In 1991, the Globalization and industrialization energised the growth of economy and took out many people from the poverty! As India grapples with a post-pandemic economic crisis, there are lessons on what to reform and how to do it? It is time to outline a credible new reform agenda that will not just bring GDP back to pre-crisis levels, but also ensure growth rates higher than it had when it entered the pandemic.
The reforms were opposed by both the Left and the Right. The Left feared they would hurt the poor and lead to unnecessary imports, perpetuating balance of payments (BoP) problems. The Right feared foreign investors would take over the economy, in a replay of the East India Company phenomenon.
The results took time because policy changes were gradual, delaying the benefits. However, by the first decade of the 21st century, India began to be seen as one of the fastest growing emerging markets. This looks enviable at a time when India is reeling from the impact of the Covid-19 pandemic, with Gross Domestic Product (GDP) having fallen by 7.3% in 2020-21, and an even sharper decline in per capita GDP because the population has continued to grow. Not surprisingly, unemployment and poverty have both increased.
The 1991 strategy had two components — reducing the fiscal deficit and implementing structural reforms. Then, the crisis was caused due to the excess demand, but the crisis today is not caused by excess demand. It has been triggered by a collapse in production following the disruption caused by the pandemic, which, in turn, has caused a fall in demand.
Those who lost incomes had to cut consumption. Even those who have not lost income, face uncertainity and have postponed expenditure. Investment, a key source of aggregate demand, has also slowed because of unutilised capacity and uncertainty about growth. If we still try to stick to the 6.8% target, we will have to cut expenditure. This would be unduly contractionary. We should definitely maintain expenditure at the levels budgeted, and let the fiscal deficit rise if it has to.
The government would be well advised to undertake a mid-year review of budget prospects in September, and come up with a revised growth forecast and establish new fiscal targets.
Revising revenue targets to more realistic levels will also have the advantage of not pushing tax officers to achieve unrealistic targets, which only leads to unreasonable assessments.
Another important lesson from 1991 is that we need to move away from a “long list of reforms” approach towards a more strategic approach, focussing on the most critical reforms needed immediately.
Our banking system is heavily dominated by public sector banks (PSBs) and genuine reform in this area is not in sight. Mergers may help reduce branches, and perhaps monetise excess real estate to boost capital, but it is not a systemic reform. Giving the Reserve Bank of India (RBI) the same regulatory control over PSBs that it has over private sector banks would qualify as a real reform.
It is time to outline a credible new reform agenda that will not just bring GDP back to pre-crisis levels, but also ensure growth rates higher than it had when it entered the pandemic.