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How far has India gone on reforms since Narasimha Rao's regime

By Ashok Lahiri
January 05, 2015 14:32 IST
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While previous governments had shied away from reforms, the PV Narasimha Rao's government launched broad reforms encompassing the real, external, monetary, financial and fiscal sectors.


Image: Former Prime Minister of India PV Narasimha Rao announced a slew of reforms under his regime. Photograph: Reuters

India started economic reforms in 1991 under P V Narasimha Rao's government with Manmohan Singh as the finance minister.

While previous governments had shied away from reforms, the Rao government launched broad reforms encompassing the real, external, monetary, financial and fiscal sectors.  

In a move from a command-and-control regime to a more market-based system, industrial licensing ended in 1991.

The peak rate of basic customs duty on non-agricultural products was gradually reduced from over 300 per cent to 10 per cent in 2007-08.

A liberal and unified exchange rate regime was implemented from March 1993; and current account convertibility from August 1994. Foreign direct investment was liberalised from July 1991.  

Financial repression was eased by reducing statutory pre-emption through statutory liquidity ration (SLR) and cash reserve ratio (CRR).

There was a calibrated graduation to international prudential standards.

Interest rates were deregulated; control of capital issues removed; and the Securities and Exchange Board of India made functional to provide the regulatory platform.

The fiscal deficit of the central government, which was 8.3 per cent of gross domestic product (GDP) in 1990-91, was reduced to 5.7-5.9 per cent in the two subsequent years.  

Mao's demise and Deng Xiaoping's rise as "paramount leader", along with the objective conditions, can explain how China embarked on its reforms in 1979.

It is natural to ask what caused so much reform in India in 1991.

When Deng started remaking China from the late 1970s, why did India continue with its old, ideologically oriented policies such as industrial licensing and restricted foreign trade?  

With political turmoil, the late 1970s and the 1980s were not propitious for economic reform in India. Indira Gandhi's 21-month emergency ended in March 1977.

Elections followed and the Janata Party, a coalition in the guise of a party, came to power.

With its inherent contradictions and interpersonal conflicts, it could not focus on reforms and did not last beyond two and a half years.

A much chastened Indira, not of the Garibi Hatao vintage, but more pragmatic and less ideological, returned to power on January 14, 1980.

The accidental death of her younger son and anointed successor Sanjay on June 23, 1980, the scandal involving Antulay's Indira Pratisthan in 1981 and the violent Sikh separatist movement in Punjab intervened. These were enough to distract Indira from issues of economic reforms.  

Rajiv Gandhi succeeded Indira Gandhi after her assassination on October 31, 1984.

But after his landslide victory in the December 1984 election, "Mr Clean" soon got mired in the Bofors controversy, and lost the 1989 election.

A coalition, the National Front, with outside support from the left parties and the Bharatiya Janata Party (BJP), came to power on December 2, 1989, under Rajiv's rebellious former minister V P Singh.

5423Singh's implementation of the Mandal commission report led to widespread violent protests. The Babri Masjid dispute agitated the nation.

Singh did not last a year; the BJP withdrew support.

Chandra Shekhar defected with 64 members of Parliament and formed a government on November 10, 1990, with outside Congress support.

The tactical Congress support was withdrawn - ostensibly because of two Haryana policemen's suspicious activities near Rajiv's residence on March 2, 1991.

Chandra Shekhar resigned on March 6, 1991. Fresh elections followed.  

Rajiv was assassinated in Sriperumbudur on May 21, 1991, in the midst of the elections for the 10th Lok Sabha.

The Congress did well in the post-assassination polling rounds, but not well enough to form a government on its own.

Its minority government with outside support of the Left had Narasimha Rao as the prime minister.

A dozen years after Deng started his reforms in China, India launched her own reforms.

The inherent difficulties of launching and sustaining reforms in a democracy are well known.

Rob Jenkins argues that powerful opponents of reforms - for example, industrialists fearing foreign competition, and politicians and bureaucrats fearing the loss of illicit spoils of office - can team up and mobilise. Vicious charges of capitulation to foreign powers and betrayal of the socialist commitment to justice can be electorally effective. 

So how so much reform in 1991 in India, a vibrant democracy?

Some scholars, like Mr Jenkins, explain it by the ruling elite's astute tactical management in insulating economic reforms from mass politics.

In a federal structure, state governments were left to perform many unpleasant tasks to deflect attention.

The Babri Masjid got demolished in December 1992.

According to Ashutosh Varshney, emotive issues such as Hindutva and caste-based reservations aroused great passion and anxiety and crowded economic reforms out of mass politics.

It was "reform by stealth".  

Furthermore, the reforms were launched in the midst of a balance of payments crisis and raging inflation.

The "attractive" average annual growth of 5.4 per cent in the 1980s was on borrowed money. Serious macroeconomic and structural imbalances had built up.

A crisis was brewing.

The Gulf War, after Iraq's occupation of Kuwait in August 1990, blew the lid off this situation.

The more-than-doubling of the oil price impacted India, a heavy importer of oil, very adversely both in terms of inflation and the balance of payments.

Remittances from West Asia dried up.

In July 1991, with less than a billion dollars in foreign currency reserves - enough only for paying for a fortnight's imports - reforms supported by standby arrangements from the International Monetary Fund (IMF) may have been more of a compulsive necessity than just an option.  

In economic reforms, compared with China, India is a late starter.

There was an overwhelmingly positive response of the Indian economy to the 1991 reforms in terms of growth, price stability and balance of payments.

Yet, after starting late, reforms did not gather the same momentum as in China.

As a result, India, in the first 22 years since the beginning of reforms in 1991-92, grew at an annual average compound rate of only 6.7 per cent.

The corresponding rate in China in the first 22 years since 1979 was 9.7 per cent.

So it is also natural to ask - why so little reform?  

Perhaps there are limits to "reform by stealth". Mr Jenkins has argued that providing a "meta goal or a meta idea" can be an important aspect of governance, but "in India, politicians have relied far less on this positive form of vision-creation than they have on ritual intonation of developmental shibboleths to conceal reforms' radical implications and thereby reassure those groups who may be threatened by them".

Prime Minister Narendra Modi has declared that reforms should be large-scale, deep-rooted and not undertaken by stealth.

With the advent of the Indian middle class and politics of aspiration, we have to wait and watch whether and how far the reforms are deepened.

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Ashok Lahiri
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