Three decades ago, on 24th of July, 1991, when Pallath Joseph Kurien, Minister of State for Industry in Government of India, tabled the New Industrial Policy (NIP) in the Lok Sabha, not many would have realized how big was the moment in the socio-economic history of Independent India. After six years of preparation and facing political challenges, the new policy, which sought to end the Nehruvian Socialism in the country, finally saw the light of the day.
The process of economic reform was set in
motion by Vishwanath Pratap Singh, the finance minister in the government of
Rajiv Gandhi (1984-1987). It gained further impetus when Ajit Singh, the MIT
educated, tech savvy industry minister of National Front’s government assumed
the charge (1989-1990).
The original draft of NIP was prepared by Amar
Nath Verma (then Industry Secretary) and Mohan Rakesh (then Chief Economic
Advisor to Industry Minister Ajit Singh) in 1990. The proposal to radically
reform the industrial policy of India were patronized first by Ajit Singh &
Vishwanath Pratap Singh (1990), then by Yashwant Sinha & Chandrashekhar
(1991) and finally by Manmohan Singh and Pamulaparthi Venkata Narasimha Rao
(1991).
The NIP was followed by supporting reforms in
the financial sector and fiscal policy. The committees set up in 1991 under the
chairmanship of Raja Jesudoss Chelliah and Maidavolu Narasimham for Tax reforms
and Financial Sector Reforms respectively. The recommendations made by these
committees and several follow up committees like Narsimhan Commmittee 2.0,
Shome Panel, Kelkar Task Force etc. have formed the basis of the economic and
fiscal reforms in the country in past three decades.
Indubitably, we have travelled a long distance
from 50% corporate tax rate to in 1990 to 25% in 2021. The journey in indirect
taxation has been even more spectacular. From a multitude of classifications
and tax slabs in 1980s, we have achieved minimum number of tax slabs and a
single Goods and Services Tax (GST) in three decades.
Financial sector has also seen a metamorphosis
in past three decades. Capital controls have been materially relaxed. A
developed national trading & settlement system for financial instruments
has been established. Foreign trade is materially deregulated. Financial
inclusion has progressed materially with liberalization of banking, insurance
and pension sectors. After initial hiccups, the Insolvency and Bankruptcy Code
is now evolving fast.
The work of reforms though is still in progress
and we have many more miles to cover. The reforms in two key sectors Agriculture
and Industrial Labor have started by passing key legislations in 2020. The
government has also outlined a clear policy on disinvestment of public sector
enterprises. From the legacy process of reforms, The Direct Tax Code, The
Indian Financial Code, Development of Retail Debt Market, Land Reforms, GST
rates rationalization and coverage expansion, etc. are some of the areas where
progress is still needed.
In recent years an entirely new economic
development paradigm has emerged globally. Sustainability and Tech driven trade
and commerce have emerged as the most dominant global socio-economic trends.
India has the opportunity to adapt to these trends early by implementing a
futuristic policy framework. The progress made so far appears patchy and reluctant.
Comprehensive and constitutionally enforceable policies for sustainable
development and digital commerce (including currencies) need to be evolved and
implemented earnestly, at the earliest.
Backdrop of 1991 reforms
The reforms in 1991 were neither ushered
voluntarily, nor enjoyed wider support. These were rather necessitated as the
socio-economic milieu of the country had reached the brink of disaster. Four
decades of pseudo-ness in post-independence policies had introduced numerous
distortions in the society and economy.
The pseudo socialist model of development
adopted post-independence in fact perpetuated the colonial feudal model. The
private sector monopolies were protected through licensing controls & state
patronage, and hugely inefficient public sector monopolies were created. Even
implementation of Monopolies and Restrictive Trade Practices Act and Foreign
Exchange Regulation Acts in 1972, were misused to perpetuate the dominance of
already well-established industrial families.
The entire development paradigm was designed to
focus on the weaknesses (risk capital and technology) of the country. The
strengths of the country (food, art, culture, religion, languages, etc.) were
undermined and allowed to dissipate easily. The effort of the government was on
discouraging and regulating consumption, rather than increasing production and
productivity. Industrial and scientific knowledge and technologies were mostly
imported. The term “imported” became synonymous with quality and prestige and
“local” became a derogatory reference. Even to date, many companies of old era
proudly include “imported” or “foreign” technology in their promotion
campaigns.
The backdrop of 1991 reforms was set by
convergence of many social, political and economic factors.
Firstly, the country was witnessing unrest on
many counts, most notably - Implementation of Mandal commission and Ram Mandir
movement had become major socio-political issues.
