» Business » The story of India's economic reforms in the last 25 years

The story of India's economic reforms in the last 25 years

July 13, 2016 11:04 IST

The remarkable feature of those reforms unveiled in 1991 is that none of those decisions has been disowned by subsequent governments in the last 25 years, says A K Bhattacharya. 

IMAGE: No government at the Centre has questioned the role and importance of reforms. Photograph: Reuters

Twenty-five years ago, this week, the government of P V Narasimha Rao had initiated the first round of reforms to rescue the Indian economy from an unprecedented balance of payments crisis and fiscal indiscipline.

What the government had then announced included a two-stage downward adjustment in the value of the Indian rupee against the US dollar and trade policy reforms that abolished all export subsidies and promised current account convertibility of the Indian currency in about two years.

More decisions followed in the subsequent weeks with liberalisation of the industrial policy, a plan of action for fiscal consolidation and reforms in the financial sector. 

The remarkable feature of those reforms unveiled in 1991 is that none of those decisions has been disowned by subsequent governments in the last 25 years.

Yes, there have been debates and discussions on the need for introducing an exit policy for labour or privatisation of state-owned undertakings, but the broad direction of economic reforms in this country has remained unidirectional and irreversible, even though the Centre since then has been ruled by six different prime ministers.

You could quarrel about their slow pace, but not their direction.

Looking back, therefore, it would be interesting to see how the major economic indicators have fared in the last 25 years.

That assessment reveals quite a few significant trends that provide a more nuanced understanding of the impact of those reforms on the actual state of the government’s economic health.

A quick analysis shows that there are a few major encouraging trends and several other disappointing ones. 

The government’s fiscal deficit, for instance, has been kept under reasonable control.

It is important to note that two years after the launch of the reforms, the government’s fiscal deficit in 1992-93 actually rose to the highest-ever level of 6.8 per cent of gross domestic product or GDP in the post-reforms era.

Thereafter, there was steady compression of the fiscal deficit.

Though there were years of slippages and recovery, the direction of fiscal deficit was southward and by 2007-08 it reached a record low of 2.5 per cent of GDP.

After that recovery, however, thanks to the global financial meltdown and the government’s attempt to reduce tax rates to provide more money with the people, the fiscal deficit kept rising to reach 6.5 per cent in 2009-10.

Since then, governments have re-imposed fiscal discipline and brought the deficit down steadily to reach 3.9 per cent of GDP in 2015-16.

Similar successes have been registered in the areas of government debt and interest liability.

The government’s debt was estimated at over 63 per cent of GDP in 1991-92. Last year, it dipped to about 50 per cent.

As a consequence of fiscal prudence and a falling share of debt, interest payments too declined from close to four per cent of GDP in 1991-92 to around 3.2 per cent last year. 

While the government’s record in the areas of fiscal consolidation, debt management and interest liability has certainly been largely commendable in the last 25 years, there are many other areas of concern in this period.

For instance, direct taxes were only about two per cent of GDP in 1991-92 and the early phase of tax reforms saw this ratio go up to 6.2 per cent of GDP in 2007-08.

But since then, direct tax efforts of successive governments have remained sub-optimal.

In fact, the share of direct taxes in GDP has fallen to below six per cent now, indicating how efforts to widen the direct tax base have made little headway.

The government’s expenditure on subsidies also suggests that its early success has been nullified by subsequent years of neglect.

Subsidies expenditure declined from 1.8 per cent of GDP to about one per cent by 1995-96.

In spite of many schemes, including the launch of the direct benefit transfer programme and price reforms to keep a check on subsidies, the expenditure under this head actually has inched back to 1.7 per cent of GDP.

It is therefore logical to ask if the governments of the past few years have lost their will to reform subsidies.

Even more worrying has been the composition of the government’s expenditure.

The government’s revenue expenditure as a per cent of GDP (largely consisting of spending on subsidies, interest, defence, wages and pensions) has stayed in double digits for each of the last 25 years.

When reforms started in 1991-92, revenue expenditure was 12.21 per cent of GDP and it dipped marginally to 10.89 per cent of GDP in 2015-16.

But a bigger cause for alarm was the fall in the government’s capital expenditure - from 4.32 per cent of GDP in 1991-92 to 1.71 per cent in 2015-16.

Ideally, the government’s capital expenditure should be boosted particularly when its revenue spending has been rising rapidly.

While its economic logic is recognised at a time when public investments have acquired greater criticality in reviving growth, even the present government has managed to increase capital expenditure only by a small margin.

That in many ways sums up the story of India’s economic reforms of the last 25 years.

No government at the Centre has questioned the role and importance of reforms.

Yet, the irony is that few ministers in the government would go all out to defend and promote reforms without weighing the political costs such pronouncements or actions might incur.

You might defend it as political pragmatism. But in a country where the outcome of the reforms in the last 25 years has largely been positive (steady growth, new economic opportunities and more choices are only a few of those advantages people have benefitted from), it is ironic that its political leaders, once in power, become overly cautious about taking bold moves.

That way reforms have still a long way to go in India.

Get Rediff News delivered into your Inbox.
Source: source