Economic reforms: why 2021 must go beyond 1991
The 30th anniversary of the economic reforms of 1991 is a time of nostalgia, retrospection and introspection. Without a doubt, for the crystal too, to consider what lies ahead.
Was 1991 indeed a magical moment or the continuation of an earlier and interrupted reform process? How have deeper changes withstood the turbulent test of time?
To answer them, we need to address a set of important questions.
Were the 1991 reforms an act of free choice or the constraints of the time? Or was it a perfect storm made up of several factors such as the disintegration of the Soviet trading system which ended the bilateral ruble payment agreement, the Iraq-Kuwait war, the slowdown in the trading partners of the India (the United States, the Soviet Union and others), and years of relentless fiscal debauchery, compounded by the political instability of having three prime ministers (PMs) between 1989 and 1991? Some might say it doesn’t matter in the rearview mirror, but it’s a deeper question about our ability to pull off the next round of changes.
Did we react with the greatest conviction to this “perfect storm”? After all, as the Roman poet Horace notes, “adversity reveals genius.” Or, were the gains the product of constant adjustment and learning?
There is no doubt that much has changed over the past 30 years, and much for the better. For example, rapid growth has dramatically reduced poverty. The measures have varied over time, making a direct comparison of 1991 and 2021 full of speculation, but a 2020 UNDP report found that a record 273 million people were lifted out of poverty in a decade ( 2005-16). We have achieved various sustainable development goals; increased access to education and health care; opened up new opportunities through financial inclusion; freed from regulatory clutches in large sectors of the economy; and encouraged entrepreneurs and small businesses. It’s even hard to remember the limited choices we had for infrastructure, services and goods in 1991 compared to what we have today.
but how did this happen? We need to look back at the decision-making process in the face of uncertainty and pressure, and see what we can learn from history to enable the inevitable next pivot. This leads to several other questions and problems.
One, why have we waited so long? Many believe that the excessive hangover of the socialist mentality and faith in the power of public spending has had a debilitating influence over successive decades. Why did India delay its economic reforms more than a decade after China began its reforms? Many argue that the injured ego of the Congressional leadership in broken promises by the West or the pursuit of a mindset that had not adapted at the time has remained a permanent handicap.
Two, why were we so shy? Even Manmohan Singh, as finance minister, had to negotiate the much needed devaluation under the astute leadership of Prime Minister PV Narasimha Rao. Likewise, pulling back an increase in fertilizer prices to preserve consensus within the party was a setback to the start of the reforms themselves. The success of our ability to negotiate with the international community rests not only on what we have done, but also on what we have managed not to do.
For example, we did not address many important issues included in the quarterly performance criteria, which we had negotiated with the International Monetary Fund, or structural reforms under the World Bank structural adjustment loan. As part of the negotiating team, I think back to the insufficiency of our responses to address these double conditionalities, especially when the formal agreement with them was terminated. The implementation of the 1991 reforms remained late, such as the liberalization of factors of production, the adoption of a tax system on goods and services (GST), the review of ownership issues of public sector banks, or the raison d’être of public sector companies. The name of the game was that we were great negotiators. In a mood of self-righteousness, we rejoiced that we survived the crisis and parted ways with small concessions. However, in today’s fast-paced, multipolar geopolitics, there is no real negotiation to be won except with reality.
Third, we need to recognize the important ways in which implementation has evolved. We have started the ball rolling for the liberalization of various infrastructure sectors, but the nature of what needs to be managed has also changed considerably. Consider the changes in telecommunications with wireless technologies, the Internet of Things and artificial intelligence, or the changing sources of competitively priced energy from fossil fuels to solar and wind. The two are essentially different political issues in 2021 than they were in 1991. At that time, Chandra Shekhar’s government and Finance Minister Yashwant Sinha took bold steps to avoid default. In addition, we had to wait for the initiatives of the Atal Bihari Vajpayee period. The enactment of the Fiscal Responsibility and Fiscal Management Act 2003 was a turning point, as were the changes in telecommunications and road connectivity that unite the nation.
These are critical questions for evaluating reforms in retrospect against the only measure that matters: how well equipped are we to deal with what lies ahead? By all accounts, it’s a different time, not so much a perfect storm, but the ability to convert the pandemic into new opportunities for economic reform.
So what does history show us about how best to capture this moment? Others in this reform series, including the finance minister, have argued that we need to repeat the 1991 moment of transformational change. I agree, but with the caveat that we need to think about how to continue credibly and in a way that does not reproduce our backwardness from the past, but exerts constant pressure for the ongoing evolution.
Under the substantial changes of the past six years, there are foundations that I believe we did not have in 1991. Inevitably, the relationship between the Center and the States has shifted to new hubs of cooperative federalism. States will be the important theaters where many of these reforms must come undone and be implemented. These will be tested, but will form a basis for the next steps in green energy, sustainable development, education, health and other constitutionally shared responsibilities. We also have a fundamental reform of the tax system, in particular of the GST, such as the reverse duty structure and the rationalization of rates. Then there is the area of judicial reforms where action in litigation and conflict resolution has remained opaque, if not elusive.
To improve the overall competitiveness of the economy, the quality of social and physical infrastructure, as well as monitoring the significant changes that have been initiated over the past two years, will be essential. We must make exports an engine of growth and ensure a sustainable evolution of trade logistics. We must stop hesitating about becoming a driver, not a reactive agent, of preferential trade agreements.
Overcoming any persistent hesitation from private capital in areas such as banking and insurance, and encouraging more meaningful partnerships in renewable energies, will be at the heart of our growth. The hard-won battle over macroeconomic stability must be anchored in our memory. A return to fiscal rectitude as soon as possible is inevitable.
Fortunately, in Prime Minister Narendra Modi we have intentional and decisive political leadership. This leadership, oblivious to the resistance that some reforms have encountered, has shown the will and capacity to push forward a complex and difficult reform agenda. The next round of changes must be motivated not by minimalistic changes and motivated, not by compulsion, but by conviction. It does not depend on the gains of the last 30 years but on the vision for the next 30 years. Fate is not a matter of luck. It’s a question of choice.
NK Singh has served as Chairman of the 15th Finance Commission, member of the Planning Commission, Secretary to the Prime Minister and Secretary of the Ministry of Finance. He is also a former deputy
Opinions expressed are personal