The Congress leader Rajiv Gandhi had just been
killed by Sri Lankan Tamil suicide bombers. Regional socialist parties had
risen to capture power in the Congress strongholds UP and Bihar. Having
permanently lost West Bengal and Tamil Nadu earlier, the Congress party’s
popular support was shrinking to a few states in central and western India.
The collapse of USSR and Berlin wall meant
realignment of global order. The non-aligned India, which was in fact closer to
USSR, was left vulnerable on many counts, especially geopolitical support and
crucial defense technologies.
In the post emergency era, the efforts of
various governments to catapult India to higher growth rate through fiscal
expansion had culminated in significant balance of payment crisis. The ten
years of fiscal expansion did manage to break the vicious cycle of the Hindu
rate of Growth (3-4%). Briefly a higher growth rate (7.6% average during
1988-1991) was also achieved; but it was not sustainable for obvious reasons.
The gulf war and two years of severe droughts further aided to the economic
woes.
The multitude of crisis pushed the policy
makers to adopt a pro market approach. The Congress Supported minority
government of Chandrashekhar sought IMF help and committed to a radical reform
in fiscal policy and industrial policy. A roadmap was prepared for
disinvestment of PSEs, fiscal reforms and implementation of NIP. However the
government fell days before the finance minister Yashwant Sinha could present,
what could have been the first dream budget of Independent India.
Impact of reforms
There is little argument over the fact that the
economic and fiscal reforms initiated in 1991, India were inevitable. These
reforms did help in bringing the Indian economy back from the brink of
disaster; even though the adequacy and efficiency of reforms has remained a
matter of intense debate ever since.
Three decades of reforms have resulted in many
structural changes in Indian economy. The contribution of agriculture has
reduced to about one sixth, while services now contribute more than half of the
GDP. The structure of foreign trade has also changed in favor of manufactured
goods and services. The balance of payment has remained robust. We have faced
three global crises (2000, 2008, and 2020) without an iota of problem.
Financial markets have remained an example to
the world. India has perhaps been the only major global financial market that
neither shut down nor imposed any trade restrictions during 2000 and 2008
market crisis.
Positives
In my view, the 1991 reforms made three most
important contributions to the Indian economy:
1. The
process of reform dismantled the pseudo socialist mindset of the policy makers;
unleashing the private enterprise which had remained constricted since
independence. Consequently, the minority socialist government of United Front
in 1996-1998 presented the second dream budget. Another minority government
supported by socialists (NDA 1998-2004) divested numerous government monopolies
like coal, ports, mobile telecom, roads, power, airports, etc. without much
trouble. The response to global sanctions post 19998 nuclear test was not lower
spending, but larger capex on building local capacities. The UPA-1 government
supported by communists made a nuclear deal with USA and UPA-2 allowed foreign
capital in retail trade. The final epithet of older policy regime was written by
NDA-2 with dismantling of planning commission; permitting off the shelve
banking licensing; and move to privatize two PSU Banks (NDA-3).
2. Shifting
of policy focus on increasing production & productivity rather than
constricting consumption. This allowed the Indian businesses and consumers to
globalize; aspire more and achieve more. We could become part of global
alliances and treaties without much resistance. We could set up large scale
capacities in automobile, pharmaceutical, textile, space technology, civil
aviation, ITeS, and housing etc. Private enterprise could attract significant
capital from global investors.
3. The
horizons of the entrepreneurs expanded materially. The post reform generation
of entrepreneurs was not infected by the traditional constraints. The new
generation could think about globally competitive scale. They were not
constrained by traditional characteristics like complacency, frugality,
austerity, contentment etc. Targtes were now being frequently expressed in “Billion
dollars” terms rather thn millions. Dreams not only became larger but also
started to get realized. Consequently, the Indian MNCs started to grow in
diverse areas like metals, automobile, ITeS, pharmaceuticals, hospitality etc.
Not so positive
However, statistically speaking, the reforms
have not been adequate in putting India firmly on the path to become a middle
income economy.
On relative basis, the peer economies like China, South Korea,
Thailand etc. have done better than India. Our share in global trade has only
marginally increased to ~3%, while China more than tripled it share in global
trade to over 17%.
Though, the financial markets developed a
global scale infrastructure, we have not been able to implement a robust system
for early detection of frauds and scams. Consequently, the investors continue
to lose significant amount of money due to frequent scams and frauds in banking
system and financial markets.
Many recent steps taken by the government
indicate that the policy makers are full cognizant of the inadequacies of
Indian economy. The new education policy, schemes and incentives to promote
local manufacturing and exports, farm sector reforms, etc. are important steps
that shall help in overcoming these inadequacies in the decade of 2020s.
