required for any nation to grow and create employment opportunities and promote innovation, and such an economic structure can change millions of lives. The next obvious question that comes up is, “what went wrong with India?”. The reforms and marketisation measures are just means, but the end is the welfare of the citizens. Unfortunately, these measures have been considered the end and no step is taken beyond these measures. The market can prove to be an invisible hand, but active government effort is required for overall and balanced development in underdeveloped nations.
This approach by the government is seen in the decline in public investments in education and primary healthcare. Education is being thrown open to the private sector which caters to only 25% of the demand (which was the suggestion of the Birla-Ambani Report of Education) while primary healthcare is being left to states and being neglected. If the government wants the country at large to reap the benefits of economic liberalisation then it must break the barriers of inequality and provide equal opportunities, which the government can ensure by just whole-heartedly invest in sectors where markets would not like rural infrastructure, agriculture, mass education and primary healthcare.
Certain lessons must be learned with time. The government must understand that GDP is not of paramount importance when it comes to economic development, since there are issues more than just market economics citizens care about. Businesses and NGOs cannot replace the government (in fact corporations agree on this point when they lobby for stimulus and bailouts during crises such as the COVID-19 pandemic) since a business is only responsible to its shareholders and not the public-at-large (though some exceptions exist). Citizen’s welfare should be prioritised over consumer welfare, because citizens deserve to be treated with justice and dignity, more than just production and consumption units. More collaboration is required for solving new issues such as climate change, inequality of income and wealth, or even pandemics, so the narrative of ‘survival of the fittest’ competition needs to be changed. A freer and more globalized world may not be a good solution for everybody, and the idea of the nation-state and of borders is still relevant to most of the citizens.
Lastly and most importantly, the market may not be the best solution for efficiency and an alternative needs to be thought of. As we march into this new era, we must use the skeleton of socio-economic development provided by our forefathers, called the Constitution, and decide what kind of a society we must transition into, an inclusive one or an ignorant one.
- By Anubhav Mishra
References:
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Sadiq Ahmed, & Sattar, Z. (2004). Impact of Trade Liberalisation: Looking at the Evidence. Economic and Political Weekly, 39(36), 4059-4067. Retrieved May 14, 2020, from www.jstor.org/stable/4415507
GS Bhalla, & Gurmail Singh. (2004). Impact of Trade Liberalisation: Looking at the Evidence. Economic and Political Weekly, 39(36), 4059-4067. Retrieved May 14, 2020, from www.jstor.org/stable/4415507
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